15 Apr 2015 Audit the Fed, but Be Careful Who Gets That Power, by Hughey Newsome
Senator Rand Paul (R-KY) is leading 30 other senators in legislation to “audit the Fed.”
The Federal Reserve, America’s central bank, sets monetary policy and oversees financial institutions. Senator Paul’s bill would make the institution more transparent by allowing an auditor to report to Congress about its deliberations. Representative Thomas Massie (R-KY) introduced similar legislation in the U.S. House of Representatives.
This is a cause Senator Paul and his father, former congressman and presidential candidate Ron Paul, have long championed. It would place a check on the independence of a powerful, yet largely unknown, institution. Reining in the Fed is a bipartisan interest. Archliberal Senator Elizabeth Warren (D-MA) has similarly called for an investigation of the Fed.
While the Government Accountability Office conducts reviews of the Federal Reserve’s infrastructure, the Paul/Massie bill lifts the ban on public review of the Fed’s monetary policy processes and reasoning which has kept many Fed deliberations secret since 1978.
Because the Fed is a dominant economic player, audit supporters believe it’s a no-brainer to make its operations more transparent. The bill’s importance is demonstrated in how Americans struggle to fully understand what the Fed does.
Secrecy only makes the Fed more confusing.
According to the Pew Research Center, a recent survey found most Americans cannot decipher the Fed’s policies on loan interest rates. Only 24 percent of survey respondents could identify Janet Yellen, arguably the most powerful woman on earth, given her influence on the global economy, as chairwoman of the Federal Reserve Board. Twice as many declined to even guess the answer than could properly identify Yellen.
An inability to see how the Fed does its work, and the hotly debated role the Fed’s actions played in recent economic problems should give any objective citizen reason to pause. Allowing Capitol Hill and the public to see how such crucially important financial decisions are made holds a lot of merit.
This is obviously supported by those who believe the Fed has too much power in manipulating monetary policy. Economist Richard Salsman argued in a Forbes magazine article that technical evidence indicates Federal Reserve decisions may have led to the 2008 financial collapse. A former bank examiner at the New York Federal Reserve Bank, Carmen Segarra, released tapes suggesting a cozy relationship between regulators and Goldman Sachs, a Wall Street giant the Fed regulates. These examples fuel a belief that the Fed needs more oversight.
Unfortunately, however, the full audit approach could be a double-edged sword. While the Fed deserves scrutiny, broad congressional oversight may not be the best answer. Lawmakers could potentially take this good government idea and turn it into a platform for political grandstanding — the reason policy discussions were exempted back in 1978.
Imagine, for instance, a congressional hearing in which a Fed governor is castigated by a Congressional Black Caucus member about alleged racial disparities in the Board’s membership. Or a grandstanding congressman admonishing a Fed official over policies that increased share prices for fossil fuel-based energy companies. Lawmakers could use their new power to seek Fed favor for businesses in their districts. While these scenarios would stretch from the intent of “auditing” the Fed, there’s no denying Congress is a hyper-political body full of inflated egos.
Congressional hearings can certainly be substantive, but they can also digress into political rabble. Remember when Senator Barbara Boxer (D-CA) brought a hearing to a halt because a general used the term “ma’am” instead of “senator,” or when Representative Hank Johnson (D-GA) shared his concern with an admiral that overpopulation on Guam might cause the island to “capsize”?
There is plenty to demand from the Fed and good reason to do it, but care should be taken about those who might overuse oversight power.
It may be daunting to decide the best way to provide transparency over something as complicated as monetary policy, but it’s worthwhile questioning if Congress is truly up to the task. It would be nice if it were, but the past record of Congress putting politics over substance strains confidence.
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Published by the National Center for Public Policy Research. Reprints permitted provided source is credited. New Visions Commentaries reflect the views of their author, and not necessarily those of Project 21, other Project 21 members, or the National Center for Public Policy Research, its board or staff.