Who Should Audit the Fed?

A few days ago the House passed with a veto-proof majority the bill known as “audit the fed” or more plainly as H.R. 459, sponsored by Ron Paul. If it became law, it would open the Federal Reserve’s policy deliberations and decisions, certain operations and dealings with foreign banks and governments to scrutiny by the Congressional Government Accountability Office. The GAO currently audits the Fed’s financials but not its policy making.

A number of House Democrats supported the bill, though party chieftains are against it. The critics of the measure, prominently including Fed Chair Ben Bernanke, argue that it will open the way to political interference with monetary policy, which is best conducted on purely economic grounds.

Both sides have a valid point. H.R. 459 proponents are surely right that the Fed should not be allowed to hide its policy making from the public—the provision of some information with a lag is not enough. The Federal Reserve system itself is a bureaucracy with its own priorities; how do we know that this secretive bureaucracy is serving the interests of the people?

Technocrats claim that the Fed bases its decisions on data and scientific models, but if you look at economic research you realize that data and models are like fish in an ocean. What you catch depends largely on what kind of tackle and bait you use and where you go fishing. (I’ve borrowed the fish metaphor from a 1961 book by a British historian.)

The Fed is a very rich bureaucracy with large research staffs who can find ways to justify almost any action—such as the $16 trillion provided in bailouts and loans in recent years. An independent overseer might at least question policymaking rationales.

Then again, allowing Congress greater say in monetary policy is a frightening prospect...

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