Audit the Fed?

Prevailing whims can blow down monetary policy.

Be careful what you wish for. You may get it.

   There's been a lot of talk from conservatives about auditing the Federal Reserve, and monitoring more closely the central bank's activities in attempting to stabilize the economy.
   "Audit the Fed!" is the chant. The reality is that the central bank's financial activities are already audited by several independent as well as government agencies, and the new campaign is a political attempt by Congress to control the Fed's policy activities.
   In effect, such a political audit would stop the Fed from helping in a timely fashion those who need help, not only curtailing critical Fed movements to control inflation and ease unemployment, but could well put the central bank out of business entirely.
   Without a central bank, financial institutions would fail, there would be no agency to bail them out, unemployment would soar, inflation would be out of control, and the entire economy would crash, much as it did repeatedly in the 19th Century. And yes, there was the Great Depression in the 20th Century, and the Great Recession more recently, and the central bank could have done a better job in the 1930s. At the time, however, it was constrained by prevailing political beliefs that in the long run, the business climate would improve and the economy would heal itself. It took strong government intervention to ease the burdens and promote recovery.
   (There are, of course, deposit insurance agencies that help protect bank customers, but a massive collapse of the system would quickly drain those agencies, worsening the overall crisis.)
   But to return to "those golden days of yesteryear," which would include a return to the hard money years of the gold standard -- also advocated by some conservatives -- only means widespread economic disaster for the many as the micro-few take advantage of the disadvantaged.
   The hue and cry for more control over the Federal Reserve Board goes back months, prompting the central bank to emphasize that it is indeed accountable, and is regularly audited by several independent as well as government agencies.
   For example, the Fed reports to Congress twice a year on its plans for monetary policy, its chair -- currently Janet Yellen -- testifies regularly before congressional committees, its Federal Open Market Committee publicizes its views and actions regarding monetary policy and interest rate decisions regularly, there is an annual report, and the financial statements of the central bank as well as the twelve regional banks are audited annually by an independent outside auditor. Then there is the Government Accountability Office (GAO) and the Office of Inspector General that audit the Fed's activities. And every week, the Fed publishes a financial balance sheet.
   Despite all that, conservatives are demanding still closer monitoring and control of the Fed's activities.
   In a speech as far back as last February, Jerome Powell, a member of the Fed's Board of Governors, noted three major parts to the effort to "subject monetary policy to undue political pressure." One, under what Powell called a "misleading name," the "Audit the Fed" plan would bring the central bank's monetary decisions to "unlimited congressional policy audits (not to be confused with financial audits, which are already conducted regularly.)"
   The second, Powell noted, would force the Fed to follow a specific path when making monetary decisions, and face "immediate" congressional hearings and investigations if it should ever deviate from that path.
   Thirdly, Fed monitors want new limits on how and whether it acts during a financial crisis.
   All of which are based on beliefs that the Fed is secretive and unaccountable, and  that no one is watching what they do.
   There is, and should be, some secrecy about what the central bank plans to do and when it plans to intervene in the credit market and in the money supply. Otherwise, some players in the financial markets would have an unfair advantage.
   But the Federal Reserve is already accountable to Congress. It reports regularly on its status and decisions, and deservedly has flexibility in how it operates to stabilize inflation and encourage employment and the economy in general.
   To demand more congressional oversight is a political attempt to control the central bank and limit its ability to act. This would only lead to the chaos so common in the 19th Century, when banks failed regularly and shut down, with no one to rescue them and restore customer deposits.