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Football season is in high gear, which means that chips, pretzels and dip are a weekend staple once more. But those goodies are just empty calories, and when Monday rolls around, you’re left wondering what happened to your diet. Of course, come kickoff the next weekend, it’s right back to snacks, and the downward cycle continues.
Unfortunately, a similar scenario is repeating itself in Washington.
This week, the Senate is poised to begin debate on a bill that would require the General Accountability Office, a creation of the U.S. Congress, to audit the Federal Reserve. On its face, this seems to be a logical means of oversight to ensure the Federal Reserve as a large financial institution is appropriately managed. Here’s the thing: The Federal Reserve is already audited through outside auditors retained by the Office of Inspector General and through other examinations by the GAO.
To date, no one has ever suggested these audits of the Federal Reserve as a financial institution were wanting in some material respect. Nor does the bill indicate the intended substance the new audit GAO is to perform. Indeed, it would be nearly impossible for the GAO to know how to respond if this bill were to become law.
If the Federal Reserve is already audited, why should the Senate consider another audit?
Some don’t like the direction of monetary policy, while others are unhappy with the means with which the Federal Reserve exercises its regulatory powers. The Audit the Fed bill would create a duplicative audit and empower the GAO to review and criticize the Federal Reserve’s monetary policy decisions.
Oddly, no record exists of anyone suggesting the GAO manifested any expertise in monetary policy. Nevertheless, if Congress doesn’t like the actions taken by the Federal Reserve, it can use the GAO as a means to create pressure on the Federal Reserve.
What does all this mean?
To break the fever of stagflation in the early 1980s, Federal Reserve Chairman Paul Volcker, with the full backing of President Regan, took the necessary but unpopular step of dramatically raising interest rates to break the back of soaring inflation. This caused short-term pain, but ultimately the economy came roaring back to life without the threat of inflation and high unemployment.
The most recent contrary example is Argentina—a country rich in resources and potential wealth. However the independence of the Argentinian central bank has been pierced, and it has been used by Argentina President Christina Fernández de Kirchner to achieve political ends. The result has been default, instability and high inflation.
In the post-World War II era, inflation in Argentina has averaged 200 percent. Even today, it hovers near 20 percent, the point where Paul Volcker swung into action.
Similar scenarios have even occurred in the business world. When the Public Company Accounting Oversight Board wanted to give auditors the ability to criticize the managers of a public company, ironically, some of the same proponents of the Audit the Fed bill viewed this as a form of interference that would be harmful to businesses and ultimately to the economy.
This effort was criticized and stopped because management has a fiduciary duty to the long-term health of a company and provide a return for shareholders. Creating a means of second guessing only empowers the trial bar and others with ulterior motives. With the Federal Reserve, the stakes are even higher.
Milton Friedman correctly recognized that stable monetary policy, devoid of political interference, will allow markets to operate efficiently and spur economic growth—that’s why the Fed’s monetary policy independence needs to be preserved.
Sure, beating up the Federal Reserve is fleetingly satisfying – just like that second bag of Fritos. But in both cases, the price is simply too high. Passing the Audit the Fed bill has the possibility of sending the United States down the road of Argentina. Let’s learn from another’s mistake and build upon the foundation of success that has served us well.