Fed Audit Clears House Finance Committee

A measure that would subject the U.S. Federal reserve to a full and complete audit by the Government Accountability Office (GAO) passed the House Financial Services Committee on Thursday, 43-26, as an amendment to the larger financial reform legislation. The amendment was sponsored by former presidential candidate Ron Paul of Texas, a longtime foe of the central bank who would, ideally, like to see the institution abolished entirely. Cosponsoring the measure was Florida Democrat Alan Grayson, himself no great fan of the Federal Reserve.

The Fed is currently subject to regular audits by both the GAO and outside CPA firms. However, subsection (b) of section 714 of title 31 of the U.S. Tax Code specifies four areas that cannot be included in any audit.

They are: transactions for, or with, a foreign central bank, government of a foreign country or nonprivate international financing organization; 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; transactions made under the direction of the FOMC, or Federal Open Market Committee (responsible for overseeing open market operations); or any part of discussions of communications among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to the previously mentioned items.

The amendment, if passed by the House, would remove these four restrictions, allowing the GAO full and complete access to all Federal Reserve records for the purposes of this audit. A previous attempt to remove these restrictions was put forward in 1993, an effort that thenComptroller General Charles Bowsher said he supported during his testimony before the House Banking Committee that year, but the legislation didn't gather enough support to pass.

This represents a monumental victory for Rep. Paul, who has submitted legislation for a full Fed audit every single year since the early 1980’s, says the New York Times. Paul has long asserted that the Fed’s powers are too great and that if the government wouldn’t oblige him by dissolving the central bank entirely, the least they could do is give it an audit, thereby increasing transparency and oversight.

The Fed, however, has strongly opposed this measure, with Chairman Ben Bernanke saying that doing so would threaten the independence of the central bank and thus have a chilling effect on its ability to make sound monetary policy. Fed counsel Scott G. Alvarez said that GAO audits or the threat of a GAO audit could be used both to second-guess the Federal Reserve's monetary policy judgments and to try to influence subsequent monetary policy decisions.

For this to take full effect, the bill must still clear both legislative chambers. A parallel measure in the Senate is being sponsored by Sen. Bernie Sanders, Independent of Vermont.

You can read our earlier coverage of this bill in a previous issue of the Trusted Professional.