Nov. 23 (Bloomberg) -- Former Federal Reserve Governor Randall Kroszner said a measure in Congress to subject the central bank’s monetary policy to audits would limit its independence and ability to control inflation.

“It would really be a shame to lose the benefits of Fed independence,” Kroszner, 47, said today in an interview on Bloomberg Radio. “It was really kind of the genius of the Congress that they structured it be independent of short-term congressional pressures but still accountable to the Congress.”

The House Financial Services Committee advanced a proposal last week requiring audits of monetary policy by the Government Accountability Office. The bill is sponsored by Representative Ron Paul, a Republican from Texas. Fed Chairman Ben S. Bernanke has opposed Paul’s proposal.

“If you had more political pressure from the GAO being able to audit any decision the monetary authority was making, a congressman perhaps the day before the decision saying I think they are going to keep rates up, I really think that’s a real problem,” said Kroszner, a professor of economics at the University of Chicago who served as a Fed governor from March 2006 to January 2009.

Paul, who wrote a best-selling book this year titled “End the Fed,” said provisions in his amendment would limit interference in monetary policy. The measure, co-sponsored by Representative Alan Grayson, a Democrat from Florida, would exclude any unreleased transcripts or minutes of Fed policy meetings. It calls for an audit of the Fed and its 12 regional banks by the GAO within a year after enactment.

Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee and opposed the Paul measure, said the issue “may be revisited” when the legislation reaches the House floor.

Declining Inflation

Kroszner said other nations have followed the example of the U.S. by insulating their central banks from interference by politicians, with the result that inflation rates have fallen around the world.

“We’ve seen much better inflation performance in other countries in the last 25 years as they’ve moved toward greater independence, using the Fed as the shining example of that,” he said.

Proposals to increase the Fed’s supervisory responsibilities over banks should be matched by an expansion of the central bank’s authority, Kroszner said.

“If the Congress chooses to give greater responsibility to the Fed for broader surveillance, it has to make sure to balance that with appropriate authority,” he said. “You can’t make someone responsible but not give them the tools necessary to do the supervision.”

Council of Regulators

The Obama administration has proposed making the Fed the regulator of large companies whose leverage and complexity threaten the financial system. The White House has also called for a council of regulators to monitor the economy for systemic risks and for the Treasury to decide if a company has grown so risky that it should be wound down.

“It’s very important to make sure that there’s good communication between the Federal Reserve and other regulators to make sure that the Fed is fully informed about what may be happening in other parts of the financial system,” Kroszner said.

(In the U.S., hear Bloomberg Radio on satellite radio: Sirius Channel 130 and XM Channel 129. In New York City, tune to WBBR 1130 on the AM dial.)

To contact the reporters on this story: Vincent Del Giudice in Washington vdelgiudice@bloomberg.net; Thomas R. Keene in New York tkeene@bloomberg.net.

Last Updated: November 23, 2009 13:50 EST