Congress has so far sensibly put this off limits. “Audit” has a different meaning in the context of the GAO than in everyday usage. It means examine, investigate, evaluate and, often, criticize. It’s not just crunching numbers. The GAO usually undertakes studies at the request of someone in Congress. This suggests that the GAO could be used to influence or intimidate the Fed through selective investigations, which would involve access to internal Fed documents and interviews with policymakers. The Fed might be pressured to finance government deficits or to adopt an “undue focus on the short term,” Vice Chairman Donald Kohn testified before Congress on July 9. Historically, similar pressures have caused other central banks to unleash inflationary torrents of money, Kohn said.
This is not inevitable, but even the impression that the Fed’s “independence” is compromised could perversely undermine confidence in the dollar, leading to higher market interest rates or a rapid fall in the dollar’s foreign exchange value. Massive projected government budget deficits compound the psychological damage. Similar objections apply to Dodd’s proposal to end the Fed’s power to examine and regulate financial institutions. If this crisis teaches anything, it is that the Fed needs to know more — not less — about large financial institutions.
The Fed isn’t infallible. Its mistakes contributed to the crisis. Its present low-interest-rate policy poses dangers of fostering inflation or new “asset bubbles.” But the congressional Fed-bashing poses greater dangers. Ironically, the destructive remedies being peddled are part of “financial reform” legislation. If this is “reform,” we’re better off without it.