Audit the FED!

Wealthy People Speaking in Tongues:

Audit the Fed!

Que?  Banco De California?  Es Estado Unidos, no?

The Federal Reserve exists because all banks lend out money on money they’ve taken in, and so if everyone came for their money, it wouldn’t be there. (Please see the technical discussion of modern banking in "It’s a Wonderful Life.")

The Fed came into existence in the early 1900s and, like almost every bureaucracy, has grown and extended its power over the last 100 years.

The Modest Digs of the Fed

The purpose of the Fed was to protect investors and increase confidence in banks. All banking systems create money, or as some call it, dynamic or demand deposits. In essence, by creating "interest" banks make money, though they don’t increase the currency base. The money they make is all on paper. Comforting, it is not.

One of the major jobs of all central banks is to control the reserves banks must have on hand. Raising the required reserves means banks have to keep more of their assets in the bank (which they do, on paper). Keeping more assets on hand means should there be a "run" on the bank, there will be more assets available (on paper). It also reduces the amount of money being lent, which reduces the amount of new wealth being created (on paper). Banks don’t like to keep a reserve, they like to have it out there, creating new (paper) wealth.

Clearly, this is a very important function, one which, as we have seen in recent years, can effect the wellbeing of the nation.

Which makes one wonder why the hen house is being watched by 12 fat foxes.

The Fed is a quasi public agency, meaning it controls our banking policy and features of our currency, has input into lending and governmental debt, and a whole host of monetary and banking policies.

From the Fed website:

  • conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices
  • supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
  • maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
  • providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation's payments systems

On the other hand, it is independent, indicating that it is outside the normal branches of government, but gets power from congress and appointments from the executive branch. It is headed by 12 governors representing 12 areas of the U.S., each of which is governed by a 9 member board. The Fed makes money, most of which it turns over to the Treasury. Last year it made $45 Billion.

From the Fed website: As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

Currently, the Fed might well be blamed for the subprime mortgage crisis, and of squandering the money American taxpayers gave to the banks after the bailout. An on going audit might prevent that. Or, it might make it worse. The whole point of an independent Fed is that it is free of politics.

Writing last November in Daily Finance (see below) Peter Cohan argued on behalf the Fed, noting that congress wants to audit the Fed, "But it's a really bad idea, because the Fed needs to be independent of political interference in order to act in what it sees as the best interests of the U.S. economy and financial system. Auditing the Fed will provide its opponents in Congress with an ongoing mechanism to meddle with its operations.

And from what I have seen of Congressional inquiries into the financial meltdown, the members of Congress have much better insight into what it takes to win elections than into how to govern the U.S. financial system. Meanwhile, the Fed plays a crucial role in providing stability amidst the raucous ups and downs of capitalism." See full article from DailyFinance.



The Fed is audited now. From the website: The Board of Governors, the Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review. Under the Federal Banking Agency Audit Act (enacted in 1978 as Public Law 95-320), which authorizes the Comptroller General of the United States to audit the Federal Reserve System, the Government Accountability Office (GAO) has conducted numerous reviews of Federal Reserve activities…

Further, the chairman meets with congress twice a year, at least, to discuss the operation and function of the Fed.

But, Representative Ron Paul (R Texas), darling of both the left and right fringes, wants the Fed called to task. From his website:

"The Federal Reserve is the chief culprit behind the economic crisis. Its unchecked power to create unlimited amounts of money out of thin air brought us the boom and bust cycle and caused one financial bubble after another. Since the Fed’s creation in 1913 the dollar has lost more than 96% of its value, and by recklessly inflating the money supply the Fed continues to distort interest rates and intentionally erode the value of the dollar."

What is not audited are monetary policies. Those are specifically protected from political oversight. Knowing monetary policies might tip investors off, giving some an unfair advantage. Other governments might try to manipulate Fed policies.

On the other hand, why would bankers need to be audited on matters of banking? Oh, yeah, the fox and hen house problem.

Who is right here? Clearly, since this is politics, everyone is lying a little bit. There is no doubt the Fed does stabilize the market, but there is strong reason to believe that the bankers who run the Fed like money and banks, and they have no doubt been pushing the envelope of profit making as far as they could without sending the ship of state over the brink. Sort of.

If Ron Paul and others are right, the Fed has been playing fast and loose with our money. An audit of key policies might reveal either bad planning which caused our current depression, or good planning which caused our current depression, making new wealth for the wealthy.

There is strong bi-partisan support to do a full audit of the Fed, but the resistance is strong, both from the members of the Fed and from those who fear political manipulation of the industry and monetary policies.

The FED website

Wiki on auditing the Fed

Do you think the monetary policies of the Fed should be audited?

Audit the Fed; sign a petition.

Here is the Wall Street Journal take on the Fed



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