WASHINGTON -- Top progressive senators are running away from a bill authored by Sen. Rand Paul (R-Ky.) to audit both the Federal Reserve's monetary policy operations and millions of foreclosures. Their aversion could doom any chance for public transparency surrounding the widespread abuse that banks deployed against homeowners in the aftermath of the financial crisis.
Both Sen. Elizabeth Warren (D-Mass.) and her fellow financial reform advocate, Sen. Sherrod Brown of Ohio, the top-ranking Democrat on the Senate Banking Committee, have come out against Paul's proposal, which would for the first time provide a public accounting of the central bank's monetary policy maneuvers and its transactions with foreign central banks.
"Sen. Brown has supported recent actions that have brought historic levels of transparency to the Federal Reserve," spokeswoman Meghan Dubyak told The Huffington Post. "But he does not see how this legislation will benefit working Americans."
Warren and Brown insist they're on board with more transparency in the Fed's regulatory operations, but they're drawing the line at monetary policy.
"I oppose the current version of this bill because it promotes congressional meddling in the Fed’s monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy," Warren said in a statement provided to HuffPost.
Other liberal financial commentators have been more blunt. Both The New York Times' Paul Krugman and the Roosevelt Institute's Mike Konczal have argued that Paul's Fed audit would empower kooky ideas about monetary policy -- particularly those of Paul himself -- and could ultimately damage the economy. Paul and plenty of other Republicans spent years warning that severe inflation was right around the corner. It never materialized, and many liberal economic experts believe that giving those voices new information about the Fed's monetary policy activities will only make it harder for the Fed to do its job.
Still, this idea of "political independence" is difficult to reconcile with basic principles of democratic accountability. It's also a distortion of the concept underlying the 1913 law that created the Fed.
"That independence is of course independence from the executive branch," University of Texas economist James Galbraith testified at a House hearing in 2009. "It is not and cannot be independence from the Congress itself. The Federal Reserve may be delegated certain functions by the Congress, but the Congress can always choose to hold it accountable … It's a legal independence of a kind that other regulatory institutions have had over the course of our history. It's not an independence which is specific to monetary policy per se."
The Fed is the world's most powerful economic institution, and its monetary policy operations are its strongest tools, setting interest rates that have tremendous influence over U.S. growth, inflation and the prices of key assets. The Fed's arrangements with foreign central banks and governments even give it a significant role in foreign policy. Yet despite its vast political reach, the Fed is far less accountable to the democratic process than other policy-setting agencies in the American government.
While the Fed's Board of Governors, based in Washington, D.C., is a public agency, the central bank's 12 regional branches are private-sector entities. Two-thirds of the directors of each regional branch are selected by commercial banks in the region, and many of those directors help select the presidents of each branch. Many of these regional presidents, in turn, play a role in setting monetary policy alongside the Board of Governors.
There have always been political dimensions to the Fed's activities. During the financial crisis, Ben Bernanke, then Federal Reserve chairman, and Tim Geithner, then president of the New York Fed, worked closely with Treasury Secretary Henry Paulson on various bailout activities, with Bernanke even helping sell Congress on a $700 billion bailout bill.
Regional Fed Presidents, meanwhile, have never been immune to political thinking. Dallas Fed President Richard Fisher ran for Senate as a Democrat before joining the Clinton administration as a trade official. San Francisco Fed President John C. Williams has been a career Fed economist, but also served as senior economist at the White House Council of Economic Advisers under President Bill Clinton. Minneapolis Fed President Narayana Kocherlakota signed a petition organized by the libertarian Cato Institute opposing President Barack Obama's stimulus plan a few months before he took office.
"I don't understand progressives', like Senator Elizabeth Warren, opposition to the idea of legislation to audit the Fed," one aide to Paul told HuffPost. "Some Democrat opposition seems more partisan than principled."
Few White House officials see Warren as an administration lapdog, particularly after she torpedoed Obama's recent Treasury nominee, Antonio Weiss, and led a revolt against a December budget deal blessed by Obama.
But securing Democratic votes will be difficult for Paul as he eyes a presidential run, and he will need at least a handful of votes from across the aisle if his bill is to overcome a filibuster. Both Brown and Warren had represented opportunities for Paul to pick up multiple Democratic votes -- Brown because of his power over other senators on the banking committee, and Warren because of her influence over the progressive wing of the party.
Progressives and Republicans have managed to find common ground on central bank transparency in the past. In 2009, both Rep. Alan Grayson (D-Fla.) and Sen. Bernie Sanders (I-Vt.) worked with Rep. Ron Paul (R-Texas), Sen. Paul's father, to audit the Fed's emergency lending operations during the financial crisis. The 2010 Dodd-Frank law requires public disclosure of any future Fed bailouts of the banking system, and most of the central bank's activity is already subject to regular auditing. Every time more transparency is proposed, Fed officials warn that monetary policy will be undermined by political interference -- although such transparency has never resulted in calamity.
The Fed has also (successfully) fought to prevent the public disclosure of records that detail widespread foreclosure abuses by big banks. Those documents underpinned a major 2012 settlement with the nation's largest banks, albeit one that ultimately provided very limited relief to victims.
Warren herself called on the Fed to release this information in 2013, castigating both the Fed and the Treasury's Office of the Comptroller of the Currency in a Senate Banking Committee hearing.
"I just want to make sure I get this straight," Warren said at the time. "Families get pennies on the dollar in this settlement for having been the victims of illegal activities or mistakes in the bank’s activities... And you now know individual cases where the banks violated the law, and you're not going to tell the homeowners?"
Sen. Paul agreed to include a public audit of the foreclosure files in his bill to audit the Fed's monetary policy activity during negotiations with Democrats during the last session of Congress. The current bill, which is identical to the previous version, has 30 co-sponsors, only one of whom, Sen. Mazie Hirono of Hawaii, is a Democrat.
Read the full bill here.