The Myth of Fed Independence

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Before
the Committee on Financial Services, Humphrey Hawkins Hearing on
Monetary Policy, U.S. House of Representatives, July 21, 2009

Mr. Chairman,
at a time when we find ourselves once again receiving a report on
the Federal Reserve’s conduct of monetary policy, it is more important
than ever that we in the Congress push for more effective oversight
and transparency of the Federal Reserve System. It would be unconscionable
for this body, especially after the financial crisis of the last
two years, not to take forceful and deliberate action to bring more
transparency to the Fed.

A common misconception
is that the Fed is completely independent of political pressure,
and that any attempt to oversee or audit the Fed would jeopardize
that independence. While the Fed has far too much authority to make
agreements with foreign governments and central banks, or create
temporary liquidity facilities, the governors and, more importantly,
the chairman, are appointed by the President. The chairman is the
dominant figure within the Board of Governors and the Federal Open
Market Committee, the public face of the Fed, and he must be reappointed
by the President every four years, with the advice and consent of
the Senate. Thus, his job security as chairman is dependent on keeping
the President and the Senate pleased. Every time the chairman acts,
it is with the knowledge that within four years he will be forced
to justify his actions to the President and the Senate.

Meetings of
the Federal Open Market Committee, the committee responsible for
conducting monetary policy and setting interest rates, are held
in secret. Minutes are released after three weeks, and transcripts
after five years. The ostensible reasons for this secrecy are that
too much openness will either hamper the freedom of FOMC participants
to discuss issues freely, or that markets will be unnerved. However,
this is not really a condemnation of transparency, but rather a
sign that far too much power has been given to one tiny organization.

We here in
the Congress hold our committee hearings publicly, broadcast on
C-SPAN and over the Internet. We are the most powerful branch of
the government and our decisions have no less effect on the lives
of everyday Americans than the decisions of the Fed. More importantly,
our discussions have a direct impact on our ability to win re-election.
Every word we speak can be used against us in our campaigns for
re-election. It would be far easier for us to hold hearings in secret
and release minutes and transcripts well after the fact. Yet we
understand that the American people deserve to know not only what
comes out of Congress, but also what goes on in the legislative
process.

In the same
way, it is vital that the American people understand what is going
on inside the Fed. Attempts at enhanced transparency and auditing
of the Fed’s auctions are not intended to dictate monetary policy
to the Fed or second-guess the Fed’s actions. To my knowledge not
a single legislative proposal put forward thus far has this as its
intended goal. We as Congressmen have the ultimate responsibility
for keeping the Fed in check, but how can we fulfill that duty if
we do not know what the Fed is doing? Greater transparency is the
first step, and only then can we begin to perform effective oversight.
Given the Fed’s abysmal stewardship of the dollar and repeated fumbling
of financial crises, we owe this to the American people.

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July
23, 2009

Dr. Ron
Paul is a Republican member of Congress from Texas.

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