Bernanke warns Ron Paul's Fed audit bill could cause 'nightmare scenario'

Federal Reserve Chairman Ben Bernanke warned Wednesday that an audit bill pushed by Rep. Ron Paul (R-Texas) could create a "nightmare scenario" for the central bank.

Testifying before the House Financial Services Committee, Bernanke pushed back against efforts to subject the Fed to full audits by the Government Accountability Office (GAO), cautioning that doing so would subject the politically independent institution to the whims of lawmakers and render the Fed ineffective.

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"The nightmare scenario that I have is one in which some future Fed chairman would decide to say, raise the federal funds rate by 25 basis points, and somebody in this room would say, 'I don’t like this decision and I want the [Government Accountability Office] to go in ... and give us an independent opinion of whether or not that would be the right decision," he said.

Establishing a system in which the Fed's monetary policy moves could be immediately called into question by lawmakers would have a "chilling effect" on the institution and generally reduce its ability to help steer the economy, he warned.

"There's a lot of evidence that an independent central bank ... will deliver lower inflation and better economic results," he said.

Bernanke found himself fielding questions from multiple Republicans on the matter as legislation that would allow Congress to direct the GAO to review all Fed operations is making its way through the House.

Paul's bill, which has garnered 271 co-sponsors, was approved by voice vote by the House Oversight Committee in June, and GOP leadership has committed to a floor vote on the measure sometime this month.

Bernanke said he was largely supportive of the measure in general, but maintained it was "absolutely critical" to exempt Fed policy decisions from immediate oversight. He detailed the number of ways the Fed is already accountable to Congress and emphasized that the Fed is committed to that goal.

"I agree absolutely with Dr. Paul that the Federal Reserve needs to be transparent and it needs to be accountable," he said. "I would argue at this point we are quite transparent and accountability."

He went on to indicate that Paul's bill is not being accurately sold to the public, contending that the Fed is already being audited under common understanding.

"I think the term 'audit the Fed' is deceptive. The public thinks auditing means checking the books ... making sure you're not doing special deals," he said. "All of those things are completely open."

Paul, who likely was facing Bernanke for the final time before he retires this fall, was unconvinced.

"When the Fed talks about independence, what they're really talking about is secrecy," he said.

Beyond that particular standoff, Bernanke largely reiterated the message he delivered to the Senate one day before. He emphasized that Congress needs to adjust policy to avoid the "fiscal cliff" coming at the beginning of the next year, and maintained that the Fed is prepared to do more to support the economy if it thinks it is needed.

He also hinted at support for the contentious Dodd-Frank financial reform law, saying that while the heightened regulation of the financial sector might pinch credit, its overall purpose makes it worth it.

"The benefits in terms of reducing the risks of a financial crisis are extremely large and whatever costs are incurred are worthwhile," he said.

And while Republicans have vocally criticized the Fed's policy moves in recent years, suggesting that it will not be able to control inflation when it comes time to unwind those decisions, Bernanke was supremely confident in the central bank's ability to control the situation.

"We know how to reverse what we did," he said.