Leave the Fed Alone!

by Neil H. Buchanan and Michael Dorf (cross-posted on The Huffington Post)

The early success of the Bernie Sanders presidential campaign surprised nearly everyone. His unapologetically liberal agenda lit a fire in the early Democratic primaries and caucuses, appealing in particular to young people and liberals.

We are not young, but we are unapologetically liberal. The calls by Senator Sanders to combat economic inequality, to reduce the role of big money in politics, and to raise the minimum wage certainly resonate with us. We also applaud the unrelenting attention he has paid to Wall Street's excesses. Even if Hillary Clinton becomes the nominee, as looks increasingly likely, the Sanders campaign will have had a major impact on American politics.

That impact is almost entirely positive. In one respect, however, the Sanders campaign has been dead wrong. We strongly disagree with his calls to "audit the Fed." As the Clinton campaign absorbs and co-opts the Sanders message, it should ignore these calls.

The Federal Reserve is imperfect, but it remains an institution that progressives need, especially when the rest of the government has been almost completely neutered by conservative forces. Fed independence should be protected, not eroded. At most, Senator Sanders and others make a case to mend the Fed, not end the Fed or, what amounts to the same thing, audit it.

Senator Sanders argues that "Wall Street is still out of control," primarily because the Fed "has been hijacked by the very bankers it regulates." He points to troubling conflicts of interest, and we endorse his call to have all voting members of the Fed be chosen by the President and confirmed by the Senate. (Currently, five of the twelve voting members are essentially chosen by bankers.) Sanders also wisely criticizes the Fed's recent decision to raise interest rates in a still-weak economy.

But Senator Sanders makes a fateful error when he writes that we should "require the Government Accountability Office to conduct a full and independent audit of the Fed each and every year." This seemingly innocuous idea would threaten the independence that has allowed the Fed to ignore calls by conservatives in Congress and on Wall Street to adopt even more restrictive monetary policies.

Indeed, economic libertarian Senator Rand Paul has been channeling fringe-right rage at the Fed for years, threatening to put an end to the Fed's policy independence because of his belief that the Fed takes actions that please people like Bernie Sanders.

"Auditing" the Fed would be a thinly veiled attempt to intimidate Fed policy makers, giving congressional committees partisan leverage. Fed audits would be little more than show trials reminiscent of the never-ending Benghazi hearings.

Sanders also seems to err in arguing that "[b]anking industry executives must no longer be allowed to serve on the Fed's boards." We do not trust bankers any more than Senator Sanders does, but the Fed regulates banking; it would be foolish not to include bankers' voices in discussions about banking regulations.

Sanders argues that "[b]oard positions should instead include representatives from all walks of life -- including labor, consumers, homeowners, urban residents, farmers and small businesses." But couldn't the Fed be overly influenced by any of those groups? If the answer is that no one industry would capture the Fed with this diverse set of interests represented, then why would we not allow bankers some representation, so long as they no longer dominate the proceedings?

Even with its currently compromised structure, the Fed has done its job well. In the aftermath of the Great Recession, the Fed's political insulation allowed it to take measures that were essential to prevent a reprise of the Great Depression.

Unfortunately, threats to our economy recur. Some arise from market forces. Others, like congressional Republicans' continual threats to refuse to pay the nation's bills by raising the debt ceiling, come from politics. Whatever their source, serious financial crises require bold action that only an independent Fed can provide.

Postscripts from Mike:

1) Frequent readers of this blog may recall that the argument presented here condenses some points made in a draft law review article that Neil and I have written and which he summarized here. After appropriate revisions, the article will appear in the Cornell Law Review in the fall.

2) Regular readers will also note that our tone above is a bit more formal op-ed-speak than the conversational style Neil and I usually adopt. That was deliberate, because we wrote this piece for a somewhat different audience. We have reproduced it verbatim.

3) We say above that it "looks increasingly likely" that Hillary Clinton will be the nominee. Although the piece went live on HuffPo the day after the Sanders come-from-behind victory in Michigan, we posted it a day earlier. (The HuffPo politics blog is moderated, so it takes about a day between posting and publication.) In light of Tuesday's result, we would have said "likely" rather than "increasingly likely." The likelihood of a Clinton nomination, as judged by prediction markets, ticked down about a point or two after Michigan, but continues to hover between 85 and 90 percent.