Francis Cianfrocca joins Ben Domenech for the Wednesday, August 19th edition of Coffee & Markets, a series of brief morning podcasts on politics and the marketplace.
This morning’s podcast focuses on Ron Paul’s call to “audit the Fed,” which has since been taken up by Republican Senator Jim DeMint. Our conversation this morning revolves around an interview with David Wessel of the Wall Street Journal at PBS. Wessel is economics editor for the WSJ, has shared two Pulitzer Prizes, and is writing a book about the financial crisis.
QUESTION: You talked on the NewsHour about how the Federal Reserve has, in essence, become the fourth branch of government. Many lawmakers say the central bank holds too much power and should be exposed to occasional audits by the GAO. Chairman Bernanke argues that the Fed is plenty open. Where do you fall in this debate?
DAVID WESSEL: I’m not in the business of favoring or opposing bills, but here are some facts. The Fed’s actions have revealed how much power it has, the power to create trillions of dollars in credit without getting anyone else’s OK and the power to lend massive sums when it deems it necessary (and to withhold such loans when it chooses.) It was the first responder to this financial conflagration; no one else had the ability.
That raises legitimate questions in a democracy, and that’s why Congress has been summoning Mr. Bernanke so often to explain what he did and why (and even publishing his e-mails.) In most capitalist democracies, however, the politicians have decided that they don’t want to have their hands on the interest-rate lever; they know that they have to face the voters frequently, and that will tempt them to juice the economy a little more now at the expense of more inflation later. So they’ve set up a central bank, insulated it somewhat from politics, and instructed it to raise interest rates even when it is unpopular to avoid unwelcome inflation.
Ron Paul, the Republican congressman from Texas, opposes that set up and is explicit about that. He’s the one pushing the bill to expand the Government Accountability Office’s power to audit the Fed. The GAO now audits much of what the Fed does — the loans to Bear Stearns, its bank regulatory activities, etc. But current law prevents the GAO from auditing interest-rate and other monetary policy decisions. That reflects the view that monetary policy makers need to be independent of politicians if they are to do their jobs. Mr. Bernanke says that if the GAO starts auditing monetary policy, it’ll inevitably lead to second-guessing the Fed and weakening its ability to do that part of its job.