Audit the Fed? Fine - So Long as Audit is Secret
I’ve always been a staunch advocate for the independence of the Federal Reserve. After all, the most important job the Fed has is to take the proverbial punch bowl away before the party gets too out of hand. Politicians, in contrast, are usually all for ordering more punch (and putting the tab on our national credit card!). The Fed’s track record on doing its job is mixed at best. I can’t believe it would be improved if subjected to the micromanagement of the Congress.
Congress is now contemplating two bills (HR 1207 and S 604) entitled the “Federal Reserve Transparency Act” which would eliminate prohibitions on having the Government Accountability Office (GAO) audit the Fed. Despite my admitted biases, I surprised myself by not dismissing these initiatives out of hand.
Specifically, under current law (the Federal Banking Agency Audit Act of 1978) the GAO cannot audit Fed monetary policy functions: (a) transactions with other central banks or governments; (b) “deliberations, decisions, or actions on monetary matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;” and (c) “transactions made under the direction of the Federal Open Market Committee.” The bills would eliminate these restrictions.
The primary objection that is raised about these bills is that they will impede Fed independence. Certainly, permitting the GAO to audit the monetary deliberations of the Fed (point (b), above) would impair that independence. So I think that is going too far.
But independence is not the same thing as unaccountable. The Fed makes (and loses) profits on its regular trading, and has put a tremendous amount of resource at risk in response to the financial crisis. It seems to me that there should be no objection to a clear, audited accounting of its transactions. Having the GAO perform such an audit strikes me as simply good governance.
One potential objection is that these audits might inadvertently disclose the data of private financial firms in ways that are harmful. For example, the Fed has traditionally not disclosed who is borrowing from its discount window so as not to start a “run” on these institutions. In the course of audits, the GAO would necessarily come across the information on these kinds of transactions. But doing the audit does not mean that there must be public disclosure of these data. GAO could conduct its audit and brief Congressional overseers in closed session.
It may be that the idea of a Fed audit is being driven solely by frustration over the financial crisis and the extraordinary range of government intervention. It may require fine-tuning so as not to harm the conduct of monetary policy. But is should not be dismissed out of hand.