Auditing the Fed

As finance-reform regulation makes its way through Congress, one idea that is getting a lot of traction is the proposal to audit the Federal Reserve. Leaving the political implications aside - and the proposal is getting support from both the right and the left - what would an audit of the Fed look like?

The Fed's independence in setting monetary policy through the use of interest rates would not likely be affected by an audit, if only because there aren't a lot of hidden numbers at work there. When the Fed decides interest rates should be raised (or lowered), it raises them. It's the investments the Fed makes and its relationships with banks both here and abroad that would be examined by an audit - and eventually subject to some sort of political pressure.

The Government Accountability Office, which in most cases can investigate any area of the federal government, is now prohibited from looking into the Fed's monetary policy or the Fed's relationships with other banks. Calling for a Fed audit would change all that. One of the weapons the Fed has been using to stabilize the banking system is purchasing securities, whether from a faltering Bear Stearns or from the Treasury Department itself. The Fed handed out more than $2 trillion worth of emergency loans during the recent banking crisis, without any obligation to disclose in any great detail where that money went. This is primarily what an audit would focus on - if there were any shady deals going on, or money spent in ways that the public would consider misguided. It would also be an opportunity to asses what kind of return the Fed is getting for all its investments.