Auditing the Fed Is Economic Suicide?

That's the view from this particular blog.

The free market understands that auditing the fed is a very dangerous line to cross. If crossed, U.S. inflation will likely skyrocket over the next decade to unseen levels. U.S. economy tanks. Bond investors lose money as interest rates rise. Stock investors earn negative real return as equity risk premium rises and aggregate PE ratio tank. The US Dollar erodes due to higher domestic inflation relative to foreign inflation. Gold and commodity prices rise.

The thesis of this blog is that if Congress knows what is in the books of the Fed, they can then use that information to put pressure on the Fed Chairman to influence their decisions going forward.



This is the mantra that comes from all those that are against the a full audit of the Fed. In fact, the Fed Chairman, Ben Bernanke, has said the same thing himself.

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

It's not totally clear just how a full audit would give Congress the license to influence policy. For one, most Congress people wouldn't have the first clue what will be in the audit anyway. The thinking, I assume, goes that if Congress knows what the Fed is holding onto as far as financial instruments, cash and liabilities, that they can use this knowledge to put pressure on the Fed to influence policy.



The explanation goes that the Fed needs total independence and any influence could politicize monetary policy. Let's think about this for a minute. The Fed is required to go to Capitol Hill regularly to testify. The Fed Chairman is selected by the President and confirmed by Congress. No one that claims that an audit would threaten the Fed's independence claim that all of these political interventions now threaten the Fed's independence.



I am not discounting that the only thing worse than the Fed Chairman running the Fed is Congress. I am not discounting the idea of unintended consequences. Yet, the Federal Reserve now trades trillions of dollars of a plethora of sophisticated assets. They do this in markets, with other central banks, and with other banks in the U.S. We, the people that it's supposed to serve, don't know exactly what they are holding on to. Can this be?



So, the argument against a full Fed audit is that someone could see a scenario under which this audit could then be used by Congress people would influence Fed policy. So, we're all supposed to dismiss the very real fear that our own central bank can make decisions worth trillions of dollars without having the public know exactly what they are doing because someone has a scenario under which the solution would lead to its politicization.



Now, it's important to point out that this particular blog is one I haven't heard of. I only found it after a scan of the much more popular blog, Little Green Footballs. Charles Johnson, the proprietor of LGF, has a thing against Ron Paul, the person most responsible for legislation calling for auditing of the Fed. As such, in the view of Johnson, anything that Paul champions must be loopy. It is in fact Johnson that linked to this blog as some sort of authority. Now, I doubt that Johnson could explain how auditing the Fed would lead to its politicization. In fact, I doubt that Johnson could explain much of anything on Fed policy. It's an area he's better to simply stay away from. Yet, he can't resist because it's an opportunity to attack Paul. So Johnson, without having a clue about the authority and expertise of the site in question, puts it out there as a site of expertise.

If you think auditing the Fed might not be a bad idea, I suggest you read this: Auditing the Fed Is Economic Suicide.

As such, Johnson engages in little more than propaganda. It's just one of many unfortunate examples of the internet being the wild, wild west. Lot's of people actually trust Johnson's words as an authority, and they might even conclude that this blog is also an authority. That piece in which he purports to act as an authority on monetary policy does them no favors.