If not for unprecedented actions by the Ben Bernanke-led Federal Reserve, the United States economy might be mired in a depression.
Yet the Fed finds itself on the defensive on Capitol Hill. There was its general counsel, Scott Alvarez, pleading last week to the House Financial Services Committee to reject attempts to expand Government Accountability Office audits of the Fed. Already, the GAO reviews the central bank’s supervisory and regulatory functions. But a bill introduced by Representative Ron “End the Fed” Paul, a Texas Republican, would also subject monetary policy and discount window operation to GAO audits. The bill has nearly 300 co-sponsors and as well as conceptual approval by Barney Frank, chairman of the committee.
The Fed views these expanded audits as threats to its independence from political pressure. As Alvarez put it, “These concerns likely would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.”
For instance, when it comes time for the Fed to start withdrawing monetary stimulus from the economy despite continuing high unemployment, the last thing it will need is haranguing from Capitol Hill that it’s moving too fast, too soon.
And if the Fed becomes the regulator of systemically important financially institutions, as the White House advocates, it’s easy to imagine how the central bank would be subject to even more intense and frequent grilling from an emboldened Congress.
Now the move for expanded Fed audits results from both the Fed’s unprecedented efforts to end the financial crisis and its regulatory failures that contributed the financial crisis. The audit bill should be a wakeup call to the central bank that the more it gets involved in the regulatory process, the great future scrutiny from a skeptical Capitol Hill.
And it’s not just Congress. World Bank President Robert Zoellick says that after reviewing the Fed’s regulatory performance, he’s concluded that it’s a bad idea to “vest the independent and powerful technocrats at the Federal Reserve with more authority.”
Past regulatory failures have already undercut confidence in the Fed – “technocrats” is hardly a compliment — and breaking new regulatory ground in the field of systemic risk increases the chances for further erosion. As it is, the Fed is already buckling to congressional pressure. Alvarez told the committee that the Fed would be “happy to work” with lawmakers on ways to release names of companies that borrow from the central bank, perhaps after a period of time.
Not only should Congress reject the idea of expanded Fed audits, it should reject the idea of expanding the Fed’s role as regulator. If need be, create a new regulatory agency or council. Let Team Bernanke focus on executing its stimulus exit strategy and strengthening its reputation as an inflation fighter.