Economist Who Didn't Want to Audit the Fed Says We Better Audit the Fed

"My view has changed because the Fed has changed." Word, Doctor, word.

Monetary Freedom teaches us about how the Fed works (sort of - I do disagree with some of this article, thought it was 6% return to Federal Reserve shareholders not 8% and would love to see sources for some of the numbers but whatever) and that you need not wear a tin foil hat to think a Fed audit might be a good idea.

The article actually made me think about a recent exchange which I will totally get into here on JDA because what happens on the Internet stays on the Internet and it's absolutely fodder for the conversation.

I will not refer to the actual tweets as that would be free publicity and Jr Deputy Accountant just doesn't get down like that. I'll remember to hashtag that shit for you stalkery folks next Internet argument I get into, I swear.

So over the weekend, I see this:

@RichmondFed The Fed has never been audited! Ask yourselves why. Watch Fall of the Republic to get the answers:

First of all, why would Richmond ask itself why it has never been audited? More importantly, why would it ask this if it is actually audited?

So when someone who actually gets the story thus far talks about a Fed audit and says that he's changed his mind along the way, you sort of want to pay attention.

Congressman Ron Paul has been trying to have Congress audit the Federal Reserve for years. In the past, few other Congressmen were interested. However, during the current session, he found 282 co-sponsors for HR 1207. While I have never been opposed to having Congress audit the Fed, I shared the past apathy of most members of Congress. The Fed is regularly audited by leading accounting firms. For example, Deloitte did the 2008 audit. What is the point of having an additional audit by Congress?

Worse, I worried that Congressman Paul was pandering to some of his more conspiracy-minded supporters. If you search the web for “Fed ownership,” more nine million hits return. Most claim that the Fed is a privately-owned corporation. They further claim that the Fed pays a few cents for printing a dollar bill. Then, according to this tale, the Fed lends out the newly-created money at interest, recovering the printing cost. The secret cabal of international bankers rake in one dollar of profit on each dollar bill. How can they get away with it? Supposedly, the Fed has never been audited. Once the Fed is audited, the “banksters’” will no longer be able to siphon off these supposedly vast profits.

This conspiracy theory is a confused mess. The Federal Reserve system is made up of twelve Federal Reserve banks. For example, Charleston is located in the district of the Federal Reserve bank of Richmond. Each Federal Reserve bank is organized as a corporation. The member banks, ordinary commercial banks located in the district, are the stockholders. For example, BB&T (BBT) is part owner of the Federal Reserve bank of Richmond. Each member bank must buy stock equal to three percent of its capital, or net worth. The stock always has a price of $100, and the Federal Reserve banks issue or retire stock according to the amount each member bank is required to own. The Fed pays the banks an 8 percent dividend on that stock-- $8 per $100 share of stock.

He's right! It IS a confused mess. But how does that happen?

So why have Congress audit the Fed? My view has changed because the Fed has changed. The Fed still issues currency, more than $900 billion in September, but banks now hold $884 billion in reserve accounts in the Fed, perhaps because the Fed now pays .2 percent interest on those balances. The Fed has nearly $1.8 trillion to “invest.”

More importantly, the Fed has greatly reduced its holdings of government bonds. In December 2008, Fed holdings of government bonds had fallen to $475 billion, though they increased back to $656 billion as of June. Rather than making a small amount of short term loans to depository institutions secured by government bonds, the Fed has vastly increased its lending to a variety of financial institutions. The Fed was lending $650 billion to depository institutions in December 2008 and the September figure is still $300 billion. They have accepted various sorts of collateral, including mortgage backed securities—so called toxic assets. The Fed current holds $766 billion in mortgage-backed securities.

Which financial institutions borrowed exactly how much from the Fed? The Fed refuses to say. No longer is the Fed just issuing currency and buying government bonds. It is instead directing credit to favored sectors of the economy. Is it directing credit to favored financial institutions as well? Yes Dr. Paul, is past time for an audit of the Federal Reserve.

Whoa. He turned.

Anyway, I'm still gnawing on the bone trying to point out that there is no way any auditor can go into that mess and come out alive. A bad auditor knows a bunch of rules but doesn't feel his way through it. Here, watch my boss on the standards of auditing. He should know, his ex firm signs off on Richmond Fed audits.

Monetary Freedom is like Fedbashing porn, read it.

Also, the Fed is done buying Treasurys. I'm not sure what happens now, I'm fairly sure it involves them still buying Treasurys. Who else would?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.



You write, "The Fed is regularly audited by leading accounting firms". Like PWC which audits AIG and Vampire Squid? Or KPMG which audits Citigroup, or ... ? If the Fed wants an audit, by a "leading accounting firm", have Zimbabwe Ben give me a call. What did Deloitte supposedly do there in 2008? You write, "there is no way any auditor can go into that mess and come out alive". I'm willing to give it a go.



the economist wrote "The Fed is regularly audited by leading accounting firms." not me. Had it been me, I would have pointed out that Deloitte and PwC sign off on Richmond audits, there is no such thing as a "leading" accounting firm unless we're tallying epic audit failures (I think KPMG is winning in that case, no?). I'm obligated to bite my tongue on Deloitte but I would be REALLY happy to point out some PwC failures or conflicts of interest.

You're onto something here... if ANYONE could make it out of there alive it would be you. Sorry, I'm going to show my girlishness here and say I can't let you go in there and try to make sense of their WTF cash flows, I care about you too much.

Deloitte and PwC both "supposedly" audited Richmond at least and there are about 25 pages of footnotes to prove it. Now here's what I want to know... part of the audit process involves being familiar with the industry which you are auditing, right? Correct me if I'm wrong (it happens). So how can an auditor be familiar with the business if even the business isn't familiar with the business? You could survey 2500 Fed employees and each one would give you a different answer about where to find the Fed balance sheet, what they do beyond issue currency, etc etc.

So when KPMG makes up Citigroup's audit, at least they have the GAAP handbook so they know how they need to make things appear.

You stay where you are.