Auditing the Fed

Good evening, dear readers.  We are going to devote the next several articles to money, or more specifically, monetary policy.  We’re looking at the the history of money and its relation to policy; and we’re having a guest writer contribute a few articles.  For now, however, allow me to tantalize you with a brief critique of a recent issue surrounding the biggest government-sanctioned monopoly: the Federal Reserve.

As a result of the recession, as invariably happens whenever something big goes wrong, Congress has for months been looking around, forming committees to decide which part of the appropriate systems failed.  It was the same story with the Great Depression, with Exxon Valdez, and even with the fairly recent widespread discoveries of athlete steroid abuse.  For the disaster du jour, however, several in Congress have Ben Bernanke and the Federal Reserve in their crosshairs.  According to a CNN article posted today, this is the result of a manifestation of populist distrust for large institutions.  While I share Congress’ distaste of the Federal Reserve and Bernanke’s buffoonery over the last 18 months, any action taken to bring the powers of the Fed under Congress itself would be a step in the entirely wrong direction.  The last thing we need running monetary policy is a gang of 500 lawyers.  For all the representation they claim to give to the disenfranchised and the crusades on which they constantly embark to promote fairness in all things, the history of Congress’ more “progressive” legislation has shown that they ultimately centralize, not decentralize, market power.  This tends to lead to political, corporate, and financial monoliths that are far more formidable than would naturally occur in a free market system. 

What CNN understates in their article is that there has always been a group of economists and statesmen who have realized the threat that central banks pose to the countries in which they operate.  They mention Ron Paul’s efforts, but his are just the latest and most prominent efforts of a movement that goes all the way back to Andrew Jackson, Thomas Jefferson, and probably earlier.  For Jackson’s part, he saw that the construction of a monopoly brought about by decree rather than sound business practices to which all federal funds were entrusted was a recipe for disaster.  Granted, the charter for the Second Bank of the United States (the first being having been put together by Alexander Hamilton and dismantled in 1811) did not grant it the same powers the Fed enjoys today, but the concept of one body wielding that kind of influence over the money supply and credit conditions and the threats it poses to the economy have not changed in 200 years.

I don’t think anyone has ever heard a politician say publicly, “I am in favor of monopolies.”  On the contrary: one hears, “Big companies are only in it for themselves.”; “Greedy monopolists are destroying this country.”; or “Big business won’t let the little guy compete.”  This may surprise many, but there is some truth in those arguments (if one can call them that), though not in the way that those who typically blurt out such things intend.  Monopolies, if created from shrewd business practices and meeting market demands, do not pose a threat.  They have proven themselves best capable at doing what it is they do, and so are best situated to service their respective markets.  The constant threat of newcomers besting them at their game will keep the monopoly running efficiently, and the consumer wins in every case.  If created by government mandate, however, as the Post Office, Amtrak, and the Fed are, there is no threat of competition and so no incentive to be run well.

Amtrak and the Post Office are such financial jokes I will not address them here.  Tax payer liability aside, if one chooses not to expose oneself to their incompetence in product or service, that option is available.  The Federal Reserve, however, affects every single person who uses the American dollar, and must be taken more seriously.  I am not saying that the way the Fed is run is necessarily a threat.  Their inner workings have less impact on the American people than their product: the dollar.  In a very compact nutshell, the Fed controls the interest rate and therefore controls the price and supply of money.  What that means is that the needs and ambitions of the banks are secondary to where the Fed’s Board of Governors wants the economy to go.  If I, a banker, want to loan money at a certain price to another bank, the rate at which I may do that is decided by the government.  Even if I am a very strong bank that can afford to pass on economies of scale to my customers in the form of low rates, too bad: the government’s economic plans come first. 

This would be fine if the government enjoyed omniscience.  It does not, evidenced in glaringly bright light by the feckless stumbling we have seen during the recession that shows as much skill and appreciation for the gravity of its actions as a toddler playing with a loaded shotgun.  The Fed is fallible, but so is Congress.  Equally monopolistic and bureaucratic, congressmen largely lack the experience in economics to effectively dictate policy, a shortcoming supposed to be addressed by the Fed itself.  The problem here is that Congress is upset with their outsourcing choice and is taking them to task in the form of audits.  That assumes, however, that Congress knows what to look for, and I’ve never met a lawyer with a better grasp of economics than an economist.  Unless those audits are redundantly conducted by private sector accounting or financial firms with limited connection to anyone in either Congress or the Federal Reserve, I have little hope any progress will be made.  Furthermore, unless those audits result in the DECENTRALIZATION of the Fed’s powers, the return of some autonomy to the financial system or just more than one organization, what we will see is the emergence of something like what will come out of the health care bill: more government programs run by lawyers with little oversight and less equipped to make informed decisions than the body they replaced.

The reason there are three branches of the government is to ensure a system with checks and balances.  Every eighth grader outside of the California public school system learns that in civics, but we must remember what that means.  It means that if one branch oversteps its bounds as defined by the Constitution there are two others to rein it in.  The Fed, a single entity, has no such check on its influence outside of Congress, which, as stated before, is really not equipped to understand what it is they are supposed to oversee.  Given the enormous impact every one of the Fed’s decisions has, it should at the very least be subject to regular audits by industry professionals and have to come to agreements with redundant agencies in all decisions.  This is far from the ideal, but it would be a start.

One final thought: in the CNN article mentioned above it was reported that Representative Mel Watt of North Carolina urged restraint in the audits sought by Ron Paul and the like.  He is quoted:  "I recognize the Fed currently has no political capital. Everyone would like to beat up on the Fed and call them the bad guys," Watt said. "If we make this decision on a political basis, I know what the result will be."  News flash, Mel: that’s our money they’re playing around with and doling out by the truckload.  We deserve, no, we are OWED, a full and regular accounting of all decisions associated with it, performed by professionals every bit as knowledgeable in the Fed’s game as its Board of Governors.

Thank you for reading.  To read the CNN article referenced in this post, visit http://money.cnn.com/2009/11/23/news/economy/Bernanke_confirmation/index.htm?cnn=yes