The Argument Against Auditing the FedMay 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.