Tuesday, August 18, 2009

Audit the Fed?

I have made little secret the fact that I do not care for the Bernanke Fed. Although it appears that Bernanke is campaigning for re-appointment, his actions are consistent with those his predecessor used while President Bush was in office. Recall that government spending exploded under George Bush. Even though tax revenues increased federal expenditures increased by even more causing an increase in the deficit. The Fed accommodated by purchasing the Treasury bills used to finance the deficit resulting in driving down interest rates and keeping them down. The result was the boom in the mortgage market and the eventual bursting of the bubble. Then came the ill-fated stimulus programs under Bush and the TARP fiasco. Ignoring history which shows that stimulus programs always fail because consumers and businesses seek to pay down debt during recessions rather than increase spending, both Bush and Obama felt the political need to endorse such a program. There is little evidence that Obama’s stimulus has stimulated the economy. Rather it was used to bail out state governments.

In the meanwhile the Fed has continued to provide accommodative monetary policy. Now the Congress led by Ron Paul is seeking an audit of the Fed. They want to know who the Fed is lending to and how much. The Fed argues that such an audit would have an adverse impact on the borrowers as their clients and the market would react negatively to the information. Some back Paul’s bill because they are Fed conspiracy theorists and believe that the Fed is just helping to enrich a precious few. Others back Paul because they want more openness in government. So who is right – the Fed or Ron Paul?

Both. Revelation of the lending information will have an adverse market effect. However, that effect will be short-lived. Second, the congress should know what the Fed is doing. My proposal is for an annual audit to be conducted of the Fed and the information be given to the House and Senate banking committees in a closed door session. Much like the CIA reveals its operations to congress behind closed doors, so should the Fed.

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