Ever since its creation in 1913, the Federal Reserve has grappled with a daunting political contradiction. The Fed is charged with preventing the collapse of the banking and financial system, whose health is essential for the “real economy” of production and jobs. But financial bailouts usually occur when mistakes or misdeeds by bankers and investment professionals make them public pariahs. To do its job, then, the Fed seems to protect an unpopular, disgraced and undeserving group. We are now witnessing this contradiction in full bloom.

The Fed has become a congressional scapegoat for assorted economic frustrations: 10.2 percent unemployment; expensive rescues of fragile financial institutions; outsized Wall Street bonuses; and the crisis itself. The House Financial Services Committee recently voted to require the Government Accountability Office to “audit” the Fed’s monetary policy—its efforts to influence interest rates and credit conditions. In the Senate, Banking Committee Chairman Christopher Dodd has proposed stripping the Fed of all powers to regulate financial institutions.

The Fed backlash is bipartisan. Rep. Ron Paul, a Republican and libertarian, proposed the GAO audit, which he sees as a first step toward abolishing the Fed. Paul favors resurrecting the gold standard and combining it with private money. His views are long-standing, principled and wholly impractical. Dodd, of course, is a Democrat. Much Fed-bashing simply indulges Congress’ impulse to blame someone else for anything unpleasant.

Lost in this politically charged climate is the reality that the Fed, more than any other government agency, arguably stopped last fall’s financial panic from becoming a global depression. The Fed pumped out more than $1 trillion in new credit, created special lending programs to support faltering segments of the credit markets and rescued financial institutions, notably AIG, whose bankruptcy might have triggered a chain reaction of failures.

What’s also overlooked is that the Fed isn’t the super-secretive, unaccountable agency of political stereotype. In 2009, Fed officials have testified 32 times before congressional committees. The Fed makes detailed disclosures about its policies. After every meeting of the Federal Open Market Committee, it issues a statement explaining why it has, or hasn’t, changed its interest-rate target.

Contrary to conventional wisdom, the Fed’s activities are already widely audited. Deloitte & Touche examines the Fed’s financial statements, which are published. The GAO can audit many Fed activities, including its banking regulation and supervision of the payments system. What it’s barred from auditing is the conduct of monetary policy, including relations with foreign central banks such as the European Central Bank.

Congress has so far sensibly put this off-limits. “Audit” has a different meaning in the context of the GAO than in everyday usage. It means examine, investigate, evaluate and, often, criticize. It’s not just numbers crunching. The GAO usually undertakes studies at the request of someone in Congress. This suggests that the GAO could be used to influence or intimidate the Fed through selective investigations. The Fed might be pressured to finance government deficits or to adopt an “undue focus on the short term,” Vice Chairman Donald Kohn testified before Congress.

This is not inevitable, but even the impression that the Fed’s “independence” is compromised could perversely undermine confidence in the dollar, leading to higher market interest rates or a rapid fall in the dollar’s foreign exchange value. Similar objections apply to Dodd’s proposal to end the Fed’s power to examine and regulate financial institutions. If the present crisis teaches anything, it is that the Fed needs to know more—not less—about large financial institutions.

The Fed isn’t infallible. Its mistakes contributed to the crisis. But the congressional Fed-bashing poses greater dangers. If this is “financial reform,” we’re better off without it.

COMMENTARY