The U.S. Federal Reserve on Thursday launched a robust defense of its independence and warned that efforts in Congress to put monetary policy under political sway would hurt the economy.
"Any substantial erosion of the Federal Reserve's monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation," said Fed Vice Chairman Donald Kohn.
In 1834, the Second Bank of the United States headed by Nicholas Biddle caused a recession to try to force President Andrew Jackson to re-charter the bank. With Ron Paul's H.R. 1207 gaining momentum and the public beginning to question the once sacrosanct Fed, the Fed threatens to resort to the same tactic once again.
No doubt, H.R. 1207 would trigger short term problems, including quite possibly a nasty recession; an audit of the Fed would likely undermine confidence in America's fourth central bank--the one thing currently keeping the dollar above water. However, just as the recession of 1834 was the fault of the Nicholas Biddle and not Andrew Jackson, any economic dislocations which result from shedding light on the Fed's operations will be the result of the Fed and not those demanding oversight.
The alternative--allowing the Fed to continue to operate in secret--is much worse than any short term pain: continued long-term economic stagnation, increased debt, and a lower standard of living for the average American.