Fed Independence: Too Important to Verify

David Boaz has a good post on the economists petitioning against an audit of the Fed on the grounds that its independence from politics is so precious. David concludes:

The Fed can be independent and unaccountable and undemocratic, or it can be subject to the political whims of elected officials; neither is a very attractive prospect.

I don’t see the choice as quite so binary. There are degrees of independence, accountability, and politicization. One reason to want an audit of the Fed is to establish whether or not it has actually been acting with sufficient independence. The question is already in the air. To attempt to impede an inquiry into the question by stressing the high value of independence is obviously to beg the question. Those who prize independence, if they really do, ought to be all the more keen on an inquiry. The importance of Congress asserting the authority to inquire is that, otherwise, the Fed can use the ideal of independence as cover for what may be in fact extremely political decisions.

There is a big difference between mundane countercyclical central banking and the liberal use of emergency powers. The distributive consequences of the Fed response to the financial crisis are enormous, and I don’t think it’s unreasonable to demand  a justification for the fact or the details of the response. Was there really an emergency that called for the Fed’s action? There weren’t WMD in Iraq. Maybe the financial crisis wasn’t going to blow up the entire economy.

The question of which firms got how much of what kind of transfer through the Fed’s excercise of discretion is inherently political, not in the sense of “partisan,” but in the sense that the Fed was picking winners and losers. I want an account of why these decisions were made the way they were.

Is the worry that no inquiry or audit could be designed that would not devolve into delegitimizing populist point-scoring or policy-warping political armtwisting? I suspect a main worry is that the Fed’s use of discretion was not independent of who in the Fed system knew whom on Wall Street, of who had what kind of pull, etc. And revealing this, even in a sober and responsible manner, would expose the Fed’s failure to act with the sort of impartiality and objectivity at the heart of any useful notion of independence. Of course, the art of central banking is the art of telling lies so that they will come true. Telling the truth about the Fed may create expectations of future partiality that will hinder the central banker’s ability to manipulate expectations in a theoretically ideal way. So the theorists band together to defend the Fed’s right to lie, or at least to stay mute when citizens are owed some justification, about its suspected partiality in the use of emergency discretion. To make this kind of defense of the importance of independence is really to defend the economic importance of maintaining the perception of independence. But this is to assume the legitimacy of useful lies, an assumption that cannot be granted merely on the basis of the self-asserted authority of “experts.”

The attitude of many macro and monetary economists about the operation of the Fed reminds me more than a little bit of the attitude of neocons about defense and foreign policy. Something with the flavor of: “You people are too stupid to understand the real existential threats out there–to understand how we, the big boys, are keeping you safe. You should be grateful, but we don’t ask for gratitude. We’re just asking you to shut up and believe what we, The Serious People, tell you to believe. Or else.”

I have to admit that this doesn’t sit well with my liberal sensibility.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center

15 thoughts

  1. Your statement that “[o]f course, the art of central banking is the art of telling lies so that they will come true” is remarkably accurate, even profound. It's also true of the President. Indeed, there's room for a general theory of modern executive power that focuses on the way in which the state's executives self-consciously manage expectations.

  2. Liz – New York – University of Rochester grad with a BA in history. Attending law school at Syracuse University. Politics, fitness, Calvin and Hobbes, dudes.
    Lizzaroni says:

    I'm not sure if you're asking for details or are genuinely unaware of the bill proposed in the House, so I'll link to it just in case. Apologies ahead of time if you're already aware!http://www.govtrack.us/congress/bill.xpd?bill=h

  3. I wasn't being facetious at all! Thanks for this pointer. A quick quote: 2/26/2009–Introduced.Federal Reserve Transparency Act of 2009 – Repeals the authority of the Comptroller General to carry out an onsite examination of an open insured bank or bank holding company only if the appropriate federal regulatory agency has consented in writing. (Retains the authority of the Comptroller General to audit a federal agency.)Directs the Comptroller General to complete, before the end of 2010, an audit of the Board of Governors of the Federal Reserve System and of the federal reserve banks, followed by a detailed report to Congress. Two observations: First, this bill reduces the scope of federal oversight JUST as banks and other federally regulated corporations are failing in major scandal; Bernie Madoff, Sanford, et al, are of such recent memory. For this alone — “less oversight, not more” — the bill should be rejected. Second – what EXACTLY does “audit” mean in this context? The full text of the bill is no more revealing. And as the books of the US Federal Reserve are already public, what questions is an audit supposed to answer? Is there any fraud? Are the Fed's reporting systems adequate to meet the laws that govern their legal obligations to the Congress? Is this an Integrated Audit as conducted by the PCAOB? If so, what laws and regulations should the Fed's conduct be compared with? Sorry. This stinks of cool sounding political rhetoric with no substance.

  4. You need to go into the larger text of the United States Code and compare it to other similar level audits. Ron Paul is like a legislative surgeon, slicing the code precisely in the way it must be done to overthrow an institution. They don't call him Dr. No for nothing.Will THANK YOU SO MUCH FOR WRITING THIS POST!I love you in all the ways a man can love a man, except the way a fool would think.Just one comment”Telling the truth about the Fed may create expectations of future partiality that will hinder the central banker’s ability to manipulate expectations in a theoretically ideal way”The brilliance of Paul's attack on the fed here is that he recognizes this truth and that if you deny the Fed the right to lie and start to challenge it's credibility of independence the whole institution begins to crumble.I imagine the future goes like this:”Our so called independent bank isn't so independent! They've lost their powers! No one trusts them to do the right thing! This is bad!””But we can't let Congress be in charge! They're a bunch of idiots and this is so bad, we can't let the fed continue.”(Enter The gold Bugs) “We had this system here, this 'gold standard', that we've had for 10,000 years before the bankers and the politicians and whomever got involved. It has about 8 million advantages over the current system and is impartial. Let's just go back to that, since it worked!”The Mises institution Libertarians probably believe that they'll be the saviors in this story, and that they'll swoop in with their Austrian economics and gold bling and everything will be great again. I encourage them in their effort if this is the case, and honestly hope they're successful. I'm always pleased when any libertarian group managed to succeed at anything, even something so anarchically atrocious (or awesome?) like destroying monetary policy as an effective means of government control. It's crazy things like this or seasteading and so on that make the libertarian party so much fun.

  5. teageegeepea – If you're willing to do a little legwork you can probably find out who I really am, and then be disappointed when you find I'm nobody.
    TGGP says:

    A reply to Will is at Modeled Behavior.It's crazy things like this or seasteading and so on that make the libertarian party so much fun.The Seasteaders and LVMIers will have nothing to do with you partyarchs!

  6. The political party is garbage. In fact, one of the first things any 'real' libertarian does is denounce it. Some go so far as to say the political system itself is suspect! I mean party here in the general sense. We are the party of individualism after all, it's only natural that it fractures and breaks apart in a hundred ways.

  7. Will,I'm reminded of my policy towards girlfriends and their pasts: Don't Ask Questions You Don't Want Answered.What happens if we crack open the Fed's books and they're everything we've feared? How will Washington react to the revelation that the Fed has been run, at least in part, for the benefit of well-connected financiers?Will we get better or worse monetary policy? I'd say that all the available evidence indicate we'd be much worse off were congress to blast the central bank with a dose of righteous wrath and “oversight.”Then again, as with girlfriends, one doesn't want to be palling around with the town floozy unawares.You point out that this isn't necessarily a binary choice, and I'm not sure I agree- but even if, arguendo, we accept the proposition, isn't the question “how much inflation are you willing to trade for an extra unit of bank cleanliness.”

  8. Part of the trouble here is that many if not most of those calling for an audit of the Fed are nearly screaming it, and seem to have arrived at that position not through good-faith reasoning but instead through ideology and conspiracy theory.Compare it to the global warming situation. So many say they want to learn the science, but when it comes down to it, they don't. They just want to play “gotcha”! and they don't obey ordinary rules of reason or fair play. Scientists and observers of science are thus very reluctant to engage them.You make a reasonable case, but you're in bad company.

  9. “…and seem to have arrived at that position not through good-faith reasoning but instead through ideology and conspiracy theory.”By this standard, every political position ought to be suspect. Everyone reaches positions via their ideology, since everyone has some mental model of social and political cause and effect. and of what's good and bad. Ideologies themselves may be more or less reasonable and accurate, and arrived at for good or bad reasons, but the idea that someone can come to political positions through some sort of nonideological “good-faith reasoning” (or “science,” or “prudence” if you want the conservative version) is a dangerous, self-flattering fantasy.

  10. Considering that the bailout of AIG was mostly a bailout for Paulson's friends at Goldman Sachs, more than one audit should be demanded.

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