Who's Overseeing the Fed's Debt Pileup?

While Democrats, progressives and the majority of economists are being called profligate for recognizing one of the last instruments left in our arsenal to address the economic crisis is fiscal policy, outspoken Senate Republicans and conservative pundits have failed to focus their attention on another fundamental and proportional spending issue.

John B. Taylor, a Stanford monetary economist spoke at the American Economic Association meetings two weeks ago, alongside a number of Federal Reserve Board economists about his concern for the recent issuance of public debt by the Treasury to be used for industrial policy purposes by the Fed. The magnitude of federal supply reserves usually fluctuates around the $10 billion range on average with a major exception occurring on 9/11 when the supply reserves had a quick spike, reported in the Wednesday figure the next day at around $95 billion. This adjusted quickly back to historical averages. We were at $8 billion as of September 8, 2008, but by September 17th the supply reserves that couldn’t be absorbed approximated the 9/11 amount and since that time these reserves have structurally swollen precipitously. As of January 7, 2009 supply reserves were $841,754 billion. While recognizing the role of programs like the MBS Purchase Program in contributing to these figures, the public has no oversight mechanism to monitor the direct use of and conditions on these funds after congress allowed the Treasury issue $500 billion in debt to the Fed to be spent on these securities.

The large changes in the supply reserves appear alongside large changes in volumes of new debt and new factors affecting absorption of these reserves. Among absorption factors, “other loans” have exploded. These other loans include strategic private investments pursued generally through the Fed’s recent Commercial Paper Funding Facility, targeting firms and sectors seen as strategic or too big to fail like Bear Sterns and AIG. Taylor’s point was clear: this new issuance of debt and spending is funded by US tax payers while these decisions evade Congress—spending of this magnitude should be subject to the democratic process as it approximates industrial policy. It is not being pursued given clear metrics to estimate the impact it will have on the economy and argued and vetted in a transparent way. These decisions are not even documented in the minutes of the Federal Open Market Committee meetings.

In contrast, the efficacy of fiscal policy for various uses has been decomposed, estimating the potential outcomes in pursuing various targets during downswings while fiscal policy is well understood as a complementary instrument to monetary policy. After the Bush stimulus efforts in 2003 and 2008, a consensus emerged recognizing the relative weakness of broad-based tax relief, opening the path for more direct targeting of lower income earners. The impact of these polices can be gauged with historical precedents and are non-experimental for all the talk to the contrary.

So while the heated debates stalling imperative economic recovery measures are an expected part of the democratic process, we should be as critical with public debt issuance by addressing the spending measures pursued in complete evasion of Congress which are of the same magnitude. An oversight board of the Fed’s operations along the lines being pursued by the Congressional Oversight Panel on TARP would be a start.