Wednesday, May 5, 2010

"Audit the Fed!" Says... Bernie Sanders?

A comprehensive audit of the Federal Reserve System has been a long-standing campaign plank of Congressman Ron Paul.  So it comes as a bit of a surprise that Vermont "Independent" Bernie Sanders has sponsored an amendment to the finance reform bill to allow the Government Accountability Office to conduct extensive reviews of policy decisions.

I frankly believe both Ron Paul and Bernie Sanders are certified kooks, hailing from diametrically different ends of the political spectrum.  Paul's motivations come from a misguided belief that the Fed is a dangerous institution that plays a high-stakes game of poker with US monetary policy with no accountability.  Sanders however, is an avowed socialist.  Paul's quixotic goal is to one day return the US to the gold standard and the elimination or restriction on the use of fiat currency.  Sanders' goal is completely the opposite.  His goal is to use the the Fed's enormous financial clout to promote a sort of Eurozone in North America.

The Fed needs to remain an independent entity.  The deliberations of the Federal Open Market Committee need to remain off-limits to political meddling, and releasing the name of every institution receiving loans from the discount window would cast a chill of market confidence on those institutions' financial stability.  If the Fed loses market confidence in its ability to combat inflation, the government would be forced to pay higher interest rates demanded by borrowers as a hedge against inflation risk.  And, if markets and the public lose confidence in private sector banks borrowing at the discount window, banking panics that were once a thing of the past could become commonplace again.

One of the hallmarks of economic growth over the last three decades or so has been a stable, non-inflationary period of prosperity.  The recessions suffered in the period have been relatively brief and historically shallow.  We haven't seen the runaway inflation present in the 1970's, either.  What we've seen in money supply growth is analagous to a large river that neither suffers catastrophic flooding nor severe, longlasting droughts.

The Sanders and Paul amendments threaten that. Paul's goals are much more admirable than Sanders, but neither amendment is going to make our economic system perform better.  They'll have the opposite effect.

Extra Point: