Thursday, May 6, 2010

Audit the Fed Amendment Modified in Fed's Favor

 RonPaul.com  May 6, 2010

Ron Paul just posted the following message on Facebook:
Ron Paul: “Bernie Sanders has sold out and sided with Chris Dodd to gut Audit the Fed in the Senate. His “compromise” is what the Administration and banking interests want: they’ll allow the TARP and TALF to be audited, but no transparency of the FOMC, discount window operations or agreement with foreign central banks. We need to take action and stop this!”
John Tate (Campaign for Liberty) immediately sent out the following alert:
Dear C4L Member,
Any time you find out Senator Chris Dodd is in support of something – watch out.
According to our sources on the Hill, Senator Bernie Sanders caved to pressure from the White House and Chris Dodd and stripped out the Paul-Grayson language from his Fed transparency amendment.
What Sanders is now proposing is essentially the Watt amendment we all opposed last year in the House. In addition, it supports just a one-time audit.
Talking Points Memo reports that, “In order to allay some of the White House’s and the Fed’s concerns, Sanders has agreed to limit the scope of what the Government Accountability Office would be allowed to audit–but his plan will still require thorough review of all the Fed’s emergency lending, beginning December 1, 2007.”
Call Senator Sanders’ office at (202) 224-5141 and tell him how you feel about this last-minute sell out.
Click here for contact information for your senators and urge them to oppose the Sanders Sellout. Tell them to put back in the original Paul/Grayson language.
A vote could come even late tonight or early tomorrow. Let your senators know where you stand right away.
The American people deserve a real audit.
In Liberty,
John Tate
President
The Wall Street Journal provides more details on the Sanders Sellout:
Last-minute maneuvering in the Senate allowed the Federal Reserve to side step legislation that would have exposed its interest-rate decision-making to congressional auditors.
Pressure from the Obama administration led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum despite opposition from the Treasury and the Fed. It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors.
The compromise, endorsed by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and the Treasury, would require the Fed to disclose more details about its lending during the financial crisis. It would also require a one-time audit of those loans as well as a one-time review of Fed governance. A formal vote was scheduled for later on Thursday.
Thursday’s Senate showdown came after senators on the left and right joined forces to support Mr. Sanders’ provision.
“At a time when our entire financial system almost collapsed, we cannot let the Fed operate in secrecy any longer,” Mr. Sanders said. “The American people have a right to know.”
But Fed Chairman Ben Bernanke, while insisting on his commitment to “openness” at the Fed, said in a letter to Congress that the Sanders amendment would “seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.”
Here’s a copy of Bernie Sanders’ amended amendment: [pdf]
Earlier this week Ben Bernanke had sent the following letter to Chris Dodd:
Dear Chairman:
I am writing to express my deep concern about possible amendments to the Senate financial regulatory reform bill (S. 3217) that would, for the first time, permit the Government Accountability Office (GAO) to audit monetary policy deliberations and operations. Such amendments, if enacted, would seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.
The Congress and the American people have a right to know how the Federal Reserve is carrying out its responsibilities and how we are using taxpayers’ resources. I strongly supported greater openness before I came to the Federal Reserve and now, as Chairman, I believe in it even more so.
In fact, during my tenure, the Federal Reserve has increased its commitment to transparency in a variety of ways, including the creation of a monthly report that provides Congress and the public detailed information on the range of programs and tools that the Federal Reserve has used to respond to the financial crisis as well as our open market activities and lending to depository institutions. Importantly, these monthly reports provide the number and distribution of borrowers under each lending facility established under section 13(3) of the Federal Reserve Act; the value, type, and quality of the collateral that secures advances under each facility; and trends in borrowing under the facilities.
Moreover, the financial statements of the Federal Reserve, including both the Board of Governors and the Federal Reserve Banks, are already fully audited by an independent accounting firm that ensures that the financial statements completely and accurately report the financial condition of the Federal Reserve System. These audited financial statements are made available to the public, both in print and on our website, and are submitted annually to the Congress.
There appears to be a widespread misconception about the role the GAO already plays in oversight of the Federal Reserve. The GAO has the authority to audit and review all of the supervisory and regulatory functions of the Federal Reserve. In addition, the GAO is authorized to conduct audits of the credit extended by the Federal Reserve to specific companies under the authority provided by section 13(3) of the Federal Reserve Act, including the loans to American International Group, Bear Steams and the Maiden Lane entities. Indeed, I have personally welcomed and encouraged the GAO to conduct a full and complete audit of the Federal Reserve’s lending facilities for AIG and the Federal Reserve has been cooperating with the GAO in its review of the two Maiden Lane facilities related to AIG.
We believe that Congress and the American people should have the information to be assured that all of the liquidity programs that the Federal Reserve established under section 13(3) to respond to the financial crisis operate in a financially sound way with taxpayer interests in mind. That is why I have supported additional proposals, like that included in S. 3217, that would allow the GAO to conduct audits of the operational integrity, internal controls, and financial reporting of the broad-based liquidity facilities that were established under section 13(3) to support the functioning of key financial markets during the crisis. With adoption of this proposal, which we support, all of the Federal Reserve’s actions to use the authority under section 13(3) to respond to the current or any future financial crisis will be subject to audit by the GAO.
However, thirty years ago, Congress purposefully – and for good reason – excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy.
Some in Congress have offered proposals that would remove these statutory protections and, thus, subject monetary policy decisions to regular review by the GAO.
Financial markets, in particular, likely would see a grant of review authority to the GAO in these areas as a serious weakening of monetary policy independence. GAO audits are very different from the type of financial audit typically conducted by an independent accounting firm. Through its investigations and audits, the GAO typically makes its own judgments about policy actions and the manner in which they are implemented and makes recommendations to the audited agency and to the Congress for policy changes or future policy actions. Thus, reviews or the threat of reviews by the GAO of monetary policy are likely to be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence likely would raise fears about future inflation, leading to higher long-term interest rates, a diminished status of the dollar in global financial markets, and reduced economic and financial stability.
The financial crisis has brought to Congress’s attention the need to address a number of regulatory deficiencies and weaknesses to prepare against any future crisis. We commend these efforts. In taking these actions, however, we should not change what has worked well and to the benefit of taxpayers and the American economy. Monetary policy independence from the political process has served our nation well, and I would ask that you keep that foremost in mind as these issues are discussed in the current Senate debate.
Thank you for your consideration.
Sincerely,
Ben Bernanke
Former Federal Reserve Chairman Paul Volker also chimed in with this letter to Chris Dodd and Richard Shelby:
Dear Chairman Dodd and Senator Shelby:
I am writing about an issue bearing upon the Federal Reserve’s independence in conducting monetary policy that has long concerned me. I understand legislation is now being considered by the Senate.
The desire of the Congress to review the auditing arrangements for the Federal Reserve in the light of the extraordinary actions taken during the financial crisis is understandable. The Congress and the public need to be assured that such emergency action be taken with regard for professional standards and protecting the taxpayer’s interest.
Decades ago, during my own tenure at the Federal Reserve, an agreed approach toward GAO audits of the Federal Reserve carefully protected, as the relevant Senate Committee report of the time indicated, the Fed’s ability to “independently conduct the Nation’s monetary policy”. The point is that a threat to expose the details of active debate within the Federal Reserve about monetary policy decisions would tend to constraint that debate, expose the policy-making process to greater political pressure, affect markets, and risk the release of sensitive information about particular institutions and relationships with foreign authorities.
Consequently, I encourage the Senate to consider measures as now proposed in S.3217 that would provide the Congress with the information it needs to assess the implementation of the Federal Reserve’s unusual lending activities. At the same time it would preserve the confidentiality of the Federal Reserve in its deliberative processes to the extent needed to conduct monetary policy independently.
I am sending copies of this letter to Senators Cardin, Feinstein, Landrieu, Levin, Merkeley and Murray.
Sincerely,
Paul Volcker


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Plan to audit Federal Reserve appears poised to clear Senate

By The Associated Press
Thursday, May 6th, 2010

Following last-minute adjustments, a proposal to audit the Federal Reserve that the Obama administration once opposed was on the verge of passing the Senate as it attracted broad support from conservatives and liberals alike.

The administration withdrew its objections to the proposal Thursday, saying it was satisfied that the audit would not interfere with the Fed's authority to set monetary policy.

The one-time audit would focus on the Fed's emergency lending to financial institutions in the months leading up to and after the 2008 financial crisis. At its peak, at the end of 2008, the Fed's lending totaled $1.16 trillion.

The Fed has become one of the targets of public anger in the aftermath of the financial crisis, blamed for not seeing the meltdown coming and for having what some perceive as too cozy a relationship with the nation's largest institutions. The audit measure, proposed by Vermont independent Bernie Sanders, has populist support from across the political spectrum, from tea party activists to liberals and labor organizations.

Story continues below...


The building momentum for the audit measure came after the Senate, prodded by President Barack Obama, rejected a Republican consumer protection plan that would have diluted a central element of the administration's financial regulation package.

Democrats and the president argued that the GOP proposal would have gutted consumer protections. The vote was 61-38, with two Republicans — Sens. Olympia Snowe of Maine and Charles Grassley of Iowa — joining Democrats to defeat the GOP measure.

Democrats have proposed an independent bureau within the Federal Reserve to write and enforce regulations that would police lending. The Republican proposal would create an agency within the Federal Deposit Insurance Corp. The FDIC would have to approve regulations and enforcement would be left to bank regulators.

Republicans said the Democratic bill overreached and would give a powerful consumer agency too big a voice in banking affairs. The Democratic version of the legislation already contained some concessions to Republicans, and Democrats showed no willingness to cede any more ground

"Alternatives that gut consumer protections and do nothing to empower the American people by cracking down on unfair and predatory practices are unacceptable," Obama said in a statement before the vote.

The sharp divisions over the consumer protection stood in contrast to the wide bipartisan support for the Federal Reserve audit.

The amendment would require Congress' investigative arm, the Government Accountability Office, to undertake a one-time audit of the Federal Reserve's emergency lending to financial institutions in the months leading up and after the financial crisis of late 2008.

The Federal Reserve and the Treasury had opposed such an audit, arguing it could interfere with the Fed's independence.

But Sanders has said the audit would focus exclusively on the Fed's short-term lending for financial institutions from December 2007 until the present. The audit would have to be completed within one year of the financial regulation legislation becoming law.

Sanders said he wants to see if there were conflicts of interest involving the institutions that received the money and members of the boards of the Fed's regional banks. Moreover, Sanders said the audit should examine whether financial institutions received no-interest loans from the Fed that they then used to buy interest-bearing government bonds.

"If that was the case, and I suspect it was, you're looking at a huge scam," Sanders said.

The amendment also would require the Fed to post on its website by Dec. 1 information regarding its lending before and after the crisis.

The Fed's short-term lending, designed to increase the liquidity of banks reeling from the crisis, grew dramatically at the height of Wall Street meltdown.

Thursday afternoon, Deputy Treasury Secretary Neal Wolin voiced the administration's opposition to the audit proposal. But hours later, following negotiations with Sanders, Wolin withdrew the opposition.

"We are confident that the revised amendment proposed by Senator Sanders strikes the appropriate balance: providing full transparency of lending programs while protecting the bedrock principle of central bank independence on monetary policy that has served our nation so well," Wolin said in a statement.

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