The Federal Reserve is at least partially to blame for the economic crisis. It left interest rates too low for too long, and laxly regulated the megabanks. Given this reality, or at least this public perception, it’s not surprising that there are plenty of economists and politicos with oodles of ideas for re-imagining the central bank’s role and function. (Linking its policymaking operations more directly to the performance of market metrics such as the greenback, bond rates, and commodities would be a good start.)
[Find out five ways to boost the economy and create jobs]
Then there is Representative Ron Paul, a Texas Republican and libertarian who would rather imagine a fantasy world without a Fed. Throughout his political career, Paul has repeatedly called for the Fed’s abolition, preferring Congress to take full control of monetary policy and eliminate fiat money in favor of a gold-backed national currency.
Since Paul can’t eliminate the Fed outright, he’s trying to emasculate it. Impinging on, and eventually ending, the central bank’s independence is the purpose of the Federal Reserve Transparency Act, Paul’s bill which would “eliminate restrictions on audits of the Federal Reserve and open Fed operations to enhanced scrutiny.”
[See if Obama's big economic gamble is paying off]
And what’s wrong with a little more sunshine on the Fed? Nothing, many Americans apparently think. A Rasmussen poll finds that 75 percent “favor auditing the Federal Reserve and making the results available to the public.”
Now those results aren’t a big surprise given the public’s unease with the unprecedented measures the Fed has taken to bolster the economy, including the unpopular bailout of AIG. Another recent poll found that the Fed is the most unpopular government institution, ranking behind even the Internal Revenue Service.
This unease is also reflected in the nearly 300 House members who are supporting the Paul bill. It’s a worrisome level of congressional support that may be pushing Ben Bernanke to educate the public on what the Fed really does, for example through his appearance at a recent town hall meeting at the Kansas City Fed.
[Find out how healthcare taxes would affect you]
Of course, most Americans surely don’t realize that the non-policy aspects of the Fed are already audited by the GAO, nor have they watched the Fed chairman’s twice-a-year testimony, once known as the Humphrey-Hawkins testimony, in front of House and Senate committees.
But Paul’s bill would go further. An audit would create an explicit and clear congressional assessment of the Fed’s performance. “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,” argues Michael Woodford, an economics professor at Columbia University.
How might more influence be exerted? Economist Anil Kashyap of the University of Chicago thinks an audit suggests the GAO and Congress could force the Fed to supply all the background information that goes into an interest-rate decision and compel all members of the FOMC to share their individual thinking on any issue in real time. “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.”
The effect on the economy might not be so beneficial, either. Even if the result of the Fed bill is onlymore aggressive congressional questioning and criticism, financial markets might well fear the bank would start taking congressional wishes into account when making policy.
“If the markets and foreign investors perceive it that way,” says economist Michael Feroli of JPMorgan, “it could immediately push up borrowing costs even if the audits are only a symbolic increasing of congressional oversight of monetary policy.”
More congressional authority would more likely be biased toward pushing for looser monetary policy to bring down unemployment. If Congress were full of hard–money guys like Paul, that would be one thing. But who really wants Nancy Pelosi and Barney Frank deciding when to tighten and ease? And right now do Americans really want global investors to start questioning the Fed’s commitment to low inflation and a stable currency, right as Uncle Sam is running up record budget deficits?
The economy is only now pulling itself out of recession. Paul’s bill, if successful, could send it back the other way.