6 economists on why Ron Paul’s Fed audit idea is wrong

August 3, 2009

I asked a half dozen economists who are very concerned about Federal Reserve independence what they thought about Rep. Ron Paul’s bill to audit the Fed. This was my specific question: “Given that Congress can already grill the Fed chairman during Humphrey-Hawkins (and occasional other congressional appearances), how would a GAO audit really threaten Fed independence in practical terms?”

Here is what they told me:

Robert Schiller, Yale University:

The GAO audit proposal is from Ron Paul, who has advocated abolishing the Fed and returning to the gold standard. Maybe people think that this is his foot in the door, a first step in the plan. When King Louis 16 called for a meeting of the Estates General in France, it led to a chain of events that resulted in his beheading!

Lee Ohanian, UCLA

My view is that there is a major difference between general economic questions from Congress to a Fed that isn’t open to a GAO audit and that doesn’t get its budget from Congress, versus a detailed audit by the GAO, which would create an explicit Congressional assessment of Fed operating procedures. An important reason why so many economists argue for independence is because there is substantial cross-country evidence that Central Banks which are more closely tied to the legislature have much higher inflation rates than in highly independent Central Banks. I do think Congress should be able to ask questions of the Fed during regular testimony, and Chairman Bernanke has certainly done more than his predecessors to explain what the Fed is doing and why.

James Hamilton, UC-San Diego

My own concern is not about a specific step such as a proposed audit but rather is a response to what I see as a changing political climate in which I fear it will be more difficult for the Fed to withstand pressure to monetize the deficit.

You ask, why should we be concerned about an audit if we’re not concerned about Congress grilling representatives of the Fed?  My answer is, I am concerned about the manner in which Congress has been grilling representatives of the Fed.

Anil Kashyap, University of Chicago

An audit suggests that they can force them to supply all the background information in real time that goes into a decision and presumably compel all members of the FOMC to share their thinking on any issue in real time.  This information is disclosed after 5 years, with good reason.

The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy.  That would be a disaster.  (Akin not just to having Supreme Court arguments on TV but also the process of them writing the decisions being televised.)

You want people to be able to change their mind and to be able to vigorously debate all sides of an issue.  If you put all this in public and subject to immediate second guessing it will shut down the give and take that is critical to reaching good decisions.

Michael Woodford, Columbia University

The level of intrusiveness of the GAO would surely be significantly greater — indeed, there would be no point to this proposal, given Humphrey-Hawkins, if it were not the intention of the bill’s proponents to exert Congressional control of monetary policy decisions in a way that the Humphrey-Hawkins testimony alone does not allow them to.

It is important to remember that the GAO already has the authority to audit the Fed, and does, except that the bill giving the GAO this authority in 1978 specifically excluded certain aspects of the Fed’s activities from GAO audits — essentially, decisions about monetary policy. The only purpose of the new bill is therefore to decrease the Fed’s independence with regard to monetary policy decisions.
Considerable historical experience suggests that political interference with monetary policy decisions can lead to regrettable outcomes — which is why Congress itself decided to forswear such interference. The dangers are especially great at a moment like the present one, when the prospect of large government deficits for years to come could easily make short-sighted decisions to use monetary policy to facilitate the financing of those deficits all too tempting. It is ironic that many of the proponents of reining in the Fed claim that their concern is preventing the Fed from further weakening the value of the currency, when the opposite would almost certainly be the consequence of their bill if passed.

Michael Feroli, JPMorgan

That’s a fair question. At H-H the Chairman is accountable for the Fed’s decisions. But I do think there is a distinction between asking questions and having all the conversations audited. For one, that could stifle the openness of the debate: to take an example, the Chairman always has to dance around the issue of NAIRU because it can be misperceived by economically illiterate members of Congress as meaning the Fed wants to engineer a certain amount of unemployment.

With audited conversations, the debate could become stilted. I think a GAO audit would also risk appearing as an official verdict on Fed decisions, as opposed to twenty different Congressmen questioning the Fed, which is much more clearly the opinions of some politicians. Finally, even if the step isn’t a major one, it’s a move in the wrong direction: if the markets and foreign investors perceive it that way, it could immediately push up borrowing costs even if theaudit are only a symbolic increasing of Congressional oversight of monetary policy.


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Hah, these arguments are so frivolous and silly, I thought this was a piece from The Onion at first. This is why news reporting as we know it deserves to die. When Reuters supplies the news, and the news is factually wrong and without any merit whatsoever, is it any wonder people are turning to the Internet to find the truth?

Posted by Jason | Report as abusive

Where there is integrity an audit is always welcomed to prove the fact. Where there is a lack of integrity an audit is feared because the concealed thief will be exposed.

Posted by Capt. Fred | Report as abusive


Posted by GabeNTX | Report as abusive

These “economists” are nothing but a bunch of goddammed court economists – paid puppets of international financial oligarchy.

Go Ron Paul.

Bring back gold standard.

Central Bank is a communist trojan horse.

James Pethokoukis cherry picks six economists that agree with his position – he’s as bad as those pharma ads that say “9 out of 10 doctors prescribe…” James – what is motivating you to engage in this smear campaign against HR 1207? Transparency is always a positive – the government should never lie to the people, nor manipulate the markets. Your stance against this audit is troubling and raises serious questions about your professional journalistic integrity.

Posted by Zack | Report as abusive

behold: the FRAUDits. i’m sure these economists don’t want an audit of the fed because they will be caught in insider trading. “hmm, so you say ‘this bank’ will be getting the money first, eh? better buy their stock quick then before the public knows about it!!”. you all deserve a kick in the teeth

Posted by Evan | Report as abusive

What about the fact that the constitution gives eplicit power of oversight of the creation of money( real money, not fiat currency) to congress but that power was wrestled away in 1913. Now we seek to take that power back and the control freak looters and plunderers don’t like that very much. Pethokoukis should do a story on how the fed was created in secret and against the will of the people. Higher interest rates should have been the policy a long time ago to be a part of the strategy to curtail out of control lending and borrowing and promote saving.

Posted by Roland | Report as abusive

More power to Dr. Ron Paul!! Fight the Creature from Jekyll Island! You certainly have my support.

How can the Fed be independent when it is owned by private corporations?

The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. -Jefferson

Posted by Dont tread on me! | Report as abusive

You are quite the little cheerleader for the Federal Reserve.
I wonder how anyone can defend this den of thieves and sleep at night.

Posted by Idaho | Report as abusive

Obviously there are economists out there that don’t think the FED should be audited. Of course there will be, because it is these same economists that believe that the FED is necessary and their jobs probably depend on it. There are also many thousands of economists who don’t believe that the FED is necessary. Not to mention most of the American taxpayers. It is unfair for you and Reuters to only force one side of the issue down the throats of the readers of this website.

I would like to see a political cartoon with James, Reuters, and his “what they say goes” economists and the FED all in bed together. Oh yeah.. Goldman Sachs should be in the bed too!

Posted by jMunny | Report as abusive

I didn’t find any of these arguments compelling. One argument was that auditing would influence decisions negatively, as if, somehow the bill proposes Congress participating in decisions. The bill does not propose this at all.
Another poor argument was that auditing the Fed would weaken the dollar. The Federal Reserve has already managed to drive the dollar to 5% of it value since the inception of the Federal Reserve in 1913. The dollar value is already being greatly debased by the Fed’s policy. I can’t imagine how an audit could make it any worse than it is and the argument didn’t provide any rationale for thsi. If anything, you’d think the Fed might be a little bit more thoughtful about debasing the currency and if it didn’t become more thoughtful, at least this would be exposed and all would understand the problems that the Fed causes by its central planning policies.

Posted by John Wheeler | Report as abusive

The central bank will be abolished. We will do whatever we want with our money. You banker oligarchs need to go back to Europe. You have been trying to control the world’s money for too long. Empire after empire. The buck stops here. Give me liberty or give me death !

This is getting scary. I know us libertarians are prone to this sort of thing but saying “well reuters is owned by the Rothchilds so clearly I don’t need to think any more about this” is just crazy. I’m sure economics as a profession will easily ignore the part of the internet that is nuts and focus on people who really want to talk about how we maintain an independent central bank without sacrificing a necessary level of transparency required by a democratic society. But all the nonsensical commentary here makes it hard to filter the signal from the noise.

Posted by Will | Report as abusive

Ugh. Post rational, logical and fact-based arguments that clearly explain why Uncle Ron’s fan are psychotic fringers and they come out of the wood work. If you all truly want high inflation rates and larger lending fees then by all means, take full access of the Fed. I find it the height of hypocrisy that those who complain about the govt being too big and having too much power can simultaneously advocate for giving Congress control over monetary policy decisions.

Posted by captwasabi | Report as abusive