During an appearance on PBS's NewsHour, which will be aired this week on local PBS stations, Bernanke said the proposed legislation would interfere with the central bank's independence. "I don't think the American people want Congress running monetary policy," he said. "And I think that's very very critical for people to understand." (See transcript below.)
This is an odd claim. If you read the bill (H.R.1207), it simply amends existing law to say "under regulations of the Comptroller General, the Comptroller General shall audit" the Federal Reserve Board and its member banks.
The Comptroller General is a Senate-confirmed official who's also the head of the Government Accountability Office (GAO), a legislative branch agency organized under the U.S. Congress. In other words, we're not talking about a political bomb-thrower, but a veteran civil servant tasked with important oversight responsibilities.
The argument for an audit has become stronger in the wake of the extraordinary and unprecedented steps the Federal Reserve has taken in response to the market turmoil that began two years ago. Among them: the Fed has printed hundreds of billions of dollars to purchase what are delicately called "troubled assets"; it has created mammoth Wall Street bailout funds with acronyms like CPFF and TALF; and it has done all of this without prior approval by the U.S. Congress.
As far back as 1977, the GAO was saying it needed the authority to conduct a full audit of the Fed. "We do not see how we can satisfactorily audit the Federal Reserve System without authority to examine the largest single category of financial transactions and assets (foreign currency purchases) that it has," its report to Congress said at the time.
If the Fed had stuck to its traditional role of setting interest rate targets and employing other monetary policy tools, it's unlikely this measure -- the Federal Reserve Transparency Act of 2009 -- would have drawn more than a modicum of public and congressional support today.
But because Bernanke and other Fed officials have been bailing out financial institutions, such as providing up to $30 billion to let JPMorgan buy Bear Stearns last year, and because the national monetary base has recently doubled, public interest in the topic has spiked.
Bernanke can thank (or blame) Rep. Ron Paul, the libertarian-leaning Texas Republican and longtime Fed critic, for focusing so much attention on this topic. Paul was the original author of the Audit-The-Fed bill, which can now claim 277 sponsors, up from 170 two months ago. It's been spurred along by concerns about the way the government is responding to what has become an unusually severe recession -- and public opinion turning against the Federal Reserve.
"Since its inception, the Federal Reserve has always operated in the shadows, without sufficient scrutiny or oversight of its operations," Paul said in a February 2009 speech announcing the bill. "While the conventional excuse is that this is intended to reduce the Fed's susceptibility to political pressures, the reality is that the Fed acts as a foil for the government. Whenever you question the Fed about the strength of the dollar, they will refer you to the Treasury, and vice versa. The Federal Reserve has, on the one hand, many of the privileges of government agencies, while retaining benefits of private organizations, such as being insulated from Freedom of Information Act requests."
Paul points out that although Federal Reserve has the authority to enter into agreements with foreign central banks and foreign governments, the GAO is prohibited from auditing or even reviewing any of those agreements. (Current law says the GAO may not audit "transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization.")
The 2008 presidential candidate has been a longtime Fed critic, and even an advocate of its abolishment, saying for years that if the central bank keeps interest rates too low, bubbles are likely to form. In 2002, for instance, Paul correctly predicted that government policies would create "a short-term boom in housing" while increasing "the likelihood of a painful crash in the housing market." This represents a minority view among economists -- see a CBSNews.com review of a recent book on the financial crisis with a foreword by Rep. Paul -- but one that has found more adherents recently.
Here's an excerpt from the transcript of the PBS exchange:
PBS' Jim Lehrer: There's an effort in Congress, and in the House in particular, to audit what the Federal Reserve does, particiularly in monetary policy. How do you feel about that?
Bernanke: So that bill, people don't fully understand what that bill is about. It sounds like, audit the Fed, it sounds like "Let's look at the books." That's what it sounds like. Congress already looks at our books. We have many different levels of auditors. The GAO, the General Accountability Office, which is supposed to be doing this audit, already looks at virtually all of our activities. And the ones it doesn't, our financial books, financial loans, and the ones it's not looking at, and where the taxpayer needs some assurance, we're willing to work with Congress to make sure the GAO gets the information it needs.
Bernanke: What people don't understand is that this bill would give the GAO, the GAO, the authority to audit monetary policy. And what does that mean? That means if the Federal Reserve decided a year from now that because of incipient inflation it was time to raise interest rates, that the Congress would say, 'Ah, the GAO's going to audit that decision. It's going to subpoena your materials. It's going to demand information from members of the FOMC. It's going to evaluate your decision. It's going to report to Congress.' I don't think that's consistent with independence. We are completely open to providing any information Congress wants to make sure we're using taxpayer money safely and soundly, that we're meeting all our responsibilities. I don't think the American people want Congress running monetary policy. And I think that's very very critical for people to understand.
PBS' Jim Lehrer: You think that's what it would end up doing?
Bernanke: Exactly, that's exactly what it would do. There's a provision in that law, which, currently, current law, which carves out monetary policy. It doesn't give Congress authority, GAO authority to audit it. That was put in in 1978, at a time when we had a lot of inflation, which you might remember. After that the Fed became more independent, brought inflation down. But now, that's exactly what it would do. If that carveout was eliminated, Congress would have the authority anytime to ask the GAO to come in, and audit, and look at, and evaluate the monetary policy decisions made by the Fed. That's not consistent with independence.
Perhaps. Then again, the text of this proposal is not chiseled into granite. If the auditing authority granted to the GAO becomes too intrusive, Congress can always amend it.
While Rep. Paul's bill enjoys strong bipartisan support in the House of Representatives, the Senate version (S.604) has only 20 sponsors and was blocked from coming to a vote by the Democratic leadership earlier this month. Now we'll see if public concern about the Federal Reserve's recent activities is sufficient to overcome this last political hurdle.
Declan McCullagh is a correspondent for CBSNews.com. He can be reached at email@example.com.