Monday, November 30, 2009
Federal Reserve Chairman Ben Bernanke wrote in yesterday's Washington Post that Senate proposals and a recent vote in the House Financial Services Committee threaten to undermine the independence of the Federal Reserve.
To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs. Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates.
Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information.
The House Committee apparently felt differently. Every Committee Republican and a good number of Democrats voted on November 20 in support of an amendment sponsored by Reps. Ron Paul and Alan Grayson to cut restrictions on the Comptroller General's authority to audit the Federal Reserve. The effect of the measure would be to increase Comptroller General audit authority over the Fed and to require Comptroller General auditing pursuant to its regulations. The amendment is patterned on Paul-sponsored H.R. 1207, and, if adopted as part of the underlying legislation, would amend 31 U.S.C. Sec. 714, the provision outlining Comptroller General audit authority.
The Fed has enjoyed some measure of political independence by virtue of its extended Board terms since its creation in 1914. That independence increased in 1935, when Congress removed the Secretary of the Treasury and the Comptroller of the Currency from the Board and increased Board terms from 12 years to 14 years.
This latest vote represents an effort to bring more political accountability to the Fed, an independent agency, by way of the Comptroller General, itself an independent office. (The Comptroller General, of course, is the head of the U.S. Government Accountability Office, which is, by statute, "independent of the executive departments." Like Fed Board Governors, the Comptroller General is appointed by the President, with the advice and consent of the Senate, and enjoys an extended tenure.)
Under the Paul amendment, the relationship between the Fed and the Comptroller General inches closer to another relationship between two independent agencies, the Public Company Accounting Oversight Board and the Securities and Exchange Commission under the Sarbanes-Oxley Act. (The SEC still maintains much greater control over the PCAOB under SOX than the Comptroller General maintains over the Fed under the Paul amendment.) That relationship is now before the Supreme Court on Appointments Clause and separation-of-powers grounds. The Court will hear arguments in that case next Monday, December 7.