Why we shouldn't audit the Federal Reserve

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why-the GAO-shouldnt-audit-the-fedU.S. Rep. Barney Frank's (D-Mass.) House Financial Services Committee has voted in favor of a proposal to have the Government Accountability Office audit the Federal Reserve, according to the Associated Press. But in my view, auditing the Fed is a thinly veiled first step toward wiping out the Fed, or at least diminishing it through political meddling. And since going back to a world without a properly functioning U.S. central bank is not a realistic option, Fed critics need to think carefully about how we can best regulate the financial markets before they start interfering with one of our most important regulatory institutions.

Before getting into why we shouldn't audit the Fed, a brief word on Rep. Frank. Last year, I appeared on a Boston-area TV program right after Frank. As I was sitting in the green room waiting to go on to the set, I was told I had to evacuate immediately. The reason? Frank wanted the green room for himself -- alone. When Frank slowly made his way onto the set, where I was sitting, he completely ignored me and made it clear he did not want to interact with anyone but the fellow interviewing him. Frank ended up taking up all but five minutes of my allotted time. To be fair, he had many interesting things to say.

Why is Frank supporting Rep. Ron Paul's (R-Tex.) proposal to audit the Fed ? According to the AP, Rep. Paul has the bipartisan support of more than 300 members of Congress for his proposal. Frank has been in Congress a long time; he realizes that if he includes the audit proposal in his bill, he can get its backers to support the part of the legislation he cares about -- which is a proposal to get banks to pay $150 billion in upfront fees into a bailout fund. For obvious reasons, banks oppose this idea.

Paul's proposal is very popular among Fed haters everywhere. You know them well -- their rants will fill the comments to this post. But it's a really bad idea, because the Fed needs to be independent of political interference in order to act in what it sees as the best interests of the U.S. economy and financial system. Auditing the Fed will provide its opponents in Congress with an ongoing mechanism to meddle with its operations.

And from what I have seen of Congressional inquiries into the financial meltdown, the members of Congress have much better insight into what it takes to win elections than into how to govern the U.S. financial system. Meanwhile, the Fed plays a crucial role in providing stability amidst the raucous ups and downs of capitalism.

Without an independent Fed, we would need some even better way to stabilize financial markets when they are gripped with the emotional extremes of fear and euphoria. If the supporters of auditing the Fed can propose such a better way, then by all means, let's analyze it and see whether it would really work.

Until then, I suggest that those who want to audit the Fed go for a five-mile run to blow off some steam.

Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter.

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