The Audit the Fed Bill

I don't even understand why the hell the GAO would audit the Fed deposit rate, it's pretty public and trade-able financial information already.

http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

http://blogs.wsj.com/economics/2012/07/05/fed-not-expected-to-mirror-ecb-deposit-rate-cut/

To me, it just confirms the theory that the average politician and the average American have no idea how monetary policy works, and some of them just want to find a big scary scapegoat for all their problems.

This information is not only public, it is frequently referred to in financial news.

An audit of the Fed will basically be poring through 80% of information that is already publicly available. If people can't understand what is going on, or don't have the time to look through these admittedly very complex economic documents, that is fine, but to try to start a witch-hunt where some "audit" will clarify everything will just lead to people poring over public texts they can't understand, and cherry-picking random figures to add to the list of why we should exile Ben Bernanke.

 

While I completely understand your clients position (are you sure you should be putting it on a BBS? just wanted to check), at the same time I think there should be a nice time lag between the decisions and any public information disclosed by the Fed. Whenever the Fed intervenes in the market (as it did when it lent billions overnight to banks), if that information goes public immediately, then it basically undoes the effect of the Fed's intervention. I can imagine if Morgan's figures were disclosed early on during the crisis, they would not have survived.

I agree that the BAC merger with Merrill was rather rushed and not terribly well thought through, and sure as hell probably wasn't best for BAC in the long run, on the other hand, I would argue that it was 'good' in a sense for the economy as a whole. While obviously not 'official', I think Sorkin's book had a nice but on Thain approaching BAC on selling Merril Lynch, so that might provide an alternate explanation. Sadly, in this case, I think even the Fed would admit that your client's loss would be attributed to 'for the greater good'...not that's that any comfort to him of course.

 

How many small businesses are involved in monetary policy decissions? The Federal Reserve was not created to keep small businesses afloat but to prevent financial panics.

Something more valuable to an economy than gold and stock prices is confidence in the system. When confidence errodes things can easily descend into panic. Right now, I would say people are suspicous (not curious) but not panicked.

 

Despite claiming to deliver answers to Americans' questions oddly enough there are no question marks in that entire article, or the website for that matter. So the question is then again, why?

 

I'm at a complete loss as to where you get your information. You're ringing alarm bells over things that have existed for the last hundred years. Just because you're just now finding out about them for the first time doesn't make them "secret."

The Fed is independent IN NAME ONLY. This whole argument about a handful of families "owning" the Fed is the dumbest thing I've ever heard. The Fed hands over 95% of its annual profits to the Treasury. The Fed harnesses reserves by requiring private banks to participate in Treasury auctions to facilitate Congress' spending. To whom do you think the Fed is really accountable? The Treasury Department or the families that "own" it?

They're discount window loans. You can read all about the discount window here, on the Fed's own website. What's so secret about it? Anybody with a reserve account at the Fed, including foreign banks, is eligible to borrow reserves. If you don't know the difference between reserves and money, then you need finish up your senior year of high school first.

I challenge you to show me data demonstrating that people's purchasing power is "much much" less. And don't say that the dollar has lost 95% of it's value since 1913 (or that prices are 2000% higher). Here's the other side of the story: Median income is 4000% higher. People like you always conveniently forget that higher price levels also mean higher wages.

Exactly, and what did Congress do in 1913? Oh right...they established the Federal Reserve after an 80-year period of financial panics with banks toppling every 3 years and extreme inflation/deflation cycles. It may surprise you, but the very first central bank in this country was not the Federal Reserve, but the Bank of the United States. It was a private bank created to establish financial order...the brainchild of Alexander Hamilton, passed by Congress, and signed into law by George Washington himself in 1791.

 

They just passed it at the house by a landslide 326 yea 99 nay

Off to the senate

 

With only one Republican voting NO.

 

A bank that opens a branch in the U.S. will typically establish a reserve account with the Fed. It's a banker's bank. When a bank is low on capital or reserves it can borrow dollars from other banks in the Fed Funds Market or from the Fed itself via the discount window (usually repaid in 24 hours). It just so happens that some of these domestic branches are owned by a foreign corporations...or sometimes even foreign governments.

Likewise, American-owned banks that establish branches in foreign countries are allowed to borrow yen/euro/pounds-sterling from the various central banks abroad if those particular branches need more foreign currency.

The money borrowed are in the form of reserves. I realize I always harp on this point, but there's a huge difference between reserve money and economy money. There's only so much a bank can do with their dollar reserves, like lending or purchasing Treasuries at auctions, etc.

Bottom line, it's a far cry from "free money doled out to foreigners" that the media would have you believe.

 

I'm not surprised. Like I said, some (mostly Republicans) latch on to keywords when they can't understand concepts.

This is why a bill that advocates transparency can be passed so proudly...

but a bill that revealed more about the Fed under regulation is fought to the death.

Dodd-Frank and publically avalible information on the Fed's website have done more to reveal the FOMC's thinking motions than anything Republicans could propose in an "audit."

My quick feeling is that most congressmen and women haven't even bothered to read FOMC minutes; perhaps because most can't understand a word of what is being said.

 

Mind you, purchasing Treasuries en masse in this environment is a very profitable activity...perhaps the most profitable one could do, short of being well...short.

 

True, but the Fed (like any other lender) is free to say no to a bank at the discount window, particularly if they're borrowing reserves purely just to bid more at Treasury auctions.

The only reason the Fed is lending reserves so freely right now is that they want to make sure banks are capitalized enough to make loans to spur the economy. Of course, private banks continue keeping their purse-strings tight and households are still reluctant to borrow. Unfortunately, what choice does the Fed have? Can they afford to start saying "no" at the discount window? IMHO, that would only cause banks tie the strings even tighter for the few people that're still willing to borrow.

 

The problem is the Fed has no control at all over how the banks spend the money being pumped into the system, and like you said, they're not gonna say "no" in this environment.

It's kinda comical how the people who crashed the system have held their own failure out as leverage to get more, more, and more.

 

How bout we do QE5 [or whatever QE we're on] and bypass the banks. Let's put $1trillion into the hands of citizens not in the top .5%. Let them do with it what they will. We can contract the money supply down the road when there is less outstanding personal debt. With the Fed money having to pass through banks and consumers having to go through the bank to get the money that the Fed is putting out there to jump start the economy, why not bypass the middle man in this case so the funds do what they're intended for? Brash, I know. But me personally, I'd go buy a house and pay down some student loan debt. That pumps money direct to the sectors of the consumer's choosing.

 

Hah...that'd be a bold move.

I can't say I'd support such a decision, because the effects would be awfully hard to predict. You and I might retire personal debts, but some other yahoo would see it as a windfall and go out and bid up prices on jetskis and yachts.

I think you'd accomplish the same thing with more predictable effects by giving a larger tax cut (particularly for the middle class), which is one reason I think the deficit hawks are choosing a bizarre time to talk about "balancing the budget."

 

The whole thing explains why. To have this information made public:

1. transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
2. deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations
3. transactions made under the direction of the Federal Open Market Committee; or
4. a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to clauses (1)-(3) of this subsection of US Code.

Who gives a **** if the statement has a '?'

 

These are already largely public.

1 and 4 are irrelevant and purposely so. I don't think you want to look into ECB/Fed or Fed/IMF relations too hard. Foreign PRIVATE banks are already covered under the Dodd-Frank law, a law Republicans abhor for some strange reason.

 

Much of what happens with #1 is out there for the public see as well.

The Fed only has the power to transact in dollars, so they wouldn't be dealing with foreign central banks if they didn't own dollars in the first place. American corporations/consumers sent those dollars overseas for goods/services. As they accumulated at foreign central banks, it only makes sense that these central banks store those dollars in the most secure USD bank.

I'm not really sure what additional benefit you'd get by allowing the GAO to audit Fed actions. Perhaps it'd make the Fed more accountable to Congress than the U.S. Treasury department? Seems like a wash to me.

 

Maybe that was before 2007, when the Fed audited itself, and released public records of its' meetings and policy decisions?

 

If it was before 2007, it was also before 2008, when a host of unwise policy prescriptions met their death, including the notion that full transparency of the Fed and discount window users---is a good idea.

Not so good when one considers how investors would treat that information (by running the economy to the ground).