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Congressman Ron Paul (R-TX) is attracting a lot of attention for his proposal to audit the Federal Reserve bank, the independent financial powerhouse that creates and regulates our money.

In other words, as he wrote in Forbes recently, Paul is ‘Fed up’ with the complete lack of transparency.

From Dr. Paul’s op-ed:

The Federal Reserve’s recent and unprecedented actions in the realm of monetary policy have provoked a backlash among the American people. Trillions of dollars worth of loans and guarantees have been provided to Wall Street firms, while Main Street Americans suffocate under harsh taxation, the prospect of higher debt levels and increasing inflation. These events have awakened many Americans to problems with the Fed’s loose monetary policy, the bubbles it has created in the past and the potential hyperinflation it might cause in the future.

One of the fallacies of modern economics is the idea that a central bank is required in order to keep inflation low and promote economic growth. In reality, it is the central bank’s monetary policy that causes inflation and depresses economic growth. Inflation is an increase in the supply of money, which in our day and age is directly caused or initiated by central banks. All other things being equal, inflation results in a rise in prices. A so-called "mild" rate of inflation of 3% per year leads to a 56% rise in prices over a 15-year period. Even a "low" rate of inflation of 2% per year leads to a 35% rise over that same period. How is that conducive to long-term growth?

A common misconception is that the Fed is completely independent of political pressures. While the Fed has far too much authority to make agreements with foreign governments and central banks, or create temporary liquidity facilities, the governors and–more important–the chairman, are appointed by the president.

"In essence, the bill requires an audit of the Fed’s activity which shall be made available to Congress," wrote Glenn Greenwald a couple weeks ago. "What possible arguments exist against this bill? Who opposes an audit of the Fed’s activities and why?"

As if to answer Greenwald’s question, days later Forbes published an opinion contrary to Paul’s, wrapped in a seemingly reasonable argument. Consider this, by Thomas F. Cooley:

Extraordinary times require extraordinary actions. Nowhere is that more apparent than in the bold policy moves undertaken by the Federal Reserve over the past two years. The financial crisis forced the Fed to be aggressive and creative in its attempts to provide liquidity to credit markets that had frozen up. These were necessary steps, and mostly applauded.

But the very boldness of its actions has put the independence of the Fed at risk. Congress is now clamoring to audit the Fed, and some of the policy proposals currently under discussion at the Federal Reserve will only increase the threat to its independence.

Before we deconstruct these issues, let’s focus on why it is important to have an independent central bank. The answer is quite obvious. An independent central bank can focus on monetary policies for the long term–that is, policies targeting low and stable inflation and a monetary climate that promotes long-term economic growth. Political cycles, alas, are considerably shorter. Without independence, the political cycle would subject the central bank to political pressures that, in turn, would impart an inflationary bias to monetary policy.

Paul’s bill, H.R. 1207, has 165 co-sponsors. Its fate is currently in the hands of the House Financial Services Committee’s 71 members. Almost all the committee’s Republicans have co-sponsored the bill and two Democrats have joined their numbers.

What are your thoughts on this bill? And why do you think there is an apparent partisan divide on a matter that essentially boils down to keeping our Congress informed?

Raw Story | Stephen C. Webster | Monday, May 18, 2009