By Josh Barro
Even though the audit doesn’t directly constrain the Fed’s power -- or abolish it, as Paul would really like to do -- the Fed has been resistant because it sees an audit as undermining its independence from Congress. The key question is, how independent do we want the Fed to be?
The point of central bank independence is to allow the bank to make good policy decisions that politicians might object to. In the early 1980s, this meant keeping interest rates high in order to bring down inflation, despite businesses and politicians who would have liked cheaper borrowing in order to encourage more investment in the short term.
While the common worry is politicians demanding inappropriately loose monetary policy, today we have the opposite problem: politicians, including Paul, demanding that the Fed tighten when it ought to be loosening more. Unfortunately, Ben Bernanke and the Fed governors have not been willing to stand up to these voices; they have failed even to meet the Fed's 2 percent inflation target, let alone to raise it, or to adopt a policy like nominal GDP targeting, which would call for higher inflation when it is needed (like today).
On one hand, I wonder what good an independent Fed is when it won't use its independence to undertake unpopular but correct policy. On the other hand, I worry that a Fed more closely overseen by Congress would have allowed even more disinflation over the last few years.
But it doesn't have to be the case that Congress is a voice for bad monetary policy. After Ben Bernanke, the most blame for the Fed's insufficient action belongs with liberal politicians. While conservatives in Washington have demanded hard-money policies that would drive unemployment even higher and GDP growth lower, liberals have been nearly silent on monetary policy.
Looser money and higher inflation (again, not forever, but in our current circumstances) would be good for the economy as a whole, but it would be especially good for the unemployed and the indebted, constituencies that are disproportionately Democratic. It should have fallen to Democrats to counter Republican pressure for hard money, but all the way up to President Obama, they have not done so. So, even if Bernanke had wanted to loosen more aggressively, he would have lacked political cover for doing so.
I expect more Congressional oversight of the Fed to simply mean more opportunities for hard money advocates to use it as a punching bag. That political pressure might mean tighter money and even worse monetary policy. But if liberal members of Congress -- or conservatives who have been reading Ramesh Ponnuru and David Beckworth -- started insisting that the Fed has been too tight, some more Congressional meddling might be a good thing.