The Federal Reserve has argued that it needs to be above politics. But Senators disagreed Tuesday, saying they want to know who the Fed helped during the financial crisis.
A Senate vote Tuesday left no doubt: Congress wants to know more about what the Federal Reserve was up to when its asset portfolio grew by more than $1 trillion during the financial crisis.
What companies did the Fed help, and on what terms?
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The Senate voted 96 to 0 for the Government Accountability Office to look into those questions by auditing the Fed’s activities since the outbreak of financial turmoil in 2007.
Supporters argue that the public has a right to know more about bailouts that were conducted by the long-secretive Fed, which acted on its own during the crisis. Critics of the move say the nation’s central bank should have broad independence from political interference, and that the audit erodes the sharp line that should exist.
In the Senate, transparency found 96 supporters, Fed independence found zero.
Fed No Longer Revered
It’s a signal of how politically charged the Fed’s actions have become during a time of economic turmoil, far different from the deference and near-reverence that Washington’s elite treated Fed Chairman Alan Greenspan a decade ago.
Earlier this year, Fed Chairman Ben Bernanke had to fight to win Senate approval for a second term, after he was renominated by President Obama.
The Senate’s vote Tuesday involved a proposed amendment to the broader financial reform bill that’s under review. If the bill passes, it must be reconciled with a House bill that also includes a Fed audit provision.
So now the question appears to be: How tough of an audit will the Fed get?
The chief backers of the audit idea are a political odd couple, Rep. Ron Paul (R) of Texas in the House and Sen. Bernie Sanders (I) of Vermont. On the right, Representative Paul is a libertarian who sees the audit as a step to help the public conclude that the Fed should not exist at all. On the left, Senator Sanders is known as a “democratic socialist” crusading against an institution that critics say is closely allied with powerful Wall Street bankers.
“When trillions of dollars of taxpayer money are being lent out to the largest financial institutions in this country, the American people have a right to know who received that money and what they did with it,” Sanders said in a statement after the amendment was approved.
“We also need to know what possible conflicts of interest exist involving the heads of large financial institutions,” he said.
The Audit’s Limits
The Senate vote is hardly a wholesale repudiation of Fed independence. The audit won’t encompass the Fed’s most important powers, its monetary policies including interest-rate decisions.
The Senate provision was altered last week, with Sanders’ consent, to allay concerns about political interference. Paul, who succeeded in getting a broader version of the audit into the House bill, criticized this narrowing of the provision in the Senate.
Sanders says that, unlike the House provision, the Senate-passed audit will require the Fed to reveal by Dec. 1 the identities of financial firms that Fed lent to during the crisis.
In the past, Fed officials have argued that keeping borrowers’ identities secret is vital, so that Fed efforts to bolster the system during a crisis aren’t undermined by banks being afraid of tapping Fed credit lines.