Tuesday, December 1, 2009


Up until, say, last fall, Federal Reserve critics tended to be rumpled William Greider types on the Left and mimeograph dealers on the Paul-ite Right. Today, the idea of "auditing the Fed" and otherwise reining in its independence has entered the mainstream. Now, I don't mind admitting to a certain revolutionary thrill at the idea of "ending the Fed," but I am old enough to know that (1) you can't "end the Fed" without replacing it with something and (2) replacing the Fed with a gold standard as a means of keeping inflation in check and protecting the dollar is not the way to go. Today, through the miracle of the Internet, we can look at two opposing views on what the proposals to reform the Fed would do, and whether reform is even desirable.

First, Robert Samuelson says not so fast. Reforming the Fed will have unintended consequences we can't imagine, plus the idea that it's some sort of secret sanctorum is a myth:
The Fed Reform We Don't Want

What's also overlooked is that the Fed isn't the super-secretive, unaccountable agency of political stereotype. In 2009, Fed officials from Chairman Ben Bernanke on down have testified 32 times before congressional committees. The Fed makes detailed disclosures about its policies. After every meeting, the Federal Open Market Committee (FOMC), the key decision-making body on monetary policy, issues a statement explaining why it has -- or hasn't -- changed its interest-rate target. Until 1994, there were no announcements after FOMC meetings. Economists and investors had to guess.

Contrary to conventional wisdom, the Fed's activities are already widely audited. Deloitte & Touche examines the Fed's financial statements, which are published. The GAO can audit many Fed activities, including its banking regulation and supervision of the payments system. What it's barred from auditing is the conduct of monetary policy, including relations with foreign central banks such as the European Central Bank.

Congress has so far sensibly put this off limits. "Audit" has a different meaning in the context of the GAO than in everyday usage. It means examine, investigate, evaluate and, often, criticize. It's not just crunching numbers. The GAO usually undertakes studies at the request of someone in Congress. This suggests that the GAO could be used to influence or intimidate the Fed through selective investigations, which would involve access to internal Fed documents and interviews with policymakers. The Fed might be pressured to finance government deficits or to adopt an "undue focus on the short term," Vice Chairman Donald Kohn testified before Congress on July 9. Historically, similar pressures have caused other central banks to unleash inflationary torrents of money, Kohn said.

See? All along we've had a warm cuddly Fed that you guys have been ignoring in favor of all of those rakish Fed-bashing populists out there! Also, Samuelson is right that the Fed's independence is worth protecting so we don't end up with politicians printing money to buy votes. Then again, the Fed hasn't really done much to contain inflation over the course of its history...

Michael Maiello, on the other hand, offers a ringing call for increased transparency: Bring On Fed Transparency

So now we get to Paul and Grayson. Their proposal preserves the Fed's most important independent functions as described by Meyer. Even if this amendment becomes law, monetary policy will not be "subject to veto by the executive or legislative branches of government."

If Paul and Grayson get their way, the act would allow the GAO to audit the Fed, which it is currently forbidden from doing. It would be able to look at the assets on the Fed's balance sheet and at loans it makes and what collateral it collects. It would tell us how newly formed bank holding companies like Goldman Sachs are using new privileges to borrow from the Fed. It would give us greater insight into the Fed's monetary policy decisions while giving us no more influence over the outcomes.

The proposal would not make unreleased Fed minutes public, and would it would still keep Fed minutes from being released immediately (currently there's a six- to seven-week lag that the amendment preserves and actually codifies).

Or we would learn things about our banks and monetary policy makers have been up to that we might not want to know. Would we really want to know?

Of course, the problem isn't whether or not the Fed should maintain its independence; it's whether the Fed can regain its credibility after 15 years of aiding and abetting asset bubbles in the name of avoiding every economic downturn that came down the pike. The Fed doesn't need reform so much as it needs to regain its credibility with the public and with Congress.

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