03/18/2010 05:12 am ET Updated May 25, 2011

Why the "Audit the Fed" Movement Is Dead Wrong

From Bloomberg:

For U.S. Representative Ron Paul, the ninth time may be the charm.

After fighting for decades to increase scrutiny of the Federal Reserve or abolish it, the Texas Republican's proposal requiring audits of the central bank's interest-rate decisions is getting traction.

The long-shot 2008 presidential candidate whose anti-tax, anti-government politics struck a chord with a swath of voters is again channeling public frustration with big government, bailouts and rising federal debt. And as Paul trains his sights on his favorite villain, the Fed, many in Congress are listening.

This is a classic example of Congress demonstrating it is filled with idiots on both sides of the aisle.

First, all of the Fed's financial information is already online. If you want to find out about the Fed's overall position, click on the above line. In addition, the Fed has a financial audit every year:

The Board of Governors orders an annual external audit of the financial statements of the Board and the Reserve Banks. The current independent auditor is Deloitte and Touche. Each Reserve Bank publishes its audited financial statements, and the Board of Governors publishes the audited combined Reserve Bank financial statements and the Board's financial statements in its annual report to Congress. The Reserve Banks and the Board comply voluntarily with the internal control requirements of the Sarbanes-Oxley Act. The external auditors also perform an evaluation of internal controls over financial reporting.

So -- we already have an audit every year. Why do we need another one?

There are two answers to that question. The first is downright scary:

the Texas Republican's proposal requiring audits of the central bank's interest-rate decisions is getting traction.

The absolute last thing we need is for anyone to second guess the Fed's interest rate decisions. That would make the country's interest rates the whim of politicians. What would happen is easy to predict. Any attempt to raise rates would be stopped cold because someone would object. They would argue "that will hurt one of my constituents." And we'd be left with low rates until inflation destroyed the economy.

The second is people want "transparency" for all the Fed's transactions. This would also be a mistake of epic proportions. Currently -- and for the entire history of the Federal Reserve -- it has engaged in "open market operations." In other words, it has purchased various securities at various times in order to implement monetary policy. This is what all central banks do to carry out their mandate. And again -- the Fed has done this since they were formed; it is standard procedure. Making these trades transparent would tell all of Wall Street exactly what security the Fed is buying. Congratulations -- you have driven up the cost of performing monetary policy. Brilliant.

The audit the Fed crowd has gotten completely out of hand. If their proposals are implemented the US economy will be crippled to the point of economic deadlock. If you thought the economic fallout in 2008 was extreme -- you ain't seen nothin' yet.