Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank
James K. Galbraith
Robert D. Auerbach began his career as a cab driver. A chance ride with Abram Lincoln Harris, a leading professor in the economics department at the University of Chicago — and its only African-American member — catapulted him into graduate school. (When he went to be interviewed, he still had his changer on his belt.) There he became a student of Milton Friedman, completing a dissertation in 1969. Then it was on to the staff of the Kansas City Federal Reserve Bank – the beginning of a lifelong no-love-lost affair with the central bank.
Arriving at American University in 1976, Bob gravitated into the orbit of Wisconsin Congressman Henry Reuss, the new Chair of the House Committee on Banking, Finance and Urban Affairs. An ardent monetarist in those days, he believed the Fed controlled inflation through the money supply. For a counterweight to this reactionary view, Reuss had me. I was between graduate schools – twenty-four, just back from a year at Cambridge, a dabbler in Keynes and as un-monetarist as one could get. Possibly for the fun of it, our staff director made us share an office.
By the grace of God, our secretary had nerves of steel.
Still, an alliance was possible, since we both favored serious congressional oversight of the conduct of monetary policy by the Federal Reserve, something that did not then exist. Working together, Bob and I made it happen, first in the quarterly hearings initiated in 1975; and eventually by drafting what became the Federal Reserve Act provisions of the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978, requiring that the Federal Reserve Chairman report twice a year. This remains the basic framework for reporting on monetary policy to this day.
The Humphrey-Hawkins hearings helped establish an essential point about monetary policy in America. The central bank is intended to be independent of the executive branch. It is not independent of Congress. The Federal Reserve must report to Congress, truthfully and accurately, on the conduct of policy. Congress may choose not to intervene. But it has a right to know, and a responsibility to monitor, what the Federal Reserve does.
Bob went from the Democratic congressional staff to the Reagan Treasury Department in 1981, and then on to the University of California, Riverside, where he won distinction — and where reality mugged his monetarism. Simply put, the equations that had closely tied money to prices up to that point ceased to apply. And Bob changed his views. He also decided it was time to head back to Washington, and so seized a chance to go to work for Henry B. Gonzalez, Democrat of Texas, who had by the early 1990s taken over at the Banking Committee.
Bob’s new book, Deception and Abuse at the Fed, chronicles the battles of Henry B against the obscurantism, self-dealing and contempt for Congress that have long been hallmarks of our central bank, and that were particularly so during the long tenure of the “Maestro,” Alan Greenspan. These include management failures — a notorious “phantom airplane” in the Fed’s check-clearing fleet — and accounting abuses, civil rights violations of Fed employees, and especially the withholding of information from Congress and the public. Most luminously, Bob gives here the tale of the Fed’s 17-year effort to keep secret the fact that Federal Open Market Committee meetings are tape-recorded, with full written transcripts.
With the Great Crisis, these matters take on a new importance. To this day, Chairman Ben Bernanke has refused to disclose to Congress exactly who has received help under the many crisis measures and under what terms. The legal and constitutional situation is clear: Congress has a right to this information. There are no plausible national security concerns. If a member of Congress abuses access to such information (say for personal profit) it is up to Congress to discipline that member. Reps. Alan Grayson and Ron Paul have asked Senator Dodd, chair of Senate Banking, to withhold approval of Bernanke’s renomination to chair the Board until the Federal Reserve comes clean on this issue.
Similarly, there is a bill before Congress that would subject the entire operations of the Federal Reserve to an independent audit – a project that dates back to the great Texas populist, Wright Patman. No one reading this book will be in doubt about the need for this bill.
Finally, there is the question of financial reform. In the new effort to bring systemically dangerous institutions (now called “Tier One Financial Holding Companies”) under effective supervision, the administration proposes to vest regulation of those entities in the Federal Reserve. The Federal Reserve naturally agrees. But the Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.
Anyone who wishes to understand why the Federal Reserve should not be the regulator of choice for the most dangerous financial institutions should begin by picking up a copy of Deception and Abuse at the Fed.
As for Bob Auerbach himself, well – there’s a story in the fact that he’s now my colleague once again, at the LBJ School of Public Affairs, The University of Texas at Austin. When Henry B. Gonzalez was forced, by declining health, to retire from Congress, Bob sent me his resumé. I passed it along, with the thought that the school might be able to use someone with such a “solidly conservative credential.” I suppressed the further thought that it would be nice if that person also outflanked me on the left.
So here we are again, in adjoining offices, and once again a shared assistant. Luckily, she too has nerves of steel.
Welcome, Bob, to FDL’s Book Salon. Care to make an opening remark?