Congressman Ron Paul has proposed a bill that would require the audit of the Federal Reserve before the end of 2010. The bill, HR 1207, would do so by amending Section 714 of Title 31. Currently, the Comptroller General of the US can only audit the Federal Reserve with their consent. HR 1207 would eliminate that option.
The Comptroller General would also be required to make his report of his audit of the Fed available to Congress along with his recommendations:
‘(2) REPORT-
‘(A) REQUIRED- A report on the audit referred to in paragraph (1) shall be submitted by the Comptroller General to the Congress before the end of the 90-day period beginning on the date on which such audit is completed and made available to the Speaker of the House, the majority and minority leaders of the House of Representatives, the majority and minority leaders of the Senate, the Chairman and Ranking Member of the committee and each subcommittee of jurisdiction in the House of Representatives and the Senate, and any other Member of Congress who requests it.
‘(B) CONTENTS- The report under subparagraph (A) shall include a detailed description of the findings and conclusion of the Comptroller General with respect to the audit that is the subject of the report, together with such recommendations for legislative or administrative action as the Comptroller General may determine to be appropriate.’.
Upside and Downside:
There is an upside and a downside to this bill. The upside is that it would create transparency within the Federal Reserve. The downside is that it would open the Federal Reserve to partisan and political interference; the Fed was designed to be free from that sort of thing.
Questions for discussion:
Which book is on the market that has the most accurate and up to date facts in explaining the history of the Federal Reserve, who owns it, and how it operates?
Will the new powers instated in the Office of the Comptroller General allow that body to audit (physically) the gold held by the Federal Reserve?
Would the bill be retroactive; if so, to what date; if not, doesn't this defeat the purpose of the bill since many of the actions being looked at occurred in the past two years?
To what entity are Fed officials accountable under the law? I am specifically referring to the BOA/Merrill forced merger which adversely impacted shareholders of BOA. How does this tie in to ongoing investigations (e.g., the Cuomo investigation - isn't that a form of audit?)
Will the audit by the Comptroller General also evaluate whether or not the Fed is in violation of any section of the Clayton Act, as would the audit of any other private entity?
You can read about the Clayton Act here:
The Clayton Act made both substantive and procedural modifications to federal antitrust law. Substantively, the act seeks to capture anticompetitive practices in their incipiency by prohibiting particular types of conduct, not deemed in the best interest of a competitive market. There are 4 sections of the bill that proposed substantive changes in the antitrust laws by way of supplementing the Sherman Act of 1890. In those sections, the Act thoroughly discusses the following four principles of economic trade and business:
* price discrimination between different purchasers if such a discrimination substantially lessens competition or tends to create a monopoly in any line of commerce (Act Section 2, codified at 15 U.S.C. § 13; if not for this particular concept, the Government would have to intervene in the fixing of prices which was to be avoided because of its comparison to a socialism state;
* sales on the condition that (A) the buyer or lessee not deal with the competitors of the seller or lessor ("exclusive dealings") or (B) the buyer also purchase another different product ("tying") but only when these acts substantially lessen competition (Act Section 3, codified at 15 U.S.C. § 14);
* mergers and acquisitions where the effect may substantially lessen competition (Act Section 7, codified at 15 U.S.C. § 18);
* any person from being a director of two or more competing corporations (Act Section 8; codified at 15 U.S.C. § 19).
It is noteworthy how the substantive provisions differ from the Sherman act. Unilateral price discrimination is clearly outside the reach s. 1 of the Sherman act, which only extended to "concerted activities" (agreements). However, the other provisions seem somewhat redundant. Exclusive dealing, tying, and mergers are all agreements, and theoretically, within the reach of Sherman-1. Likewise, mergers that create monopolies would be actionable under Sherman-2.
However, the substantive provisions of the act are significant. First, Section 7 of the Clayton Act allows greater regulation of mergers than just Sherman-2, since it doesn't require a merger-to-monopoly before there is a violation; it allows the Federal Trade Commission and Department of Justice to regulate all mergers, and gives the government discretion whether to approve a merger or not, which is still a widely approved action by the government today. It employs the Herfindahl-Hirschman Index (HHI") test for market concentration, to see if the merger if a positive one.
Section 7 is probably the most notable one as it elaborates on specific and crucial concepts of the Clayton Act; "holding company" defined as a "common and favorite method of promoting monopoly"[1], but more precisely as "a company whose primary purpose is to hold stocks of other companies"[2] which the government saw as an abomination and a mere corporated form of the 'old fashioned' trust.
Another important factor to consider is the amendment passed in Congress on Section 7 of the Clayton Act in 1950. This original position of the US government on mergers and acquisitions was strengthened by the Celler-Kefauver amendments of 1950, so as to cover asset as well as stock acquisitions.
Section 8 of the Act refers to the prohibition of one person of serving as director of two or more corporations.
Because the act singles out exclusive dealing and tying arrangements, one may assume they would be subject to heightened scrutiny, perhaps they would even be illegal per se. That is not the case. When exclusive dealings or tying arrangements are challenged under Clayton-3 (or Sherman-1), they are treated as rule of reason cases.
Under the 'rule of reason', the conduct is only illegal, and the plaintiff can only prevail, upon proving to the court that the defendants are doing substantial economic harm. Despite what the statute may suggest, the regime makes sense. The reason for the per se rule in Sherman-1 price fixing cases is the overwhelming likelihood that price fixing is harmful. It is a recognizable fact that exclusive dealings and tying arrangements are quite common, and potentially beneficial to consumers, and the economy. Therefore, the Court has seen fit not to apply a per se rule to Clayton-3 conduct.
Organizations such as the GATA (Gold Antitrust Action Committee) contend that the Federal Reserve manipulates the price of gold by leasing out its gold to bullion banks at minuscule interest rates. Will HR 1207 be able to put an end to this practice, if, indeed, it is being pursued by the Fed?
You can view their website here.