The time has come to audit the Federal Reserve on a regular basis.
The Fed derives its authority from the Congress of the United States, which provides oversight and can alter the responsibilities of the Fed by statute. The Fed can control the demand and supply of money by altering interest rates and bank reserve requirements and through the purchases and sales of government securities during open market operations.
Congress has authorized 12 Fed banks to be the operational arms of the central bank. These regional banks issue stock to member banks. By law, the annual stock dividends are 6 percent, according to the Fed.
Excess member bank reserves held at the Fed were $2 billion prior to the financial crisis. Today, that figure has mushroomed to more than $1.8 trillion, according to the St. Louis Fed.
This liquidity has been provided by the Fed. Instead of lending these funds to individuals and corporations to promote employment, the member banks are free to invest this proprietary capital in financial assets, such as stocks and bonds, to benefit their bottom line.
The first-ever audit of the Fed by the Government Accountability Office was conducted as a requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act. It showed $16 trillion went to financial institutions during the 2008-09 financial crisis, including $2.5 trillion to Citigroup, nearly $2 trillion to both Morgan Stanley and Merrill Lynch, $1.3 trillion to Bank of America and over $800 billion each to Barclays, Bear Stearns and Goldman Sachs.
In a 2011 study, The Levy Institute of Economics calculated the total liquidity provided to banks by the Fed was close to $29 trillion
— a figure that includes financial asset purchases, direct loans and guarantees.
The extraordinary power held by the Fed needs to be checked and balanced with Congressional oversight on an annual basis to ensure sound monetary policy.
The Federal Transparency Act of 2009 passed the House by a vote of 327-98, with the support of 89 democrats, on July 25, 2012, but has been stalled in the Senate for three years. This piece of legislation was sponsored by then-Rep. Ron Paul, R-Texas. It directs the Comptroller General to conduct an audit of the Board of Governors of the Federal Reserve System and the Fed banks and provide a detailed report to Congress.
This year, Ron Paul's son, Sen. Rand Paul, R-Ky., sponsored a similar bill in the Senate (S. 209). In a recent letter to Senate Majority Leader Harry Reid, D-Nev., Sen. Paul requested this piece of legislation be considered in an up or down vote concurrent with the vote to approve the nomination of Janet Yellen to be the next Fed chairman.
While addressing the Senate in 1995, Reid said, "I have sponsored legislation that would call for an audit of the Federal Reserve system. I offer that amendment every year, every year the legislation gets nowhere."
Perhaps Reid will allow this measure to be voted on. Passage would build greater trust and credibility in the Fed by the American people. This transparency and accountability would ensure a more stable monetary policy that generates greater investment, employment and income over the long term.
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