Top progressive senators are running away from a bill authored by Sen. Rand Paul (R-Ky.) to audit both the Federal Reserve’s monetary policy operations and millions of foreclosures. Their aversion could doom any chance for public transparency surrounding the widespread abuse that banks deployed against homeowners in the aftermath of the financial crisis.
Both Sen. Elizabeth Warren (D-Mass.) and her fellow financial reform advocate, Sen. Sherrod Brown of Ohio, the top-ranking Democrat on the Senate Banking Committee, have come out against Paul’s proposal, which would for the first time provide a public accounting of the central bank’s monetary policy maneuvers and its transactions with foreign central banks.
“Sen. Brown has supported recent actions that have brought historic levels of transparency to the Federal Reserve,” spokeswoman Meghan Dubyak told The Huffington Post. “But he does not see how this legislation will benefit working Americans.”
Warren and Brown insist they’re on board with more transparency in the Fed’s regulatory operations, but they’re drawing the line at monetary policy.
“I oppose the current version of this bill because it promotes congressional meddling in the Fed’s monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy,” Warren said in a statement provided to HuffPost.
Still, this idea of “political independence” is difficult to reconcile with basic principles of democratic accountability. It’s also a distortion of the concept underlying the 1913 law that created the Fed.
“That independence is of course independence from the executive branch,” University of Texas economist James Galbraith testified at a House hearing in 2009. “It is not and cannot be independence from the Congress itself. The Federal Reserve may be delegated certain functions by the Congress, but the Congress can always choose to hold it accountable … It’s a legal independence of a kind that other regulatory institutions have had over the course of our history. It’s not an independence which is specific to monetary policy per se.”
The Fed is the world’s most powerful economic institution, and its monetary policy operations are its strongest tools, setting interest rates that have tremendous influence over U.S. growth, inflation and the prices of key assets. The Fed’s arrangements with foreign central banks and governments even give it a significant role in foreign policy. Yet despite its vast political reach, the Fed is far less accountable to the democratic process than other policy-setting agencies in the American government.
While the Fed’s Board of Governors, based in Washington, D.C., is a public agency, the central bank’s 12 regional branches are private-sector entities. Two-thirds of the directors of each regional branch are selected by commercial banks in the region, and many of those directors help select the presidents of each branch. Many of these regional presidents, in turn, play a role in setting monetary policy alongside the Board of Governors.
There have always been political dimensions to the Fed’s activities. During the financial crisis, Ben Bernanke, then Federal Reserve chairman, and Tim Geithner, then president of the New York Fed, worked closely with Treasury Secretary Henry Paulson on various bailout activities, with Bernanke even helping sell Congress on a $700 billion bailout bill.
Regional Fed Presidents, meanwhile, have never been immune to political thinking. Dallas Fed President Richard Fisher ran for Senate as a Democrat before joining the Clinton administration as a trade official. San Francisco Fed President John C. Williams has been a career Fed economist, but also served as senior economist at the White House Council of Economic Advisers under President Bill Clinton. Minneapolis Fed President Narayana Kocherlakota signed a petition organized by the libertarian Cato Institute opposing President Barack Obama’s stimulus plan a few months before he took office.
“I don’t understand progressives’, like Senator Elizabeth Warren, opposition to the idea of legislation to audit the Fed,” one aide to Paul told HuffPost. “Some Democrat opposition seems more partisan than principled.”