Last week, U.S. Senator Rand Paul signaled his intention to bring back up one of his father’s failed pet legislative issues: auditing the Federal Reserve System (the Fed).
Paul may attach the latest version of his Audit the Fed legislation to the next debt ceiling increase, which may be before Congress as early as March.
Is Paul’s idea for auditing the Fed really necessary?
Paul Doesn’t Want an Audit; He Wants Greater Policy Oversight
To be frank, the Fed’s actions over the past several years with the Quantitative Easing (QE) program scare many Americans.
Paul is capitalizing on these fears, but he is being careless with his definitions. He doesn’t want an audit of the Fed, which is already fully audited by the federal government — he wants greater policy oversight.
Paul’s carelessness is probably due to a lack of understanding of the power structure of the Fed, the reasons for creating the Fed, and the sheer amount of publicly available information which is analyzed by thousands of professional economists (both private and government) each week, as well as capitalizing on current fears to politicize the Federal Reserve System.
Who Holds the Power Over the Monetary System?
The U.S. Constitution gives Congress broad powers over the monetary system of the United States, primarily in Article I, Sections 8 and 10:
Congress shall have power…
To borrow money on the credit of the United States;
To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;
To provide for the punishment of counterfeiting the securities and current coin of the United States –Article I, Section 8
No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility. — Article I, Section 10
A large part of the argument against the Federal Reserve System is the belief that Congress does not have the authority to delegate its power and responsibilities.
Prior to 1935, the Supreme Court actively maintained the Marshall Court’s opinion that Congress could not delegate its legislative powers, but could, in fact, delegate other powers and rights.
Since 1935, however, the Supreme Court has not ruled against any delegation of Congress to an administrative agency, shifting the court’s view to a much broader standard.
The Federal Reserve Act of 1913 passed both chambers of Congress with overwhelming majorities (287-85; 54-34) in response to a series of financial panics.
By the Great Depression, the Fed assumed its current form and function with additional legislation passed in the 1920s and 1930s.
Congress delegated these powers to the Federal Reserve System with a three-fold mandate:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” — 12 U.S. Code § 225a
This is an essential distinction to make. Too often critics assume that the Fed started as a central bank and then later usurped the powers of trying to micro-manage the economy. However, the reality is that the Fed always had these powers.
Even though Congress delegated powers to the Federal Reserve, Congress can take them back at any time. This is something the last three chairs of the Fed have all acknowledged on multiple occasions.
Too often, critics portray the leadership at the Fed as a rouge group refusing to even acknowledge Congress’ authority over them; this is far from the truth:
Both Greenspan and Bernanke drove home the point that U.S. Rep. Ron Paul (R-Texas) was not wanting more transparency, but more policy oversight with his audit proposal.
Even so, both chairs acknowledged that Congress was well within its rights to require any oversight it so chooses, even if politically irresponsible.
Yellen goes a step further and presses the issue of why an “audit” of the Fed is a poor idea in her December 2014 press conference:
To understand Yellen’s reasons, it is critical to understand the historical reasons for the design of the Fed.
What this means is that Congress has the right and responsibility to manage and oversee the monetary system of the United States, Congress has delegated this responsibility to the Federal Reserve System, but Congress can reassert authority, oversight, and control at any time.
Why is the Federal Reserve Set Up This Way?
While Congress has the authority to reassert its monetary authority, it’s probably not a good idea.
Simply put, Congress did a really poor job of managing the monetary system — even under the gold standard.
From 1789 to 1933, while the United States was on the gold standard and without any form of banking insurance, there was a major banking panic, recession, or depression averaging every 4 years.
The first economic crisis in American history created food shortages — even the Founding Fathers couldn’t get it right.
The only president to totally eliminate the national debt (with Congress’ help) wound up train-wrecking the economy by causing a spectacular economic contraction and depression.
If the gold standard is the magical answer to economic woes, why was there so much financial chaos while America was on it?
Dr. Kelton addresses the myths of the gold standard and Bretton Woods’ system, and how our modern monetary system should not be judged by the same rules and theories.
Because the rules aren’t the same, Dr. Kelton argues that the Fed should more aggressively pursue its mandate of maximum employment, while maintaining its current policies of low interest rates and monetary growth.
What is good for the economy is not always politically expedient, and what is politically expedient is not always good for the economy.
Hundreds of thousands of people and businesses lost their deposits, with no recourse for recovering the lost assets.
Since the Federal Reserve assumed its current form, and off the gold standard, there has been no major banking panics, and the time between recessions and depressions increased to almost 7 years. The severity of the financial crises significantly lessened both in impact and duration.
A significant part of the Fed’s successful intervention in the economy comes from its ability to make decisions independent of political expediency; what is good for the economy is not always politically expedient, and what is politically expedient is not always good for the economy.
What Information is Already Public?
Whether Rand Paul likes to admit it or not, the average American has more information about the Fed’s operations than they have about their own local bank.
Each week, the Fed releases complete financial reports, including balance sheets, open-market operations, and foreign currency exchanges.
In addition, each of the Fed’s regional banks submits a complete annual report with consolidated accounting financial statements, auditor’s reports, information about the regional directors, and information about advisory groups. This information is released on a 6-month lag from the end of the fiscal year, which is very modest considering the trillions of dollars changing hands each year within the Federal Reserve System.
Private banks (like the ones we have checking and savings accounts at) are not required by law to disclose full balance sheets or transactions to the public, and when they do release audit or financial information, it is usually only once a year.
Who Interprets This Data?
Each week, thousands of economists — both private and government — pour over the data from the Fed to analyze trends and predict future economic events.
These economists are from all ideological and political ilks — from Austrian to Keynesian, from libertarian to communist.
On any given day, a survey of Internet news sources will uncover hundreds, if not thousands, of interpretations of this data.
What this means is that the Fed is already being scrutinized by credible auditing methods, and their data is analyzed by countless researchers. There is simply no chance of fraud or hidden transactions; it’s already completely transparent.
But there’s a catch…
The average American does not possess the educational training in economics to interpret this data for themselves; they have to rely on whatever analysts they find credible (or within their ideological or political ilk).
Likewise, if Rand Paul’s demands for greater policy oversight becomes law, doctoral-level economists from the Fed are going to have to try to explain extremely complex economic data to a group of politicians who are primarily trained as lawyers.
In turn, these same lawyers are going to be making policy oversight decisions within a field in which they are unqualified to make correct or rational judgments.
Making every decision at the Fed a platform for a political statement is a recipe for economic disaster. The Fed is already being audited; let’s leave it at that.