Congress Pushing for Federal Reserve Audit

ECONOMY-US:
Congress Pushing for Federal Reserve Audit
Matthew Cardinale

ATLANTA, 30 Jun (IPS) - A majority of the U.S. House of Representatives is now in support of a historic bill by Republican lawmaker Ron Paul to audit the Federal Reserve (the Fed), the privately run central bank that sets monetary policy for the United States.

A similar bill in the U.S. Senate was proposed by Democratic Socialist Sen. Bernie Sanders, and has three right-wing Republican co-sponsors.

Meanwhile, a House committee recently approved an amendment offered by left-leaning Democrat Dennis Kucinich to a bill granting more oversight to the Government Accountability Office, which would audit the Fed's response to the economic crisis specifically.

Notably, the amendment passed committee unanimously, with broad bipartisan support, and now heads to the full House for action.

"The Fed has taken a number of extraordinary and unprecedented steps to address the financial crisis," Kucinich told IPS in an email. "In so doing, it has committed over one trillion dollars to the purchase and financing of many different kinds of assets. It has selectively intervened in certain economic sectors, while it has ignored others."

"All of these interventions mark a departure from traditional monetary policy, raise significant public policy questions, and impact taxpayers considerably," Kucinich said.

Fed Chairman Ben Bernanke is "not revealing what they did with the two trillion dollars they created on their books. It was loans to banks for sure. There have been several actions under the Freedom of Information Act to get them to say who they were to and what the terms were, but they won't do it," Ellen Brown, author of 'Web of Debt', told IPS.

Most people in the United States do not understand what the Federal Reserve is or what it does, except some know the Fed sets a federal interest rate, which in turn affects interest rates on some variable private loans.

However, the Fed's impact is much greater than this. Essentially, the Fed, which is made up of private bank representatives, can determine how much money is in the nation's money supply.

"The money supply helps determine the general level of interest rates paid for the use of money, employment, prices, and economic growth. Many economists believe the money supply is the most important determinant of these variables," according to a 1964 Congressional report, "Money Facts," by the Committee on Banking and Currency.

One way the Fed impacts the money supply is by taking actions that open or restrict credit.

The vast majority of money in the U.S. economy was created through the issuance of loans by private banks. "Created" might seem like a strong word, but in fact, banks typically create money as a bookkeeping entry that did not exist before. Because of what is called "fractional reserve lending", banks can create up to 10 times more money than they have on deposit with the central bank.

"How does the Federal Reserve change the money supply?" the Congressional report notes. "By regulations which tell the member banks the maximum amount of bank deposits they may create per dollar of reserves."

It may seem obscure, but author Ellen Brown argues that "reserve ratio" decisions by the Fed may have preceded several economic crises in U.S. history, including the Great Depression in the 1930s.

"When the Federal Reserve raised the reserve requirements [from 10 percent] to 20 percent right before the Depression, that's what brought on the Depression," she argued.

"Let's say you have a reserve requirement of 10 percent, and for every 10 dollars of reserves, you've got 100 dollars on loans. If they suddenly change the reserve requirement, they have to call in 50 dollars of loans. That caused the Depression. They have the power to shrink the money supply," Brown explained.

Meanwhile, in the last year, the Fed has taken on incredible new powers, including managing the Troubled Asset Relief Programme (TARP); purchasing parts of new federal debt; and issuing funds to unknown parties.

"There is a large number of members of Congress and Americans in general who believe that such an extraordinary and unprecedented commitment of taxpayer money demands Congressional oversight. That is why my amendment was adopted unanimously in committee when I introduced it in the committee of jurisdiction of the GAO," Kucinich said.

"Reforms may be necessary, but first it is critical to shine a light in the shadows. The Fed's actions have ballooned their balance sheet from 874 billion dollars to more than two trillion dollars. This is more than double the cost of TARP and we still do not really know where the money went. That's unacceptable," Kucinich said.

"The Constitution provides 'the Congress shall have power to coin money, regulate the value thereof,'" the Congressional report notes. "The Supreme Court interpreted this clause, again and again over a period of 150 years, to mean that 'whatever power there is over the currency is vested in the Congress.'"

Congress delegated its authority to create and regulate money to the Federal Reserve, an independent agency it created in 1913. The "independence" of the Fed creates two problems, according to the report.

"Since the Federal Reserve is independent it is not accountable to anyone for the economic policies it chooses to pursue. But this runs counter to normally accepted democratic principles," it says.

"The President and Congress are responsible to the people on election day for their past economic decisions. But the Federal Reserve is responsible, neither to the people directly nor indirectly through the people's elected representatives. Yet the Federal Reserve exercises great power in controlling the money-creating activities of the commercial banks," the report notes.

"With an 'independent' Federal Reserve, Congress and the President can be moving in one direction while the Federal Reserve is moving in the other," it says.

Prior to 1913, the U.S. went through several different phases of monetary policy, including President Abraham Lincoln's decision to print whatever funds he needed to win the U.S. Civil War, rather than relying on private banks.

Some believe it is appropriate, even inevitable, that the Federal Reserve be nationalised again.

"Nationalising the Fed would be a great idea that would solve a lot of problems," Brown said.

"What they really should do is buy out the shareholders, which are private banks. So if you bought them out at what they paid years ago, it wouldn't cost much money," she said.

It is remarkable that the Fed has purchased part of the federal debt in the last year, Brown says, although the public is mostly unaware of this development.

The U.S. government pays three to four percent interest to bondholders of the federal debt, but it could borrow the money from the Fed at less than half a percent, she said.

Brown believes a publicly-run Fed should eventually purchase the entire U.S. debt from foreign countries.

"That's what we'll have to go to. Our banks will end up public banks. You can have private lenders, but the fractional reserve system should be a public system. Creating credit on the books should be a public function because nothing backs the dollar but the full faith and credit of the United States," Brown said.

"Private banks pretend to have money they don't have. Public banks, they're not pretending anything, because we are the public. We are pledging our full faith and credit of 100 dollars for you to pay it back."

(END/2009)