On February 22, 2016, Republican presidential candidate and brand-licensing billionaire Donald J. Trump released a statement (and tweeted) about the importance of auditing the Federal Reserve. It was one of Trump's scant few and rarely substantive verbal forays into monetary policy.
Trump largely echoes the sentiments of other major 2016 presidential candidates, who – with the notable exception of former Secretary of State Hillary Clinton – are calling for a Fed audit. The general consensus seems to be: the Federal Reserve is very powerful and shouldn't act in secret.
Even though it's not clear from his statements that Trump understands the ins-and-outs of Fed policy or economic theory, his position has a lot of support from the academic and political communities.
What It Means to Audit the Fed
It's a bit of a misnomer to suggest the Federal Reserve isn't audited. Most federal agencies are subject to audit by the Government Accountability Office (GAO), even the Federal Reserve. The Fed, however, has received a special exemption dating back to 1978 when it comes to monetary policy and transactions with foreign central banks. In other words, the Fed's balance sheet is audited loosely, but the vast majority of its most critical functions remain secretive.
A full Fed audit would, first of all, include immediate public minutes from Fed board meetings, which are now released every five years. It would also require disclosures about financial institutions and foreign governments from which the Fed buys assets, loans money to, bails out or otherwise contracts with to help perform monetary policy functions.
Trump Claim: The Fed is Creating a Bubble, Protecting Obama
In a wide-ranging October 2015 interview with The Hill, Donald Trump blasted the Federal Reserve for keeping interest rates too low in order to protect President Barack Obama from leaving the White House during a recession.
Vacillating between attacking the Dodd-Frank Wall Street Reform Act and Fed chairwoman Janet Yellen, Trump said those hurt most are traditional savers, whose accounts don't generate interest anymore, and investors, who will "get wiped out" down the road. He asserted the widely held belief that the Fed's easy-money policy was creating an asset bubble. Trump spun a similar tale for Bloomberg News earlier in the year.
Trump hasn't delved much deeper when it comes to Fed activity, but his statements are laced with informative assumptions. Among these are: the Fed is a political institution, not independent as it claims; the Fed distorts the economy when it pushes interest rates too low; and the Fed might function better with an audit.
Is Donald Trump Right?
Donald Trump has made plenty of bad economic policy arguments, but this doesn't seem to be one of them. It's impossible to know if Janet Yellen is a closet champion of Obama's political legacy, but the Fed is most certainly walking a dangerous line with its recent activity.
The returns on the Federal Reserve's controversial and extreme quantitative easing (QE) programs since 2008 have been much worse than intended. The economy never escaped its rut, banks that were too big to fail only grew larger and there are renewed concerns among many that asset prices are pushed past rational levels. The recovery between 2009 and 2015 was the slowest in U.S. history.
A basic understanding of capital economics demonstrates that artificially low interest rates will encourage long-term expansion away from savings and consumer goods, and into capital and durable goods. Low rates send a signal to businesses, entrepreneurs and investors that savings are plentiful, capital markets are liquid and future consumption will be very large.
When that turns out not to be the case, however, seemingly profitable ventures aren't so profitable anymore. Building projects fail to generate enough rents, and businesses fail to generate enough revenue. Asset prices collapse and, just as in 2008, the economy could crater. Even John Maynard Keynes understood that excessively low rates would cause an overstimulation of industrial activity and an overexertion in good times.
Also of concern is the Fed's cozy relationships with the financial industry's power players. Senator Bernie Sanders did force a one-time investigatory audit of the Fed in 2012, after which the GAO concluded the Fed lacked a workable system to deal with conflicts of interest -- perhaps after learning that the CEO of JPMorgan Chase & Co. (NYSE: JPM) served on the New York Fed's board of directors at the same time that JPMorgan received nearly $400 billion in special assistance from the Fed.
Likelihood of a Full Fed Audit
In any event, Donald Trump is far from the first or the loudest voice calling for a Fed audit. The modern political architect of today's "Audit the Fed" movement is former Texas congressman Ron Paul, who wrote a book called "End the Fed," and initially passed an Audit the Fed bill through the House of Representatives.
Trump is probably not even the loudest such advocate this election cycle. Texas senator Ted Cruz, a vocal Fed critic, was a co-signer of the Senate's version of Audit the Fed, which failed on January 12, 2016 after a 53-44 vote (60 votes are required for continuation). Senator Cruz missed the vote. Other presidential candidates to vote for the bill included Florida senator Marco Rubio and Vermont senator Bernie Sanders. The bill was authored by former candidate and Kentucky senator Rand Paul, who has assumed his father's mantle as the most serious antagonist of Fed power.
There have been dozens of efforts to fully audit the Fed since its inception in 1913, but none has succeeded. Momentum for auditing the Fed seems to increase during times of economic hardship. Since the United States failed to hit 3% economic growth for a record 10th consecutive year in 2015, there is plenty of evidence to suggest the Fed's programs haven't worked as intended.