The Dangers of a Fed Audit

[Toro]

the cutting edge of the Paul bill is not a call for more transparency; it is a proposal to subject the Fed's decisions on monetary policy and its dealings with foreign central banks and foreign governments to audit by Congress' Government Accountability Office (GAO). Up until now, these activities have been explicitly exempted from audit by the U.S. legal code.

On the surface, authorizing such an audit may sound like much ado about nothing. After all, the Fed already gets a regular external audit of its financial statements. (If Chairman Bernanke were living high on the hog at the taxpayer's expense, Congress would know, as it should.) Further, the GAO is already permitted to examine most aspects of the Fed's operations, including such special financial arrangements as the deals with Bear Stearns, AIG, Citigroup, and Bank of America. The Federal Reserve's chair and other officials are frequently called before congressional committees to testify about the body's activities, even its monetary policies -- precisely the area in which it is independent. What is more, those policies are dissected and evaluated by the markets and the media in excruciating detail on an almost daily basis. The Fed, appropriately enough, gets plenty of critical evaluations.

But an audit of its monetary policies by the GAO -- which, remember, works for Congress -- could easily develop into something quite dangerous. Here is a not-so-unlikely hypothetical: sometime in 2010, the Fed, wanting to avoid inflation, will likely begin to abandon the hyper-expansionary monetary policy it adopted during the recent crisis as a way to stave off a depression. As it does so, interest rates will start rising even as unemployment remains high. Predictably, Congress, being more closely attuned to public opinion, will be unhappy with this situation. Until now, the Fed's independence has ensured that it can afford to ignore public opinion and take such necessary but unpopular economic measures. That is precisely why we want an independent monetary policy.

But if the Paul bill passes, angry members of Congress could ask for a GAO audit. And, if the report is critical, they could use it to browbeat members of the Federal Open Market Committee, the Fed's interest-rate-setting body, for killing the country's economic recovery. Congress has always had, but never used, the legal right to override the Fed's decisions. But does anyone believe monetary policy would be better if it were made in the political domain?

In my 1997 article, I invoked the success of the Federal Reserve's monetary policies to argue that perhaps we should adapt the model to other selected government decisions, thereby moving some of them out of the political and into the technocratic realm. I suggested, in particular, that decisions that are more technical in nature (as opposed to laden with value judgments) and those that require a long time horizon were the most likely candidates for such treatment. Watching Congress's handiwork over the past dozen years, I have become increasingly convinced that this is true and that monetary policy should remain firmly in the technocratic realm.

The Fed's Political Problem | Foreign Affairs

 

[Kevin_Kennedy]

The "independence" of the Fed is a myth, and we shouldn't want an independent Fed anyways. The Constitution calls for the Congress to handle monetary policy, that way we could theoretically vote those who do a poor job out. No such luck with the supposedly independent Fed which has obviously done a terrible job. The American people have a right to know, at least, what's going on with their money and why. Also, and audit does nothing to the Fed overall. It doesn't change their policy in any way it simply allows us to see what and why they're doing what they're doing.

 

[Paulie]

I personally don't take into consideration any kind of potential "dangers" when it comes to how my government is handling something that the people own.

In my opinion, it's MORE dangerous that the government controls the people's money and tells them very little about what they do with it.

We deserve transparent representation when it comes to our currency. Congress created the fed, and therefore they have an obligation to represent us when it comes to monetary policy.

 

[JBeukema]

the Fed already gets a regular external audit of its financial statements.

It does?

 

[Oddball]

This is like the pusher telling the junkie that getting off the smack is going to be a bad thing.

It's about time that ongoing criminal enterprise is brought to its knees and exposed for what it is.

 

[Toro]

the Fed already gets a regular external audit of its financial statements.

It does?

Yes.

 

[xsited1]

Alan Blinder is as Keynesian as they come. He's about as far removed from reality as an Economist can be.

 

[Paulie]

Alan Blinder is as Keynesian as they come.

Yeah, who isn't in the MSM.

 

[JBeukema]

It does?

Yes.

Where can we find this?

 

[Polk]

the cutting edge of the Paul bill is not a call for more transparency; it is a proposal to subject the Fed's decisions on monetary policy and its dealings with foreign central banks and foreign governments to audit by Congress' Government Accountability Office (GAO). Up until now, these activities have been explicitly exempted from audit by the U.S. legal code.

On the surface, authorizing such an audit may sound like much ado about nothing. After all, the Fed already gets a regular external audit of its financial statements. (If Chairman Bernanke were living high on the hog at the taxpayer's expense, Congress would know, as it should.) Further, the GAO is already permitted to examine most aspects of the Fed's operations, including such special financial arrangements as the deals with Bear Stearns, AIG, Citigroup, and Bank of America. The Federal Reserve's chair and other officials are frequently called before congressional committees to testify about the body's activities, even its monetary policies -- precisely the area in which it is independent. What is more, those policies are dissected and evaluated by the markets and the media in excruciating detail on an almost daily basis. The Fed, appropriately enough, gets plenty of critical evaluations.

But an audit of its monetary policies by the GAO -- which, remember, works for Congress -- could easily develop into something quite dangerous. Here is a not-so-unlikely hypothetical: sometime in 2010, the Fed, wanting to avoid inflation, will likely begin to abandon the hyper-expansionary monetary policy it adopted during the recent crisis as a way to stave off a depression. As it does so, interest rates will start rising even as unemployment remains high. Predictably, Congress, being more closely attuned to public opinion, will be unhappy with this situation. Until now, the Fed's independence has ensured that it can afford to ignore public opinion and take such necessary but unpopular economic measures. That is precisely why we want an independent monetary policy.

But if the Paul bill passes, angry members of Congress could ask for a GAO audit. And, if the report is critical, they could use it to browbeat members of the Federal Open Market Committee, the Fed's interest-rate-setting body, for killing the country's economic recovery. Congress has always had, but never used, the legal right to override the Fed's decisions. But does anyone believe monetary policy would be better if it were made in the political domain?

In my 1997 article, I invoked the success of the Federal Reserve's monetary policies to argue that perhaps we should adapt the model to other selected government decisions, thereby moving some of them out of the political and into the technocratic realm. I suggested, in particular, that decisions that are more technical in nature (as opposed to laden with value judgments) and those that require a long time horizon were the most likely candidates for such treatment. Watching Congress's handiwork over the past dozen years, I have become increasingly convinced that this is true and that monetary policy should remain firmly in the technocratic realm.

The Fed's Political Problem | Foreign Affairs

Agreed.

 

[Toro]

It does?

Yes.

Where can we find this?

The GAO I believe.

 

[Polk]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

 

[Paulie]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

It's not a matter of trust, it's a matter of constitutionality. The constitution authorizes congress to coin money and regulate the value thereof, not a central bank. They should create and pass an amendment if they wish to relinquish that control to a central bank.

At the very least, if congress was in control of the money supply, the people would have a voice. If they chose to actually USE it, of course.

Personally, I'd much rather see the market decide what money costs. At least that way, we would have no one to blame but ourselves in the event of a recession. With that kind of responsibility, perhaps we'd be a little more intelligent about our finances.

 

[Polk]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

It's not a matter of trust, it's a matter of constitutionality. The constitution authorizes congress to coin money and regulate the value thereof, not a central bank. They should create and pass an amendment if they wish to relinquish that control to a central bank.

At the very least, if congress was in control of the money supply, the people would have a voice. If they chose to actually USE it, of course.

Personally, I'd much rather see the market decide what money costs. At least that way, we would have no one to blame but ourselves in the event of a recession. With that kind of responsibility, perhaps we'd be a little more intelligent about our finances.

The Constitution also authorizes the Congress to pass law as necessary and proper for performing it's duties. That's why the creation of a central bank was ruled constitutional in a unanimous decision of the Supreme Court (McCulloch v Maryland (1819)).

 

[JBeukema]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

It's not a matter of trust, it's a matter of constitutionality. The constitution authorizes congress to coin money and regulate the value thereof, not a central bank. They should create and pass an amendment if they wish to relinquish that control to a central bank.

At the very least, if congress was in control of the money supply, the people would have a voice. If they chose to actually USE it, of course.

Personally, I'd much rather see the market decide what money costs. At least that way, we would have no one to blame but ourselves in the event of a recession. With that kind of responsibility, perhaps we'd be a little more intelligent about our finances.

The Constitution also authorizes the Congress to pass law as necessary and proper for performing it's duties. That's why the creation of a central bank was ruled constitutional in a unanimous decision of the Supreme Court (McCulloch v Maryland (1819)).

That ruling is illegal. The constitution does allow any part of the fed to pass the buck on their authority

 

[Kevin_Kennedy]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

Why do you trust the Fed with the money supply?

 

[Polk]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

Why do you trust the Fed with the money supply?

Because they are isolated from political pressures.

 

[Kevin_Kennedy]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

It's not a matter of trust, it's a matter of constitutionality. The constitution authorizes congress to coin money and regulate the value thereof, not a central bank. They should create and pass an amendment if they wish to relinquish that control to a central bank.

At the very least, if congress was in control of the money supply, the people would have a voice. If they chose to actually USE it, of course.

Personally, I'd much rather see the market decide what money costs. At least that way, we would have no one to blame but ourselves in the event of a recession. With that kind of responsibility, perhaps we'd be a little more intelligent about our finances.

The Constitution also authorizes the Congress to pass law as necessary and proper for performing it's duties. That's why the creation of a central bank was ruled constitutional in a unanimous decision of the Supreme Court (McCulloch v Maryland (1819)).

Necessary and proper in regards to the "foregoing powers" that were explicitly listed in the Constitution.

 

[Kevin_Kennedy]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

Why do you trust the Fed with the money supply?

Because they are isolated from political pressures.

That's a laugh. Fed officials have never dropped interest rates around a Presidential election or when they're going up for reappointment? The Fed adopts the monetary policy that the administration tells them to and that's certainly very political.

 

[Paulie]

If you doesn't trust Congress to keep the checkbook balanced, why would you trust them with the money supply?

Why do you trust the Fed with the money supply?

Because they are isolated from political pressures.

How is a person who is appointed by the POTUS (the fed chairman) "isolated" from political pressures?

There's no isolation from politics in government. To think otherwise is naive to say the least.