Please Don’t Audit the Fed

Source: Wikimedia Commons

Rand Paul, following in his father’s footsteps, has re-introduced a plan to audit the Fed. Trump supports the plan and even Bernie Sanders voted for it the last time the bill was put up before congress. I have no idea why. There might be an argument for ending the Fed entirely. Larry White gives a good summary of the argument in this video. I’ve written about the American Free Banking System, which worked reasonably well in the absence of a central bank (although the evidence is mixed). And maybe ending the Fed is the ultimate goal of Fed audit supporters and this bill is just a symbolic victory. But it really does essentially nothing useful and could potentially have detrimental effects.

In the press release linked above, Thomas Massie says “Behind closed doors, the Fed crafts monetary policy that will continue to devalue our currency, slow economic growth, and make life harder for the poor and middle class. It is time to force the Federal Reserve to operate by the same standards of transparency and accountability to the taxpayers that we should demand of all government agencies.” Even besides the fact that there is no serious economic analysis I know of that says the Fed makes life harder for the poor and middle class, this statement is complete nonsense.

Does the Fed need to be more transparent? I have a hard time seeing how it possibly could be. The Fed already posts on its website more information than anyone other than an academic economist could possibly want to know. Transcripts from their meetings, their economic forecasts, justifications for interest rate changes – it’s all there in broad daylight for anybody to read. As David Wessel points out in an excellent Q&A on auditing the Fed, the Government Accountability Office (GAO) already knows everything important about most of the assets held by the Fed.

The only possible change that could come as a result of auditing the Fed is more influence by congress over Federal Reserve decisions. That’s terrifying. Whatever your opinion of the Fed, it’s impossible to deny that it’s run by incredibly smart people who have dedicated their lives to understanding monetary policy. That doesn’t make them infallible. I’m all for taking power away from experts, for decentralizing and allowing markets to control money. But if we’re going to allow a group of individuals to decide the policy, at least let them be people who have some idea what they’re talking about. You might not love Janet Yellen, or Ben Bernanke, or Alan Greenspan, but I can’t imagine anyone would prefer monetary policy to be run by congress. Think about the arguments over raising the debt ceiling. Do we want that every time the Fed tries to make a decision? I certainly don’t.

I can absolutely criticize monetary policy. The Fed has come in below its 2% inflation target consistently for about 10 years now even though unemployment had been far from the natural rate. Maybe an NGDP target would be an improvement over the current dual mandate. And maybe we don’t need a central bank at all. I’m not opposed to monetary reform. But I can’t get behind a bill that only appears to make conducting monetary policy more political.