Yesterday a reader of my blog sent me an email asking my opinion as to whether or not the Fed should be audited. As many of you know, people like Ron Paul are pushing for a Fed audit. My response to the email is below.
|It's a dumb idea being pushed by people who are completely ignorant of our monetary system.|
Here are several reasons why it is stupid.
1. One of the Fed's main monetary policy tools is the setting of interest rates. It does this by manipulating the level of reserves in the banking system. Any audit that would constrain the Fed's ability to add to reserves would serverly hamper its ability to conduct monetary policy and that would be bad for the economy.
2. Under a free floating non-convertible currency system such as the one we currently have there is never an issue of "solvency," and solvency, ostensibly, is what the audit woiuld seek to determine. A currency issuing nation and its central bank "spend" by crediting bank accounts and there is no constraint on the ability to do this because there is no "backing" for the currency as would be the case under a gold standard or fixed exchange rate. Conducting an audit for solvency in a monetary regime where there can never be a solvency issue is nonsensical.
3. Last but not least: The Fed is required by law to turn over all its profits to the U.S. Treasury. No business in America and probably no business in the entire world is under such a confiscatory directive. If the Fed were allowed to keep its profits in the form of retained earnings--as nearly all businesses do--then its capital over the past 96 years would have grown into the tens of trillions. The question of solvency would be moot.