Fed Independence: Too Important to Verify

David Boaz has a good post on the economists petitioning against an audit of the Fed on the grounds that its independence from politics is so precious. David concludes:

The Fed can be independent and unaccountable and undemocratic, or it can be subject to the political whims of elected officials; neither is a very attractive prospect.

I don't see the choice as quite so binary. There are degrees of independence, accountability, and politicization. One reason to want an audit of the Fed is to establish whether or not it has actually been acting with sufficient independence. The question is already in the air. To attempt to impede an inquiry into the question by stressing the high value of independence is obviously to beg the question. Those who prize independence, if they really do, ought to be all the more keen on an inquiry. The importance of Congress asserting the authority to inquire is that, otherwise, the Fed can use the ideal of independence as cover for what may be in fact extremely political decisions.

There is a big difference between mundane countercyclical central banking and the liberal use of emergency powers. The distributive consequences of the Fed response to the financial crisis are enormous, and I don't think it's unreasonable to demand  a justification for the fact or the details of the response. Was there really an emergency that called for the Fed's action? There weren't WMD in Iraq. Maybe the financial crisis wasn't going to blow up the entire economy.

The question of which firms got how much of what kind of transfer through the Fed's excercise of discretion is inherently political, not in the sense of “partisan,” but in the sense that the Fed was picking winners and losers. I want an account of why these decisions were made the way they were.

Is the worry that no inquiry or audit could be designed that would not devolve into delegitimizing populist point-scoring or policy-warping political armtwisting? I suspect a main worry is that the Fed's use of discretion was not independent of who in the Fed system knew whom on Wall Street, of who had what kind of pull, etc. And revealing this, even in a sober and responsible manner, would expose the Fed's failure to act with the sort of impartiality and objectivity at the heart of any useful notion of independence. Of course, the art of central banking is the art of telling lies so that they will come true. Telling the truth about the Fed may create expectations of future partiality that will hinder the central banker's ability to manipulate expectations in a theoretically ideal way. So the theorists band together to defend the Fed's right to lie, or at least to stay mute when citizens are owed some justification, about its suspected partiality in the use of emergency discretion. To make this kind of defense of the importance of independence is really to defend the economic importance of maintaining the perception of independence. But this is to assume the legitimacy of useful lies, an assumption that cannot be granted merely on the basis of the self-asserted authority of “experts.”

The attitude of many macro and monetary economists about the operation of the Fed reminds me more than a little bit of the attitude of neocons about defense and foreign policy. Something with the flavor of: “You people are too stupid to understand the real existential threats out there–to understand how we, the big boys, are keeping you safe. You should be grateful, but we don't ask for gratitude. We're just asking you to shut up and believe what we, The Serious People, tell you to believe. Or else.”

I have to admit that this doesn't sit well with my liberal sensibility.