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.

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National Journal
Catherine Hollander
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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.

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