Who’s Looking at the Fed’s Books?

By WILLIAM A. BARNETT
NYT

Lawrence, Kan.

ON Tuesday, Senator Jeff Merkley, Democrat of Oregon, and Senator Bob Corker, Republican of Tennessee, introduced legislation to allow the Government Accountability Office to audit some of the Federal Reserve’s lending programs. Different bills calling for more comprehensive Fed audits already have widespread support in the House and Senate. Expanding this oversight is long overdue.

After the financial turmoil of the last year, it should be clear that we depend on the Fed for high-quality financial data and that the Fed should be held to the highest standards of transparency. And yet we cannot be assured of either of these things unless the Fed is subjected to a thorough audit of its numbers. I worked on the staff of the Federal Reserve Board 30 years ago, and I know that without comprehensive audits to double-check Federal Reserve data, the risk exists of inadequate and sloppy accounting from the Fed.

Consider the data the Fed presented last year on nonborrowed reserves. Nonborrowed reserves are total bank reserves minus money borrowed by banks and held as reserves. Clearly, the money borrowed cannot exceed the total reserves, so nonborrowed reserves should not be negative. Yet for a few months last year, the Fed reported banks’ nonborrowed reserves at billions of dollars below zero. In its calculations of nonborrowed reserves, the Fed included in borrowed reserves new forms of bank borrowing not being held as reserves. Such incompetent accounting would not survive an unconstrained, fully informed audit.

(More here.)