The Real Danger of Congress Controlling the Fed

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This past Tuesday, Richard Shelby, a republican senator from Alabama, introduced a draft bill to reform the Federal Reserve, a controversial topic across the entire political spectrum. While calls for further oversight of the Federal Reserve system are well intended, there comes real risk by expanding the control of politicians over the day to day and long term powers of the Federal Reserve.

Richard Shelby (R-AL), Source: Chip Somodevilla/Getty Images

For many libertarians and an increasing number of republicans and democrats, "Audit the Fed" is a battle cry aimed at the gluttonous and controversial bailouts seen during the previous financial crisis. The bailout remains a symbol of the cronyism defining some of the Fed decisions over the prior decades, and given the overall performance of the US economy, many question the validity of quantitative easing as a smart monetary policy. Regardless, I am not here to debate these issues. What I want to emphasize is chairwoman Yellen's argument that by increasing congress' control of the Fed, we risk putting a relatively independent Fed under the influence of contemporary partisan politics.

The current draft of Shelby's bill is rather toothless, and some of its reforms are beneficial, such as a GAO study for regulatory capture from Fed policies and oversight. In other words, the study would make sure that Fed officials who carry out regulatory oversight do not get too close to the companies they regulate. Moving beyond that, and you begin to enter the realm of bitter and short sighted politics.

Some portions of the bill already foreshadow this, such as making the New York Fed bank governor a Senate approved position. The Federal Reserve developed largely independent of political influence, an important factor to ensure that the economy cannot be 'cooked' by a majority party. Putting the Fed at the whim of the executive or legislative branch risks future economic crisis at the benefit of boosting current economic performance for votes and political support.

I am far from an expert on monetary policy and banking, but I think everyone agrees that giving congress control over the Fed is a horrible decision. Giving the same people known for shutting down the government, stalling debt agreements until the very last minute, and for having no capacity to negotiate with their peers creates a recipe for monetary disaster.