Battle Brews on Federal Reserve `Secrecy'
Fed chairman Greenspan resists attempts by a lawmaker to inject more `sunshine' into powerful body's operations
WASHINGTON — IT'S a battle as old as the Republic - the little guy against the vested interests, debtors against the bankers, the populists against the Establishment.
This time, it's Rep. Henry Gonzalez (D) of Texas battling the secretive, powerful Federal Reserve, which controls the nation's money supply and holds sway over the economy.
The battle was joined anew yesterday when Representative Gonzalez hauled Fed chairman Alan Greenspan before his House banking committee. He called into question the Fed's ``vast powers'' which, although wielded from behind closed doors, directly affect ``the economic health of our citizens.''
Not that Gonzalez exactly fits the mold of one of ``the little guys.'' He is chairman of the House Committee on Banking, Finance, and Urban Affairs. And he's been shaping national policy in the Capitol for nearly 32 years.
In this fight, however, Gonzalez is going up against some muscular opponents, including Chairman Greenspan, President Clinton, and some members of his own committee.
The problem for Gonzalez is this: The Federal Reserve has tremendous influence over the interest rates everyone pays to buy a house, or any other big purchase. Yet Fed policy is controlled by policymakers who operate largely in secret.
Further, the policymaking arm of the Fed, the 12-person Federal Open Market Committee (FOMC), includes five members who are appointed by private banks. And a number of those banks, Gonzalez points out ominously, are ``foreign owned.''
Gonzalez wants to change all this with HR 28, the Federal Reserve System Accountability Act of 1993. The bill, which alarms some of his opponents, would do several things:
* Require that the 12 Federal Reserve Bank presidents be nominated by the president of the United States, and confirmed by the Senate. The current system that allows private banks to help in the selection of the 12 presidents would be scrapped.
* Require that major decisions made by the FOMC be made public within a week. Gonzalez says the curtain of secrecy surrounding Fed decisions at present nourishes ``the rumor mill industry'' in financial markets.
* Require that a transcription and videotape of FOMC meetings be made public after 60 days. The FOMC has not taken minutes of its meetings since 1976, Gonzalez says, ``to evade the Sunshine in Government Law.''
* Remove restrictions on the General Accounting Office that limit its authority to examine how the Fed spends its money. Gonzalez suggests that the Fed uses public funds for lobbying, and to pay dues to private clubs.
* Prohibit employees of foreign banks from serving on the board of directors of the Federal Reserve Banks.
Greenspan terms these and other provisions of Gonzalez's bill a ``major mistake.''
Appearing before Gonzalez's committee, Greenspan noted that during the past 60 years, the Fed has ``stood the test of time.'' The system represents ``an exquisitely balanced approach to an extremely difficult problem,'' he said.
The problem Greenspan refers to is balancing short-term politics with long-term economics.
Short term, any government can gun the engine of its economy by slashing interest rates and pressing down on the monetary accelerator. For one, two, or three years, the economy will zoom ahead, generating jobs and a false sense of prosperity.
Then comes the payoff. Inflation soars. Productivity and living standards begin to slump. To wring out inflation, government must clamp down on the supply of credit, and the economy fizzles.
The Fed's independence, including five regional bank presidents who take turns sitting on the FOMC, ensures that it won't be subject to political winds of the moment, Greenspan argues.
During the past year, critics of the Fed, including Gonzalez, were sometimes accused of trying to impose short-term goals on the bankers. Gonzalez has reportedly criticized the Fed, for example, of doing too little to encourage growth as American workers were laid off in the recent recession.
Gonzalez denies that is his goal, however. He is merely trying to direct some sunshine into the Fed's operations, he says.
Rep. Lee Hamilton (D) of Indiana, who supports Fed reform, says if it were just lower interest rates he wanted, he would have little reason to complain today, with the federal funds rate down to 3 percent. But Representative Hamilton is still unhappy.
``The Federal Reserve ... is an enormously powerful institution, but it does not conform to the normal standards of government accountability,'' Hamilton says. ``Power without accountability simply does not fit into the American system of democracy.''