The Federal Reserve does most of its business behind closed
doors. It lives off interest payments on Treasury bonds acquired in carrying out monetary policy and, thus, avoids the scrutiny of the Congressional appropriations process. Much of its operation, as well, is outside the audit authority of Congress’ watchdog, the General Accounting Office. Members of its Board of Governors are insulated behind 14-year terms, the longest tenure except for the life time nominations to the Supreme Court.
In short, the Federal Reserve — unquestionably the nation’s single most important regulator of the economy — carries out its public functions outside the normal checks and balances designed to provide accountability in a democratic government.
This cocoon of secrecy and special privilege places a great responsibility on the Senate and House Banking Committees to carry out oversight of the Federal Reserve Board in Washington and the 12 Federal Reserve district banks scattered across the nation.
While the Senate Banking Committee did nibble timidly around the edges of its oversight functions in the 104th Congress, the House Banking Committee under the Chairmanship of Representative Jim Leach of Iowa, adopted a “see no evil, hear no evil, smell no evil” approach to the Federal Reserve throughout the just adjourned Congress.
The Committee’s nonfeasance was all the more extraordinary since so much hard evidence of Federal Reserve problems landed on Chairman Leach’s desk.
For example, Representative Henry B. Gonzalez, the ranking Democrat on the Banking Committee, last January presented Leach with an extensive report raising major questions of waste, abuse and contracting irregularities in the Federal Reserve’s check clearing and collection operations. Gonzalez offered Leach reams of backup material including signed statements by Federal Reserve employees which had been collected by the Democrats’ staff economist and investigator, Dr. Robert Auerbach.
That was ten months ago and Leach still has not followed up on the report. In fact, he has not even replied to Gonzalez’s letters on the issue.
In May, Gonzalez and Auerbach turned the spotlight on the Los Angeles branch of the San Francisco Federal Reserve Bank after receiving a tip that records in the branch had been falsified to cover errors of more than $178 million in reports of currency placed in circulation in the last three months of 1995.
Again, Leach greeted the report with silence. But, Gonzalez was successful in getting the General Accounting Office (GAO) to conduct an “emergency audit.” The audit not only confirmed Gonzalez’s original findings, but expressed concerns about the accounting and cash inventory systems of other Federal Reserve banks.
One more time, Gonzalez asked Leach to hold hearings. Again a stonewall of silence from Leach.
In June, the GAO released a 154-page report — requested by Senators Byron Dorgan and Harry Reid — detailing system wide problems and rising costs in the operation of the Federal Reserve -everything from construction projects to wasteful personnel practices.
Chairman D’Amato did hold a brief hearing on the report in the Senate Banking Committee, but on the House side there was not a word of concern from Chairman Leach — and certainly no mention of a hearing or corrective action to be undertaken by his Committee.
Perhaps, none of this stonewalling should have come as a surprise. Early in 1995, Leach introduced legislation which would have broadened greatly the role of banks in securities and other financial services. The bill was structured in a manner that would have expanded the Federal Reserve’s regulatory role, making it preeminent among the bank regulators. It was a nice plum for the Fed.
As Leach continued to hit brick walls in attempts to move the legislation, Federal Reserve Chairman Alan Greenspan chipped in with a glowing letter of support for the bill. The move and its timing was interpreted widely as a gratuitous bit of lobbying.
Later in support of the Federal Reserve, Leach adamantly opposed using surplus Fed funds — hidden away in a contingency reserve that hasn’t been tapped for decades — to help with the recapitalization of the savings and loan insurance funds. After the use of the funds was approved by the Banking Committee, Leach had the provision excised before it reached the floor.
This cozy relationship and mutual back scratching between the Congress and the regulatory community are hardly new. For too many years, Congress failed to carry out proper oversight of the Federal Home Loan Bank Board, and left that agency to make monumental mistakes that contributed greatly to the cost of the savings and loan bailout.
Both Banking Committees need to tighten their oversight of the Federal Reserve in the 105th Congress — regardless of which party has the majority. Let’s hope that the new Members entering Congress in January will have the guts to break up some of the cozy and comfortable relationships, and end the absurd and idolatrous practice of treating the Federal Reserve Chairman and Governors as deities.