Why Rand Paul’s War Against the Fed Is a Terrible Idea

His bill sounds innocuous enough — but in this case, transparency could damage the economy.

Magnifying glass over building. 
National Journal
Catherine Hollander
Add to Briefcase
See more stories about...
Catherine Hollander
Oct. 31, 2013, 5 p.m.

Ben Bernanke is of­ten asked how well he sleeps at night. Usu­ally, the Fed­er­al Re­serve Board chief says he slum­bers just fine. “I need to be well res­ted,” he told law­makers last year. But the out­go­ing chair­man has de­scribed a re­cur­ring and ter­ri­fy­ing dream.

“The night­mare scen­ario I have is one in which some fu­ture Fed chair­man would de­cide to, say, to raise the fed­er­al-funds rate by 25 basis points, and some­body in this room would say, “˜I don’t like that de­cision; I want the GAO to go in and get all of the re­cords, get all of the tran­scripts, get all of the pre­par­at­ory ma­ter­i­als, and give us an in­de­pend­ent opin­ion wheth­er or not that was the right de­cision,’ “ Bernanke told the House Fin­an­cial Ser­vices Com­mit­tee.

Now Sen. Rand Paul is try­ing to make that night­mare a wak­ing one. The Ken­tucky Re­pub­lic­an, who has cri­ti­cized the cent­ral bank’s stim­u­lus pro­grams, has pledged to tie le­gis­la­tion au­thor­iz­ing an audit of the Fed­er­al Re­serve to the Sen­ate’s con­sid­er­a­tion of Janet Yel­len as Bernanke’s suc­cessor. In fact, he in­tends to place a hold on her nom­in­a­tion un­til he gets such a vote. That means the cent­ral bank is once again in for an un­com­fort­able dis­cus­sion of the (de)mer­its of trans­par­ency — and this time, it should be wor­ried.

Paul’s bill sounds in­noc­u­ous enough. It’s brief — 580 words of le­gis­lat­ive text, call­ing for an audit by the Gov­ern­ment Ac­count­ab­il­ity Of­fice and de­let­ing the words in cur­rent law that grant Fed poli­cy­mak­ing de­cisions im­munity from that kind of re­view. It’s identic­al to a bill pro­posed last year by his fath­er, then-Rep. Ron Paul, R-Texas, that Bernanke warned would have a “chilling ef­fect.” (The seni­or Paul’s le­gis­la­tion non­ethe­less passed the House with 89 Demo­crats on board, sug­gest­ing his son’s ef­fort should not be taken lightly.)

It’s not en­tirely clear what a GAO audit of the Fed would en­tail, be­cause the agency’s in­vest­ig­at­ors have nev­er done one like this, says Orice Wil­li­ams Brown, man­aging dir­ect­or of GAO’s Fin­an­cial Mar­kets and Com­munity In­vest­ment team. But the agency’s re­view of the Se­cur­it­ies and Ex­change Com­mis­sion’s 2002 se­lec­tion of board mem­bers of­fers clues: In­vest­ig­at­ors ex­amined thou­sands of in­tern­al doc­u­ments in­clud­ing plans, memos, and cor­res­pond­ence among com­mis­sion­ers, and con­duc­ted in­ter­views with them about their ac­tions. At the Fed, this could shut down ex­actly the kind of pro­tec­ted dia­logue ne­ces­sary to en­sure the best policy de­cisions. “You want the de­cisions to be un­hampered by the fear that some­body’s go­ing to look over your shoulder,” said Fed his­tor­i­an Al­lan Meltzer in 2010.

This is not be­cause Bernanke doesn’t want to deal with nosy law­makers or pesky in­vest­ig­at­ors. De­bates be­hind closed doors about mon­et­ary-policy ac­tions — which have in­creas­ingly seemed to in­volve art, rather than sci­ence, as the Fed ad­op­ted a num­ber of ex­per­i­ment­al meas­ures in the af­ter­math of the fin­an­cial crisis — are best when they flow freely, audit op­pon­ents say. And what little re­search there is on the ef­fect of in­ject­ing more trans­par­ency in­to that pro­cess sug­gests they’re right.

Be­fore 1993, the Fed re­cor­ded its meet­ings, but par­ti­cipants be­lieved the re­cord­ings and tran­scripts were des­troyed after aides fin­ished com­pil­ing meet­ing minutes. They were, in fact, not des­troyed. So, when the Fed de­cided in 1993 to be­gin re­leas­ing de­tailed meet­ing tran­scripts after a five-year lag and also pub­lished tran­scripts from pre-1993 meet­ings, it cre­ated an un­ex­pec­ted op­por­tun­ity to judge the ef­fects of trans­par­ency on poli­cy­makers’ be­ha­vi­or.

Amer­ic­an Uni­versity eco­nom­ist El­len Meade and Dav­id Stasav­age, a polit­ics pro­fess­or at New York Uni­versity, did just that, com­par­ing the pre- and post-1993 policy meet­ings; they found that mem­bers of the Fed­er­al Open Mar­ket Com­mit­tee were less likely to chal­lenge Chair­man Alan Green­span when they knew the dis­cus­sions would be made pub­lic. They were also less likely to switch from their open­ing po­s­i­tion, no mat­ter how the de­bate un­fol­ded. “After the tran­scripts were re­leased, you ended up with a lot of pre­pared speeches by FOMC mem­bers,” re­called Steph­en Oliner, who was a Fed eco­nom­ist dur­ing this time.

That’s not to say there’s noth­ing off the cuff in the later tran­scripts. But the ten­or changed, des­pite the five-year lag in the tran­scripts’ re­lease. An audit could mean an even short­er lag — and a more clammed-up FOMC.

But the scar­i­er pro­spect, in the Fed’s view, is the polit­ic­al pres­sure that’s ex­pec­ted to ac­com­pany ad­di­tion­al trans­par­ency. Former Vice Chair­man Alan Blinder de­scribed his fear to Na­tion­al Journ­al last year that a hos­tile Con­gress might sic GAO on the bank whenev­er it dis­agreed with its po­s­i­tion.

Rep. Brad Sher­man of Cali­for­nia, one of the House Demo­crats who voted for Ron Paul’s bill last year, says it’s un­fair to equate trans­par­ency with politi­ciz­a­tion. Nor would GAO, which doesn’t have any in­her­ent mon­et­ary-policy ex­pert­ise, have to weigh in on the policy choices the Fed made, he said. “I’m look­ing for facts,” Sher­man said. “I don’t need com­ment­ary.”

But he might find less to like in the res­ults of an open Fed. Meltzer has been a vo­cal op­pon­ent of the Fed’s bond-buy­ing pro­grams, but he still thinks it’s wrong to fo­cus on the in­tern­al de­lib­er­a­tions that pro­duced them. The Fed’s ac­tions ripple through the eco­nomy over time, and the im­pact isn’t al­ways im­me­di­ately ob­vi­ous. “We don’t know enough to be able to say, in the short term, wheth­er the de­cision that they made was right or wrong, or too much or too little,” he said. “So let’s try to get the pro­cess ex­cluded from the dis­cus­sion and put the em­phas­is on the out­come.”

Politi­cians have the op­por­tun­ity to do that when they con­firm Fed board mem­bers, ques­tion the Fed chief at twice-yearly hear­ings, or send fol­low-up ques­tions to the bank’s staffers. For now, they should stick with this re­gime — for the eco­nomy’s sake.

What We're Following See More »
AFRAID HE’S TAKING SUPPORT FROM CLINTON
Democrats Taking Aim at Gary Johnson
4 minutes ago
WHY WE CARE

"Democrats panicked by third-party candidates drawing support away from Hillary Clinton are ramping up their attacks against Gary Johnson and warning that a vote for a third party is a vote for Donald Trump. Liberal groups are passing around embarrassing videos of Johnson and running ads against him warning about his positions on issues like climate change that are important to young voters and independents."

Source:
RUSSIA DENIES
Dutch Investigators: MH17 Was Downed by Russian Launcher
7 minutes ago
THE LATEST

Russo-Western relations are getting thornier all the time. "Dutch-led criminal investigators said Wednesday they have solid evidence that a Malaysian jet was shot down by a Buk missile moved into eastern Ukraine from Russia. Wilbert Paulissen, head of the Central Crime Investigation department of the Dutch National Police, said communications intercepts showed that pro-Moscow rebels had called for deployment of the mobile surface-to-air weapon, and reported its arrival in rebel-controlled areas of eastern Ukraine." Russia, of course, is denying culpability.

Source:
FIRST DEMOCRAT ENDORSEMENT EVER
Arizona Republic Endorses Clinton
11 minutes ago
WHY WE CARE

In its roughly 125-year history, the Arizona Republic has never endorsed a Democratic candidate for president. Until now. "The 2016 Republican candidate is not conservative and he is not qualified," the editors write, as they throw their support to Hillary Clinton.

Source:
TO BE INCLUDED IN SEPARATE BILL
Deal on Flint Aid Likely to Avert Shutdown
15 minutes ago
WHY WE CARE

Speaker of the House Paul Ryan and House Minority Leader Nancy Pelosi have reached a deal which is likely to avert a government shutdown. The biggest impediment had been the GOP's refusal to include funding for Flint water system reconstruction in the continuing resolution, and this solution provides an alternative measure likely to appease both sides. The funding for Flint will be included in the Water Resources and Development Act as an amendment to the version passed by the House of Representatives, one which will be passed in the senate. It now appears likely that Congress will in fact be able to keep the government open.

Source:
GOP REFUSED VOTE ON FCC COMMISIONER
Reid Blocks Tech Bill Over “Broken Promise”
16 hours ago
THE DETAILS

Monday night's debate may have inspired some in Congress, as Senate Minority Leader has decided to take a stand of his own. Reid is declining to allow a vote on a "bipartisan bill that would bolster U.S. spectrum availability and the deployment of wireless broadband." Why? Because of a "broken promise" made a year ago by Republicans, who have refused to vote on confirmation for a Democratic commissioner on the Federal Communications Commission to a second term. Harry Reid then took it a step further, invoking another confirmation vote still outstanding, that of Supreme Court nominee Merrick Garland.

Source:
×