Tuesday, November 3, 2009

Should the Fed be audited?

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.



googleheim said...

We can imagine a congressional subcommittee by which the congress would control the Fed and the Treasury !

50 years of democrat subcommittee tyranny and 20 years of Republican't deconstructivism tyranny begs us not to allow congress to write law, execute law ( by usurping the president ), and determine law ( by usurping the judiciary ) as it does but now to also determine our currency, our interest rates, and our liquidity ?

Mike Sandifer said...

I think Ron Paul and his ilk mean well, but they are too ignorant to know how ignorant they are.

However, we also have to admit that monetary policy by the Fed has been horrible for a long, long time. Their targeting regime is a joke, the signals they often send to markets are confused, and they have inflation hawks sounding off during a period with the greatest deflationary pressures since the 30s. Add this experience with some of the pro-inflation policies of the 70s and you have a lack of confidence in the Fed, even among some in the know.

Add to this the general distrust in government that arose during the Bush years and the Fed's non-existent public relations operatiions (until recently) and you have a good recipe for the end of Fed indepedence.

Unfortunately, those who wish to bring this about will make things profoundly worse, and possibly for a very long time to come.

I hope reasonable changes in the structure of the reserve system and other fundamental changes that don't threaten its independence can hold off the pitchforks for now.

Dsylexic said...

as usual,ignorance is your forte.
the audit's purpose is to find out a)what sort of securities the fed purchased in a hurry and who were the beneficiaries.what was the rationale behind the prices paid for the junk securities for which tax payers are on the hook
b)secondly, the fed indulges in swaps and treaties with other central banks.that is clearly not mandated by the congress.even if it were a technicality,thre is no reason why it should be top secret.the fed wasnt created to deal with foreign central banks without supervision.

by pointing out stuff about reserves which the audit has nowhere mentioned,you bring up a strawman and proceed to slaughter it.wow