Audits Of The Fed May Begin Soon

Barney Frank and other Congressmen are anxious to pass a law that would allow the government to audit the Fed including what its assets are, how they are lent, who they are lent to, and what the results of the loans are.

The Government Accountability Office, which is an agency of Congress, would do the work, giving Congress some level of new oversight of the Fed, whether it wants to admit that or not.

Fed chair Bernanke see that Congressional plan as an intrusion on his agency’s independence and he is almost certainly right. He testified on the subject recently and said “A perceived loss of monetary-policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.”

One of the most sensitive aspects of the audits is that they will give Congress access to a list of which troubled institutions have come to the Fed for money. The release of that information could cause a run on those banks, which could cause the Fed and FDIC to put more money into the institutions so that they will not fail. The Fed defends it secrecy in these matter by making the powerful case that some information about the financial system is best kept from the public.

Frank’s answer to this disclosure issue is that the names of institutions borrowing frightening sums from the Fed would be kept confidential for several months after the audits which would avoid a panic when the data finally does come out because it will be outdated.

Frank’s plan is based on the theory that in a perfect world information in the possession of Congress is never leaked. History has proved that that assumption is rarely worth relying on. The more hands that information about Fed lending passes through, the most likely that the public will have the names of troubled banks very soon after the agency provides them money.

It is too early to tell whether audits of the Fed will allow Congress to pressure the agency on monetary policy. It is not too early to say it could cause bank panics.

Douglas A. McIntyre