In the debate over the Fed audit bill, one question I've had is what it is would be audited that isn't already. So I learned something today from Prof. Michael Woodford of Columbia.

It is important to remember that the GAO already has the authority to audit the Fed, and does, except that the bill giving the GAO this authority in 1978 specifically excluded certain aspects of the Fed�s activities from GAO audits � essentially, decisions about monetary policy. The only purpose of the new bill is therefore to decrease the Fed�s independence with regard to monetary policy decisions.

To verify that, I dug up a Congressional Research Service report from 2005:

The Federal Banking Agency Audit Act (P.L. 95-320) was enacted in 1978 to enhance congressional oversight responsibilities. The law gave the General Accounting Office (GAO; now the Government Accountability Office) the authority to audit the Board of Governors, the Reserve Banks and branches. Such audits are limited, however, as GAO is prohibited from auditing monetary policy operations, foreign transactions, and the FOMC operations. Congressional oversight on these matters is exercised through the requirement for reports and through semi-annual monetary policy hearings.

Here's the Fed's 2008 audits, and the last page shows the audits done by GAO.

Do you think the Congress should have the GAO audit monetary policy, rather than having this done in Humphrey-Hawkins testimony? Some conservatives do. Professor Woodford points out the dangers:

The dangers are especially great at a moment like the present one, when the prospect of large government deficits for years to come could easily make short-sighted decisions to use monetary policy to facilitate the financing of those deficits all too tempting. It is ironic that many of the proponents of reining in the Fed claim that their concern is preventing the Fed from further weakening the value of the currency, when the opposite would almost certainly be the consequence of their bill if passed.

Labels: economics, Federal Reserve, money