House Takes Up Fed Audit Proposition

Expanding the Government Accountability Office's (GAO) audit authority over the Federal Reserve could volatilize the financial markets and stifle U.S. relations with foreign central banks, the Fed's general counsel will tell lawmakers today.

Scott G. Alvarez, counsel for the Federal Reserve's Board of Governors, will testify before the House Financial Services Committee this morning, arguing against the enactment of H.R.1207. The bill, introduced by Rep. Ron Paul, R-Texas, would give the GAO comprehensive auditing power. The GAO currently acts as the Fed's auditor, assessing its capital standards and reviewing its enforcement of consumer protection laws.

The office also recently gained authority to audit credit facilities such as those extended to AIG, Bear Stearns, Citigroup and Bank of America, but it does not get involved in two particular areas of the central bank's operations: monetary policy and discount window lending.

Changing the scope of the GAO's authority would run the risk of dissolving the Fed's independence, Alvarez says in prepared testimony. Alvarez will defend the Fed's transparency to lawmakers, citing regular statements from the Federal Open Market Committee (FOMC), weekly publication of its balance sheet and a monthly report on liquidity programs as examples.

Thomas E. Woods Jr., a resident with economics research center Ludwig von Mises Institute who will also be testifying before the committee, argues that the bill is not designed to empower politicians, but rather to "open the Fed's books to public scrutiny."

"Congress has a moral and legal obligation to oversee institutions it brings into existence," Woods will say.

Auditing monetary policy actions, such as bilateral currency swaps, will cause uneasiness among foreign bodies with which the Fed works, Alvarez says. Identifying which banks draw discount window credit could stigmatize those financial institutions in the eyes of borrowers and increase banks' unwillingness to leverage such credit.

Historical evidence indicates that banks' reluctance to use the discount window can cause momentary interest-rate spikes and, thus, market volatility, Alvarez argues.

Supporters of the Federal Reserve say steps taken by the central bank earlier this year were pivotal in slowing the recession. Paul, a longtime critic of the Fed, told Bloomberg TV this week that, had there been no Fed to facilitate easy credit, the housing crisis would have been averted altogether.

"The Fed created the conditions for the necessary correction," he said.

The FOMC announced Wednesday that the Fed would gradually reduce its purchases of $1.25 trillion of agency mortgage-backed securities and up to $200 of billion agency debt

Today's testimonies cap off a busy week for the House Financial Services Committee, which is plowing through an ambitious schedule of hearings set by Committee Chair Barney Frank, D-Mass. The proposed Consumer Financial Protection Agency (CFPA), resolution of "too big to fail" institutions and regulator consolidation were among the topics debated this week. Next week, the committee continues CFPA discussions, looks at rating agency reforms and gets the Fed's perspective on overhauling the financial markets.
Frank insisted Wednesday that financial system reform was the committee's top priority, saying, "Media reports that it's dead for the year are inaccurate."


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