Is Auditing the Fed a Good Idea?

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By Jacob Maslow

federal reserve facadeThe biggest complaint critics of the Federal Reserve have is that this quasi-governmental body lacks transparency. Consider the trillions of dollars worth of economic activities impacted by U.S. Federal Reserve policies both in the United States and outside of its borders. You would think that there should be some sort of public accountability mechanism. According to this argument, it would make sense that, given the huge amount of risks and economic distortions that bad U.S. Federal Reserve policies can effect, at the very least, some level of oversight is required.

The main argument against this criticism is that any kind of public accountability, whether in the form of regulatory accountability or political accountability, would render the U.S. Federal Reserve a political slave. The whole thinking is that the U.S. Federal Reserve should maintain a high level of discretion and secrecy so as to remain free of political meddling. The idea is that accountability necessarily translates to political meddling and political pressure. It is definitely a bad idea for politicians to stick their grubby fingers into the inner workings of the U.S. Federal Reserve and, to an extreme, pick winners and losers. However, the defenders of the Federal Reserve are engaging in a straw man argument. They are equating accountability with politics.

We can all agree that the political meddling in U.S. Federal Reserve decisions should not be allowed. However, we also agree that the U.S. Federal Reserve should not be allowed to operate with so much secrecy that we are completely in the dark as to the powerful economic effects that it unleashes. The current proposal by Sen. Rand Paul seems sensible on its face. There should be at least some sort of auditing mechanism for the U.S. Federal Reserve. It can’t be allowed to operate with full freedom despite the consequences of its bad decisions.

Auditing the Fed is crucial because the Fed has created $4.5 trillion worth of empty money buying bad mortgages. You might think that $4.5 trillion is not all that big considering the total debt volume of the United States. However, if you consider the effects of that $4.5 trillion, there are serious downsides to letting the U.S. Federal Reserve run unchecked.

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