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Ben Bernanke Testifies: Why We Need A Full Audit Of the Federal Reserve

“End the Fed?” I’ve been investigating this question for nearly three years as it’s become a hotly debated issue thanks to former libertarian congressman and three-time presidential candidate, Ron Paul. By now, most millennials have heard of the libertarian political philosophy of non-aggression and perhaps sympathized with some of the anti-war or pro-civil liberties positions like ending the war on drugs. Even so, not everyone is very interested in a dry topic like Federal Reserve monetary policy or how currency inflation devalues our purchasing power. I'll lay out a non-partisan argument about the role of the Federal Reserve System (AKA “the Fed”) in the U.S. economy and recommend some solutions to help it become more transparent. 

The Federal Reserve, with help from Chairman Ben Bernanke, began using Quantitative Easing (QE) in 2008 to buy $600 billion of mortgage-backed securities to combat the financial crisis. QE policy failed to immediately generate a positive response so QE2 and QE3 were implemented. QE4 was introduced in December 12, when the Federal Open Market Committee (which oversees the Fed’s buying and selling of U.S. Treasury securities) increased the amount of open-ended bond-buying purchases to $85 billion per month along with continuing to keep short-term interest rates low. This is a monetary intervention policy based on the “Bernanke Doctrine” that is intended to broaden the monetary base and prevent deflation.  

Federal Reserve Board Chairman Ben Bernanke testifies before the Joint Economic Committee on Capitol Hill, June 7, 2012 in Washington, DC.

In actuality, QE policy has had the adverse effect, including devaluation of our dollar by keeping interest rates artificially low in order stimulate credit expansion through more loans. This additional access to consumer credit is what is now driving out economy. Roughly put: more money = less value. There are more dollars in circulation as a result of QE, causing an increase in consumer goods prices – or “inflation.” Inflation coupled with high unemployment (or as some call it “weak labor demand”) and stagnant wages is especially detrimental to the well-being of the middle and lower economic classes since they are most impacted by higher consumer goods prices.

Upon reviewing the Federal Reserve System Purposes and Functions, the monetary chapter policy underscores that, “The Federal Reserve sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates.” I’m not convinced that the QE policies of keeping interest rates low to stimulate demand is going to have a long-term positive effect on the economy. Instead, I believe it will cause a series of bubbles as we’ve seen in Housing, Student Loans, and perhaps now with the Stock Market. The negative impact of these bubbles is that they eventually burst, which causes worse economic conditions.

Back on March 20, Chairman Bernanke gave a press conference where he took questions and announced his plans to stay on course with QE4. Bernanke said, “You know, we do need to see a sustained improvement. One month, two months doesn’t cut it. And, normally, you would expect that you would need to see a reasonable pace of GDP growth in order to achieve that. So we’re just going to have to keep providing support for the economy and see - you know, see how things evolve.” This left a lot of speculation on when QE policy will wind down.

Bernanke is scheduled to testify Wednesday in front of the Joint Economic Committee at 10:00 a.m. By law, the chairman is required to testify in front of Congress two times per year on monetary policy objectives. This joint committee is made up of ten house representatives and ten senators. This means there are only two substantial meetings for twenty committee members to question the Fed’s decisions – making it one of the most influential and secret institutions in the United States. With the amount of power over the economy that the Fed yields, it seems reasonable that we should be seeking more transparency.

According to Forbes contributor Matt Kibbe: “Bloomberg News first forced the Fed to release documents back in April [2011]. The financial news organization went through an arduous, three-year court battle to make some documents public through the Freedom of Information Act (FOIA). The Fed, which repeatedly appealed court decisions and requested numerous delays, took its fight for secrecy all the way to the Supreme Court and lost.” 

In the 28,000-page FOIA requested document, it had been exposed that the Fed had secretly loaned out money to the Arab Bank Corporation owned partly by the Libyan central bank, Bank of China, Brussels- and Paris-based Dexia SA, and Dublin-Based Depfa Bank PLC. It was no wonder the Fed had been operating with such secrecy. After the first ever watered-down version of a Federal Reserve Audit in July 2011, it was discovered that the Fed loaned out $16 trillion at 0% interest to banks and corporations around the world in less than three years. 

source: GAO

Federal Reserve oversight should include more than two annual meetings with the Joint Economic Committee on how the Federal Reserve determines buying and selling of Treasury Securities and open-ended bond-buying program. After the first audit, we discovered that the Fed had loaned out a substantial amount of interest-free money to foreign banks and corporations. It is now important that we demand a full audit of the Federal Reserve which is being held up by Harry Reid in the Senate. The House of Representatives overwhelmingly supported Ron Paul’s Audit The Fed Bill in a 327-98 veto-less majority vote count, and we should be using this as an opportunity to move forward without partisan posturing in the Senate. There is no reason that such an important economic institution should operate in such secrecy. Our senators need to listen to the constituents’ voices and call for a full audit which would lead to more transparency in the Federal Reserve.

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