- The Washington Times - Monday, November 21, 2005

Ben Bernanke, President Bush’s choice as the new chairman of the Federal Reserve Board, is a highly respected economist who is well-qualified to hold the position.

However, the change of leadership, after Alan Greenspan’s long tenure, provides a good opportunity to re-examine how the Fed works. Specifically, Congress should use this changing of the guard to modernize Fed finances.

The Fed’s finances are an obscure mystery except to a tiny group of policy wonks. Unlike most federal agencies, Congress does not authorize funding for the Fed. Instead, the Fed survives off the earnings of the government bonds it holds.

Each year, the Fed pays out part of these earnings to its member banks across the country, as a return on the money they have invested in the Fed. It also uses some of its earnings to pay for its operations. The rest of the Fed earnings are returned to the Treasury, where originated as interest on government bonds. In effect, the Fed is allowed to spend as much as it wants for its operations — at the expense of American taxpayers — because higher expenses mean less money goes back to the Treasury.

And the Fed’s cost has been rising. The agency projects it will spend $288 million in 2006, compared to a budget of just $156 billion in 1994. After adjusting for inflation, this is still an increase of more than 45 percent. While the Fed’s budget is not a big item in the context of the whole federal budget, Congress has had major battles over smaller sums.

One of the biggest items in the Fed’s budget is monetary and economic policy, a category that will cost $112 million in 2006. Much of this funds economic research. While the Fed needs some research to do its job, much of the research has no obvious relationship to monetary policy.

For example, the Dallas Federal Reserve Bank recently published articles on trade and climate change, Social Security reform, and the economics of biotechnology. While these studies may have been quite useful, there is no reason they should be paid for by taxpayers through the Fed. Congress should be able to determine how much economic research it wishes to fund and explicitly appropriate the money. The Fed should not take taxpayer money to finance this research through the back door.

To correct this problem, the Federal Reserve Board’s budget should be subject to congressional approval just like other federal agencies. Will this jeopardize its independence? Unlikely.

The Supreme Court has relied on congressional appropriations for more than 200 years and no one from either party has claimed this restricts the court’s independence from Congress.

In short, there is no reason to give the Fed a blank check on funding its own operations. The current situation is a historical relic of legislation that created the Fed nearly a century ago. With Fed leadership changing hands, Congress has a great opportunity to modernize the law and reform the Fed.

When Congress is looking to trim money for children’s health care, education and other important programs, there’s no reason taxpayer dollars should be funneled to the Fed without any oversight. If the new Fed chairman can’t sell his budget to Congress, he’s probably asking for too much money.

Dean Baker is co-director of the Center for Economic and Policy Research.

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