Today, the House Committee on Financial Services held a hearing regarding whether to grant the Government Accountability Office (GAO) expanded authority to audit the Federal Reserve. Chairman Barney Frank (D-MA) opened the hearing by briefly describing the economic crisis over the past year, including the Federal Reserve’s involvement in stabilizing the financial market. Members of the Committee, including Representatives Stephen F. Lynch (D-MA) and Jeb Hensarling (R-TX), also made introductory comments, noting the need to increase transparency at the Federal Reserve and to differentiate between emergency funding and serial institutional bailouts.
Testifying before the Committee were the following witnesses:
- Scott G. Alvarez, General Counsel, Board of Governors of the Federal Reserve System
- Thomas E. Woods, Jr., Ludwig von Mises Institute
Since 1978, when the Federal Banking Agency Audit Act was enacted, the Board of Governors of the Federal Reserve System, the individual Federal Reserve Banks, and the Federal Open Market Committee have been subject to GAO audits.
Under current law, certain Federal Reserve matters are expressly excluded from GAO audit:
"Audits of the Federal Reserve Board and Federal reserve banks may not include -
(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;
(3) transactions made under the direction of the Federal Open Market Committee; or
(4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to clauses (1)-(3) of this subsection." Proposed H.R. 1207 would repeal all of these exclusions.
Mr. Alvarez explained why granting the GAO broad new authority to audit the monetary policy and related activities of the Federal Reserve would be contrary to the public interest. Mr. Alvarez defended the Federal Reserve’s commitment to protecting the public interest, noting that monetary policies, to be most effective, must be as free as possible from political influence, and asserted that the Federal Reserve is “not as secretive as [it is] thought to be.” He stated that the Federal Reserve is accountable to both the Congress and the public, noting that the GAO already audits the Federal Reserve and that such audits also serve as a policy guide and provide recommendations with respect to policies. He further noted that the GAO had conducted 14 audits of the Federal Reserve to date and that an additional 14 GAO audits remain pending.
Committee members asked Mr. Alvarez why the identity of firms accessing discount window loans at the Federal Reserve remains confidential. Mr. Alvarez explained the Federal Reserve’s concern that if the names of borrowers are disclosed in a GAO audit, as proposed in H.R. 1207, borrowing institutions would be viewed by the public as troubled institutions, potentially triggering a deposit run and accelerating failure, notwithstanding the fact that the Federal Reserve makes the discount window available to both troubled and healthy institutions.
Another Committee member requested details of what circumstances warrant the authorization of loans pursuant to Section 13(3) of the Federal Reserve Act . Mr. Alvarez stated that institutions will only receive Section 13(3) funding in unusual and exigent circumstances and upon a determination that no other credit is available to the institution. Mr. Alvarez reviewed additional measures recently adopted by the Federal Reserve to increase accountability, including additional public disclosures about the composition of and changes in the Federal Reserve’s balance sheet, heightened disclosure of policy programs and financial activities on the Fed’s website, Congressional reports on each outstanding liquidity facility authorized under Section 13(3) and public disclosure of significant contractual obligations entered into to assist in the management and administration of the programs established to address the financial crisis.
In response to a question by a Committee member, Mr. Alvarez asserted that he did not believe enhanced GAO audits would have prevented the financial crisis and concluded that the adoption of H.R. 1207 would “increase inflation fears and market interest rates and, ultimately, damage economic stability and job growth.”
Mr. Woods defended H.R. 1207, stating that “taxpayers—involuntary investors in this case—have a right to know who received loans, in what amounts, for which collateral, and why specific loans were made.” He asserted that, without a full audit of the Federal Reserve, inflation cannot be effectively fought and interest rates cannot be effectively monitored. Mr. Woods noted that the current financial crisis is a historic moment and challenged the Federal Reserve’s defensiveness, arguing that “if you’re not doing anything wrong, you have nothing to worry about.”