Review of Robert Auerbach's Deception and Abuse at the Fed

Though his long tenure as Chairman of the Federal Reserve is now viewed in a successful light, when William McChesney Martin took over in 1951 he said to himself, “My gracious, here I am the new Chairman of the Fed, and I’m not the brightest fellow in the world but I’m working hard on this – and I haven’t the faintest idea of how you figure the money supply. Yet everybody thinks I have it at my fingertips.” Luckily for Martin, knowledge of the money supply or anything else wasn’t much needed during his 19-year reign due to the fact that the dollar was fixed to gold, and money supply decisions were largely communicated to central bankers through the market price of gold.

As is well known now, things changed in the early ‘70s when the “gold window” was closed and the dollar proceeded to “float” without definition. With the Fed no longer on a form of auto-pilot, central bankers grew in prominence for their ability to foster or retard economic activity depending on their skill in overseeing the currency. Notably, the activities of central bankers were charitably secretive despite their broad impact on ours and the world’s economy. In his latest book, Deception and Abuse at the Fed, University of Texas professor Robert Auerbach chronicles the efforts made by former Congressman Henry B. Gonzalez and himself to remove the shroud of secrecy that to this day defines our central bank. As a former economist at the Kansas City Fed, and staff economist for the House Financial Services Committee, Auerbach brings a wealth of knowledge about the inner workings of the “Temple”, and has turned it into a worthwhile book.

Whether readers possess a little or a lot of knowledge concerning the Fed, what will strike them most about Auerbach’s account were the boldly dishonest measures taken by the Fed, and in particular Alan Greenspan, to hide the discussions that centered around interest-rate decisions. When we consider that the Fed serves at our pleasure, and issues the currency that is the lubricant of our economic activity, it’s shocking to learn how eager Greenspan et al were to keep their doings secret.

The above serves as the book’s most entertaining thread whereby Gonzalez sought greater transparency from the Fed about the thinking that went into rate decisions. Remarkably, Auerbach reveals that for seventeen years our central bank stuck by the falsehood suggesting that it kept no records or minutes pertaining to the FOMC meetings where rates were discussed. When asked by Rep. Maurice Hinchey if meeting records existed at all, Greenspan replied: “There is no permanent electronic record, this is correct. We obviously have rough notes.” When he finally achieved access to the allegedly “rough notes,” Auerbach hints with a bit of sarcasm that the “neatly typed FOMC transcripts I later viewed were not rough notes.”

Furthermore, as was the case with every FOMC meeting, according to Auerbach participants would “speak into microphones with voice-activated green lights that indicate the recording of their utterances.” Considering the protests of many FOMC members suggesting they were unaware that they were being recorded, Auerbach notes that at best this “was not a good sign, given the skill level desired in FOMC members.”

And if we ignore the obvious problems that would result from a secret, unaccountable bureaucracy, Greenspan’s own inscrutability itself proved to be very problematic. As Auerbach entertainingly shows, the newspaper headlines pertaining to Greenspan’s Q&A at a Seattle banking conference in 2000 spoke to an annoying unwillingness on his part to be clear. Indeed, drawing on the same answers, the New York Times concluded that Greenspan felt a recession was on the way, the Washington Post assumed he felt a recession unlikely, the Baltimore Sun guessed that he believed recession risks were rising, and the Wall Street Journal’s headline was sanguine; as in “Fed Chairman Doesn’t See Recession on the Horizon.” Sadly, in his mostly unremarkable autobiography, The Age of Turbulence, Greenspan never explained his desire to seemingly keep everyone in the dark.

When we consider the great technological strides made by commercial interests over the years, Auerbach’s description of the Fed’s fleet of 53 airplanes proves very interesting. Despite a 1999 survey showing that banking systems around the world were increasingly shunning paper checks for electronic money transfers, the U.S. still “boasted” a system whereby 68.6 percent of payments were made in paper fashion. Though it sought to make its airplane operations similarly opaque, Auerbach shows the folly of the Fed planes moving 43,000 pounds of checks per day, not to mention that those operations lost money. The Fed could of course subsidize its own version of the Pony Express thanks to its ability with the click of a mouse to issue money in exchange for interest-bearing bonds offered up by banks.

On the subject of economists, Auerbach notes that the Fed is “one of the largest employers of U.S. economists.” In addition to the hundreds on its staff, the Fed also contracts with many in academia. On its face this shouldn’t be surprising given the nature of the Federal Reserve’s operations, but then Auerbach points us to a comment from the late Nobel Laureate Milton Friedman who made the interesting observation that the Fed’s enhanced public standing is aided by its ability to buy “up its most likely critics.” If top economists work for the Fed in some form or fashion, it’s less likely that they’ll criticize its doings. When the press is factored in, Auerbach pointed to the Fed’s tendency to freeze out journalists unwilling to use leaked information in a friendly way.

Amidst Auerbach’s intriguing critiques of the Fed, there were other points made that were more disagreeable. Auerbach’s mention of the impact of tax cuts, particularly his view that they shifted the burden to those not wealthy was a non sequitur for a book about the Fed, not to mention that the top 1% of taxpayers presently account for 35 percent of federal revenues. While it says here that the S&L crisis was the direct result of federal efforts to privatize profits while socializing losses, Auerbach perhaps contradicts himself in suggesting that Charles Keating’s Lincoln Financial was corrupt sentences before noting that the charges against the same person were eventually dismissed.

Auerbach argues that Greenspan’s garbled statements helped him “retain his position as Fed Chairman through four administrations,” but that too seems somewhat contradictory. Greenspan was able to be opaque precisely because he was mostly successful as Fed Chair. Had stocks nosedived throughout his tenure, his and Gonzalez’s efforts would have met with much more success, not to mention that Greenspan wouldn’t have lasted four terms.

The above brings us to the biggest area of disagreement in what is an important book. Auerbach acknowledges that with the majority of all dollars issued presently overseas, past views suggesting a relationship between the money supply and U.S. inflation are less telling. Of course. The Fed has monopoly control over dollar issuance, but it cannot control where those dollars go. Friedman, the modern father of monetarism, acknowledged as much in 2003.

The problem there is that Auerbach ties the strong stock market of the late ‘90s to excessive money growth. Even if we ignore where the majority of dollars issued went ten years ago, the basic truth is that as evidenced by the strength of the dollar versus gold and foreign currencies during the time in question, the Fed’s major mistake of the late ‘90s was in failing to accommodate a rising economy with more money. In short, technology stocks didn’t boom due to too much money, but instead rose because with the dollar dear commodities were collapsing; thus driving more investment than normal into the technology sector.

In addition to advocating a reworking of the banking regulatory structure, along with lobbying restrictions on the Fed, Auerbach’s major conclusion is that all FOMC meetings “should be recorded, and the unedited transcripts should, ideally, be available within one month to the chairmen and ranking members of the Senate and House Banking Committees.” I say that’s not going far enough.

In the end this is our money we’re talking about, so rather than hope that those in Congress will be more transparent, we should acknowledge that the Fed’s power lies in its ability to secretly manipulate the dollar and interest rates. In that sense, the better suggestion would be for the Fed to float the cash rate it targets, all the while returning us to the gold standard that made McChesney Martin’s admitted inexperience less relevant. Under a gold-exchange standard, there would be zero mystery about the Fed’s operations in that the citizenry would be well aware that the Fed’s actions would be limited to extinguishing/creating money in order to achieve a stable dollar price. Markets would prevail when it comes to the all-important value of the dollar. In short, with a gold standard the Fed would be on auto-pilot, and we’d all be better off.