Audit the Fed!

I support an Audit of the Fed.

I just read a short newspaper article criticizing Rand Paul's Senate bill.   The article noted that Senator Cruz has jumped on the bandwagon.

When Ron Paul began calling for an audit of the Fed, I was a bit irritated.   I am well aware of the crazy conspiracy theories regarding the Fed.   The secret international banking cabal is making huge profits from its ownership of the Fed, with some kind of confused notion that each dollar created is a profit for the Fed's owners.   I even wrote a short paper debunking these views.    Part of the conspiracy theory is that the Fed isn't audited.

As I said, giving credence to these crazy views is irritating.   Sadly, any audit of the Fed would likely do little good in debunking the conspiracy theories, because these crazies won't believe the audit anyway.    Still, that there was a special major audit of the Fed, sponsored by the son of Ron Paul, would require the conspiracy mongers to go further off the deep end.   Good.

Of course, after the Fed got into the business of making loans to particular banks and other financial firms in big way in 2008 and 2009, an audit became especially justified.   Who was bailed out and why?    This is government money.   Should central bank officials know that they will have to justify their decisions later?   Yes, of course.   Will this make them more cautious in an emergency?   Most likely.   Should they be more cautious because they understand that their decisions will be subject to "Monday morning quarterbacking?"   Yes.   It is much better than the alternative of bailouts with no accountability.

And finally, I fully support having the Fed's monetary policy actions reviewed.   Should Fed officials understand that they will have to justify what they have done?   Yes, of course.    Might the need to do so make them more cautious?    Yes.     Might that result in some errors where a Fed that was less accountable would take an appropriate action?   Maybe.    And, of course, it might also avoid other errors due to irresponsibility.   More importantly, it is better than the "rule" of no accountability.

Now, I admit that I think the Fed went way too far in 2008 and 2009 in bailing out politically connected financiers.

Further, I think the Fed's monetary policy is bad and needs fundamental change.

I think the Fed should have much less discretion, and that the Fed should have a rule imposed upon it that works tolerably well in all circumstances.

What about Fed independence?   Well, I don't favor having the Treasury Secretary setting interest rates every six weeks, much less some crazy policy of just fixing them for long periods of time.    Nor do I think the Treasury should determine the scope of open market operations on a day to day basis.   Neither do I think Congress should be setting interest rates or targets for base money.  And I also don't favor having the Treasury Secretary or Congress directing Fed lending.  Political favoritism would shift from a concern to a certainty.

I do think Congress should legislate the target for monetary policy--preferably a growth path for nominal GDP.   And I think the Fed should be given discretion in determining the current monetary conditions consistent with hitting the target.   The Fed should expect to have its decisions reviewed, and most obviously if it misses the mandated target.   And that will probably happen frequently.   Here is what base money and short term interest rates did over the past year, and nominal GDP ended up off target.   And Fed officials will have to explain why they thought their decisions about base money and/or interest rates were justified.  

And then I read Paul's bill.   It is difficult to connect Paul's bill to what the reporter said.   Did the reporter even read the bill?