A few years after the 2008 financial collapse, the Government Accountability Office (GAO) got a rare opportunity to peek behind the curtain at the Federal Reserve.
Although the review was limited in scope, the GAO was able to audit the agency's emergency loan programs. What it found was troubling, to say the least.This rare audit found conflicts of interest and no-bid contracts. It also revealed that the Fed authorized $16 trillion in bailouts to businesses and banks without so much as a whisper in the Capitol hallway to Congress. Unsurprisingly, the Federal Reserve would prefer not be audited further with any degree of substance by the GAO, especially on interest rate decisions. Yet the Federal Reserve insists its reluctance is centered on fears of political interference.
Formed in secrecy off the coast of Georgia in 1910, the Federal Reserve has clung to its cloak of secrecy ever since. It operates in the shadows controlling interest rates, thus deciding how big of a house the average American can buy, and oversees the banking system, thus deciding whether banks can continue to make loans.
The Federal Reserve exercises enormous power, and it doesn't always exercise it wisely. Just look to the financial collapse in 2008, which created the Great Recession. The Federal Reserve didn't even see it coming until we were neck deep in the rubble of Lehman Brothers and Bear Stearns.
Before the 2008 crisis, banks were taking on more and more risk, and lenders were making loans that never should have been made. When it all fell apart, it fell apart in a spectacular fashion, taking down not only Wall Street but also Main Street, including ordinary families who walked away from homes that suddenly were worth less than they owed for them. For many, the American dream went up in flames. Shouldn't the Federal Reserve, which is tasked with overseeing banks, have noticed that someone was playing with matches?
Former Federal Reserve Chairman Ben Bernanke recounted in his memoirs the measures he felt had to be taken in order to avert further disaster. He shared an anecdote about pushing for the Federal Reserve to loan $85 billion to an insurance company that, in his words, "gambled recklessly, using exotic financial instruments to ensure securities backed by subprime mortgages." The one factor in the insurance company's favor was that so many other companies already had failed. Faced with a shaky house of cards that couldn't withstand even the smallest of breezes, or one more bankruptcy, an $85 billion bailout had to be executed.
That's the level of power that the Federal Reserve wields. It is its own bagman. Clearly, some amount of transparency is needed through the experienced eyes of the Government Accountability Office.
For nearly a century, the independent GAO has sifted through paperwork and computer spreadsheets that track government spending. Again, the GAO is completely independent. These are the people who keep calculators and freshly sharpened pencils in their shirt pockets. They care about numbers, not politics. If there’s anyone who can bring transparency to the Fed without spilling financial secrets, it’s the independent GAO.
The GAO should audit the Federal Reserve, because the best way to resist temptation is a proper upbringing, a strong set of values – and witnesses.
Congress needs independent audits because the Fed doesn’t always follow the rule book. Let’s go back to the 2008 financial crisis. The Federal Reserve gambled on what’s known as quantitative easing in order to help the housing market recover. The Fed went on a spending spree, snapping up billions of dollars in mortgage-backed securities and Treasury bonds to manipulate interest rates and the economy.
Now the Federal Reserve is unwinding this stimulus program. It is a significant move that will shake the markets and interest rates.
Yet the Federal Reserve doesn’t want an auditor peeking over its shoulder as it makes decisions that will impact millions of families. Instead, the Fed is asking us to just trust that everything will work out. And we’re supposed to believe that it’s best for Congress to be blindfolded in its role as public guardian of the American economy. I don’t buy it. It’s time to audit the Fed.
Kennedy is a member of the Senate Banking Committee.