The most secretive, least accountable institution tied to the U.S. government is not the CIA, DIA or NSA. Those clandestine agencies are subject to at least some Congressional oversight.
Not so the Federal Reserve, which, since its creation in 1913, has been the most opaque institution in the land, despite the power it wields over interest rates and the money supply—indeed, over our whole economy. Now that the economy is mired in a crisis that some say might become a second Great Depression, it’s high time to shed some light on the central bank. Fed Chairman Ben Bernanke isn’t really a vampire—he shouldn’t be afraid of the sunlight.
The Fed’s defenders say it shouldn’t be subject to a congressional audit because it’s a “private institution.” But its Board of Governors is appointed by the president and confirmed by the Senate, and the Fed unquestionably exercises policy-making powers. Its defenders say that an audit would expose the Fed to political pressure from Congress. But the Fed is already a political institution—every president wants as much economic growth as possible during his administration and to minimize any downturns. Politics is indeed very much on the president’s mind when he appoints the Federal Reserve chairman.
The Fed does not, as many people think, prevent inflation. On the contrary, it creates inflation—since 1913, the Fed has presided over the devaluation of the dollar by 95 percent. Its response to the present crisis has been to drop interest rates to almost zero and expand the money supply beyond the horizon. For now, the inflated money supply has not brought about higher prices because banks are keeping the cash in the vault to shore up their own solvency.
But once they think they are out of danger, banks will start lending again, and the country will be awash in currency. Prices will soar, while the value of dollars in your paycheck, wallet, and savings account will plummet.
Why do we have a central bank if it actually causes inflation?
The answer is that many of our political and economic elites believe that a little inflation is a good thing. Rock-bottom interest rates mean anybody can get a loan. Businesses can borrow more than they otherwise would, which means they can spend more too. They hire more employees, raise wages, and launch new projects. That’s great for consumer spending, and the whole economy grows. But it’s the economic equivalent of taking steroids—it isn’t healthy, hard-earned growth. It’s a quick fix that rapidly leads to serious trouble.
That mirage of prosperity is created out of thin air by easy money. Companies are naturally conservative about their investments. When they have access to limitless artificial reservoirs of credit created by the Federal Reserve, however, they take bigger risks. Eventually the boom turns into a bust as bad investments—in real estate derivatives, for example—lead to businesses and financial institutions going broke together. Consumer spending falls, and an artificial cycle of prosperity turns into a real cycle of layoffs and contraction.
Supposedly cheap money is a drug that has made addicts of us all. Now our economy is in withdrawal, and it hurts. Bernanke prescribes more of what made us sick in the first place—even lower interest rates and a fresh injection of dollars. What we really need is to get off the drug and make the Fed accountable.
Congress and the American people are not the only ones kept in the dark about the Fed’s activities—even the central bank’s inspector general doesn’t know exactly what the Fed has been up to during this crisis. In a recent hearing, Inspector General Elizabeth Coleman was asked whether she could account for who received the $1 trillion the Federal Reserve had added to its balance sheets since 2008 or whether she had examined off-balance-sheet transactions reportedly totaling $9 trillion. She could not give any answers, except to say, “We do not have jurisdiction to directly go out and audit reserve bank activities specifically.”
We have a Congress for a reason: so duly elected representatives of the people can make the most important decisions about war and peace, tax and monetary policy that affect us all. Congress, and the public, deserves to know what the Federal Reserve is doing; someone has to hold the central bank accountable, or it will continue to exacerbate the business cycle and depreciate the currency.
Fortunately, a transpartisan coalition of conservatives, liberals, libertarians, and progressives is demanding an audit of the Fed, and legislation Rep. Ron Paul has introduced to do just that has 317 cosponsors in the House. The bill’s Senate counterpart has 31 cosponsors. Will Barack Obama sign it if it passes and make the central bank subject to at least as much oversight as the CIA? The Fed has many secrets, but one thing that everybody should know by now is the terrible price we pay for its unchecked power.
Michael Ostrolenk is a public policy consultant who works on health, education, privacy and national security related issues. He has written for a wide variety of publications ranging from USA Today to The American Conservative Magazine. Mr. Ostrolenk is also a policy fellow for the Coalition for a Realistic Foreign Policy and the Center for Cognitive Liberty and Ethics.