The Federal Reserve: What’s the Big Secret?

Currently, there is a move in Congress for more government oversight of the Federal Reserve System, or at least a one time audit? Chairman Ben Bernake predictably resists this. Mr. Bernake says the Federal Reserve needs to remain independent, free of congressional pressure. As an example, the chairman states that the Fed sometimes must raise interest rates to combat inflation, a decision often unpopular with politicians who want to keep rates to stimulate the economy and, presumably, get them more votes at election time.

But there seems to be a “disconnect” (to use a popular word of today) here. The Congress already knows what the Fed is doing about interest rates. The Congress can demand lower rates any time it wants to. The Fed can ignore the Congress as it always has. No matter what the Congress wants or what secret information the Fed gives the Congress, the Fed can continue to do what it wants. With one exception. If the Fed is doing some illegal or improper, then changes will occur.

But that’s crazy talk. The Federal Reserve is composed of very distinguished, accomplished individuals. They would never do anything wrong or improper, would they? Well the fact is that the Federal Reserve’s ability to give emergency loans to banks or to buy up various assets gives it the power to do favors for friends or business associates. The public is suspicious of a power like that. Likely some members of Congress are also suspicious. To use the cliché, is the Fed favoring Wall Street over Main Street? Just put everything out in the open and everyone will be happier. Why can’t that be done?

Well, one argument used by advocates of secrecy is that the Fed sometimes gives loans to banks that are having difficulty getting financing elsewhere. Public knowledge of this could, in theory, lead to a run on the bank, thereby defeating the Fed’s purpose. But should the Fed be supporting banks that can’t survive on their own? Perhaps this is not what the Congress wants. I know it’s not what some members of the public want. No, we want disclosure. If exceptions need to be made to prevent a national disaster, which I doubt, then those exceptions can be made. But the Federal Reserve System is not the CIA or the Manhattan Project. The public and Congress should know what it’s doing.