As part of the ongoing reconfiguring and reregulating of the American financial system, the House Financial Services Committee today will take up an amendment that seeks to audit Federal Reserve monetary policy. As so many things are backward in Congress, the vote today is actually a vote on a proposal to retain a ban on audits of Fed interest rate decisions. If it is voted down, then the Ron Paul bill to audit monetary policy could see the light of day.
The Paul bill has 300 cosponsors and clearly has struck a nerve in Congress. I'd go back to the fall of 2008 when Bernanke and Paulson shocked legislators during discussions over what the Fed could do to stabilize the markets and how much money the Fed could marshal to aid the situation. Bernanke stunned the group by saying $900 billion as this was the entire balance sheet of the Fed at that time.
This was the ultimate wakeup call to Congress that a fourth entity had control of the taxpayer’s money and could act on it without the approval of Congress. While the Fed and the Treasury acted quickly to stem the financial panic, the question remains: is there any section of the US constitution that provides this much financial power to such a small group of individuals? I don't think so and neither do 300 cosponsors of Paul's bill.
Now the question becomes what's worse, Congress involved in monetary policy decisions or a fourth, unelected branch of government usurping powers granted only to Congress? As Chairman Bernanke put it in July, "I don’t think the American people want Congress running monetary policy." But do the American people want the Federal Reserve running fiscal policy?
A real time example of this situation is being battled out in New Zealand. The opposition Labour leader Phil Goff said today that the RBNZ inflation policy targets don't work. "Our Reserve Bank policy targets are not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible."
Next, the NZ government has been struggling with the impact that a strong NZ dollar is having on their export sector and their economy. The strong currency is seen as a symptom of the central bank's inflation stance and lack of monetary support to the economy. The NZ Treasury is putting forth a policy to front load fiscal policy accompanied by significant tax reform to make the New Zealand dollar materially lower for several years.
This is the ultimate end game for central banks and governments around the world: who will control the purse strings and who will control the monetary levers to get the economy moving. Today's vote in Barney Frank's committee will give us an indication of where the US is heading. A no vote to retain a ban on audits should be seen as a sell signal for the US dollar.
Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.