Last week the Senate Banking Committee held a hearing about monetary reform and the need for “responsible oversight” of the Fed as Senator Richard Shelby, the Committee Chair, put it.  Allan Meltzer was a witness, and I sat next to him at the witness table listening carefully when he spoke.  Meltzer was remarkably clear, articulate and convincing, directly addressing Senators on the Committee, both Democrats and Republicans.  Indeed, both sides seemed to be listening carefully, in part because he was so obviously nonpartisan, supportive, for example, of a bill by Ranking Member Brown and Senator Vitter and for a lender of last resort proposal by Senator Elizabeth Warren about which he said,” I congratulate you, Senator Warren, for keeping this issue alive.”

Meltzer spent a lot of time explaining in simple terms the merits of the policy rules bill, especially in comparison with other reforms, including the Audit the Fed bill.  It’s worth listening to. Here are some highlights:

In his opening, Meltzer said “We need change to improve the oversight that this Committee and the House Committee exercises over the Fed. You have the responsibility. Article I, Section 8 gives that to you. But you do not have the ability to exercise authority. You are busy people. You are involved in many issues. The Chairperson of the Fed is a person who has devoted his life to monetary policy. There is not any series of questions that you can ask on the fly that they are not going to be able to brush aside. That is why you need a rule. I agree with John Taylor about some of the reasons for the rule, but I believe one of the most important is that Congress has to fulfill its obligation to monitor the Fed, and it cannot do that now because the Chairman of the Fed can come in here, as Alan Greenspan has said on occasion, Paul Volcker has said on occasion, and they can tell you whatever it is they wish, and it is very hard for you to contradict them. So you need a rule which says, look, you said you were going to do this, and you have not done it. That requires an answer, and that I think is one of the most important reasons why we need some kind of a rule.”

Later in the hearing Senator Brown raised the issue of the audit the Fed bill, saying “Dr. Meltzer, be specific, if you would, about your thoughts about the Audit the Fed proposals,” and Melzer answered: “I think you do not get what you want. Suppose you knew everything. Suppose you found out that the Fed chooses its policy using a ouija board. What would you be able to do with that? What you want to do is get something which permits you to see that the policies that are carried out, are carried for the benefit of the public….The information you want has to come from having something very deliberate that you know they are going to do and that they tell you they are going to do, and you are able to say, ‘You did not do it,’ or, ‘You did.’”

Meltzer later elaborated: “The problem with many of these proposals [release transcripts earlier, audit the Fed, etc.] is they don’t look at what would be the circumvention….What I think the Congress needs to do, it needs to face up to its responsibilities. Its responsibility is to be able to say to the Fed: ‘You told us you were going to do this, and you didn’t do it. Why?’ That’s what the rule gives you. That’s more important….You have to get a discipline in the Fed to tell you what it is going to do and then do it.” At this point Senator Shelby interrupted: “That is more important, isn’t it?” and Meltzer answered “That is more important than any other single thing you can do. You do not have the ability now to monitor them.”