COLUMN-Fury against Fed intensifies on Capitol Hill: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON Nov 20 (Reuters) - In an extraordinary move, the House of Representatives Financial Services Committee yesterday voted 43-26 to approve an amendment fiercely resisted by the administration and central bank officials that mandates a comprehensive audit of the Federal Reserve, including the Fed's controversial lending programmes.

The amendment's passage, by a comfortable majority in a committee dominated by Democrats, shows mounting outrage with the Fed and the Treasury Department on Capitol Hill, and indicates that the administration is losing the argument on bank bailouts and stimulus.

Yesterday's amendment was offered by long-term Fed gadfly Representative Ron Paul (Republican, Texas) and co-sponsor Alan Grayson (Democrat, Florida). It has now been incorporated into one of the main financial reform bills promoted by Financial Services Committee Chairman Barney Frank (Democrat, Massachusetts) (HR 3996).

It is a modified version of a bill (HR 1207) that Paul introduced earlier in the year and which has attracted more than 310 co-sponsors from across both parties.

While HR 1207 has enough votes to be approved on the floor of the House, and a similar bill has attracted support from around a third of the Senate, it has gone nowhere. HR 1207 is strenuously opposed by Frank, as well as the Federal Reserve, and Frank has ensured it remains bottled up in his committee.

But by attaching the audit provisions to the chairman's own bill, Paul and his supporters on the committee have made it much harder to stall.

To win a majority, Paul and Grayson added some language to make clear the legislation is not intended to interfere with the Fed's independent conduct of monetary policy (grayson.house.gov/Paul-Grayson%20amendment%20text.pdf).

The amendment could still be removed or watered down as the bill makes its way through the legislative process. But any increase in formal oversight is anathema to the White House, Treasury and Fed. So the amendment's approval in Frank's own committee represents a spectacular, and humiliating, defeat for the chairman.

DEMOCRATS REBEL

The detailed vote count for the Paul-Grayson amendment has not yet been posted on the committee's website or THOMAS (the legislative tracking service run by the Library of Congress). But the House Financial Services Committee has 42 Democrats and 29 Republicans. So at least 14 Democrats (one-third of the total) must have defied the chairman and the Treasury to vote in favour.

By convention, chairmen control their committees like feudal barons (through a mixture of blandishments, patronage and fear). For a chairman to lose control of a bill in his own committee in this way is unusual.

Frank has played an unusually powerful role shaping financial reform bills this year. He has been the administration's liaison in Congress and showed a willingness to modify proposed laws in response to the concerns of industry lobbyists (for example introducing a corporate hedging exemption in the over-the-counter derivatives modernisation bill currently working its way through the legislature).

But congressional frustration with the financial services sector, and the perception of policymakers at the Fed, Treasury and White House have been "captured" by the industry they are supposed to regulate, is now widespread and threatens to boil over.

GRASSROOTS ANGER

The Paul-Grayson amendment is only one symptom. In another, a maverick congressman from the president's own party, Representative Peter DeFazio (Democrat, Oregon), used a television interview to call for Timothy Geithner's resignation as secretary of the Treasury, claiming he was too close to the banking industry he is charged with regulating.

In a follow up interview, DeFazio said "Quite frankly, all the gambling on Wall Street is doing nothing to put people back to work in America and rebuild our economy."

And at an acrimonious session of Congress's prominent but powerless Joint Economic Committee (JEC), the ranking Republican, Representative Kevin Brady (Texas) told Geithner "The public has lost all confidence in your ability to do the job." Geithner won support from various Democratic legislators, but it is significant the White House felt the need to back him.

Paul is a long-time Fed critic, and author of the bestselling but quixotic book "End the Fed", so his views are not necessarily mainstream.

But the fact his legislation is gaining so much traction -- when Federal Reserve Chairman Ben Bernanke, other senior Fed staff, the administration, and a battery of expensive lobbyists hired to present the Fed's case -- have all been pressing hard to avert stricter oversight of monetary policy functions is a sign how far Congress has been angered.

Legislators have been infuriated by the secrecy and apparent lack of either accountability or contrition on the part of the banks and their regulators.

DATE WITH THE VOTERS

If the major banks continue to report strong profits next year while the rest of the economy is mired in poor growth and high unemployment, the juxtaposition of Wall Street success and Main Street misery could become an explosive mix. There is a substantial risk of a populist backlash at the ballot box in the November mid-term elections.

Some elements of the Republican Party appear to be laying the ground for an insurgent, anti-incumbency campaign that would attempt to brand Democrats as too close to special interests and favouring them at the expense of ordinary voters. At least some Democrats now appear to be taking a more populist stance to defend themselves.

The chances of the Paul-Grayson amendment becoming law in its current form are modest. But the fact it has got this far, and the increasingly poisonous attitude on Capitol Hill towards both the Fed and the Treasury, are a clear sign the central bank and other regulators are losing the debate.