By Scott Lanman
Nov. 19 (Bloomberg) -- The House Financial Services Committee will consider today how much to expand audits of the U.S. central bank in a test of Federal Reserve Chairman Ben S. Bernanke’s clout among lawmakers.
Panel members will vote on a Democratic proposal to retain a ban on audits of Fed interest-rate decisions. Approval would deal a blow to Representative Ron Paul, the Texas Republican who introduced a bill with 300 cosponsors that would allow audits of interest-rate decisions, a step Bernanke opposes.
Advancing the Democratic measure would be a victory for Bernanke as the Fed faces the biggest threats to its authority and independence in five decades. Lawmakers are seeking greater transparency for the Fed and limits on its powers, saying lax regulation by the central bank helped trigger the financial crisis.
“Congress created an independent Federal Reserve with a group of board members and bank presidents who have very long terms and a whole culture of independence from politics,” Alice Rivlin, a former Fed vice chairman, said in a Bloomberg Radio interview yesterday. “It’s very important, I believe, to preserve that.”
Representative Barney Frank, the Massachusetts Democrat who heads the committee, said the panel would take up Fed audit proposals today during debate on legislation to create a council of regulators to monitor risks to the financial system. Today’s session in the panel begins at 9 a.m. in Washington.
‘Substantial Increase’
Frank told reporters yesterday that he has “no interest in guessing” whether the more limited audit amendment backed by Representative Mel Watt of North Carolina has the votes to be approved. “There will be a substantial increase in auditing,” Frank said. “Exactly how much will be voted on.”
Should an audit measure be attached to the legislation, the main bill would face a vote by the committee. It then must be approved by the House and Senate and signed by President Barack Obama to become law.
The amendment to be offered by Watt, who chairs a subcommittee on U.S. monetary policy, would limit Government Accountability Office audits of Fed emergency-loan programs to their operations, excluding decisions and internal talks about the facilities. Identities of borrowers may be released a year after the programs end.
Watt’s plan has more limits than a proposal unveiled last week by Senate Banking Committee Chairman Christopher Dodd.
Paul and Representative Alan Grayson, a Florida Democrat, have drafted a competing measure for broader Fed audits, which would exclude only any unreleased transcripts or minutes of Fed policy meetings. It also says the legislation shouldn’t be construed as interfering in monetary policy.
Monetary Policy
Bernanke said in July that the Paul audit bill could result in lawmakers issuing subpoenas over potential decisions to raise interest rates. “I don’t think the American people want Congress running monetary policy,” he said.
The central bank chairman said independence from political interference in setting interest rates produces “much better results” for the economy. “We are very, very sensitive to this issue,” Bernanke said at the televised forum in July.
Congress is considering legislation stripping the Fed of some powers, including its consumer protection authority, and giving it to a Consumer Financial Protection Agency.
The House panel also will consider a measure from Paul and Grayson requiring the Treasury secretary to sign off on Fed decisions to swap currency with other central banks. Grayson said yesterday there’s a need for “some accountability” in the actions.
Dollar Swaps
The Fed’s dollar swaps, begun in 2007 to ease banks’ funding difficulties outside the U.S. during the financial crisis, reached a high of $583.1 billion in December 2008 and have since shrunk to $29.1 billion.
In addition to Treasury approval, the Grayson-Paul measure would require separate sign-off from at least five Fed governors. Currently, such swaps are subject to approval from the Federal Open Market Committee, which includes governors and regional Fed presidents.
Paul, who wrote a best-selling book this year called “End the Fed,” said last month that his audit bill had been “gutted” by Watt while moving toward a vote in the Democratic- controlled House. Watt responded that “we don’t want to have politicians second-guessing the Fed on monetary policy” and said Paul was “exaggerating.”
Watt’s draft measure allows for audits of Fed operations including supervision of banks, bailouts of individual companies and check-clearing functions.
Avoiding Fraud
For Fed emergency programs accessible to a group of companies, such as the commercial-paper facility, the GAO’s audits would be limited to ensuring that the programs are operating according to Fed procedures and avoid risk and fraud.
The GAO would be barred from auditing, reviewing or making recommendations on the Fed’s decisions to create or terminate a facility, its terms and conditions and any “deliberations, discussions or communications among or between” Fed officials and employees, Watt’s proposal says. It also doesn’t permit GAO audits of monetary policy.
Watt said in a letter to colleagues that his plan will “provide transparency of the Fed’s financial operations that will be completely unprecedented” without interfering with monetary policy.
Frank said this week the full House will consider his regulatory overhaul legislation in December. Dodd, a Connecticut Democrat, plans to hold a committee meeting today to discuss financial-overhaul legislation.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net
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