[Congressional Record Volume 140, Number 28 (Tuesday, March 15, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 15, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
 FEDERAL RESERVE OFFICIALS MISLEAD PUBLIC, FALL SHORT ON ACCOUNTABILITY

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Texas [Mr. Gonzalez] is recognized for 5 minutes.
  Mr. GONZALEZ. Mr. Speaker, I have known for a long time that the 
Federal Reserve is not telling the American public the whole story 
about what it is doing. Records recently made available show how 
Federal Reserve officials have misled the public about their assessment 
of a possible recession that they knew might emerge from their own 
tight money policies. The situation I will describe is similar to 1994 
because Federal Reserve officials publicly were warning about inflation 
while failing to fully report the threat of recession that Fed 
officials had discussed. The records now available for part of 1988 
give a much better idea of what happened than the official public 
statements of the day.
  The Fed keeps its true intentions from public view by releasing a 
totally unsatisfactory summary of what happens at its Federal Open 
Market Committee [FOMC] meetings where it decides on the Nation's 
monetary policy. A comparison of the summary of a 1988 FOMC meeting 
with the actual transcript shows disparities in what really went on and 
what was spoon-fed to an unwitting public when the Fed knew its 
policies might cause a recession. Do we still have that kind of 
misleading public posture by the Fed? Undoubtedly.
  This lack of disclosure should come as no surprise. The public relies 
on officials who have been given the power to run large bureaucracies 
in a democratic government to act as their agents and to make decisions 
that promote their general interests. These officials may have other 
objectives, such as maintaining and promoting the power of their 
bureaucracy. In other words, Government officials who have been given 
the power to run large bureaucracies and who do not have to personally 
stand for election can and often do have other objectives than the 
public interest. Making the public interest these officials' first 
priority is known in the social sciences as the agency problem.
  The same problem occurs in private businesses where managers of 
corporations may have different objectives than the stockholders who 
own the corporation. For example, the managers may want to enhance 
their salaries rather than maximize the profits of the corporation.
  One way to remedy the agency problem is to require full and accurate 
accountability. Officials of Government bureaucracies must be 
accountable to the public. This means complete and accurate records of 
each individual performance of our Government officials.
  Unfortunately, the Federal Reserve has regressed to less 
accountability in 1976. The FOMC stopped releasing detailed minutes 
because it was trying to evade Freedom of Information Act requests. It 
falsely announced that it kept no detailed records of these meetings 
until last October when I was able to uncover the fact that the Fed has 
in its possession, 17 years of FOMC transcripts.
  As a substitute, the Federal Reserve began publishing and still 
publishes a summary of its meetings 5 or 6 weeks after they occur. The 
summary does not attribute any statements to individual FOMC members, 
only final votes which rarely reveal dissents. The summary is a mostly 
boilerplate recounting of economic conditions that could be obtained 
from many financial reports in the media. The critical need for 
individual accountability is lost.
  Last Wednesday the Federal Reserve began releasing the FOMC 
transcripts I have persuaded them to release. However, they only issued 
transcripts for the last half of 1988. I checked one of these summaries 
to see if it was an accurate reflection of the transcripts. Not 
surprising, it was not.
  At the December 13-14, 1988 FOMC meeting, the transcript clearly 
shows that Chairman Greenspan and the FOMC perceived signs of a 
forthcoming recession. After they were presented with a staff summary 
about the economy, Chairman Greenspan told the FOMC members:

       Having listened to all of this, certain things seem to be 
     coming forth fairly clearly. One starts off with the quite 
     credible concerns of Governors Kelley and LaWare about the 
     dangers of a recession.

  Then the transcript reveals that member after member of the FOMC 
pleaded for tightening and even raising interest rates except for 
Governor Martha Seger who dissented. Many of these members are still on 
the FOMC. Here is what Governor LaWare said:

       Let me just suggest that instead of ringing the gong, that 
     in connection with this move we might just `jingle' the 
     bell--that's a seasonal [Christmas] pun!--and perhaps not 
     move the discount rate a full half point but rather move it a 
     quarter point.

  As history shows, they got their wish. The Federal funds rate rose to 
nearly 10 percent and their tightening was followed by a recession and 
by a recovery that the FOMC members also slowed to a crawl.
  The inflation rate, which was officially 3.06 percent annual rate in 
December 1988, was overstated because of problems in the index known to 
the members of the FOMC. Nevertheless, the Fed decided to slay the 
chimerical dragon: The money supply fell to negative growth in February 
1989, a product of the tighter Federal Reserve policy.
  Buried in the six pages of summary later issued by the Federal 
Reserve and printed in the April 1989 Monthly Bulletin is the bland 
mention that some members cautioned that the risk of a recession 
stemming from substantial tightening of policy should not be 
overlooked. The tone of the summary can be summarized by the following 
quote:

       Many expressed the concern that continued expansion at a 
     relatively rapid pace raised the risk that inflation would 
     intensify, given already high rates of capacity utilization 
     in many industries and tight labor markets in many parts of 
     the country.

  Every American family knows what has happened. Unemployment rates 
went above 7 percent and are still high. There are continuing huge 
layoffs where workers leave good jobs and transfer to low-paying and 
part-time jobs.
  It is time to have reasonable accountability from the Federal 
Reserve. I want complete transcripts and a record of what they are 
doing right now so the American public will know how each individual 
Fed official supports the current policy of raising interest rates to 
stop an inflation that no one can see.

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