Measure opening Federal Reserve to more scrutiny gains steam-L.A. times

Measure opening Federal Reserve to more scrutiny gains steam

Congressional auditors would have broad power to examine the Fed's operations under the legislation first introduced 26 years ago by Rep. Ron Paul. Two-thirds of the House now back it.

By Jim Puzzanghera

8:38 AM PDT, September 25, 2009

Reporting from Washington

A key House lawmaker said today he supported a growing effort to require more detailed audits of the Federal Reserve and said he wanted to include the requirement in legislation overhauling the financial regulatory system.

The support of Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, gives a major boost to legislation by Rep. Ron Paul (R-Texas) to allow the Government Accountability Office to conduct detailed audits of the Fed's operations.

The bill, which Paul has been pushing for 26 years, has gained strong momentum since the complex and little understood Federal Reserve has taken extraordinary actions to stem the financial crisis. Those include invoking emergency powers last year to use hundreds of billions of dollars to help engineer the sale of Bear Stearns and bail out American International Group.

"We are serious about some legislation in this regard," Frank said during a hearing he held today -- the first one on Paul's bill since he introduced the legislation in 1983. The bill now has 294 co-sponsors -- two-thirds of the House of Representatives -- fueled by outrage and frustration over the Fed's ballooning balance sheet, which has taxpayers on the hook for trillions of dollars in lending related to the financial crisis.

The Obama administration wants to increase the Fed's power to oversee financial institutions that pose a major risk to the economy, adding to worries in Congress about the limited details available about who borrows from the Fed and more broadly about the agency's operations.

Frank reflected that, saying he also wanted to rein in the Fed's emergency lending powers.

But he expressed concerns about how the GAO's intensive auditing would affect financial markets, indicating he would seek changes to Paul's legislation to avoid "the impression that we are somehow in a formal way injecting Congress into the setting of monetary policy, because I think that could have a very destabilizing effect."

The Fed opposes the legislation, which would threaten the central bank's independence to conduct monetary policy, said Scott G. Alvarez, the agency's general counsel.

"We're concerned that would cause the markets and the public to lose confidence in the independence and judgment of the Federal Reserve," Alvarez said.

He noted that a full, independent audit of the Fed's financial operations is conducted every year and that Chairman Ben S. Bernanke has taken steps in the last year to increase the amount of information the central bank releases.

But Alvarez said GAO audits are not like traditional accounting audits. The congressional watchdog has power to question Fed officials and make policy judgments about the central bank's operations.

"The concern that we have is that monetary policy, to be effective . . ., has to be as free as possible from political considerations," Alvarez said. GAO audits are "really policy reviews that involve oftentimes conducting interviews and deposition of participants, looking at records, coming to an independent policy judgment and publishing that policy judgment," he said.

But Paul questioned what the dozen members of the Fed's Open Market Committee, which sets monetary policy, were hiding.

"This idea that a group of 12 individuals that work behind the scenes that want more secrecy and less transparency, how did this come about where you assume you're in charge of the public interest?" Paul said, calling the Fed "a government unto itself."

http://www.latimes.com/business/la-fi-fed-audit26-2009sep26,...