Representative Ron Paul (R- TX) has introduced a bill in congress entitled HR 1207 Federal Reserve Transparency Act. The FED, according to it’s own website is an institution which is “Independent within the government”. Created on December 23rd 1913 under the Federal Reserve Act, it functions as a self funding semi-autonomous entity responsibile to report periodically in front of congress. The FED’s site states “The Federal Reserve’s ultimate accountability is to Congress, which at any time can amend the Federal Reserve Act.
Currently, the Federal Reserve is audited annually by an independent auditor and can be audited by the Government Accountability Office (GAO) under the Federal Banking Agency Audit Act of 1978. The question is if the FED is created by Act of congress and is subject to independent audit then what is the purpose of the new Federal Reverse Transparency Act, and why has the Act gained such broad support in congress thus far?
The Washington Post ran a story on July 24th which stated that the Federal Reserve Transparency Act would “subject the Fed’s decisions to a full-blown audit by the Government Accountability Office, the investigative arm of Congress.”. Additionally Bloomberg.com reported that on July 22nd “Bernanke told Paul at a House Financial Services Committee hearing last week that GAO audits, often initiated at the request of members of Congress, could be used as a club against the Fed.” But if, as we’ve seen, the FED’s own website states that it is already subject to audit by the GAO what is the real issue here?
The principle on which the FED’s independence rests is its mandate to regulate monetary policy free from the influence of politics. This fact is actually quite strange when we think that the foundation of this nation was the dependence of all institutions on civil society as opposed to the dependence of the government on institutions such as the Church or the Central Banks of Europe.
Now the regulation of the monetary system is something which we seem to take for granted. It has only been the recent expansion of the FED into areas not traditionally under it’s domain in response to the financial crisis which has cause the backlash behind the Federal Reserve Transparency Act. The recent attempts to have the FED regulate financial markets, oversee consumer protection, purchase distressed structured assets in order to support the markets, and intervene in the support of businesses from brokerages, investment banks, manufactures, and mortgage lenders have all contributed to the general impression that the government has ceded too much power to an entity which is self described as an “independent entity within the government”.
Prior to this financial crisis it was commonly understood that the dual mandate of the FED was to balance price stability and full employment. It did this through it’s regulation of short term interest rates and its control over monetary policy. Basically, the FED would lower or raise interest rates or, in conjunction with the US Treasury, reduce or increase the amount of currency in circulation. Thereby, in theory, the FED was able to add a layer of control over the economic cycles of boom and bust which all nations and economies are subject to.
It is open for debate as to the effectiveness of the FED in this regard. A mere 16 years after its creation the FED was unable to (or even contributed to) the Great Depression. We generally assume that the marvelous expansion of the economy in the 20th century was proof of the effectiveness of the FED. Certainly the American Economy is many many times larger now at the beginning of the 21st century than it was at the beginning of the 20th. But, as this financial crisis has made clear, so is the balance sheet of the government many many times larger as well.
We see today that the FED has done everything possible to achieve so called “price stability” at the expense of its other assumed mandate of “full employment”. There are many who openly question whether it wasn’t the FED’s own policies of artificially low interest rates and artificially cheap credit which caused the current crisis. In this regard, with years of FED supported asset price growth and a short period of asset price crash the term “price stability” seems incorrect, the more correct term would be “price control” or lack thereof. With the official unemployment rate at almost 10% and the unofficial unemployment rate projected to be much higher, we hear that such is the necessary sacrifice in order for “the markets to heal”. As if markets were human beings who bleed and heal and human beings are just workers whose place is analogous to red blood cells rather than individual citizens.
I think this really is at the heart of the debate over the Federal Reserve Transparency Act. On one side there are those who believe that the economic system is paramount and from it comes the health of the nation, while the other side believes that individual citizens in representative democracy are the ultimate source of the State’s continued existence.
This philosophical debate goes to the core of our ideas of government and the individual and its history is as old as human civilization. Where does our individual responsibility lie? Is it to us, or our family, or our friends? Is it to our city, or our state, or our nation? Where does the FED’s ultimate responsibility lie? Is it to itself and its member banks, or the United States government, or to the other central banks of the world?
It remains to be seen whose best interests are being served here; but I can only trust in the knowledge that anytime attempts at transparency are resisted it can only mean one thing… fraud. Can we afford to trust the same individuals, the same organizations, and the same system to fix the societal ills which they have caused? Transparency will never be tolerated when it comes to the FED, regardless of what their website claims. If it were, the American people would know that they are only cogs in the machine, and the owners of capital mean to continue to impose the silent tax upon them… inflation. Just as the revolutions of representative democracies were wagged on the basis of “no taxation without representation”, so the public knowledge of the silent tax of inflation would demand a response in kind and in measure.