Rep. Ron Paul's "Audit the Fed" bill has been back in the national conversation the past week with news of an amendment offered by North Carolina Rep. Mel Watt (D). The Ron Paul amendment would have the GAO audit Fed monetary policy decisions, including the recent expansion of the Fed balance sheet in the wake of the financial crisis meltdown. Rep. Watt's amendment essentially would essentially have the GAO audit just the ways the Fed has been lending money over the past 18 months by claiming special circumstance.
In today's Journal, Anil Kashyap and Frederic Mishkin argue that Rep. Paul's bill would be dangerous because it would overexpose the Fed and hurt independence. This argument has been the major one from Paul's critics all along. But they support Rep. Watt's amendment as a positive thing Congress can do to hold the Fed accountable. And I agree that it is a good compromise. Kashyap and Mishkin write:
Congress is considering an amendment to the bill that would prevent the negative consequences of the original Paul legislation. This amendment, put forward by Rep. Mel Watt (D., N.C.) would change the focus of the bill by instructing the GAO to audit the new lending facilities at the Federal Reserve that were authorized under the 13(3) "unusual and exigent circumstances" clause of the Federal Reserve Act. The 13(3) lending authority, which had not been used by the Fed since the Great Depression, was the basis for many of the most controversial decisions made during the crisis, including the rescue of AIG and the establishment of new lending facilities.
This audit would involve oversight of the operational integrity of these facilities' accounting, internal controls, and protection against losses. It would also disclose the borrowers from these facilities one year after the facilities are closed. The audit would produce new, important information that is not otherwise available and would play to the strengths of the GAO. And the amendment would exempt the Fed's normal monetary policy actions from the audit.
Now, I wrote back in July that I more or less supported the Ron Paul bill:
...does the proposed GAO audit of the Fed constitute a threat of its independence. The audit is not an attempt to control interest rates. The audit would not make monetary policy recommendations the Fed would be forced to follow. The audit would simply provide an outside perspective. Congress doesn't need a tool to intimidate the Fed into changing rates since the Fed isn't completely independent. Now, I'm not sure what Congress plans to do after the GAO audits the Fed, but if there is any debate here, it should be over the value of transparency itself.
I still disagree with Kashyap and Mishkin that the GAO audit would destroy independence. As they point out in their editorial, most of the monetary policy information is already public. And it is unlikely that a GAO opinion on monetary policy will shift the market much. The more important part of the bill—which is why I supported the Paul bill—is a review of where all the money the Fed has been lending is going.
The Fed has lent billions as a way of controlling interest rates and providing liquidity to the marketplace. They have not been upfront with where the money went, and it should be public information to keep the Fed accountable. Even if it is just a Congressional committee that sees an "eyes only" report.
Rep. Paul claims that the Watt amendment guts his bill, as my colleague Adam Summers noted last week. But if the issue is keeping the Fed accountable, then the sensible approach would be a bill that requires an audit of the "exigent circumstances" lending facilities. The Watt amendment might not be everything Rep. Paul wants, and it might need to be tweaked to get it just right, but the compromise path here would lead to the fastest approval of some necessary accountability checks on the Fed.