Why Isn’t The Federal Reserve Audited?

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Senator Rand Paul’s ideas have been gaining traction, probably because he is much more pragmatic than his father, Ron Paul. Rand sees what each side wants in a negotiation and finds a suitable solution that all parties can agree on. His ideas for the framework of healthcare legislation would have passed the Senate if John McCain wouldn’t have changed his vote without telling anyone. He’s also had new ideas which have been put into action by the President. The latest one was his idea for the President to do an executive order to allow for small businesses to more easily join associations to buy healthcare insurance (just like large corporations) across state lines.

Audit The Fed Isn’t A Traditional Audit

With this context in the backdrop, let’s discuss the prospects of the Audit the Fed bill and the arguments for and against it. The most important aspect to understand is the Audit the Fed bill isn’t really an audit like you’d think of in business terms where a firm’s accounting is looked at. The Fed is already audited by an independent inspector general and an outside accounting firm. The Audit the Fed bill is about the Congress being able to look at the processes involved in the Fed’s decision making. The debate is about whether the Government Accountability Office should be able to look into the Fed’s activities.

Trump, The Republicans, & Some Democrats Support It

The two sides of the debate are Republicans led by Rand Paul and Thomas Massie, who support the efforts, and almost everyone at the Fed, who oppose the efforts. President Trump has also expressed support for the bill. The bill was passed by the House in 2012 and 2014, but was defeated in the Senate which was controlled by Democrats. The bill has also been approved by House and Senate committees. It’s somewhat surprising that it hasn’t passed because most Republicans and some Democrats support it. The bill had 10 Democratic cosponsors in the House last Congress. The Republican party platform in 2012 and 2016 supported auditing the Fed.

In the past few months, there hasn’t been any action on this bill. To be fair, there hasn’t been much action on anything. It’s tough to predict whether it will pass. The best description for this bill is to say, it has a very low probability of passing for a bill that is relatively popular. Just because a bill is supported by a majority in Congress doesn’t make it law if there’s no vote. Currently the Congress is preoccupied with healthcare legislation and tax policy. Considering the fact that most voters outside the Tea Party and libertarians don’t know about this bill even though the President tweeted about it, the odds of near term action are low.

Why The Fed Hates It

The biggest contingency that hates the Audit the Fed bill is the Federal Reserve itself. If the Fed supported it, the Democrats in Congress would probably change their minds since most are just going along with the ‘experts’ instead of deciding for themselves. The argument against this bill starts with the fact that the Fed already gets two audits every year. Fed officials are afraid the Congress will start to get involved in monetary policy. That could be a problem because the Congress is politicized. It would be bad if the Congress made the Fed cut rates prior to an election to swing the results in favor of the incumbent party. The Congress usually has a tough time passing a yearly budget. It isn’t a bastion of long term solutions. Congress also doesn’t have the technical skills necessary to make decisions on monetary policy in the midst of normal activities.

Besides the Fed being audited already, the Fed officials against this plan say the Fed is transparent already, so this bill isn’t needed. The GAO reviewed the emergency lending programs put in place during the financial crisis and the Fed’s governance structure. Congress already decided the Fed’s dual mandate (maximum employment & stable prices) and the Fed reports to it regularly.

Why Legislators Like It

The proponents of the bill think the Fed is fearmongering because the bill doesn’t give Congress the ability to set monetary policy. One Democratic Representative who supported the 2012 and 2014 efforts, but opposed the 2017 committee approval said the Fed should publish the policy transcripts 2 years after the meetings instead of 5 years. That’s a far stretch from the Congress getting any control over monetary policy.

The Fed’s exemption from traditional GAO is unique. The bill aims to relax these rules to allow the Congress to access more information to perform its oversight obligations. The audits done on the Fed don’t look at transactions made by the FOMC, transactions with foreign central banks or non-private international financing organizations, and other decision making discussions. The expansion of Congressional oversight through this bill could get the Congress access to this information.

Game Theory Of The Legislation

Let’s look at the goals of each side to understand the chess match which is taking place. The philosophy players such as Rand Paul have is to end the Fed because they view it as anti-capitalist. In a free market, there wouldn’t be a bank connected with the government deciding on the short term interest rates, setting regulations, and coordinating bailouts of financial institutions. The fact that capitalism is unstable is what makes it more stable. That means when companies fail, they don’t get saved. The fact that they can fail makes them unstable, but the fact that they know they can fail, makes them take less risk which brings stability. The Fed bringing ‘stability’ to the marketplace encourages banks to take more risk because they know they will be saved. The Fed needs to regulate them to limit the risk they take in this moral hazardous situation.

At the very least, capitalists want to limit the Fed by supporting a rules based approach to monetary policy which forces rates to change based on economic data. In this case, the Fed gets less leeway in making policy. The Audit the Fed bill is a Trojan Horse for more legislation to limit the Fed. Fed members know the goals of their critics, so they overreact to the Audit the Fed bill to limit its chance of passing. Technically, the Audit the Fed bill wouldn’t do much in terms of policy. The key for the libertarians is moving the proverbial ‘ball down the field.’ The Fed doesn’t want any restrictions, so they oppose the process.

The goal for the conservatives is for some ‘bombshell’ information to be given to the public in this audit to get the public to want more restrictions on the Fed. If the Fed doesn’t have anything to hide, it could favor the audit to show the conservatives overplayed their hand. The fact that the Fed opposes this bill means either they are hiding something or the members think that even if nothing meaningful is discovered, it will be a win for the conservatives.

Conclusion

On the micro side, this debate is about getting more details on how monetary policy is set and the Fed’s day to day actions. The difference between whether the Fed gives out transcripts after 2 years or 5 years is nothing. If the bill helps the Congress discover the Fed does some action that’s unknown, it’s a big deal. On the macro side, supporters and opponents of the Fed are battling it out in a long term debate on how monetary policy should be set. If the bill passes, it would be a small victory for Fed critics; if it doesn’t, the status quo remains.

Sources

“Audit the Fed” is not about auditing the Fed

http://reason.com/blog/2017/06/06/congress-may-finally-introduce-accountab

https://reason.com/blog/2017/01/04/new-audit-the-fed-bill-may-have-best-cha

http://www.reuters.com/article/us-usa-fed-congress/u-s-house-committee-approves-bill-to-increase-scrutiny-of-fed-idUSKBN16Z2GJ

http://money.cnn.com/2017/07/12/news/economy/yellen-posey-audit-the-fed/index.html

https://mises.org/library/how-rand-paul-can-free-americans-fed

https://www.federalreserve.gov/monetarypolicy/fomc_historical.htm

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