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Anything Fed: Taipei 聯準會台北敘事

廖汶釗 wen FB: Finami

 

葉倫和國會 Yellen and Congress: Perennial Pressures

script used for FB broadcast 20170426

 

I intend to use English, at first, to write my transcript, for FB broadcast, and see the effect on me the broadcaster. It's supposed to be the “easiest” way for me, as I don't have to translate readings first to Chinese, and do the reverse for English-speaking broadcast. This is a text (transcript), not an article, so I do not pursue writing perfection here.

 

I use this broadcast to further my finami effort here in Taipei, and my targeted audience are people (Chinese-speaking), who need to learn “more” English (federal reserve), hopefully from me. And I will read during the broadcast the transcript, and make my life much easier here, as a trial. I will later write a formal, well-written (analytical) Chinese article (with the the main purpose for the broadcast), on the topic of Yellen and the U.S. Congress.

 

The House Committee on oversight and government reform passed the so call “Audit the Fed” bill on Mar. 28, with the full name “Federal Reserve Transparency Act of 2017”; someone says, “This bill would open the floodgates to political interference in monetary-policy making”. Fed chair and Congress have a complicated relationship (of course..), and the Fed independence issue (no interfering on the monetary policymaking) is hotly debated, supported and objected (in a particular way). Here I use Conti-Brown's “Power” book for the analysis of the Chair-Congress (or Fed-Congress) relationship. (I actually repeat Conti-Brown's analysis, as I use it for my textbook, or the finami course on federal reserve english.)

 

Congress can infleuence the Fed (and chair) through legislation. The Banking Act of 1935, the so-called second founding (by Conti-Brown) of the Fed, created “Board of Governors”, and redefined FOMC (which was created only 2 years ago). This act put monetary policymaking authority in the FOMC (essentially the Board), and took away it from the reserve banks.. [but it does not take the “assessment” (meaning reserve banks gave funding to the Board) away from the reserve banks.. we'll be on it later, on the budget autonomy of the Fed].

 

To a lesser extent (and much more often), Congress influence the Fed by posing “legal threats”, through say Congress hearings, while the “threats” might as well become real thing, as the political wind blows. [In my last article on U.S. President and the Fed chair, I told the story of Patman Hearing, where Fed chair Martin was pushed into the arms of president Johnson.] This time around (2017), the wind is not strong (enough).

 

Former Fed chair Bernanke said at his formal press conferrence as chair: Congress has “every right to set the terms on which the Fed operates”. In terms of the Transparency Act of 2015, two years ago: “This approach raises serious concerns about Fed independence and the integrity of the process for making monetary policy.”

https://www.brookings.edu/blog/ben-bernanke/2016/01/11/audit-the-fed-is-not-about-auditing-the-fed/

 

Let us look at the Act of 2017, which was passed by the House Committee a while ago:

(excerpt from Congress website: https://www.congress.gov/bill/115th-congress/house-bill/24 )

--

Federal Reserve Transparency Act of 2017

This bill directs the Government Accountability Office (GAO) to complete, within 12 months, an audit of the Federal Reserve Board and Federal Reserve banks. In addition, the bill allows the GAO to audit the Federal Reserve Board and Federal Reserve banks with respect to: (1) international financial transactions; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made under the direction of the Federal Open Market Committee; and (4) discussions or communications among Federal Reserve officers, board members, and employees regarding any of these matters.

--

 

I would focus on the “transparancy issue”, which has more story to tell, and the focus is on FOMC meeting decisions.. how monetary policies are made (FOMC minutes, meeting transcripts, tapes or so). By viewing/keeping a (public) record of FOMC's meeting-by-meeting decisions, the Fed is then subject to Congressional review and pressure. In the early 1960s Congressman Patman had asked the Fed to disclose the full-text transcript of FOMC meetings (of early 1960s), and the Fed began to release the MODs (memoranda of discussion, a detailed description but not full-text transcript), on a 5-year lag. But in response to the Sunshine Act, as a way to avoid the sunshine out, the Fed stopped the release by a decision vote of 10-1! Congress was angry, and chair Burns made compromise by releasing “Minutes” (a summary), on a 90-day lag.

 

Fed chairs had been secretly taping and making full-transcript of FOMC meeting, for personal use, but otherpeople had not known. The fact came out in the early 1990s during the Gonzalez Hearing, and then chair Greenspan tried in the end to stop the fallout by agreeing to release the full-text transcripts, on a 5-year lag, along with the “Minutes”. That's how we are doing the Fed's “centerpiece of public engagement” (Conti-Brown, p.205). Here is a graph of the public disclosure evolution; I'll take a picture and put it in “留言”of FB.

 

 

--[budget automony]--

Now we come to the second pillar where the Congress could actually influence the Fed, but Congress has not been doing. It's the budget automony of the Fed, as opposed to annual congressional appropriation process that is the norm of the government agency business. Before 1935, the reserve banks used to give funding to the Board, not the other way around in which we are used to now. But while the Banking Act of 1935 relocated the monetary policymaking authority from reserve banks to the Board (FOMC), the Act did not remove the “assessment” provision, so the Board still had to collect money from the reserve banks. By reserve banks we mean 聯準會分行(如紐約、波士頓、費城、堪薩斯、達拉斯、舊金山等等).

 

The Fed in its original design, in terms of funding, was more like FDIC which charges fees from private institutions. The reserve banks had been doing the job, probably until 1947 [Q: my question, which has not been resolved: when was the Board given the authoriry, or had started the practice of using proceeds of open market operations to fund itself?] In addition, after deducting the funding on the Fed, the remaining proceeds of open market operations are remitted to Treasury; this practice occurred by “public announcement by the Fed” in 1947--not a practice authorized by Congress!

 

The funding process was designed for the Fed during the period of “real bill doctrine” and “gold standard”, and the two doctrines limit then Fed's ability to print money. The modern Fed does not have these limitations, and it creates its budget “using a statutory authorization from a different era” (Conti-Brown, p.215).

 

I would not delve into real bill doctrine and gold standard; the simple way to understand it is that the so-called fiat money (paper money) was not supported by “real things/assets” such as “letters of credit” (trade) or gold. And in the early 1900s, when the Fed was built, fiat money was still controversial , without good standing. So unlike today when fiat money is accepted, taken for granted, and the Fed can “print” as many as it likes (supposedly), the original design of the Fed actually built-in with it a natural constraint on “printing money. The original design went astray.

 

[Conclude]

So the “Audit the Fed” bill was not new, and the Congress has been, as always, pressuring the Fed. Political winds play a far more important role in determining the outcome. The current republican-majority Congress and Senate and a republican president are making headaches for the Fed (and in specific for Yellen). Let me explain more in the Chinese article.

 

I specifically thank Conti-Brown and his “Power” book, for providing me the analysis, for writing this text and as textbnook for my course. (I hope somehow I've helped with his book sales..). I respect his copyright.. if I've done something not proper, please feel free to let me know. I've done it with good intention.. and Taipei right now has something called “谷阿莫”news event right now... if you are interested, please find this (in Chinese): https://udn.com/news/story/7339/2428086?from=udn-catelistnews_ch2

 

–

House panel passes bill to audit the Fed

by Greg Robb, Mar 29, 2017

http://www.marketwatch.com/story/house-panel-passes-bill-to-audit-the-fed-2017-03-28

 

House Bill to 'Audit the Fed' Would Cost $6 Million

by Charles S. Clark April 21, 2017

http://www.govexec.com/oversight/2017/04/house-bill-audit-fed-would-cost-6-million/137222/

 

 

Anything Fed: Taipei 聯準會台北敘事

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