[We] propose a new institution, which I label the "Sentinel," to act as the public's sentry over financial policies and to help compel financial regulators to act in the public interest, regardless of their private interests. The Sentinel's purpose is to improve the governance of financial regulation by providing an informed, expert, and independent assessment of financial regulation. Its sole power would be to demand any information necessary for evaluating the state of financial regulation. Its sole responsibility would be to continuously assess and comment on financial policies, delivering a formal report to the legislative and executive branches of government (at least) annually. The Sentinel would not have the power to change, reverse, or reform any financial regulation or supervisory practice.
This is the argument that will be found in a forthcoming book by Levine, James R. Barth, and Gerard Caprio, Jr.
In some sense, this is an argument to audit the Fed--as well as all the other financial regulators. I think it is potentially a good idea, but I still prefer to think in terms of policies that make the financial system easier to fix, as opposed to harder to break.
I want to make the case more generally for independent auditors of government agencies. For example, I would love to see an audit of homeland security conducted by a team of skeptics. I think that independent skeptics could find ways both to enhance security and to reduce the costs and intrusiveness of the security state. In the absence of an independent auditor, I expect the Department of Homeland Security to continually move in the direction of eroding freedom and protecting bureaucratic derrieres, not American lives.
I think that independent auditors may be the best modern hope for reconstituting the concept of checks and balances. You're not going to corral the modern state back into the Constitutional barn. You are more likely (although there would be intense resistance) to be able to use independent auditors to call out agencies for incompetence and mindless power-grabbing.