Until the US Federal Reserve took the unprecedented step of financing the purchase of Bear Stearns Companies Inc.by JPMorgan Chase and Co. in March,criticism of the central bank was largely confined to its conduct of monetary policy. The institution itself usually got a pass. Lone voices that dared to knock theFed were drowned out by its supporters in the financial community—the very bankers the Fed regulates.
One of those lone voices, US representative Henry Gonzalez, came from the Lone Star State. Neither the power of the Fed nor the near-mythic status of its longtime chairman, Alan Greenspan, deterred the late Texas populist.
Facing the flak: Alan Greenspan, ‘the master of garblements’, fares the worst in Auerbach’s book on the Federal Reserve.
As chairman of the house banking committee from 1989 to 1994, he relentlessly pressed for public scrutiny of what he called a secretive agency wielding enormous power, writes Robert D. Auerbach in his convincing first-hand chronicle of Gonzalez’s battle, Deception and Abuse at the Fed.
Auerbach, who teaches at the Lyndon Baines Johnson School of Public Affairs of the University of Texas at Austin, did two stints as a staff member of the house banking committee. His time there spanned four Fed chairmen: Arthur Burns, G. William Miller, Paul Volcker and Greenspan.
None of these chairmen comes off well here. Greenspan, “the master of garblements”, fares the worst. His “skill in presenting imprecise, sometimes near-meaningless, conflicting, yet learned-sounding views won him over-the-top adulation for his insights and abilities”, Auerbach writes.
These evasions and deceptions allowed Greenspan to avoid accountability, which is the thrust of Auerbach’s critique. The Fed has 19 decision makers—seven governors in Washington and 12 regional bank presidents. They are accountable to no one.
Auerbach sees a clear conflict of interest in the Fed’s role as bank regulator. He should know. While at the banking committee, he says he helped uncover how the Fed used banks to lobby against legislation it didn’t like, claiming new laws would curb its independence—“the all-purpose banner that could be waved to shield Fed officials from accountability”, he says.
Some of the conflict was baked into the Fed cake from the beginning. Commercial bankers elect two-thirds of the directors at the Fed banks, as required by the Federal Reserve Act of 1913. The upshot? “The Fed is regulating the very people charged with regulating it,” Auerbach writes.
Like his former boss, Auerbach is on a mission for more glasnost at the Fed. “Unelected Fed decision makers should not be given carte blanche to decide what the public should know about how they are running the central bank,” he writes.
Students of the Fed will recall the 1993 Gonzalez probe that produced the disclosure, after 17 years of denial, that the rate-setting Federal open market committee (FOMC) kept verbatim transcripts of its meetings. (At the time, Greenspan said “a staff member jogged my memory” about the existence of the records.)
Other deceptions and abuses are less well known. Drawing on court papers, Fed records and other official documents, Auerbach shows how the central bank stonewalled a congressional investigation into the $6,300 (Rs2.68 lakh today) found on the Watergate burglars in 1972; downplayed embezzlements of cash from the Fed’s vault; reported inaccurate currency activity at a Fed bank branch in Los Angeles; and allowed $5.5 billion to be sent to Iraqi dictator Saddam Hussein from an Atlanta branch of an Italian bank.
Auerbach has some suggestions for how to make the Fed conform to democratic standards. For starters, FOMC should publish transcripts of its meetings within 60 days, not with the current five-year lag, he says.
All Fed governors and regional bank presidents should be appointed by the US president and approved by the Senate, he adds. Restrictions on government auditing standards audits of the Fed should be lifted. The Fed should also stick to monetary policy and leave bank regulation to a separate entity.
The US is currently considering a major reorganization of its antiquated system of financial regulation in the wake of the subprime mortgage crisis. What better time to let a little sun shine on the Fed?
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