Evan Soltas
Jul 26, 2012

About that Audit

Representative Ron Paul's bill to audit the Federal Reserve System, H.R. 459, the "Federal Reserve Transparency Act of 2012," passed through the House of Representatives on Wednesday afternoon in a 327-98 vote. Republicans voted overwhelmingly in favor, with Mitt Romney appearing to endorse the legislation on Twitter. Democrats were split almost evenly between yea and nay on the measure.

The legislation as engrossed by the House is available here, via the THOMAS program of Library of Congress. I've read it and suggest you do the same. (Don't worry, it's short.) The legislation makes significant amendments to 31 U.S. Code § 714, available here. This law establishes the duties of the Government Accountability Office (GAO) as they pertain towards the money and banking arms of the federal government. In particular, these are the Financial Institutions Examination Council, the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Comptroller of the Currency.

Browsing the Internet, I found basically no serious policy discussion of the legislation and a dearth of reporting. I attempt to fill that void in this post by explaining in some detail what the bill says.

The Act requires the Comptroller General of the Congress to conduct a yearly audit and public report of all of the Federal Reserve System's activities.

The Comptroller General is the executive position at GAO and is held currently by Gene Dodaro. GAO's mission is to provide thorough congressional oversight of federal government operations. The legislation would expand considerably Dodaro's purview into a number of Fed activities which his Office had previously not audited or inspected.

The Act's most important provisions, in fact, are not in the actual text of the legislation. They're in the law it amends -- and in particular, the critical sections it deletes had limited the scope of GAO scrutiny. Here's the text of those sections which the Act would remove:

Audits of the Board and Federal reserve banks may not include—
(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;
(3) transactions made under the direction of the Federal Open Market Committee; or
(4) a part of a discussion or communication among or between members of the Board and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection.
Translation: the GAO now has the power and responsibility to examine all of the above activities of the Fed.

The Act also strikes subsection (f) of 31 U.S. Code § 714. The subsection had provided for limited GAO audits which examined the Fed's credit facilities, open market operations, and discount window advances in regards to their "operational integrity, accounting, financial reporting, and internal controls."

Basically, this meant that GAO was to check that the Fed's operation were clean, that there was no criminality or corruption, and that they were up to normal accounting and risk control standards. The proposed new rules transform the GAO's involvement as a "watchdog" from the criminal concerns of the old rules into an extensive examination the Fed's decisions and decision-making.

The Act further requires the GAO to provide a "conclusion" and "recommendations for legislative or administrative action." Given that the GAO may now examine, publish, and opine upon the Fed's monetary policy deliberations within a year of their occurrence, it is my opinion that the Act opens the door for an effective congressional power to reject or approve the monetary policy decisions made by the Federal Open Market Committee.

The Act seeks transparency, and further public disclosure of the activities of our central bank is a laudable end. There are, however, no protections whatsoever of central bank independence in the Act's pursuit of transparency. For that reason, I believe this legislation will undermine significantly the ability of the Fed, and in particular the FOMC, to make independent decisions without fear of congressional intervention or reprisal.