Fertilizer Markets and Finance

Ron Paul’s “Audit the Fed” bill passed the House of Representatives today by an overwhelming margin: 325-99. As Kate Nocera of Politico notes, the bill has come a long way from being one of Ron Paul’s lonely crusades to being a measure with broad bipartisan support.

Even though the audit doesn’t directly constrain the Fed’s power — or abolish it, as Paul would really like to do — the Fed has been resistant because it sees an audit as undermining its independence from Congress. The key question is, how independent do we want the Fed to be?

The point of central bank independence is to allow the bank to make good policy decisions that politicians might object to. In the early 1980s, this meant keeping interest rates high in order to bring down inflation, despite businesses and politicians who would have liked cheaper borrowing in order to encourage more investment in the short term.

While the common worry is politicians demanding inappropriately loose monetary policy, today we have the opposite problem: politicians, including Paul, demanding that the Fed tighten when it ought to be loosening more. Unfortunately, Ben Bernanke and the Fed governors have not been willing to stand up to these voices; they have failed even to meet the Fed’s 2 percent inflation target, let alone to raise it, or to adopt a policy like nominal GDP targeting, which would call for higher inflation when it is needed (like today).

http://www.bloomberg.com/news/2012-07-25/ron-paul-finally-reins-in-the-fed.html