The Washington Times - July 25, 2012, 10:53AM

Call it Rep. Ron Paul’s swan song.

The House is expected to vote today on the retiring Texas Republican’s latest, and likely last, push for legislation that would audit the Federal Reserve. The bill has 274 co-sponsors but is being considered under suspension. That means it will need approval from two-thirds of the House to proceed to the Democratic-led Senate, where it is likely dead on arrival.

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Advocated by Paul for decades, the Federal Reserve Transparency Act would direct the nonpartisan Government Accountability Office to conduct an audit of the Fed and make recommendations for legislative or administrative actions in a report submitted to Congress. Fed Chairman Ben Bernanke expressed concerns about the audit to Paul and other proponents at a committee hearing last week, as reported by Reuters:

Bernanke said it would be a “nightmare scenario” if politicians decided to second-guess monetary policy.

“That is very concerning because there’s a lot of evidence that an independent central bank that makes decisions based strictly on economic considerations and not based on political pressure will deliver lower inflation and better economic results in the longer term,” Bernanke told the U.S. House of Representatives’ Financial Services Committee.

In a lecture at the Capitol Visitors Center Tuesday, Paul cited actions taken during the recent financial crisis as evidence that the politicization of the Fed has already occurred.

“Today we have a combination of a secret Federal Reserve dealing with private banks who collude with private banks to set interest rates. At the same time they collude with the executive branch. They claim, they say we can’t have an audit of the Fed because it would make it political,” Paul said.

“Well, how can it be more political if the Treasury Department from the executive branch gets together with the Federal Reserve and bails out their friends? And then they want it kept secret. And they say it would be chaotic. Yea, it would be chaotic for those people who have been ripping us off. That’s why they don’t want to have it. They talk about, ‘I want transparency.’ And they talk about independence. Independence to them means secrecy.”

Directed by a provision in the Dodd-Frank financial reform law, the GAO administered a one-time audit of the Fed’s emergency loan programs from December 1, 2007, through July 21, 2010. The report, released last year, found evidence of a revolving door between financial institutions that received loans as well as contracts to manage other bailouts.

The Federal Reserve Banks awarded 103 contracts worth $659.4 million during the period prescribed by the report. About two-thirds of the contracts were awarded noncompetitively — including eight of the 10 highest-value contracts — due to “exigent circumstances,” such as the time-sensitive nature of the emergency programs (figure 4 in report).

For instance, Morgan Stanley was awarded the largest no-bid contract of $108.4 million to help manage the AIG bailout (table 14). The financial firm received $45 billion in term-adjusted loans from the Fed’s emergency programs (table 9).

The report also noted more specific incidences posing conflict of interest problems. The Chief Executive Officer of JPMorgan Chase, Jamie Dimon, served on the board of directors for the Federal Reserve Bank of New York (and still does) while JPMorgan Chase featured prominently in the emergency programs as both a borrower and a manager of other bailouts (page 80).

Another official at the New York Fed, William Dudley (who is now the president and CEO), was granted a waiver by then-President Timothy Geithner in September 2008 to retain 4500 shares of General Electric common stock valued at $106,830 and 500 shares of AIG common stock valued at $1200, according to financial disclosures (page 93). Though Dudley’s investments in companies that received emergency loans weren’t particularly substantial, the approval of the waiver came three days after the Federal Reserve Board authorized the AIG bailout (page 70 of report).

Whether one agrees with Paul’s method of auditing the Fed or not, the central bank has significantly expanded its intervention in the economy since the financial crisis with not much to show for it. The unemployment rate remains high at 8.2 percent, and inflation looms on the horizon.

The seasonally adjusted M2 monetary supply — a key economic indicator for forecasting inflation — has increased by $2.1 trillion, or 27 percent, between September 2008 and June 2012 (when the total M2 supply was $9.9 trillion), compared to a $1.5 trillion, or 24 percent, increase between September 2004 and September 2008.

UPDATE: The House has approved Paul’s bill to audit the Fed, 327 to 98.