March 26, 2019 read, explore

Auditing the Fed: What It Really Means

The Republican Party’s new official platform returned to many traditional (and what many would call outdated) ideas and principles, like reaffirming traditional marriage and declaring pornography a national health crisis. Wedged in the middle of all of the social conservatism was yet another insistence to audit the Federal Reserve. Supported by Republicans, most notably Kentucky senator Rand Paul, and progressive Democrats, including Bernie Sanders (I-Vt.), bills to audit the Fed have passed the GOP-controlled House multiple times but have never gained enough support in the Senate. No matter which party has the majority in Congress following the 2016 election, similar proposals are undoubtedly going to be supported again.

However, just because a Fed audit has support from both the left and the right doesn’t mean that it’s a sound idea. The notion that the Fed needs auditing stems from the widespread, but wrong, belief that the bank is a scattered mess, especially with the 2008 recession and the subsequent anemic growth. While giving the central bank of the United States more transparency sounds good on paper, in reality, political oversight over the Fed impedes prudent monetary policy.

Contrary to popular belief, the Federal Reserve is extremely transparent. Already, the Fed is subject to constant reviews by the Government Accountability Office (GAO), which has audited the Fed since 1978 for waste, fraud, and abuse. Its financial statements are also audited by outside firms, currently Deloitte & Touche. Members of the Fed Reserve Board are subject to Senate approval; they consistently give interviews and press releases and submit policy reports to Congress twice a year.

So why, exactly, do so many people want to “audit the Fed?” Well, as former Fed Chair Ben Bernanke writes, auditing the Fed isn’t about actually auditing the Fed. It’s about politics – congressmen and women who want more control over monetary policy. Last year’s Federal Reserve Act of 2015, sponsored by Rand Paul, would allow for Fed meetings to be subject to congressional overview and for the GAO to submit policy recommendations to the Fed board. Clearly, political pressure would mount up for the Fed to act one way or another, putting the central bank’s independence in jeopardy. And given the nature of federal monetary policy, it’s highly unlikely that members of the Senate or the House have as much expertise as someone like Bernanke or current Fed Chair Janet Yellen.

Historically, allowing a supposedly independent central bank to be pressured by politics has resulted in disaster. Zimbabwe’s 1998 economic crisis, for example, which led to hyperinflation and food shortages, was triggered in part because of this very cause. The rapid inflation Germany experienced in 1923 was caused by the same reason. In both cases, the government pressured the central bank to issue more and more currency to fund government expenses. The consequence for both nations was an economic fallout.

The Fed’s two mandates are to keep inflation low and employment high. It’s unable to achieve these two goals if Congress is always on its tail, trying to turn the Fed into another government agency. The recovery from the Great Recession may have been shaky, and there are still many problems with the economy (low wages, low job participation rate), but the Fed has done a surprisingly effective job in getting the economy back on track. The economy might not be soaring, but there’s been a record 73+ months of private sector job growth, a sub-5% unemployment rate, and gradual labor market improvement, wages, and consumer spending.

The Fed’s two mandates are to keep inflation low and employment high. It’s unable to achieve these two goals if Congress is always on its tail, trying to turn the Fed into another government agency. The recovery from the Great Recession may have been shaky, and there are still many problems with the economy (low wages, low job participation rate), but the Fed has done a surprisingly effective job in getting the economy back on track. The economy might not be soaring, but there’s been a record 73+ months of private sector job growth, a sub-5% unemployment rate, and gradual labor market improvement, wages, and consumer spending. Obviously, the federal government can execute a myriad of strategies to improve the economy and its own transparency; however, auditing a Fed is not one of them. Such a move would be short sighted and impractical – something that could spur calamitous repercussions for the American economy.

[Photo Credit: bradhoc]

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