Posted by FillBax on 07/30/09
Last updated 07/30/09

"I do not believe that HR 1207 is necessary, and I can not support it"

-Congressman Joe Sestak

July 28, 2009

 Thank you for corresponding with me about support for H.R. 1207, The Federal Reserve Transparency Act.  I greatly appreciate your input on this matter, and I apologize for the delay in my reply.

 As a Member of Congress, it is my responsibility to represent my constituents' concerns and interests and to provide them the honorable and enthusiastic service they deserve. I truly value your thoughts and suggestions on issues before the House. In a representative government such as ours, it is essential that I know what your views are on these issues.

 The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central bank of the United States. The Federal Reserve was created on December 23, 1913, with the enactment of the Federal Reserve Act by President Woodrow Wilson. It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. 

Today, the Federal Reserve's responsibilities fall into four general areas:

o   conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices 

o   supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers 

o   maintaining the stability of the financial system 

o   providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation's payments systems 

The key components include: 

o   The Board of Governors of the Federal Reserve System in Washington, D.C. is a federal government agency, comprised of seven members appointed by the President of the United States and confirmed by the U.S. Senate; 

o   Twelve Regional Federal Reserve Banks and their branches located in major cities throughout the nation act as fiscal agents for the U.S. Treasury, operating a nationwide payments systems, supervising and regulating member banks and bank holding companies, and serving as banker for the U.S. Treasury.  Each Reserve Bank has its own nine-member board of directors, comprised of three Class A directors representing commercial banks that are members of the Region, three Class B directors representing the public, but selected by member banks, and three Class C directors representing the public, but appointed by the Federal Reserve Board of Governors.

o   The Federal Open Market Committee (FOMC) is composed of the Seven members of the Board and five of the twelve Reserve Bank presidents - including the President of the New York Federal Reserve Board as a permanent member with the other four positions rotating; 

o   Private U.S. member banks, which fall into two categories.  All national banks chartered by the federal government are required by law to be members of the Federal Reserve.  Banks chartered by states are not required to be members of the Federal Reserve System, but may do so if they meet the standards set by the Board.  Member banks must subscribe to stock in their regional Federal Reserve Bank; however, this stock is merely a legal obligation of the Federal Reserve and the stock may not be sold or pledged as collateral for loans. 

 As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. 

 The system was designed out of a compromise between the competing philosophies of privatization and government regulation.  In 2006, Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise going back to the original Federal Reserve Act of 1913.

o   Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control.  But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees. 

o   The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.

 The Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. The Full Employment Act of 1978 (PL 95-523), also known as the Humphrey-Hawkins Act set out the hearings and reporting requirements which established Congressional oversight while maintaining Federal Reserve independence over monetary policy. 

o   Semi-annual hearings, in February and July, with Senate Banking Committee and House Financial Services Committee are the primary forum. 

o   The Fed Chairman presents the Monetary Policy Report to the Congress, testifies, and responds to questions from the Committee members. 

o   These were renewed in the American Homeownership and Economic Opportunity Act of 2000 (PL 106-569). 

 On May 20, 2009, President Obama signed into law S. 896, Helping Families Save Their Homes Act of 2009 (P.L. 111-22) which explicitly confirms the General Accountability Office (GAO) authority to audit the activities of the Federal Reserve and the Treasury under the Troubled Asset Relief Program. 

 On July 22-23, 2009 in his semi-annual testimony before the Senate and House Committees, Mr. Bernanke made the following statements:  "The Congress should have the ability to oversee all aspects of our operations, including whether or not we have appropriate financial controls, whether we are lending on a good basis of collateral, and so on.  So we are willing to work with Congress on that.  We do think that the Congress has the right to see how we are using taxpayer money.  Where we are concerned is that the Congress would be intervening in our specific policy decisions relating to monetary policy and the economy."

 In a round of questions and answers with Senator Jim Bunning, Mr. Bernanke responded to the question of why the American public and Congress believe that the Fed's independence has already been compromised with the following:   "I understand, but I think it's a misconception.  The Federal Reserve has worked with Treasury, both the Republican and Democratic Treasury because in a situation of crisis, it's very important, and I think that the American people want to see their financial leadership working together to protect the stability of the system. 

 He replied to Senator Bunning who said "your job is monetary policy, not fiscal policy", with "My job is also financial stability.. We have a joint statement with Treasury which makes clear that the Fed should not be responsible for credit allocation or fiscal policy.  We are looking at financial stability.  That's our objective." 

 With the massive scale and complexity of the U.S. government and economy, and increasingly, the global interconnections of business and financial systems, I believe it is essential that we maintain a central bank for the United States.  And I believe that the central bank must remain independent of political influence.  I support allowing the Federal Reserve emergency powers during unusual and exigent circumstances because I believe it is essential that the Federal Reserve have the ability to respond quickly when the need arises.  I have been generally supportive of Chairman Bernanke's actions over the last year to ensure that this country avoided the mistakes of the Great Depression, where the Federal Reserve did not take action which could have forestalled or mitigated the massive destruction of employment and wealth. 

 I also believe that unlike his predecessors, Chairman Bernanke has made efforts to expand the transparency of Federal Reserve Actions.  He has established a guiding principle to provide to the public as much information as possible.  He has created a separate section of its website devoted to providing data, explanations, and analyses of its lending programs and balance sheets.  On June 10, the Federal Reserve issued the first of a series of monthly reports to provide more detailed information on its credit and liquidity programs. The report includes information on the number of borrowers, the amounts borrowed by type of institution, collateral by type and credit rating, and data on the concentration of borrowing.  It also includes information on liquidity swap usage by country as well as quarterly income information on the different classes of Federal Reserve assets.  (See www.federalreserve.gov/files/monthlyclb-sreport200907.pdf) Finally, the Federal Reserve Bank of New York has made available the investment management agreements related to its financial stability and liquidity activities. 

 At the same time, I believe it is essential for Congress to provide appropriate oversight to ensure that one chairman does not have the ability to push forward a political economic philosophy beyond the bounds of monetary policy.   For example, during the Chairmanship of Alan Greenspan, there were instances where he stepped outside of his role as the administrator of the country's monetary policy to weigh in against a concept of oversight for derivatives proposed by the Commodity Futures Trading Commission.   His intervention effectively stopped attempts to regulate what has become now a major issue in the markets for derivatives and energy related commodities. 

 So, in summary, I do not believe that HR 1207 is necessary, and I can not support it.  The GAO already has authority to audit the transactions by the Federal Reserve and the Treasury for the roughly $3 billion of commitments under the Troubled Asset Relief Program, as well as reviews each year of specific activities of the Federal Reserve.  The Special Inspector General has recently issued its Second Quarterly Report to Congress, dated July 21, 2009, which lays out many further details of the TARP program, including its recommendations for further control actions.   I believe, however, that we must preserve a strong central bank and the Federal Reserve must maintain independence over monetary policy operations.  I see no benefit and significant risk for political interference with long-term damage if Congress and the GAO become involved in monetary policy.

Thank you again for your letter. If I can be of any additional assistance, please do not hesitate to contact me. I look forward to our future correspondence.

Posted 07/31/09 Publius1 Gouldsboro, PA

They're running scared. Sestak totally sidesteps the main issue. For one, the Fed's chief auditor could not answer simple questions about where $2 TRILLION went. That's enough right there for an audit!

Posted 08/01/09 FillBax Linwood, PA

His response (or should I say his staffs response) is a load of crap and yeah I was kind of insulted by the history lesson. I've been thinking about setting up a meeting with him so I can personally hand him petitions and some literature regarding economics, the fed, and the constitution. I don't expect it to happen (it took him several weeks to respond to my message about 1207) but if it does what books/literature should I give him?

Posted 08/03/09 MichaelKoffenberger Stewartstown, PA

I agree with Fadestyle here...I mean c'mon, a citizen writes you to support a bill in the House. Does that happen every day? Wouldn't you assume that your constituent ALREADY knows what is in the bill??? For every 1,000 people out there, only one cares enough to write their Congressman. You could assume that the one person that writes out of that 1,000 is already educated on that issue!!! Unreal...condescending BS! FillBax - give him "Meltdown". It is short enough for him to read and keep his attention span, but not too advanced for him to put it away like Rothbard's "The Case Against the Fed"!

Posted 08/03/09 gurjo Girard, OH

boo

Posted 08/07/09 mimipoosh Havertown, PA

So, what should I do with my response from Joe? (that's how he signed his name; see? he's just 1 of the folks. I just got a response letter 2 days ago. maybe give it back to the anti-audit crowd; they're using alot of wallpaper this year.