GAO audit of the Fed would represent a giant step–backward by Joseph Lazzaro, BloggingStocks - Posted Dec 14th 2009 12:15PM
The financial services reform process is likely to yield many public policy improvements, but one dimension that Congress should not act on concerns the U.S. Federal Reserve. One reform effort would authorize the General Accountability Office (GAO) to audit the Federal Reserve. The initiative, though well-intentioned, would represent a regression.

One hallmark of the United States is that it has an independent central bank. The Fed’s dual mandate is price stability and full employment. Moreover, the Fed’s ability to protect the value of money over time is one major reason (but not the only reason) the dollar is the world’s reserve currency.

Much of the current criticism surrounding the Fed is rooted in the argument that it was the Fed’s unwillingness to raise interest rates during the housing bubble, and its delay in reviewing the portfolio risk of key financial institutions, that helped perpetuate the bubble, which then burst, resulting in the financial crisis. This a superficial analysis of the very worst sort. Fed policy was not the primary factor in low long-term interest rates — the recirculation of surplus dollars (foreign savings) back to the U.S., particularly from China, helped keep real, long-term U.S. interest rates low. That’s the same reason they’re still comparatively low today, despite trillion-dollar U.S. budget deficits.

Further, the notion that the Fed was the only party responsible for absurd mortgages ignores the mortgage broker, appraiser, real estate agent, mortgage packager, securitizer and rating agency parties involved that also bear blame. And don’t forget about the borrower: true, many vulnerable Americans were almost swindled into believing that their home could serve as a permanent, withdrawal-only ATM, but there were millions of sophisticated, educated Americans who believed the same. That speaks to the power of financial marketing and cultural norms.

Finally, a GAO audit of the Fed would represent a Rubicon for the United States. It would make the Fed vulnerable to short-term political considerations — something that is inherently antithetical to effective monetary policy and that would hurt the Fed’s ability to protect the value of money over time.