A wrongheaded effort to exert more Congressional authority over the Federal Reserve unfortunately has gained momentum with the apparent support of a key House Democrat.
The Wall Street Journal quotes Rep. Ron Paul, R-Texas, as saying he has a commitment from Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, to push ahead a bill that would subject the U.S. central bank to more audits.
Even if the emerging legislation specifically carves out the creation and implementation of monetary policy from Monday morning quarterbacking, otherwise known as Government Accountability Office audits, there likely will be enough left in the bill to make people around the world wonder about the Fed’s independence of action, especially in reaction to a crisis.
Specifically, the Ron Paul bill directs the head of the GAO to complete an audit of the entire Federal Reserve System by the end of 2010 and report back to Congress.
Let’s keep in mind that Rep. Paul doesn’t think the Federal Reserve should exist. He told the Journal’s Sudeep Reddy that he expects the audit to detail to whom the Fed lends money and how much and arrangements made with foreign central banks and others. The bill only seeks a single audit, but Paul wants at least an annual audit.
It’s an appropriate time to think about the Fed and its loan arrangements nearly a year after what is likely to be considered the nadir of the credit crisis, the collapse of Lehman Brothers. The Fed maintains it didn’t have the authority to save Lehman (it doesn’t make unsecured loans) but it did balloon its balance sheet in a number of ways to support non-functioning markets and some seriously struggling financial companies with systemwide ties.
A year later, though some can and should quibble with individual actions, the Fed looks good. It helped mightily to keep a credit crisis and deep recession from evolving into something worse. Other agencies at the time seemed stuck in bureaucratic mud. The Fed’s relative independence allowed it to move fast when fast action was needed.
It won’t exactly be the same next time, but you can be sure there will be a next crisis and the Fed will be as neeeded again to act fast and show flexibility.
But how will the central bank react if this legislation is passed, knowing every crisis borne action will be second guessed after the storm is passed? How many foreign central banks and other important market players will want to work things out quickly and effectively with the Fed if they know every move will be revealed in an inevitable audit?
Ben Bernanke was just nominated to another term at the head of the Fed. The Senate will confirm him. If his leadership is so desired, shouldn’t the Fed chairman be listened to on the audit issue?
Here’s what Bernanke said: “Financial markets, in particular, likely would see a grant of review authoritry in these areas to the GAO as a serious weakening of monetary independence.” And only bad things for world market stability will stem from that perception.