Fed audit throws a monkey wrench

November 20, 2009

It’s easy to understand why the House Financial Services Committee would vote to open the Federal Reserve’s monetary policy decisions to government audits. Transparency is one of the buzz concepts of 2009. And if measured pound-for-pound of power, the central bank is probably the most opaque institution in Washington.The Fed is also terribly unpopular. And deservedly so. Its easy monetary policy and lax regulation helped create the American housing and financial crisis that spawned the Great Recession. Moreover, its role in the policy responses to the crisis from TARP to the AIG bailout have earned it scorn across the political spectrum. Attacking the Fed is good politics. Just ask Christopher Dodd, the embattled Senate Banking chairman, who hopes to Fed-bash his way to another term.But such combativeness makes for poor economic policy. When you’re a nation preparing to float $11 trillion or more in government debt over the next decade, you don’t want your creditors musing whether political pressure could nudge your central bank to go soft on inflation. And auditing monetary policy would likely lead to an explicit congressional assessment of that policy. Who might do the assessing? How about dovish House Financial Services Chairman Barney Frank? He already wants to boot the regional Fed banks presidents from the FOMC because they vote too often for higher interest rates.The Fed audit bill also makes it a bit harder to pass financial regulatory reform next year. There are jagged policy disagreements between Frank and Dodd, as well as between Dodd and Richard Shelby, the ranking GOP member on his committee. The Fed audit amendment doesn’t make agreement any easier since the idea is less popular in the Senate. (Senator Judd Gregg, the New Hampshire Republican, calls it absolutely inexcusable.)”For the first time, I now think it’s possible financial reform doesn’t happen this election cycle,” says one financial industry insider in Washington. And who knows what the 2011 political environment for reform will be like with a likely influx of anti-Fed, anti-Wall Street Republicans and the Fed perhaps tightening despite continued high unemployment.Make no mistake, renewing faith in the U.S. economy requires a sweeping financial overhaul. And now that might now happen.

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