Center for Financial Privacy and Human Rights

Free markets are a necessary condition of liberty, prosperity and tolerance.

 
 
http://dailycaller.com/2011/02/08/put-the-federal-reserve-on-a-budget/
 
 
 
February 8, 2008
 
 
  Time for Congress to Put the Fed on a Budget
 
The Federal Reserve, which has the power to print money, also sets its own operating budget. That’s the
  wrong kind of independence. Unfortunately, recent proposals to audit the Fed do not address this issue.
 
  Putting the Federal Reserve on a Congressional budget would bring much needed accountability and
fairness, instill a culture of efficiency, and increase effectiveness. An annual Congressional appropriation
  process would do more to bring long-term accountability to the Fed than the popular audit proposal.
 
  The Fed’s mid-1980s bailout of Continental Illinois Bank and Trust Company, then the nation’s seventh
largest bank, illustrates the need for such a process. An accounting shell game hid the Fed’s loan to
  Continental Illinois, which was “not recorded in the FDIC’s budget because the FDIC did not provide any
  ‘budgetary resources,’ [and the] loan is not recorded in the budget under the Federal Reserve’s account
  because the discount operations of the Federal Reserve are excluded from the budget,” according to a
1985 Congressional Budget Office report (“The Budgetary Status of the Federal Reserve System”). The
  FDIC later assumed the $3.5 billion Fed loans after insolvency sent the bank into receivership.
 
  This clandestine Fed bailout of Continental Illinois helped spawn the “too-big-to-fail” problem, and led to
various broad-based reform proposals over the years from Democrats Alan Cranston, Lee Hamilton and
  Byron Dorgan and Republicans Jack Kemp and Mack Mattingly. Had Congress put the Fed on a budget
  back then, we might have avoided the recent financial crisis.
 
For a real-world example of reform, we can look to New Zealand, which in 1989 put its central bank on a
  fixed annual budget for five years. Central bank chairman Don Brash pleaded for a cost of living
  adjustment. Prime Minister Ruth Richardson retorted, “You believe in price stability, prove it.” After five
years, the New Zealand central bank was underspending its budget by 38 percent, and reduced staff
 
from about 600 to 285 over a decade.
 
  New Zealand’s central bank aligned incentives. As Brash explained, “So the inflation rate has no direct
  bearing on the budget of the Bank, except that the budget of the Bank is set on the presumption that
prices are stable, so that if prices are not stable, we are put under some pressure.” Meanwhile, the
 
Federal Reserve Board’s expenses have increased significantly in recent years.
  page 1 
 
 
 
Center for Financial Privacy and Human Rights
PO Box 2658 Washington, DC 20013-2658 Tel. 571.377.8596
www.financialprivacy.org bjansen@financialprivacy.org
http://dailycaller.com/2011/02/08/put-the-federal-reserve-on-a-budget/ 
 
 
 
February 8, 2008
 
 
The Federal Reserve’s funding process is little understood, and therefore little scrutinized. That needs to
 
end. Here’s how it works: The Fed buys Treasury securities with money it creates out of thin air. The
  major source of the Fed’s revenue is taxpayerfunded interest on those bonds. The Fed spends however
  much it wants and rebates the remainder to the Treasury. This end run around the Congressional budget
  process violates the spirit of the Constitution, which grants all budget power to Congress.
 
Former Reagan Treasury official David Malpass recently explained the importance of examining the
 
composition of the Fed’s portfolio of Treasury bonds to the Senate Budget Committee. “We have a full-
 
blown fiscal crisis underway which requires an upheaval in our federal spending and budgeting culture,”
  he said. “We face the risk of a catastrophic tipping point due to our enormous federal debt and the growth
  in spending. Adding to the risk, the maturity of the national debt is dangerously short, made worse by the
  Federal Reserve’s buyback of long-maturity debt.”
 
The Federal Reserve bailed out insolvent financial institutions through its Section 13.3 lending facility.
 
Congress corrected that abuse by limiting future bailouts to illiquid but solvent institutions and delegated
  broad new powers to the Fed, including greater consumer financial protection oversight. Whether or not
  one favors these regulatory changes, Congress ought to ensure that these responsibilities are executed
  effectively and with accountability.
 
  Banking experts Vern McKinley and King Banaian argue in “Central Bank Operational Efficiency:
Meaning and Measurement,” in the book Central Bank Modernization, that increased efficiencies in
 
central bank operations actually increase their effectiveness. They argue that improved efficiency
  improves governance, addresses the problem of the concentration of power developing, guards against
  the Fed crowding out private sector operations, and increases government revenues.
 
  The Founding Fathers envisioned elected representatives accountable to the people – with Congress
  overseeing the budgetary process. Voters are calling for a return to that ideal. We need stronger audit
scrutiny of the Fed as well as an annual appropriation process to ensure both effectiveness and
 
accountability.
 
  Subjecting the Fed to the Congressional appropriation process would not affect its monetary policy role. It
  would make the Fed more effective and efficient as well as freeing up other taxpayer resources for
  narrowing the budget deficit, cutting taxes, or other government priorities.
Center for Financial Privacy and Human Rights
J. Bradley Jansen is the Director of the Center for Financial Privacy and Human Rights of the Liberty
PO Box 2658 Washington, DC 20013-2658 Tel. 571.377.8596
and Privacy Network and an adjunct scholar at the Competitive Enterprise Institute. He was the
www.financialprivacy.org
legislative staffer bjansen@financialprivacy.org
for banking and monetary affairs for US Rep. Ron Paul from 1997-2001.
  page 2 
 
 
 
Center for Financial Privacy and Human Rights
PO Box 2658 Washington, DC 20013-2658 Tel. 571.377.8596
www.financialprivacy.org bjansen@financialprivacy.org