- The Washington Times - Monday, July 27, 2009

ANALYSIS/OPINION:

The Transparency Act of 2009 (H.R. 1207), a bill originated by Rep. Ron Paul, Texas Republican, that mandates Government Accountability Office (GAO) audits of the Federal Reserve, has the support of more than half the members of the House of Representatives. In one sense, it’s almost comical. The insinuation that Federal Reserve Board Chairman Ben S. Bernanke is against openness is like saying Popeye is against spinach.

Long before he came to Washington, Mr. Bernanke argued for greater Fed transparency in the belief that it would help stabilize markets and that the public has a right to know. At the Fed, he advanced the publication of the minutes of monetary-policy meetings, made available more frequent Fed economic forecasts and added to public information on the Fed’s balance sheet and lending programs. He has long been in favor of the Fed announcing a numerical inflation target to reduce uncertainty in financial markets.

Yet it’s understandable that in the worst recession of the postwar era, Congress wants to know more about what’s happening inside the Fed, especially in light of the big-bucks innovative programs newly created by Mr. Bernanke and his colleagues to ease the financial crisis. Unfortunately, many in Congress aren’t making the distinction between optimum transparency and excessive transparency, or what some economists have labeled dangerous meddling.

The Fed has a history of autonomy and legally protected independence, out of which has grown a trust on which markets have come to depend. That trust will be threatened by perceived attempts to politicize the Fed, whatever the motive. Markets will worry that the Fed’s mandate to control inflation and maximize employment has been weakened.

Many see a GAO audit of the Fed as a threat to the Fed’s independence and a not-so-subtle attempt by Congress to influence monetary policy. That perception will undermine confidence in the Fed’s ability to control inflation, thereby unanchoring inflation expectations and leading to faster rising prices, higher interest rates, a weaker dollar and economic instability. H.R. 1207 empowers the GAO to make recommendations to Congress for legislative or administration action — unnerving language.

Mr. Bernanke has made it clear in recent testimony that he is not against all auditing of the Fed — just not traditional monetary policy. He doesn’t want second-guessing of the Fed’s open-market operations or Federal Open Market Committee (FOMC) decisions concerning the federal-funds interest rate, reserve requirements and discount window lending. He has said unequivocally that audits of the Fed’s extraordinary new financial programs would not be unwelcome, nor would audits of any new regulatory authority the Obama administration might give the Fed.

Why, then, is a majority of the House of Representatives calling for an unrestricted audit of the Fed, including an investigation of monetary-policy actions? A cynic might say it’s a grab for power by Congress to influence future inflation. Why? To monetize an unsustainable rise in the federal debt? To let inflation devalue the currency instead of bringing the budget under control? The cynic might also point out that having the ability to influence interest rates before elections could tempt even the devil, let alone a politician.

More likely those members of Congress supporting H.R. 1207 are doing so because of the heat they’re feeling from their hard-pressed constituents. Backing the bill makes supporters look good, though in their heart of hearts, many in Congress probably know it’s very risky and wouldn’t be disappointed if it fails. It’s uncertain whether the Senate would approve a Fed audit bill without monetary policy carved out, or if such a bill would be welcomed by the White House.

A compromise could save the day and bring a sigh of relief all around.

The document that illuminates monetary decision-making in detail isn’t the minutes of the FOMC discussions, published three weeks after policy meetings. The minutes are only a summary. It’s the verbatim transcript of FOMC meetings that names names and spells out the details of policy deliberations, warts and all. It makes delicious reading, though it’s seldom looked at because the Fed won’t release transcripts until five years have passed, lest the revelations fuel financial speculation. Here’s where a compromise might be possible.

If the Fed were to publish verbatim transcripts of FOMC monetary-policy decision-making one year after meetings instead of five, that could satisfy enough disgruntled members of Congress to relegate H.R. 1207 to the dustbin. It shouldn’t be a bitter pill for Mr. Bernanke to swallow.

Ironically, Mr. Bernanke himself may be partly responsible for the current brouhaha over transparency. His predecessor, Alan Greenspan, spoke to Congress in arcane terms that even economists found hard to decipher. In contrast, Mr. Bernanke speaks clearly and understandably and consequently invites more questions. When the door of understanding is opened, it instills the desire to become involved. Such are the risks of transparency.

Alfred Tella is a former Georgetown University research professor of economics.

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