May 7, 2010 11:40AM

Federal Reserve 1, Transparency 0

It is being reported that the Senate has reached a “compromise” on Bernie Sanders’ amendment to audit the Federal Reserve. This amendment was a companion to Ron Paul’s House bill that would have subjected both the Federal Reserve’s lending facilities and monetary policy to a GAO audit. The compromise? Drop the monetary policy audit. It is hard to match Ron Paul’s reaction: “Bernie Sanders has sold out.”

Congressmen Paul is 100% right on this. While it is important to get details on the Fed’s emergency lending facility, those decisions are behind us. The public has a right to know who benefited from the Fed’s actions, but the reality is that such an audit would change little going forward. The real action is monetary policy.

After having spent seven years as a staffer on the Senate Banking Committee, I can attest that most senators, congressman and their staff have little understanding of the mechanics of monetary policy. Just listen to any random appearance of the Fed chairman before Congress and you will immediately know what I mean. But then, congressman in general don’t understand the workings of most federal programs. That is one of the purposes of the GAO: to help explain to Congress how programs work and evaluate how well those programs are working. I can think of no area more in need of such understanding than monetary policy.

Of course, some worry that an audit would undermine the claimed independence of the Fed. For instance, former Hartford insurance exec, now Obama Treasury official, Neal Wolin praised the compromise, claiming the original language would “threaten the central bank’s independence from Congress.” Sadly, Mr. Wolin is confused about the nature of the Fed. If there is a constitutional basis for the Fed, it is Article I, Section 8’s delegation to Congress of the ability “to coin money, regulate the value there of,” which Congress has delegated to the Fed. The supposed independence of the Fed is from the Executive branch, not Congress. And one of the very reasons for an audit is for the public to have a window into the dealings of the Fed with the Executive branch, most importantly the Treasury. What Mr. Wolin and others are trying to protect is the favored relationship between Treasury and the Fed. A GAO audit would shift the balance of power over the Fed away from the Executive and back to Congress, who despite its many problems, is directly accountable to the American public.

The gutting of the Sanders’ amendment is a huge win for both Wall Street and the Treasury (is there any longer a difference between the two?), and a massive loss and missed opportunity for the American public, and its representatives in Congress, to regain some control over an agency (the Fed) that has acted as a piggybank for both Presidents Bush and Obama.