Who Should Audit the Fed?

by Chidem Kurdas

A few days ago the House passed with a veto-proof majority the bill known as “audit the fed” or more plainly as H.R. 459, sponsored by Ron Paul.  If it became law, it would open the Federal Reserve’s policy deliberations and decisions, certain operations and dealings with foreign banks and governments to scrutiny by the Congressional Government Accountability Office. The GAO currently audits the Fed’s financials but not its policy making.

A number of House Democrats supported the bill, though party chieftains are against it.  The critics of the measure, prominently including Fed Chair Ben Bernanke, argue that it will open the way to political interference with monetary policy, which is best conducted on purely economic grounds.

Both sides have a valid point. Continue reading

Big Bank Breakup or Tea Party?

by Chidem Kurdas

We’ve been going back and forth on the economics of too-big-to-fail banks but paying less attention to the politics. The most recent ThinkMarkets broadside on banks is Jerry O’Driscoll’s post on the Federal Reserve Bank of Dallas annual report.

In part of the report, the Dallas Fed’s director of research Harvey Rosenblum argues that the new Dodd-Frank regulations are insufficient to deal with the threat posed by too-big-to-fail banks and therefore these need to be broken into smaller entities. He and the bank’s president, Richard Fisher, made a similar point in a Wall Street Journal column.  Some other Fed officials have espoused the position as well.  Continue reading

Dallas Fed President Calls for the End of Too Big to Fail

 by Jerry O’Driscoll  

Thursday at the Cato Monetary Conference, Dallas Fed President Richard Fisher called for the end of of the too-big-to-fail doctirine.  He identiifed the largest financial institutions as the source of excessive risk taking.  He also repeated his claim that these institutions interefere with the conduct of monetary policy. 

Fisher offered a middle ground between two strategies discussed on ThinkMarkets: steeper capital requirements or beaking them up.  He advocated forcing the largest banks to give up some of their riskiest operations.   In effect, that is forcible downsizing. 

This is a noteworthy call coming from within the Fed itself.

What About The Fed?

by Jerry O’Driscoll

I have been active in criticizing recent Fed policy, but avoided the controversy over Fed governance (“Audit the Fed”).  I worked for the Dallas Fed for 12 years and believed then, and continue to believe, that there is a legitimate private banking function that the Fed performs.  It was born as a bankers’ bank, a successor to the private clearinghouses.  As explained by Richard Timberlake, legal ambiguity surrounded some of the activities of the private clearinghouses (e.g., provision of reserves in times of distress). The Fed was the compromise. Continue reading