The Economist recently interviewed Ron Paul about HR 1207, “The Federal Reserve Transparency Act Of 2009”, which he sponsored and which currently has some two-hundred and seventy cosponsors (it is more popularly called the audit the Fed bill). Ron Paul as usual does a commendable job answering the various questions put to him by the somewhat snarky interviewer. Like most in Washington, the interviewer clearly thinks that inquiring attitudes towards the Federal Reserve’s everyday operations are, as he puts it, “potentially dangerous.” I think the truth is exactly the opposite: the attitude of viewing the Federal Reserve as sacrosanct is dangerous. And not just “potentially”, either. The last ninety-six years of living with a central bank have shown full well the dangers inherent in such an institution, what with inflation, business cycles, and the like.
Basically, the biggest problem the interviewer seems to have with the idea of making the Fed more transparent and therefore giving Congress a greater ability to “oversee” the bank is that it might weaken the Fed’s political independence. This would be a bad thing, the interviewer argues, because Congress may pressure the Federal Reserve into taking politically popular but economically disastrous steps (for instance, raising interest rates to put a brake on inflation which would have the effect of slowing down the economy).
This particular criticism misses the point of Paul’s bill by leaps and bounds, however. First, the bill doesn’t give Congress anymore “power” over the Fed than it already has (which is very little). Anyone can read the bill for itself here. It is extremely short, and merely changes Section 714 of title 31 of the United States Code to allow the Comptroller General to audit the Fed at will, instead of having to get the permission of the Federal Reserve and its member banks to do so. Seems like a pretty reasonable demand, right? Is there any other section of the Federal Government that gets the convenience of choosing to be audited or not?
Second, the interviewer misses the target of this bill by focusing on the Fed’s manipulation of the interest rates which can sometimes be politically unpopular. But where the Federal Reserve wants interest rates to be is probably if anything the most transparent aspect of Federal Reserve policy. A simple Google News search found an article from a few weeks ago indicating the New York Federal Reserve was going to buy 7.5 trillion dollars worth of government securities in an attempt to…”lower long-term borrowing costs and revive economic growth.” Unless I’m mistaken here I really doubt the Federal Reserve is rushing to have a gag order put on Reuters for revealing such sensitive information. In other words the interest rate policy is right out in the open for Congress to see if it so chooses.
Interest rate policy is not the driving factor behind Ron Paul’s sponsoring of this bill. If it were it would not explain why it has so many supporters in Congress. While some commentators may care that the Fed controls interest rates, Congress certainly doesn’t. The whole point of the Federal Reserve is to control monetary policy. The simple reason why the bill has been supported by such an ideologically diverse group is simple: the Federal Reserve refuses to disclose who is receiving the money it is handing out to troubled banks. In fact, back in December the Federal Reserve expanded its balance sheet by 2 trillion dollars with zero oversight from anyone but the seven members of the Federal Reserve Board and then refused to let anyone know where that money went. Could it really be so difficult to understand why Congress would want to find out where that money is going?
As Ron Paul points out in the interview, the bill is really political in nature and aimed not so much at monetary policy per se which, as pointed out above, is largely seen to be the legitimate function of the Federal Reserve. The real issue at stake is what we don’t know. To be more specific, we don’t know who specifically is getting the money. We also don’t know why they are getting the money. When the nation’s money supply rests in the Fed’s hands do we really want to assume the Fed is made up of altruistic do-gooders, which is exactly what they want us to believe? To put it another way, if Lord Acton’s dictum, “absolute power corrupts absolutely”, is an even slightly correct description of human nature, can we really afford to let the Federal Reserve be independent?
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