Sunday, July 1, 2012

Auditing the Federal Reserve a good idea? Well I don't write the headlines

Knoxville News Sentinel Auditing the Federal Reserve a good idea By Dr. Harold Black Sunday, July 1, 2012 One of the failings of Ben Bernanke is that he has probably tarnished the Fed's reputation more than any other chairman. The tarnishing is well deserved. However, my opinion as to why is different from the public at large. Bernanke's Fed has purchased both government assets and private assets. I have less of a problem with the purchase of private asset backed securities than with the Treasury component of the government purchases. Indeed, the Fed should be banned from buying Treasuries directly from the Treasury. It should only repurchase them from the private sector. Direct purchases have enabled the Federal government to essentially operate without a budget constraint. If the Treasury cannot sell its bills and bonds to the public, then the Fed can buy them. This sets the stage for an increase in the money supply and inflation. This monetizing the national debt should be the focus of Congress' concern rather than seeking to audit the Fed. However the audit is popular. Ron Paul's new bill has 225 sponsors in the House but only 20 in the Senate. All of Tennessee's Republican representatives support the bill but neither of its senators do. Indeed, it its hard to argue with Sen. Lamar Alexander's opposition when he says "The audit? It's a bad idea. It's a sorry day when the Congress superimposes itself on the Fed, nosing around in monetary policy. It's bad enough we are nosing around with the car companies." What Paul wants to do is to expose the Fed's unprecedented exercise of Section 13(3) of the Federal Reserve Act. That section enables the fed to create special discounted lending programs and lending facilities during "unusual and exigent circumstances." This resulted in the Fed increasing its balance sheet to over $3 trillion through the purchase of asset backed securities and Treasuries. I do not have a problem with the purchase of asset-backed securities through the creation of special lending facilities. The Fed's commercial paper facility kept that market operating when it teetered on failure. Collapse of the commercial paper market would have prevented the financing of most consumer durables and might have led to an even deeper recession. In purchasing asset-backs, the Fed's loans were collateralized and when repaid, the Fed ended the facilities. Such a response was an appropriate one even though it was controversial. When it was revealed, during the audit under the Dodd-Frank bill of the Fed's actions during the financial crisis, that the Fed had lent over $16 billion to many of the world's largest financial enterprises, many cried foul. However, these proved to be short term loans that were mostly repaid with little loss to the Fed. Yet, the mortgage backed securities purchased by the Fed from Fannie Mae and Freddie Mac have suffered significant losses. Ironically, these purchases have generated less discussion and outrage than the better collaterized private asset-backs. I guess the public would rather the Fed make bad loans to the government than good loans to the private sector. Paul's current bill calls for a full and complete audit of the Fed with the results being publicized. While I have no issue with the audit I do not think they should be publicized. Many of the Fed's actions can be crucial in the rare instances of deep financial panic. However, those actions may be less than optimal if they are to be publicized creating severe market reactions to a temporary decrease in balance sheet values. I propose instead that periodically the Fed be audited thoroughly with the results given to the House and Senate banking committees in a closed-door session. Scripps Lighthouse © 2012 Scripps Newspaper Group — Online

No comments: