The Federal Reserve has always acted as a separate government. Normal checks and balances that apply to other federal agencies are simply ignored by the Federal Reserve Board.
The Board sets its own budget and operates off the billions of dollars collected in buying and selling government securities as part of its control of the money supply. The spending is not even subject to a formal Congressional review. With the exception of an occasional perfunctory hearing, Congressional oversight is largely a joke or non existent. Rather than probing the operations of the Federal Reserve, hearings invariably become contests to see which Member of Congress can utter the most fulsome praise for the Fed and its current Chairman, Alan Greenspan.
The Federal Reserve picks and chooses what laws it follows. It claims, for example, that it is not subject to the Civil Rights Act and the provisions of the Act which outlaw job discrimination. In 1980, the Congress passed the Monetary Control Act in an attempt to eliminate the subsidies that the Federal Reserve was handing out to commercial banks in the form of below market pricing of check clearing and other services. The Fed processes more than 17 billion checks annually, largely carried out through a contract fleet of 53 airplanes.
Instead of changing its pricing system to comply with the law, the Fed has engaged in some “creative bookkeeping” and some less than straight forward explanations to Congress in an attempt to obscure the subsidies.
A handful of Members of Congress and their staffs have refused to fall for the Fed’s flimsy explanations. They believe that the Federal Reserve is continuing to thumb its nose at the law and the clear intent of Congress that services be priced at market value and the subsidies ended for the banks.
During the mid 1990s former House Banking Chairman Henry Gonzalez and his chief economist and Fed-tracker extraordinaire, Dr. Robert Auerbach, conducted detailed investigations which revealed “waste and fraud” in the Fed’s payment system. Among other things, the Gonzalez report documented what it called “corrupted bidding procedures,” interference with competitors and overcharging the U. S. Treasury for hauling its cleared checks—all of which helped mask the subsidies. The report cited, as well, cases of the Fed paying for “phantom aircraft” and double paying for aircraft that the Federal Aviation Administration had permanently grounded due to falsified maintenance reports.
Fed officials tried to play down the report and portrayed Gonzalez’s findings as simply “differences of opinion about management decisions.” Despite this attempt to dust off the report in public comments, the Fed behind the scenes did make some limited internal changes in its check transportation system. Now the Federal Reserve has come up with a new scheme to maintain the fiction that it is recovering the costs of the payment system, rather than subsidizing the services in violation of the 1980 Monetary Control Act. The Fed is now transferring part of the excess in its employees’ pension funds to subsidize the services. Dr. Auerbach, who is now a professor at the University of Texas’ Lyndon B. Johnson School of Public Affairs, estimates that the Fed offset $87 million of the payment system’s costs in 1998 by using the pension funds.
After learning of the pension fund gimmick, Senator Harry Reid of Nevada quietly attached an amendment to last year’s financial modernization legislation which prohibited the Fed’s use of pension fund money to balance the books on the payment services.
But, the amendment was short-lived. During the House-Senate conference, Fed Chairman Greenspan—who appeared to serve an ex-officio member of the conference—lobbied House Banking Chairman Jim Leach, a long-time apologist for the Federal Reserve, to get rid of the Reid amendment. Without any debate, recorded votes or public announcement, the amendment suddenly disappeared from the bill’s text, leaving the Fed free to continue to play with pension funds to hide payment services subsidies.
The treatment of Reid amendment is the latest illustration of how subservient the Congress is to the Federal Reserve and how weak-kneed the Banking Committees are in resisting pressure from Alan Greenspan. Congress is letting the Monetary Control Act of 1980 become a nullity and allowing the Federal Reserve to openly hand government money to the banks in contravention of the law. It is time for the voters to demand a Congress that doesn’t cave to the every whim of the Federal Reserve. It is a disgrace when Congress cannot summon the courage to see that the laws it passes—like the Monetary Control Act of 1980—are carried out. No wonder that Chairman Greenspan openly thumbs his nose at Congressional oversight and operates the Fed as a private preserve for the banks and Wall Street.