Wednesday, February 24, 2010

Audit the Federal Reserve?

There is a new movement, led by Ron Paul, that seeks an audit of the Federal Reserve. This movement is driven by a mixture of conspirationists who think the Fed is controlling the world, people seeking to blame someone for the crisis and people who think that monetary policy should be more transparent.

William Barnett would in the latter category and thinks that the Fed makes decisions based on data of really poor quality and that an independent institution should be created to draw monetary statistics. Then both the public and the Fed would be better informed. But one could ask why the Fed would not do that itself. It is probably trying to get as good data as it can, yet one can see that there is an agency problem here: given that monetary policy is rather secretive in the US (there are no explicit targets, Board minutes are released with a significant delay, there is no official pronoucement on the current monetary stance) compared to other countries, hiding data allows to maintain this secrecy. There can be good arguments why you would want to conduct such untransparent policy, but by now counterarguments seem to prevail and the drive for an audit may just be a way to force the Fed to adopt policies that are common elsewhere.

But this is not the reason Barnett wants an independent monetary statistics agency. He thinks the Fed is basing its decisions on faulty data, and in particular that it should be using the Divisia index of money, a weighted index of various monetary aggregates that is supposed to better represent the transaction role of money. The current data definitions used internally would not survive a proper accounting audit, he claims. An audit would force the Fed to revise its data practices. Even better, putting data collection outside of the Fed would remove potential perverse incentives of having the institution that influences data by policy also collect it.

It needs to be clear that an audit would not change the policy independence of the Fed, and every serious economist agrees that politics should not interfere with monetary policy. An audit would be about accounting practices, not business decisions. In this respect, one should rather be worried about this newly found collaboration between the Fed and the Treasury Department, which gnaws at the very notion of independent central bank policy.

1 comment:

Matt Mazewski said...

I completely agree that an audit ought to preserve the autonomy of the central bank, but one must keep in mind that this is not the motivation driving those who are seeking one. The ultimate goal of Ron Paul is to do exactly what he says in the title of his latest book: "End the Fed."