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The Argument Against Auditing the Fed

May 18, 2009 - by Donny Shaw

Somebody – NYU Prof. Thomas F. Cooley to be exact – is taking the unpopular position of opposing Rep. Ron Paul’s bill (H.R.1207) to bring some transparency to the Federal Reserve. Here’s an excerpt from his, recent Forbes column:

An independent central bank can focus on monetary policies for the long term—that is, policies targeting low and stable inflation and a monetary climate that promotes long-term economic growth. Political cycles, alas, are considerably shorter. Without independence, the political cycle would subject the central bank to political pressures that, in turn, would impart an inflationary bias to monetary policy.

On this view, politicians in a democratic society are short-sighted because they are driven by the need to win their next election. This is borne out by empirical evidence. A politically insulated central bank is more likely to be concerned with long-run objectives.

Thing is, the current, un-audited Fed has failed utterly in their role as a stabilizing force in the economy. In fact, a lot of the Fed’s policies in the years leading up to this crisis ended up being pro-cyclical — encouraging market excesses rather than tempering them. William Greider described this in his piece, Fixing the Fed:

Instead of frankly acknowledging the problem, Fed governors proceeded in the past two decades to engineer exaggerated swings in monetary policy—raising interest rates, then lowering them, in widening extremes. This led to the series of bubbles in financial prices—first stocks, then housing and commodities—that collapsed with devastating consequences, climaxing in the present crisis. In other words, the central bank’s weakened condition and its misguided policy decisions have been a central factor in destabilizing the American economy. More to the point, the Fed’s operating disorders are directly threatening to recovery; the economy is not likely to get well if the dysfunctional Fed is not also reformed.

In this crisis the central bank has so far flooded credit markets and financial institutions with trillions of dollars in new liquidity and loan guarantees, which may help to stabilize credit markets. But the Fed has been unable to engineer what the economy desperately needs—renewed lending to companies and consumers that can finance renewed growth. The confused purpose of monetary policy stands in the way. The Fed could not restrain credit expansion when it was exploding, and now it cannot stimulate credit expansion when it is frozen.

On the broader issue of Fed transparency, Cooley remarks sracastically, “obviously, monetary policy is so falling-off-a-log simple that your elected representatives can insert themselves via the demand for transparency into decisions of true complexity and subtlety.” I’ll just say two things. First, H.R.1207 would not give members of Congress any new powers over Fed policy. And second, when monetary policy starts affecting people’s houses, jobs and schools like it is now, the public, which is always capable, becomes more than willing to make the effort to undersatnd what went wrong at the policy level.

The Federal Reserve Transparency Act of 2009 is now up to 169 bipartisan co-sponsors. More background on the bill here.

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  • Anonymous 05/18/2009 12:31pm

    Yep. And no matter how much they deny it, the Fed chairman is influenced by the desires of the current administration, and is not really able to focus on the “long term” and be entirely above politics.
    But on the other hand, even if we grant that the Fed is above politics, why should the American people cede control over monetary policy to a group of little-known, unelected officials, let alone not be able to audit what they are doing?

  • Anonymous 05/18/2009 7:25pm

    Treasury has been writing off 100s of billions in foreign aid loans to Obama and Biden pals for years and they don’t have to report any of it.

    Why did they get in office?

  • AlphaOmega 05/19/2009 7:44pm

    This is just more communist BS. If the People (you and I) are not able to see everything in black and white how can we decide when enough is enough? The point is that those in charge are no longer working for us as in “We the People” and they know that once we see what looting and games have been going on with our money they will all get hung! That would be the only reason they don’t want to open the books PERIOD!

    I guess I sound like a broken MP3 file but regardless the time has come that “We the People” must take our Constitutional responsibilities seriously and start by exercising our 1st Amendment Right and through a large assembly we must redress our grievances till our satisfaction is met!

  • Anonymous 05/21/2009 9:45am

    People act like the Fed is in over its head when these bubbles pop and mass amounts of money go up in smoke.

    Wrong. The Fed knows exactly what it is doing and that is helping its buddies steal trilions of dollars and putting the onus to payback that money on us, our kids and grandkids.

    The Fed is an out of control racket that has way too much power and causes way too much misery for most people.

    But if you’re one of the insiders that is scooting that stolen loot to the Cayman Islands, you’re probably happy as a pig in feces with the Fed.

    Nearly 12 TRILLION dollars has been shoveled by the Fed to its buds on Wall Street and around the world since last Fall.
    Bloomberg filed a request under the Freedom of Information act to find out where that money went and who it went to and the Fed basically told them to piss off.

    But look out for those “al Qaeda” boogiemen in New York!!!

    The Fed has caused way, way more damage than any terrorist attack could or will.

  • Anonymous 05/22/2009 6:07am

    I can appreciate the position being applied here, but this is not China. The criticism of a democracy whereby the elected officials are obligated to be short-sighted is extremely valid (you didn’t think democracy is without weaknesses did you?) But, we have chosen to live and die by the strengths and weaknesses of this democratic system. To ask us all to simply put our trust into something that even if transparent, we’d have no hope at understanding, is as ridiculous idea as it is dangerous. Even if it’s true that we would not understand, it’s irrelevant. This institution, if operating under premises like that, is above the law and entirely unconstitutional. Like I said, perhaps these guys are right, we can’t understand and we should simply trust them to do a good job. It may even be possible that by opening up the Fed to a true congressional audit, may be tantamount to throwing a stick between the spokes of a bicycle wheel, but at least it’d be democratic.

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  • Anonymous 06/28/2009 2:50pm

    If this bill ever hits debate, it will be very clear to see who is corrupt and who is only partially corrupt. Those who vote against the American people knowing where their money will find themselves without a political position in the upcoming election. Their constituents will not be fooled by arguments of “long-term” vs. “short-term”.

    We pay tax dollars to our public servants for OUR OWN INTEREST. Knowing where those tax dollars are going (especially on which generation they will be going) is vitally important to the vision of a free America.

    Do you want slavery? Vote against this bill. Do you want communism? Vote against this bill. Do you want a government by the government and for the government? Vote against this bill.

    If you want freedom and liberty and the country our founding father’s fought for, it’s time to call your public servants and demand transparency.

    Obama isn’t going to do it for you.

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