Who Should Audit the Fed?

A few days ago the House passed with a veto-proof majority the bill known as “audit the fed” or more plainly as H.R. 459, sponsored by Ron Paul.  If it became law, it would open the Federal Reserve’s policy deliberations and decisions, certain operations and dealings with foreign banks and governments to scrutiny by the Congressional Government Accountability Office. The GAO currently audits the Fed’s financials but not its policy making.

A number of House Democrats supported the bill, though party chieftains are against it.  The critics of the measure, prominently including Fed Chair Ben Bernanke, argue that it will open the way to political interference with monetary policy, which is best conducted on purely economic grounds.

Both sides have a valid point. H.R. 459 proponents are surely right that the Fed should not be allowed to hide its policy making from the public—the provision of some information with a lag is not enough. The Federal Reserve system itself is a bureaucracy with its own priorities; how do we know that this secretive bureaucracy is serving the interests of the people?

Technocrats claim that the Fed bases its decisions on data and scientific models, but if you look at economic research you realize that data and models are like fish in an ocean. What you catch depends largely on what kind of tackle and bait you use and where you go fishing. (I’ve borrowed the fish metaphor from a 1961 book by a British historian.)

The Fed is a very rich bureaucracy with large research staffs who can find ways to justify almost any action—such as the $16 trillion provided in bailouts and loans in recent years. An independent overseer might at least question policymaking rationales.

Then again, allowing Congress greater say in monetary policy is a frightening prospect. Oh yea, they’ve done so well with fiscal policy and budgets, we need the same special interest catering and political machinations to come to play with interest rates.

What I’d like to see is something different. Why not randomly pick a group of taxpayers to hear the Fed’s case for its actions? After all, juries consisting of ordinary people decide all kinds of cases in courts. Let the Fed explain what it is doing and why, in comprehensible language.

The bureaucrats may be less inclined to experiment on the rest of us if they know they have to make the case not to members of the political and technocratic class but to a random selection of taxpayers. The random part is essential to avoid interested parties from interfering and to get people with different viewpoints.

You say the matter is too complicated to explain to non-specialists? That in itself should be a warning sign.  If  there is no way to account for a policy that makes it acceptable to a cross-section of citizens, then it is probably being done for reasons that can not bear the light of day.

And yes, I know some folk will say that the Fed should simply be abolished. Well, I think the common cold should be abolished, but until it is, best to use remedies to control it and limit the damage.

Meanwhile, Rand Paul is sponsoring “audit the Fed” in the Senate. But there the Democrats are expected to kill it— if it comes up at all.

About Chidem Kurdas 58 Articles

Chidem Kurdas is a financial journalist, analyst and writer.

Throughout her career she has held numerous positions, including: Research Analyst at Thomson Reuters, New York Bureau Chief at HedgeWorld, News Editor at Infovest21, Senior Associate Editor at Medical Economics Publications at The Thomson Corporation. She is currently Editor at Opalesque Futures Intelligence.

She holds a PhD in Economics from New School University.

Visit: Mutual Fund Smarts

1 Comment on Who Should Audit the Fed?

  1. I believe this answer should be quite obvious. We the people, whom our government and it’s offshoots represents, should be the ones to choose whether or not to audit the federal reserve and see where our money goes and why they must continually increase the money supply instead of allowing the bubble to burst so this depression can end and continue on in the markets most natural forms. If a ‘independent’ audit took place, I could guarantee everyone reading here today that either the facts and the truth would be twisted or hidden from public eye while the Wall Street executives sat in on this independent audit and had a say in how secretive they wished their transactions with foreign entities to be. There will come a day, when all Mankind, females and mes everywhere shall have liberty, united under the true passion and love it brings .

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