The governors of the Federal Reserve are in a panic deeper than the ones they supposedly are protecting us from. This week, a few of the financial wizards at the Fed came out to tell the American public why they are against an audit of the Federal Reserve’s monetary policy decisions—and why you should be too.
Dallas Fed Chief Richard Fisher said on Monday that the Fed is already “audited out the wazoo.” He wasn’t, of course, referring to the kind of audits that proponents of the “Audit the Fed” bills (S. 264/H.R. 24) actually want—audits of the board’s monetary policy decisions. Rather, he was likely referring to the annual audits of the bank’s financial statements, which are conducted by the General Accountability Office. Philadelphia Fed Chief Charles Plosser went out of his way to slam the bill on Monday, too.
Fed Governor Jerome J. Powell, speaking Monday at Catholic University in Washingon this week, went further, saying that Senator Rand Paul’s “Audit the Fed” bill is merely a “stepping stone towards abolishing the Fed.” Powell added: “There is nothing other than literally having TV cameras in the Fed board room that would be advanced in terms of transparency.”
Powell is also concerned that if the bill passes, Congress and the GAO would be able to insert themselves into the Fed’s monetary policy decisions, thus compromising the Fed’s beloved independence and making it vulnerable to political meddling.
But this is a sheer smokescreen, critics point out.
“If you look at the language of the bill there is nothing in there that gives Congress any new authority over monetary policy,” said Norman Kirk Singleton, vice president of policy for Campaign for Liberty, who attended Powell’s lecture. “It just says there will be transparency. And the Fed’s independent decision-making is actually protected by time…it’s not like a real-time audit.”
That means no TVs in the Fed’s boardroom.
Singleton added that many supporters of the bill, which now has 31 cosponsors in the Senate, explicitly reject the idea of abolishing the Fed.
Additionally, critics such as Heritage Foundation’s Norbert Michel point out that the Fed’s freedom from political pressure is straight hooey, as it has enjoyed a close relationship with the U.S. Treasury in the era of Ben Bernanke. What kind of “independence” from politics is that?
David Stockman, Ronald Reagan’s director of he Office for Budget and Management, believes that the exact opposite is true, that the Fed has been all too willing to throw its weight around on Capitol Hill. In a recent column, he characterizes Bernanke’s lobbying of Congress in the wake of the financial crisis this way: “Indeed, it was Bernanke and his Wall Street sidekick, Hank Paulson, who went up to Capitol Hill and put a gun to their heads. It was these demagogues who scared the ‘politicians’ witless with a phony alarm that Great Depression 2.0 was just around the corner unless the Fed opened the monetary spigots, and Congress added $700 billion of TARP on top.”
It’s true that some of the Fed’s fiercest critics want to see it go completely, and they blame it for perpetuating a boom and bust cycle.
The Austrian School of Economics, for instance, emphasizes the knowledge problem. Mises Institute scholar Mark Thornton explains that when the Fed lowers the interest rate below where the market would set it, this inappropriately sends signals to entrepreneurs to invest, to engage in more lending, and even in new technological processes and business plans. “Ultimately, all of those plans can not have enough resources for all of them to be completed in a way that all of these entrepreneurs achieve their goals,” he said. The only way to correct this imbalance is for companies to eventually to sell off assets, restructure, go bankrupt, or otherwise free up resources.
Powell, asked about the cycle of boom and bust, replied: “I guess I would really look that question this way: What would life be like without the Fed?” He added that before 1914, when the Fed was created, “there were very severe depressions—depressions that looked a lot more like the Great Depression.”
For instance, he said the reduction in economic output during the current crisis was only 4 percent, versus 25 percent reduction during the Great Depression. “That kind of thing happened a lot in the 19th century,” Powell said. “You had these hard stops of credit. The banking system would fail. There would be a run on the banks.”
Thornton notes that these kinds of things did happen in the era before the Fed, but he argues that they were usually quick. In a 1920 depression, for example, he said output of some industrial production, such as steel, went down by more than 20 percent. “But we were out of that depression by some time in 1921,” he said.
Further, Thornton argues that even before the Fed, the United States didn’t have a free market in banking. “We did have the national banking acts, which created a regulated monetary pyramid where deposits in the big New York City banks could be pyramided on,” he said. It was “federally regulated banking” that “was almost designed to create panics.”
“Because if people took money out of the New York City Bank in any noticeable amount that would force contractions in regional banks, and in the small local banks, and so you would have these periodic panics,” Thornton said.
Powell’s second point was that the Fed has done a “good and improving job” at keeping price inflation down for more than 30 years.
Thornton argues that’s due to an “economic revolution”—computers, digital communications, the downfall of communism, the opening of Eastern Europe, China, and India and their subsequent contributions to output—not Fed policy.