http://www.nytimes.com/2009/10/22/opinion/22barnett-1.html Whoâs Looking at the Fedâs Books? Without a comprehensive audit to double-check Federal Reserve data, the risk exists of inadequate and sloppy accounting. By WILLIAM A. BARNETT Published: October 21, 2009 Lawrence, Kan. ON Tuesday, Senator Jeff Merkley, Democrat of Oregon, and Senator Bob Corker, Republican of Tennessee, introduced legislation to allow the Government Accountability Office to audit some of the Federal Reserveâs lending programs. Different bills calling for more comprehensive Fed audits already have widespread support in the House and Senate. Expanding this oversight is long overdue. After the financial turmoil of the last year, it should be clear that we depend on the Fed for high-quality financial data and that the Fed should be held to the highest standards of transparency. And yet we cannot be assured of either of these things unless the Fed is subjected to a thorough audit of its numbers. I worked on the staff of the Federal Reserve Board 30 years ago, and I know that without comprehensive audits to double-check Federal Reserve data, the risk exists of inadequate and sloppy accounting from the Fed. Consider the data the Fed presented last year on nonborrowed reserves. Nonborrowed reserves are total bank reserves minus money borrowed by banks and held as reserves. Clearly, the money borrowed cannot exceed the total reserves, so nonborrowed reserves should not be negative. Yet for a few months last year, the Fed reported banksâ nonborrowed reserves at billions of dollars below zero. In its calculations of nonborrowed reserves, the Fed included in borrowed reserves new forms of bank borrowing not being held as reserves. Such incompetent accounting would not survive an unconstrained, fully informed audit. The information the Fed releases on bank deposits is similarly biased and contaminates data on the money supply and thereby on the liquidity of the economy produced by Federal Reserve policy. In order to evade reserve requirements, which mandate that a certain fraction of deposits be held in reserve and not lent out, many banks sweep much of their checking account deposits into shadow money-market-deposit savings accounts before reporting those deposits to the Fed. Since such accounts have no reserve requirements, this allows the banks to decrease the amount of total reserves theyâre required to have. But the liquidity provided to the economy from checking accounts is the pre-sweeps amount, not the reported post-sweeps amount. Why does the Fed not require banks to go public with their real checking account deposit data? If the Fed doesnât see it as a problem that banks evade reserve requirements on checking accounts, why doesnât it just remove those requirements? Such evasion would be less likely to continue in the face of a comprehensive audit by the Government Accountability Office. But while the Fed needs to be audited substantially, creating an independent data institute to monitor the Fedâs monetary and financial data would be better than expanding a Government Accountability Office audit. An independent institute would have the highest specialized expertise to produce economic data for the Fed. Neither an independent monitoring institute, nor â a reasonable second best â an expanded Congressional audit would constrain the Fedâs ability to act in the countryâs best interests. It would simply ensure that the country knew what the Fed was doing, and why. William A. Barnett is a professor of macroeconomics at the University of Kansas and the editor of the journal Macroeconomic Dynamics.