(Kitco News) – “Audit the Fed” is back in the spotlight, with the U.S. Senate voting against a bill to do an audit on the Federal Reserve’s assets. The last Fed chairman points out the bill might not actually be about auditing the central bank at all.

Former Chairman Ben Bernanke is not too happy about it, either.

On Tuesday, the Senate voted not to pass the Federal Reserve Transparency Act of 2015 – widely known as the “Audit the Fed” bill – which surfaced last November by republican presidential candidate Rand Paul, son of former congressman Ron Paul, who first brought about the idea in 2009.

“Unfortunately, this approach raises serious concerns about Fed independence and the integrity of the process for making monetary policy,” said Bernanke, Fed chair from 2006 to 2014, in a Brookings Institute blog post Monday morning.

He added one might think the bill “would have something to do with auditing the Fed, in the conventional sense of reviewing the institution’s financial assets and liabilities, records, and operations. You’d be wrong.” 

According to Bernanke, the central bank is already thoroughly audited by an independent inspector general and by an outside accounting firm — currently, Deloitte and Touche.

“[T]he resulting financial reports are made public online,” he added, noting that the Government Accountability Office (GAO), which does in-depth reviews and analyses of government activities, has done about 70 reviews of Fed operations since the 2008 financial crisis.

The former Fed chair, now turned advisor for Washington-based think tank Brookings Institute, argued that too much political intervention in monetary policy decisions will hurt the economy.

“The principal effect of the bill would be to make meeting-by-meeting monetary policy decisions subject to congressional review and, potentially, congressional pressure,” he said.

In other words, the bill, if passed, would allow the GAO to view all materials and transcripts related to Federal Open Market Committee meetings at any time, and provide recommendations on monetary policy and potentially “individual FOMC interest-rate decisions.”

“The risk is that GAO reviews and recommendations concerning individual monetary policy decisions would provide a vehicle for members of Congress to apply political pressure on the Fed,” he continued.

Another issue that arises, according to Bernanke, is the potential for FOMC discussions and materials to be compromised given that “short-term confidentiality could never be assured.”

“I know from first-hand experience that the FOMC sets monetary policy with the best technical information available and without any consideration of politics or partisanship. I am also confident that political interventions in monetary policy decisions would not lead to better results,” he argued. Bernanke is not against congressional oversight, but noted that it comes with “complex tradeoffs.”

“Congress is not well-suited to make monetary policy decisions, itself, because of the technical and time-sensitive nature of those decisions.  Moreover, both historical experience and formal studies…have shown that monetary policy achieves better results when central bankers are allowed to focus on the longer-term interests of the economy, free of short-term political considerations,” he said.

Congress’ role, according to Bernanke, should remain to provide the central bank with guidelines – for instance, maximize employment and maintain stable prices – but should not be too involved in the decisions made to reach those goals.

“In turn, the Fed must regularly report and explain its decisions to Congress and the public, and in particular it must demonstrate that it is meeting its congressional mandate,” he said, adding that the Fed already communicates a lot with the public through minutes, press conferences, congressional hearings and so on.

“The Fed should continue to strive to improve its transparency and accountability, and in particular to ensure that Congress has all the information it needs to fulfill its oversight responsibilities.  However, this goal is not best achieved by overturning longstanding practice and effectively inserting Congress and the GAO into monetary policy decisions, calling into question the Fed’s independence.”

By Sarah Benali of Kitco News; sbenali@kitco.com
Follow me on Twitter @SdBenali