Ron Paul’s signature Audit the Fed legislation finally passed the House; on July 25, the House bill was passed 327 to 98. But the chances of a comprehensive audit of monetary policy — including the specifics of the 2008 bailouts — remain distant.
Why? Well, the Fed doesn’t seem to want the sunshine. Critics including the current Fed regime claim that monetary policy transparency would politicise the Fed and compromise its independence, and allow public sentiment to interfere with what they believe should be a process left to experts dispassionately interpreting the economic data. Although the St. Louis Fed makes economic data widely available, monetary policy is determined behind closed doors, and transactions are carried out in secret.
We fully accept the need for transparency and accountability, but it is a well-established fact that an independent central bank will provide better outcomes.
When the Fed talks about independence, what they’re really talking about is secrecy. What the GAO cannot audit is monetary policy. It would not be able to look at agreements and operations with foreign central banks, and governments, and other banks, transactions made under the direction of the FOMC [Federal Open Market Committee], and discussions or communications between the board and the Federal Reserve system relating to all those items. And why this is important is because of what happened 4 years ago. It’s estimated that the amount of money that went in and out of the Fed overseas is $15 trillion. How did we get into this situation where Congress has nothing to say about bailing out all these banks?
What I am struggling to understand is why the Fed is so keen to not disclose the inner workings of monetary policy even in retrospect. How can we judge the success of monetary policy operations without the raw facts? How can we have an informed debate about what the Fed does unless we know exactly what the Fed does? Why should only insiders be privy to this information? Surely the more we know, the better debate economists and the wider society will be able to have about Fed policy?
There are plenty of critics of Bernanke and the Fed, including both those who believe the Fed should do more, and those who believe the Fed should do less. But it seems very difficult to appraise the Fed’s monetary policy operations unless we can look at every aspect of its policy. If Bernanke and the FOMC are confident that their decisions have been the right ones, why can they not at least disclose the full extent of monetary policy and explain their decisions? If they are making the right decisions, they should at least have the confidence to try and explain them.
All that the current state of secrecy does is encourage conspiracy theories. What is the FOMC trying to hide? Are they making decisions that they think would prove unpopular or inexplicable? Are they ashamed of their previous decisions or decision-making frameworks? Are they concerned the decision making process will make them look bad? Are they bailing out well-connected insiders at the expense of the wider society?
We can’t have a real debate about policy unless we have access to all the data about decisions. Those who believe the Fed’s monetary policy has worked should welcome transparency just as much as those who believe the Fed’s monetary policy has not worked. If the Fed’s actions have been beneficial, then transparency will shine kindly on it. If not, then transparency will help us have a better debate about the road forward.