Friday, July 24, 2009

An Overview of the "Audit the Fed" Debate

The debate over H.R. 1207 and S. 604 is achieving quite a bit of publicity. I would like to compile some of the questions and resources surrounding it. To be clear - the audit gives the Government Accountability Office (GAO) additional power to examine
  • The Fed’s discount window operations
  • Funding facilities
  • Open market operations
  • Agreements with foreign banks and governments
With that said, lets take a look at the arguments for, and against, auditing the Fed.

Why should we audit the Fed?

In The Case Against The Fed, Murray Rothbard argues that the Fed enjoys a greater secrecy and independence than even the CIA.
The CIA and other intelligence operations are
under control of the Congress. They are accountable: a Congressional committee supervises these operations, controls their budgets, and is informed of their covert activities. It is true that the committee hearings and activities are closed to
the public; but at least the people's representatives in Congress insure some accountability for these secret agencies.


The FederalReserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation's vital monetary system, is accountable to nobody—and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue.


So: if the chronic inflation undergone by Americans, and in almost every other country, is caused by the continuing creation of new money, and if in each country its governmental "Central Bank" (in the United States, the Federal Reserve)
is the sole monopoly source and creator of all money, who then is responsible for the blight of inflation? Who except the very institution that is solely empowered to create money, that is, the Fed (and the Bank of England, and the Bank ofItaly, and other central banks) itself?
Rothbard's first chapter is excellent, and highly relevant to this post. I would strongly recommend reading it in its entirety.

Ron Paul articulates:

Claims are made that auditing the Fed would compromise its independence. However, by independence, they really mean secrecy. The Fed clearly cherishes its vast power to create and spend trillions of dollars, diluting the value of every other dollar in circulation, making deals with other central banks, and bailing out cronies, all to the detriment of the taxpayer, and to the enrichment of themselves. I am happy to challenge this type of “independence.”

They claim the Fed is endowed with special intellectual abilities with which to control the market and that central bankers magically know what the market needs. We should just trust them. This is patently ridiculous. The market is a complex and intricate thing. No one knows what the market needs other than the market itself. It sends signals, such as prices, that should be reacted to and respected, not thwarted and controlled. Bankers are not all-knowing and cannot ignore the rules of supply and demand. They might act as if they are, but their manipulation of the market just ends up throwing it wildly off balance, which gives us the boom and bust cycles.

They claim the Fed must remain apolitical. No organization is apolitical that relies on the President to appoint the Chairman. In fact, it is subject to the worst sort of politics – power to create trillions of dollars and affect the value of every dollar in the country without the accountability of direct elections or meaningful oversight! The Fed typically enacts monetary policy that is favorable to particular administrations close to elections, to the detriment of long-term considerations. They do this partly because of the political appointee process for the Chairmanship.

Ron Paul recently articulated the conflict between the people and the Central Bankers in this appearance on MSNBC:

Over at Campaign For Liberty, Peter Orvetti asks "What's the Establishment Got to Hide?"
A dollar today is worth less than one-twentieth what it was worth on the day the Federal Reserve was created 96 years ago. Yet over all that time, the unelected Fed has never had to face the full scrutiny of our elected representatives that other powerful agencies must. Even our intelligence agencies must report to Congress -- but not the Fed, which has helped rack up an $11 trillion national debt, and an additional $13 trillion in dubious loans and bailouts.

The Fed will not say where that money is going. Chairman Ben S. Bernanke has refused to tell Congress, and why should he? There is no means to compel him, and no way to find out what he’s been doing. The Federal Reserve Transparency Act would change that.

C-SPAN covers an excellent debate with Tom Woods and others (including Warren Coats, former IMF official) on the pros and cons of auditing and abolishing the Federal Reserve. The basic positions are:
  • Audit and abolish the Fed and replace it with private commodity money and private banking.
  • Strip the Fed down to the sole task of protecting the value of the dollar.
  • It is too impractical to end the Fed without creating economic instability, so another plan is needed.
It is a very good video, if you have the time I recommend it.

The Smith Family Foundation hosts a very similar debate with George Selgin, Peter Schiff, Steven Axilrod (former member of the Federal Reserve's Board of Governors), and a political science professor from Columbia University:

I just want to point out that at minute 58 Axilrod exposes the political interests of the Fed and its Board of Governors.

Why shouldn't we audit the Fed?

Too Big To Bail makes the case that to audit the Fed is essentially to end it, and we should not forget that ultimately it was Congress that created the Federal Reserve system and as such they should be blamed for it. In other words, we are to blame for it, and blaming Bernanke and the Fed for our woes is misplaced anger. As he states,

Don’t get me wrong. I think the idea of a Fed and fiat currency, are bad ideas. I just think we should stop the classic congressional game where we create a problem and then complain about the Fed as if they are to blame. We created the beast and now are not happy with it. We can pull the plug whenever we want. But doing so would be an admission that we screwed up, not the Fed. The issues everyone has seems to be with the institution per se. And we created the institution.

So within the very framework that we set up, the Fed’s argument in favor of independence seems to make perfect sense. Of course, I question the whole framework, but given the situation, it does make sense.

Fed Chairman Ben Bernanke speaks on the issue, and claims that the audit would nullify Fed independence -

And from his article in the WSJ:
The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

The Washington Post also thinks auditing the Fed is dangerous:
Though the bill has attracted 276 co-sponsors in the House and 17 in the Senate, it is wrongheaded in the extreme. By opening up the Fed's most sensitive interest rate and credit policies to public second-guessing, the bill would create a risk -- real and perceived -- of monetary policy bent to suit congressional overseers. This would destroy financial markets' faith in the Fed and, by extension, the value of the U.S. dollar, just as surely as a political "audit" of the Supreme Court's deliberations would undercut public faith in the justice system. ... The Federal Reserve Transparency Act is an unserious answer to a serious question.

If I may, the serious question is the existence of the Federal Reserve itself. As I find more sources I will update this post and continue to compile them. I hope this is a good start for you, though.

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