Robert Auerbach, an economist to the Committee on Banking and Financial Services during the Arthur Burns, Paul Volcker, and Alan Greenspan chairmanships at the Fed, as well as being a Fed economist and now a professor at the University of Texas (Austin) has a bombshell revelation in his recent book Deception and Abuse at the Fed. He recounts how the struggle to make the Fed more transparent and accountable has much deeper roots than the mainstream media has let on, and those earlier fights revealed that the central bank hid the existence of original documents, namely FOMC transcripts, then destroyed them, and continues the practice of destroying the original records.
This chicanery means that what the GAO is auditing is not what the Fed does, but a simulacrum the Fed has served up, and a prettied-up one to boot.
In a Huffington Post article recapping some of the material in his book, Auerbach describes how the Democrats tried to make the Fed more accountable in the 1970s:
The Democrats tried to pass similar audit bills in the 1970s. The House Banking Committee (now called the Financial Services Committee) Chairman Henry Reuss, (1975 -1981, Democrat, Wisconsin) could not pass a GAO audit bill through his committee. That bill was then passed by the Government Reform Committee and became law in 1978 with substantial limitations…
In the 1970s, the Fed organized a massive lobbying campaign in the Congress against a GAO Fed audit, using officials from private banks they regulated Evidence of the Fed’s orchestration of the lobbying campaign came into public view after Reuss negotiated with Fed Chairman Arthur Burns for six months. Reuss obtained three years of transcripts from secret meetings of all twelve district Federal Reserve Banks in December 1976….
One example was: “On February 19, 1974, President Frank E. Morris of the Boston Federal Reserve Bank called on his board of directors to contact the members of Congress to promote the Federal Reserve’s position on an earlier version of the GAO audit bill.”
So the central bank is pressing executives from entities it regulates to lobby on its behalf. Charming. But here is where things get sordid:
Source FOMC transcripts should not be destroyed. The Fed lied when they notified Congress that there were no transcripts. The “17-Year Lie” is a chapter in my book republished on The Huffington Post.)
The seventeen-year lie began. Fed chairman Arthur Burns notified House Banking chairman Wright Patman in 1974 that he could not give Congress the FOMC transcripts because ‘they are routinely disposed of after the Committee has formally accepted the memorandum of discussion for the meeting in question,’ …” (Auerbach, page 89)
House Banking Chairman Henry B. Gonzalez called a hearing in 1993 to question the Fed District Bank presidents and the Board of Governors They did not explain the existence of 17 years of FOMC transcripts even though they had been informed about them at a secret Fed meeting four days before. Later, one district Fed bank broke ranks and notified Gonzalez about the transcripts. Gonzalez sent me to the Board of Governors with a committee lawyer and several staff members. They showed us the transcripts in a room right around the corner from Chairman Alan Greenspan’s office.
In 1995 a majority or more of the FOMC members voted to destroy the transcripts:
A subcommittee of the FOMC reported its deliberations. The subcommittee chair, Governor Alan Blinder, characterized the discussion at the FOMC meeting: “I did not hear any consensus–maybe someone else heard a consensus. Maybe we should just have a vote on whether there should be an ‘off the tape’ portion. Do you agree?” Greenspan replied: “I agree.” He later added: “I am not going to record these votes because we do not have to. There is no legal requirement.” The vote was taken without recording members’ names. Greenspan announced: “The ‘Ayes’ have it.” (Auerbach, page 104, reprinted from the FOMC transcript January 31-Februaqry 1,1995)
The central bank asserts, via a 2001 letter from Don Kohn, that this 1995 incident was the only time that automatic recording system was turned off during an FOMC meeting. Why should we believe that, particularly given how quickly the idea was mooted and accepted. If this instance was so exceptional, you’d expect to see more debate.
The letter also explains that the Fed’s practice is to redact FOMC minutes, and then send the redacted version to participants in the meeting for editing. That means that the version eventually released to the public has been well sanitized.
With this history, the requirement that the Fed be subject to further scrutiny by the GAO seems entirely reasonable. The central bank has not behaved in a forthcoming or even upstanding manner. Yet defenders, who all run the same
Fed dictation talking points, contend that the GAO will somehow abuse the Fed. The site Free Banking, whose writers include former Fed attorneys, debunks that notion, using an article by Robert Samuelson as its point of departure:
True, the Fed is in some respects more transparent than it used to be. But it has also been doing things that it never used to do…Not for nothing did Dodd-Frank provide for a special, one-time audit of the Fed’s crisis-related undertakings. Among other things, that audit pointed to some serious conflicts of interest that might otherwise have escaped censure. Yet according to Mr. Samuelson’s supposedly up-to-date Fed history, it should have been just as unnecessary as the recurring audits Fed “bashers” have been calling for.
Would such recurring audits themselves be otiose? The Dodd-Frank audit covers the Fed’s actions up to July 21, 2010. Consequently the GAO isn’t allowed to look into any of the Fed’s unorthodox measures since then, including later rounds of Quantitative Easing, Operation Twist, and its enhanced overnight reverse repo program, not to mention its stress tests and other financial-regulatory measures. More importantly, under existing law it can’t be asked to look into any “emergency” steps the Fed might take in the future. Should we always have to rely on special legislation after the fact to allow Congress to scrutinize unusual Fed actions?
Mr. Samuelson complains about simplistic history. Allow me to complain instead about simplistic conjectures about the future–conjectures to the effect that the Fed will never again engage in the sorts of activities that warranted the Dodd-Frank audit. Such conjectures are after all implicit in claims, like his, to the effect that a permanent enhancement of the GAO’s Fed-auditing powers would only serve to “fulfill conservatives’ political agenda” by allowing Congress to “harass” the Fed and to otherwise undermine its ability to do its job.* Does Mr. Samuelson believe that the GAO “harasses” the other government departments and agencies over which it has unlimited auditing powers? If not, why does he worry that it would harass the Fed? Conservative agenda? Does he think that only conservatives (or conservatives and libertarians) distrust the Fed, and welcome GAO scrutiny of its unusual activities? If GAO officials themselves argue for relaxing present limits on their agency’s Fed-auditing powers, must they be part of a conservative plot?
This post omits that the Fed refused to provide some of the mandated information in the Dodd-Frank related audit. As we wrote in 2010:
Well, even under the compulsion of law, the Fed chooses not to comply. Should we be surprised that it continues to refuse to make mandated disclosures?
In this case, as reported by Bloomberg, the Fed has withheld information that was of the collateral posted by borrowers to secure $885 billion of loans. Without this information, it is impossible to ascertain the risks undertaken in various emergency facilities. Dodd Frank specifically requires this detail be released…
The terms of the various types of support extended are to be revealed by borrower, in particular the details of the various types of support extended, including the collateral posted. Instead, the Fed provided the data on an aggregated basis, by asset type and rating and then only for three of six facilities.So what is the Fed trying to hide?
A number of experts correctly pointed out that this is inadequate:
“This is a half-step,” said former Atlanta Fed research director Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. “If you were going to audit the facilities, then would this enable you to do an audit? The answer is ‘No,’ you would have to go in and look at the individual amounts of collateral and how it was broken down to do that. And that is the spirit of what the requirements were in Dodd-Frank.”…
It is “specifically impossible” to know how much risk taxpayers were taking by looking at pools of collateral grouped by asset class and rating, said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press.
The Fed made barmy excuses that it needed to withhold this information to prevent bank runs. Please. This was well after the crisis was past and major banks had all passed the stress tests. The only risk was to the Fed’s reputation and its secrecy. And that, and not the public interest, is why the central bank continues to fight tooth and nail against efforts to subject it to the sort of checks and balances that are essential to prevent abuse of power. The Fed has demonstrated repeatedly that it can’t be taken at its word. The time is long past due for more oversight.