Economists James Galbraith, Dean Baker and Robert Auerbach write a letter to Larry Summers, urging him to “reconsider the administration’s position of apocalyptic opposition to the bill in Congress that would subject Federal Reserve operations to an audit” (PDF):
Lyndon B. Johnson School of Public Affairs
May 5, 2010
The Honorable Lawrence Summers
We write to urge you to reconsider the administration’s position of apocalyptic opposition to the bill in Congress that would subject Federal Reserve operations to an audit. We have very long experience with congressional oversight of the Federal Reserve. Two of us joined the staff of the House Banking Committee back in 1975 — when Wright Patman was the most prominent backer of an audit bill. We helped author the Humphrey-Hawkins provisions of the Federal Reserve Act, enacted in 1978. One of us – a former doctoral student of Milton Friedman’s at the University of Chicago – worked on Federal Reserve oversight and investigations into the 1990s, under Chairman Henry B. Gonzalez. Our careers have been tied to the cause of establishing a reasonable, forthcoming dialogue between the Federal Reserve and Congress on monetary topics. At every stage, for 35 years now, the Federal Reserve has resisted.
In 1975, the Fed resisted regular hearings on the conduct of monetary policy. They were nevertheless established, under H. Con. Res 133, and written into the Federal Reserve Act in 1978. Those hearings continue today, and are widely considered a very substantial policy success – so much so that when the legal mandate briefly expired, the hearings continued without one.
Once the hearings were established, the Federal Reserve resisted giving to Congress its economic forecast for the year ahead – a resistance that was only broken by disciplined questioning at the Banking Committee. Today, that information is considered innocuous.
In the late 1970s, the Fed resisted releasing the policy directive at the end of each FOMC meeting. It preferred the silly practice of waiting until after the following meeting – even though everyone knew immediately from the movement of the Federal Funds rate what the directive was. Today, the announcement is made immediately, and nobody thinks twice about it.
In the 1980s, the Federal Reserve pretended for years that it was not keeping verbatim minutes of the FOMC meetings. This deception eventually caused major embarrassment. Now the minutes are released after a five-year delay – and the only consequence is that from time to time the public becomes aware of incompetence or deception that the Federal Reserve would prefer to conceal. An example was in the press earlier this week, as you surely know.
In the recent crisis, the Federal Reserve took extraordinary steps to provide liquidity to the marketplace, both domestic and foreign. These measures involved taking onto the Fed’s balance sheet trillions of dollars of assets – the precise nature of which remains, to this day – a closely held secret.
Whatever the merits of keeping this secret, we believe that under law and the Constitution, the Federal Reserve has no right to keep it from Congress. Congress has an unqualified right to review the operations of the Federal Reserve, as it does of any federal agency. If there is truly sensitive information – which we doubt – the Congress has procedures to assure that such information does not leak to the public. Information far more secret – such as covert intelligence operations – is briefed to the appropriate congressional leadership routinely, with no history of inappropriate disclosure.
We also believe that there is no case for maintaining such secrecy with respect to Federal Reserve operations during the crisis. On the contrary the extraordinary scale of the operations demand an extraordinary effort to be clear about what they were, what they were for, and why they were necessary. The Government Accountability Office – an arm of Congress – is the correct agency to review these matters.
The Paul-Grayson audit bill, now being introduced in the Senate, would set up an appropriate procedure for oversight of these and similar complex operations, for evaluating them in a reasonable way.
The fact that we do not sympathize with Congressman Paul on most matters — and do not share his long-term objective to “end the Fed” — has no bearing on the fact that on this issue, he’s correct on the merits.
We are entirely confident that once the bill becomes law, the Federal Reserve will resign itself to compliance, and will go on with its effectiveness unimpaired. What they are playing now is an old game, and there is no reason why anyone who has been around should indulge it.
With very best regards,
Robert D. Auerbach
James K. Galbraith