Anil Kashyap and Frederic Mishkin are worried that the Ron Paul proposal to audit the Fed will "cripple policy making":
The Fed Is Already Transparent, by Anil Kashyap and Frederic Mishkin: Under the banner of increasing Federal Reserve transparency, Congressman Ron Paul has sponsored a bill that would subject the Fed's monetary policies to an audit by the Government Accountability Office (GAO). The bill is a veiled attempt to undermine the Fed's independence. If it passes, it will cripple policy making...
Weakening the Fed's independence now might raise the risk of inflation, which would cause borrowing costs to rise and would lower prospects for a strong economic recovery. ...
Fortunately, Congress is considering an amendment to the bill that would prevent the negative consequences of the original Paul legislation. This amendment, put forward by Rep. Mel Watt (D., N.C.) would change the focus of the bill by instructing the GAO to audit the new lending facilities at the Federal Reserve that were authorized under the 13(3) "unusual and exigent circumstances" clause of the Federal Reserve Act. The 13(3) lending authority, which had not been used by the Fed since the Great Depression, was the basis for many of the most controversial decisions made during the crisis, including the rescue of AIG and the establishment of new lending facilities.
This audit would involve oversight of the operational integrity of these facilities' accounting, internal controls, and protection against losses. It would also disclose the borrowers from these facilities one year after the facilities are closed. The audit would produce new, important information that is not otherwise available and would play to the strengths of the GAO. And the amendment would exempt the Fed's normal monetary policy actions from the audit.
We strongly support an amendment of this type because it will increase the Fed's accountability without compromising its monetary independence. We also believe that the lag in disclosing the names of borrowers would enable Congress to have appropriate oversight over these facilities without compromising their effectiveness. Earlier disclosure would diminish the efficacy of these facilities because of the so-called stigma problem: If borrowing from emergency lending facilities is immediately made public, the markets would know that the borrowers might have financial difficulties, which would make it harder for the borrowers to operate.
No one can be fully comfortable with all the unprecedented actions that the Fed has taken to limit the damage from the financial crisis. We appreciate the frustration of the public and members of Congress who want a better understanding of what has happened. ... But the Paul bill, as originally written, won't help with these goals and will only stifle the recovery.
I think one of the problems the Fed is facing is that people do not feel like the Fed is operating on their behalf, they don't think that the Fed's actions are in their best interests, and they don't feel like they have any way to do much about it.
So how could we fix this? One way would be to have each party choose a candidate for Fed chair during presidential election years, and then have the public vote for the candidate of their choice at the same time they pick the president (but this seems likely to mimic the presidential outcome independent of the particular candidates). The Fed governors could all be elected in this way, and then serve their usual 14 year terms without the possibility of reelection. The hope is that this would give voters some sense of control over the process.
I don't think that proposal is all that good, but the point I am trying to make is that one of the Fed's most valuable attributes, its independence, also causes the public to feel as though it has very little say in how policy is conducted, and this leads to distrust of the Fed's motives and actions. Why should the fate of the entire economy be decided by twelve people who aren't accountable to anyone? If we can somehow get the public more vested in the process without sacrificing the Fed's independence, that would be helpful. But most of the ways that I can think of to implement accountability through the ballot box also undermine independence, and for me independence is an important attribute to preserve.