Rand Paul Draws Liberal Fire As The Left Discovers Its Inner Love Of The Fed

Townhall.com ^ | February 24, 2015 | Ralph Benko

[Kaslin]

The New Republic, in its February 8^th issue, carries an article by Danny Vinik entitled Rand Paul Has the Most Dangerous Economic Views of Any 2016 Candidate. It appears that TNR’s fact checkers decamped along with its top journalists. Vinik:

Speaking in front of more than 150 Iowa activists, Paul ripped into the Federal Reserve and promoted his “Audit the Fed” bill, which he introduced earlier this week. “I think there needs to be some sunshine,” he said, according to reports of the event. …

Paul’s bill …would significantly damage the Fed’s independence, which exists so that politicians cannot influence the central bank for their own political purposes. In other words, “Audit the Fed” would lead legislators to interfere with monetary policy matters and put the entire economy at risk.

Whether or not one supports Audit the Fed, the argument really cannot rest on the Fed’s independence. Fed independence currently is a polite fiction. As I have cited before:

As journalist Steven Solomon wrote in his indispensable exploration of the Fed, The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, 1995):

“Although they strained to portray themselves as nonthreatening, nonpartisan technician-managers of the status quo, central bankers, like proverbial Supreme Court justices reading election returns, used their acute political antennae to intuit how far they could lean against the popular democratic winds. “Chairmen of the Federal Reserve,” observes ex-Citibank Chairman Walter Wriston, “have traditionally been the best politicians in Washington.”

Forbes.com contributor Dr. Norbert Michel recently published a column here relying on the rather shabby tactic of citing empirical evidence to demonstrate how dubious is the claim of Fed independence. Michel:

Here are just a few examples (with Fed Chair dates provided):

• William Martin (1951 – 1970). President Eisenhower directed his Treasury Secretary to put the “utmost pressure” on Chairman Martin to “get a greater money supply throughout the country.” When Martin refused, Eisenhower pressured him to resign or reconsider. Martin reconsidered.
• Arthur Burns (1970 – 1978). President Nixon repeatedly worked with Burns to secure easy monetary policy with the view that it would help win elections. On one of Nixon’s famous tapes, Nixon and Burns openly mocked the idea of Federal Reserve independence.
• G. William Miller (1978 – 1979). President Carter found Miller uncooperative, so he replaced him as Fed Chair (he made Miller his Treasury Secretary).
• Paul Volcker (1979 – 1984). Ronald Reagan openly cultivated a working relationship with Volcker and repeatedly asked him for tighter monetary policy. Alan Greenspan reports that, in one meeting, Reagan reminded Volcker that the Federal Reserve Act was subject to change.
• Alan Greenspan (1987 – 2006). Alan Blinder, appointed to the Fed Board by President Clinton, publicly suggested Greenspan was catering to Clinton.
• Ben Bernanke (2006 – 2014). A 2012 New York Fed publication notes: “The U.S. Treasury and the Federal Reserve System have long enjoyed a close relationship…. This relationship proved beneficial during the 2008-09 financial crisis, when the Treasury altered its cash management practices to facilitate the Fed’s dramatic expansion of credit to banks, primary dealers, and foreign central banks.”

Perhaps the Fed’s defenders have some other definition of independence in mind?

The issue of central bank independence from political meddling is a venerable one. As the New York Fed’s Liberty Street Economicseruditely notes, in a recent column anticipating Valentine’s Day:

John Keyworth, curator of the Bank of England’s museum, has provided on the Bank’s website a full explanation for why the institution is called “The Old Lady of Threadneedle Street.” It stems from an elaborate 1797 satirical cartoon created by JamesGillray. The author’s words best explain what is going on in the cartoon:

“The cartoon shows the Prime Minister of the day, William Pitt the Younger, pretending to woo an old lady, the personification of the Bank, but what he is really after is the Bank’s reserves, represented by the gold coin in her pocket, and the money-chest on which she is firmly seated.”

…

Unsurprisingly, this action was seen by the Government’s detractors as outrageous and Sheridan, representing the Whig opposition, described the Bank as ‘an elderly lady in the City who had . . . unfortunately fallen into bad company’.

There is a certain irony. Sen. Paul might be counted as one of the great champions of protection of the Fed from abuse by the political authorities. It is very probable that Sen. Paul’s motive is to rescue the Fed from having “unfortunately fallen into bad company.” Although the Fed, the Democrats, and leftish economic commentators may dispute his chosen means they may share a common ideal: high integrity monetary policy.

Fed independence from political meddling — which I support — actually became crippled when Lyndon Johnson, in the wake of the Tet Offensive, closed the London gold pool. It died when Richard Nixon closed “the gold window” in 1971. It is after he genuflects to the shibboleth, though, that Vinik really goes off the rails:

But a Paul presidency would still have disastrous effects on the U.S. economy, for other reasons that were on wide display in Iowa on Friday night.

“Once upon a time, your dollar was as good as gold,” he said. “Then for many decades, they said your dollar was backed by the full faith and credit of government. Do you know what it’s backed by now? Used car loans, bad home loans, distressed assets and derivatives.” Paul’s comments make very little sense. When Paul asks what backs the U.S. dollar now, he’s effectively asking what makes it valuable. When the U.S. used a gold standard, it meant that a dollar was worth a certain amount of gold. Economists overwhelmingly agree that that was a terrible idea, but the connection seemed to explain why dollars had value. …

“What Paul and his followers are concerned about is the purchasing power of the dollar. They want to return the U.S. to the gold standard to ensure that inflation doesn’t undermine the actual purchasing power of the dollar. Over the long run, a gold standard would guarantee that price stability. But over the short run, prices would still fluctuate violently, as happened when the U.S. used the gold standard.

“In terms of current policy, goldbugs, as they are often called, think the Fed’s recent decisions—its zero interest rate policy and bond-buying program—will cause skyrocketing inflation and reduce what you can buy with dollars.”

There is so much just factually wrong about this that one hardly knows where to start.

To be continued.

[grania]

Auditing the fed is be a winning issue. For us “little folk” it’s obvious the banking system isn’t working for us, and this would be a good place to start.

[PapaNew]

Paul is one of the few that seems to get that the FED has a nasty habit of exacerbating and making worse much if not most of our economic woes. It is an unaccountable and powerful government entity that needs accountability and limitations put on it.

[entropy12]

Observe Japan’s money printing. It is far bigger than ours.
There is deflation in Japan, not inflation.

[82nd Bragger]

“Paul is one of the few that seems to get that the FED has a nasty habit of exacerbating and making worse much if not most of our economic woes. It is an unaccountable and powerful government entity that needs accountability and limitations put on it”.

No. The Federal Reserve is a private entity (bank). This entity is not subject to FOIA reporting requirements, which is which Paul’s bill is necessary. Read The Creature at Jekyll Island.

[PapaNew]

If the Fed is a private entity, why does the President of the United States appoint its Chairman who greatly determines the course of monetary policy in the U.S.?

[82nd Bragger]

‘If the Fed is a private entity, why does the President of the United States appoint its Chairman who greatly determines the course of monetary policy in the U.S.?’

Don’t know. Politics? There is no ‘If’. The Fed is a private bank. Easily researchable.

[CutePuppy]

"Money-printing" by central banks in Japan and the US and elsewhere is not the cause of deflation (or inflation) - the reason for "printing" is the massive debt and deficits that have been and are being created ("printed") by their respective governments. The central banks simply monetize them the best they can as they are required to do by their charters. Without debt, there is no need for the Fed to "print money" or do QE - the Fed doesn't create the debt, in fact in the last few years it returned excess profit to the Treasury — on the order of approximately $100B per annum, on average — thus reducing the government deficits.

This quixotic / "Paulist" focus on the Fed as "the root of all evil" is simply a political grandstanding, attention-grabber for financially / economically unsophisticated people who don't know or really understand what the Fed is required to do, according to the laws made by Congress, like the idiotic and self-contradictory "dual-mandate" etc., without having the necessary tools but for a few blunt monetary instruments granted to them by Congress... and as such setting up the political blame game with the Fed as a scape-goat for financial or economic problems created by politicians.

It's also a convenient diversion from real problems created by the economically unworkable, stupid laws, taxes and regulations created for their own political purposes by Congress and administrations and agencies which distort normal realities of financial markets — like CRA, Sarbanes-Oxley, Dodd-Frank, Fannie and Freddie, HUD, CFPB etc. etc.

Waging jihad against the Fed not only distracts from the positive things Fed has done for the economy — like creatively using QE to help keep rates low whichi allowed the private sector to refinance the debt, including mortgage and shore up corporate capital structures and equity markets which is the prime reason for somewhat less-than-disastrous economy and employment, and partially mitigate gross distortions of the economy from government malinvestment of fiscal "stimulus" programs, particularly ObamaCare —

It would be far better for GOP, both politically and sincerely, to give credit to the Fed for saving the economy from the unwise fiscal policies of this administration and previous Congresses, and recognize, just like both Bernanke and Yellen said, that the US fiscal policy of high debt and deficits is unsustainable. This would recognize the Fed's contribution to the limping and weak, but not contracting, economy and gives it credit for health of the equity markets and corporate profits, which have provided them with capital to hire and increase employment - thus taking away any semblance of credit from Obama and the Democrats. As it stands, while GOP is busy beating up on the Fed, Obama and the Dems are laughing all the way to take the credit for all the things that monetary policy accomplished despite their disastrous fiscal policies and programs.

That's the kind of thing that would also go over well with people who understand the economy and the differences and limitations of fiscal and monetary policies (which is why presidents would be wise to work together with the Fed, as article indicated, and as was done successfully during the 2008 financial/credit crisis) who would not be caught dead voting for liberal Democrats, yet are looking at Paulistas or other Fed-bashing Republicans and just shake their heads at the financial / economic ignorance of otherwise natural allies.

Fed has already been much more transparent than Rand Paul. And Fed is audited, really audited, every year. this Audit the Fed ruse is about political control of the monetary policy by know-nothings in Congress and administrations, same way as the Net Neutrality which is really about regulation and control of the Internet. Maybe we should rename Audit the Fed into Fed Neutrality - that should go over well with OWS crowd and "disadvantaged."

The Fed, in and of itself, is not the enemy - let's not create them where they don't exist and get embarrassed in the process.

See also:
There's a new mortgage crisis brewing [Richard Bove] - FR / CNBC, by Richard X. Bove, 2015 February 23

It's Official: Ron Paul Is Head Of Monetary Policy Subcommittee - FR, post #99, 2010 December 09 (acorn/tree)

Blame the Fed for the Financial Crisis - FR, post #38, WSJ, by Ron Paul, 2011 October 21 (acorn/tree)

Meet The 35 Foreign Banks That Got Bailed Out By The Fed (And This Is Just The CPFF Banks) - FR, posts #31, #34, #35, #38, 2010 December 02

br

[entropy12]

I disagree. Every quasi government entity must be have a congressional oversight. It does not mean congress will always be right or beneficial.

What it really means is people elect representatives every 2 years, and people’s voice must be the boss.

[CutePuppy]

Every quasi government entity must be have a congressional oversight. It does not mean congress will always be right or beneficial.

They do have congressional oversight - at least 4 (twice to House and twice to Senate) times a year (see former Humphrey-Hawkins testimony)... By the way, today was the first day of Fed Chair Janet Yellen's testimony to Congress as part of this process : What to expect after Yellen's statement - CNBC, 2015 February 24

Audit the Fed is nowhere near "oversight" - check again the link I provided before ( It's Official: Ron Paul Is Head Of Monetary Policy Subcommittee - FR, post #99, 2010 December 09 (acorn/tree) ) ... Just replace "Ron" with "Rand" and you'll see the difference between oversight which has been long in place and outright control / takeover of monetary system by politicians.

Audit the Fed is stupid and not benign, and if it came from Democrats, most on FR would rightly be screaming "hijacking" and "politicizing" the Fed (whatever minor political biases they may have now are of human nature and can't be totally eliminated - that's why the Fed was layered that way, to minimize politics and maximize economics). Congressional takeover of monetary policy is not a solution, it is a problem to be avoided at all costs, just like takeover of Internet in the US by the FCC, under the "benign" guise of Net Neutrality.

Ron Paul has been embarrassed several times by Bernanke during these hearings' exchanges, I hope Rand Paul becomes as transparent to conservatives as his father was.

[entropy12]

If FED is doing nothing bad, there should be no fear of an Audit. It is really not complicated.

An audit is NOT TAKING CONTROL. It is simply a report.

[Pelham]

We could go back to what we had before the Fed. Private banks issuing their own currency. No lender of last resort to halt bank runs. Bank collapses that wipe out depositors and not just stockholders. It should be exciting.

[lavaroise]

The Fed derives nowadays its existence not on the economy but on tax payers paying the debt and interest rates for ever.

The Feds needs to be audited like a welfare queen needs to be drug tested. Transparency is of utmost importance.

We have a soft fascist system in place. I find it amusing that Hitler threatened CEOs pretty much the same as the Feds are pressured.

[lavaroise]

It is an establishment system. I was saving money betting on the house bubble to pop because the “fools” turning over houses were obvious frauds overinflating house valuations.

However the bail out saved the frauds and those doing real savings and preparing for the drought got shafted to pay their bills with taxes!

It takes no genius to foresee that the next communist man made drought is going to be even worse and enslaving. look to see the BLM or IRS to lead the “poor harvest” riots, playing the green card or the race card etc...

[lavaroise]

I would add, it is an establshment system pausing as a redistribution antiestablishment.

Welfare and the feds are the same political nomenclatura, benefiting from the same fraud language of blackmail of tax payers and workers.

[CutePuppy]

It is simply a report.

Today was one of these simple reports. If the Audit is "simply a report" then it's pretty meaningless and both Pauls, Ron and Rand, have been fraudulently overselling the importance of the Audit as the game-changer that would put the screws on the Fed. And the Audit would not have as many people thinking that it is a bad idea, instead of just another bureaucratic waste of time, for which Congress is infamous. Obviously, it's not "simply a report" and enough (though not quite enough) Republicans understand this:

From Janet Yellen's Advice to Rand Paul -BLV, 2015 February 24

< snip > ..... The Fed is already "extensively audited," she said, and Senator Rand Paul's bill to audit it even more "would politicize monetary policy." ..... < snip >

..... Undermining the central bank's political independence would ultimately harm the economy. Studies show that independent central bankers are better stewards of their economies than are politically appointed finance chiefs. The reason is simple: Politicians often favor easy-money policies that promote short-term growth and boost their re-election chances, even if they bring on inflation later. ..... < snip >

..... She might start with Paul, who appears to suffer from both misunderstandings (confusing assets for liabilities on the Fed's balance sheet) and misapprehensions (worrying about inflation, which has undershot the Fed's 2 percent target for three years now) about the Fed's role. Sadly, he is not alone: His bill, which will be the subject of a Senate Banking Committee hearing next week, has 30 co-sponsors, and a version of it has already been adopted by the House.

The bill would subject the Fed's balance sheet and monetary-policy deliberations to congressional audits. Yet the Fed is already audited 10 ways from Sunday. Deloitte & Touche and an inspector general perform an audit of the Fed's financial statements, its $4.5 trillion portfolio of assets and their market value, and the central bank's compliance with laws and regulations. The Government Accountability Office further reviews the Fed's internal controls.

These reports are available, in all their soporific splendor, to members of Congress. Paul surely knows this. So what is the purpose of his bill? Ask Senator Bob Corker, Republican of Tennessee, who opposes it. The bill is "an attempt to allow Congress to put pressure on the Fed's members" on monetary policy, he told Yellen. "That would not be a particularly good idea." ..... < snip >

As I've said before, this fixation on the Fed, gold standard and other such economic nonsense is taking Republicans in exactly opposite direction from where they should go - recognize and credit the Fed with the recovery despite horrendous Keynesian "constant stimulus" fiscal policies of Obama and Democrats and deny them any credit for even the weakest recovery on record which came despite fedgov adding $8T to debt (so far) and piling more mandatory liabilities to already overburdened system. But this is a Republican Party, so... 'nuff said.

We could go back to what we had before the Fed. Private banks issuing their own currency. No lender of last resort to halt bank runs...

Yep, the last financial panic of the kind was in 1907, when John Pierpont Morgan played Godfather with the heads of 10 largest banks, to become "lenders of the last resort" and to stave off the run on the banks. It worked, but both the government and financial titans realized that there was a need for central bank. And thus the idea of public-private bridge / Federal Reserve System was born, patterned on the Bank of England. Lest be taken by charlatans, it helps to know history:

When One Man Was the Central Bank - FR, post #9, 2010 December 29

How to Make the Dollar Sound Again - FR, posts #15, #36, 2010 November 15

Blame the Fed for the Financial Crisis - FR, posts #37, #39, #38 WSJ, by Ron Paul, 2011 October 21

[PapaNew]

The Fed is a private bank.

In name only, not in who is running the show.

[entropy12]

I never ever said get rid of the FED.

All I want is to shine the light on FED.

Do a thorough audit every few years, issue a report,
and let the chips fall where they may.

People elect 435 house members and 33 senators every 2 years. Let those elected representatives of people decide if FED is doing the right thing.

If FED is beneficial and benevolent, why are they fiercely opposing an audit?

An audit is NOT removal of FED. It is simply a report exposing how FED decides and acts on different initiatives such as the multiple QE’s.

The sudits may very well show everyone that FED is a good thing.

[DarkSavant]

I never ever said get rid of the FED.

I will. Get rid of the fed.

[Pelham]

“If FED is beneficial and benevolent, why are they fiercely opposing an audit?”

Probably because it could disclose sensitive information about the retail banks that belong to the Fed. A short seller would love finding out for free which banks might be shaky.

“It is simply a report exposing how FED decides and acts on different initiatives such as the multiple QE’s.”

It already publishes its minutes describing what it is watching and reacting to. And there is also a concern that armed with detailed knowledge bond vigilantes and others could neutralize Fed policies.

http://www.federalreserve.gov/newsevents/press/monetary/20141029a.htm