The Paul Bill & The Fed’s Independence
Anil Kashyap and Frederic Mishkin lay the smackdown on the bill introduced by Rep. Ron Paul (R) that would authorize GAO audits of the Federal Reserve. A well-written and measured argument that doesn’t even have to fall back on the significant evidence that exists showing how important independence is to a central bank’s ability to control inflation and, to a lesser extent, promote economic growth.
Perhaps their most interesting point:
The Fed’s independence is critical to its credibility. During the financial crisis, this credibility allowed the Fed to take extraordinary action to prevent a possible depression without triggering inflation.
In other words, contrary to what Paul and his supporters are arguing, the Fed’s actions during the financial crisis might have resulted in worse outcomes if they had been subject to political oversight.
Something to think about before making any drastic changes to an institutional arrangement that has worked well for so many years, including as part of the successful effort by President Reagan to turn the nation’s economy around after the catastrophe that was the Carter administration.