Not this again.
Calls to “Audit the Fed” are back. And just as before, they are extraordinarily dangerous to the health of the U.S. economy.
First, a little background. Conspiracy theories about the Federal Reserve’s wacky technical mumbo-jumbo voodoo have a long populist history. Monetary policy is complicated and abstract; entrusting it to a secretive, propeller-headed cabal naturally arouses suspicion. No surprise, then, that libertarian hero and former Texas congressman Ron Paul for years tried to persuade his colleagues to curb the central bank’s power and independence with recurrent calls to “Audit the Fed” (if not kill it entirely). He made Fed audits a centerpiece of his 2008 and 2012 presidential campaigns.
Now, with Republicans controlling both houses of Congress, he might finally get his way.
Sen. Rand Paul (R-Ky.) has picked up his father’s mantle and reintroduced the proposal as the Federal Reserve Transparency Act of 2015. Sen. Ted Cruz (R-Tex.) — like Paul a likely 2016 presidential contender — has also joined the cause, along with 29 other co-sponsors. A companion bill was introduced in the House by Rep. Thomas Massie (R-Ky.).
“A complete and thorough audit of the Fed will finally allow the American people to know exactly how their money is being spent by Washington,” Paul the Younger said in a statement. The Fed “currently operates under a cloak of secrecy and it has gone on for too long.”
That alleged “cloak of secrecy” is looking a little threadbare, if you ask me.
The Federal Reserve Board and its 12 affiliated regional Fed banks already undergo an audit. Multiple layers of audits, in fact, by the Government Accountability Office, the Office of the Inspector General and independent private auditors such as Deloitte. The Fed also releases weekly data about its balance sheet and the minutes from its closely watched Federal Open Market Committee meetings with a three-week delay.
Under chairman Alan Greenspan, the Fed was often criticized (and parodied) for its Delphic pronouncements and opacity, but his successors, Ben Bernanke and now Janet Yellen, have cultivated transparency and engagement with the public. The Fed chair holds televised news conferences now. Fed officials regularly give speeches and interviews discussing how their views of the economy and policy preferences differ from those of their colleagues. Twenty years ago this sort of public dissent was unheard of; today it is commonplace, and largely Yellen’s doing. Not because of congressional compulsion, mind you: Yellen has instead said, multiple times, that she believes more open communication about Fed activity and intentions is good for the economy and helps monetary policy work more effectively.
Why, then, would Yellen oppose the Paul legislation? And why likewise are so many financial journalists — who are genetically predisposed to value transparency above all else — skeptical of it?
The problem is, despite the name, this bill is not really about transparency. It’s about subjecting more of the Fed’s day-to-day operations — including policy deliberations in which Fed officials, for now, feel free to speak candidly — to the scrutiny of politicians who can pick discussions apart to score political points as policy is being set in real time. The likely result is a chilling effect on open dialogue, as Fed officials try to avoid making any comments in meetings that might lead to harassment from Congress, and more sensitivity to short-term political pressures.
This is a scary prospect. We have a long, long body of literature showing that greater central bank independence — in countries both rich and poor — is associated with lower inflation. That’s partly because monetary policy is a complex technical apparatus that not everyone is equipped to operate. The bigger problem, though, is that politicians’ short-term goals — dictated by election cycles — are not always aligned with the long-term health of the economy. One need only look at fiscal policy to know this is true.
It’s not exactly clear what problem the “Audit the Fed” acolytes are trying to fix, either.
The general consensus among economists is that, while the Fed should have taken concerns about credit bubbles more seriously in the lead-up to the 2008 financial crisis, the central bank’s creative and “unconventional” policy measures since then almost unilaterally saved us from a full-blown depression. Fed policy is also one of the main reasons our recovery has actually been substantially faster and stronger than those in every other postcrisis country.
All this was possible because the Fed had the courage, and importantly the independence, to act “unconventionally” even when critics — including Pauls both père and fils — claimed that its controversial measures would lead to hyperinflation.
If politicians are truly concerned about the long-term health of the economy and the stability of U.S. currency, the best thing they can do is stop undercutting our central bank’s credibility and let the Fed do its job.