The Federal Reserve has made damaging economic mistakes in the past. The Fed’s important role in our economy magnifies these mistakes and impacts our nation’s social welfare.
The Fed took unprecedented actions during the country’s latest severe economic downturn by bailing out large financial companies like AIG and infusing large sums of capital into the struggling economy. Now some members of Congress want to look deeper into these actions and see how they have, and will, affect our economy. Some members of Congress want to monitor the Fed with more scrutiny. Congress is calling for an audit.
The bursting of the housing bubble is viewed as an important driving force that lead to our nation’s current economic condition. Dr. Duy, an Economics professor at the University of Oregon, feels that the Fed failed to take seriously their regulatory responsibility in the realm of consumer mortgages.
To aid in the recovery process, the Federal Reserve purchased toxic mortgage-backed securities from struggling financial institutions. Buying these toxic mortgage-backed assets bailed out troubled financial institutions, eased the banking industry’s lending problem, and ensured that additional negative spillovers wouldn’t drastically impact the economy.
Dr. Tim Duy monitors the Fed and regularly comments on Fed activities on Tim Duy’s Fed Watch blog. When asked about whether or not Congress should initiate an audit, Dr. Duy points to the two different aspects of a Congressional audit. If a Congressional audit leads to questioning the rationale and direction of monetary policy, he believes it would likely lead to greater political pressure on the Fed.
“I think that auditing in the sense that interfering with monetary policy would be a poor decision because it would likely lead to disruptive policy. I’m less concerned with auditing, especially with lag, the emergency lending facilities.”
Political influence directed at the Fed can lead to higher inflation rates. Higher inflation rates negatively impact economic activity by inflating prices of consumer goods ranging from low priced products like food and clothing to high priced products like cars and houses.
If audit information is dispersed in a timely non-detrimental manner, Dr. Duy feels the Fed should be open about what actions took place and why those actions were deemed necessary.
“I think that trying to hide behind the veil of secrecy only leads to suspicion upon suspicion, that the cozy relationship between Wall Street and Washington is a detriment to the U.S. public as a whole.”
Dr. Duy believes the Fed should have gotten in front of this type of criticism a long time ago.