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07/18/2009

Audit the Fed, or End It?, by David Henderson

The Congressman I admire most, Ron Paul, is advocating that the Federal Reserve Bank be audited. Is this a good idea? I think there's one obvious plus and there are two less-obvious minuses.

The obvious plus is that an organization of bureaucrats that is used to not giving much information to Congress and to Americans in general would be required to open its books. Whenever a bureaucrat is humbled, all other things equal, that's a good thing.

Now, to the minuses. The first minus flows directly from the one plus. Much as some of us might enjoy seeing unelected bureaucrats squirm, the purpose seems to be, and the likely result would be, to make the Fed less independent. But a lot of research in the last 15 years or so, including work done by Alberto Alesina and Larry Summers [pdf.], finds that the more independent a central bank is, the lower is its inflation rate. So an ironic effect of auditing the Fed and reducing its independence could well be to raise the inflation rate.

The second minus is related to the first. The whole idea of a having one federal agency audit another typically excites mainly inside-the-Beltway people. Remember that Ron Paul will not be conducting the audit and that the "consumers" of the audit, Congress, are not 534 Ron Paul clones. It could not only lead to the first minus above, but could distract from discussion of more serious reforms such as ending the Fed.

One final point that is neither a plus nor a minus. The Fed, for all its secretiveness, is by no means the most secret government agency in Washington. I'm not talking about the obvious deep-cover organizations like the CIA or the National Security Agency. I'm talking about rank-and-file agencies like the Treasury Department, the EPA, the Department of Energy. Are they required to provide less information about their activities than the Fed is now required to provide? It's not obvious to me that they are.

Postscript: I enjoyed the interview that an anonymous (of course) interviewer with The Economist did with Ron Paul. My favorite line comes at the 10:24 point when they are discussing a world without the Fed.

The Economist: But who would control interest rates?
Ron Paul: The market. What's so strange about that?

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