For U.S. Representative Ron Paul, the ninth time may be the charm.
After fighting for decades to increase scrutiny of the Federal Reserve or abolish it, the Texas Republican’s proposal requiring audits of the central bank’s interest-rate decisions is getting traction.
The long-shot 2008 presidential candidate whose anti-tax, anti-government politics struck a chord with a swath of voters is again channeling public frustration with big government, bailouts and rising federal debt. And as Paul trains his sights on his favorite villain, the Fed, many in Congress are listening.
This is a classic example of Congress demonstrating it is filled with idiots on both sides of the aisle.
First, all of the Fed's financial information is already online. If you want to find out about the Fed's overall position, click on the above line. In addition, the Fed has a financial audit every year:
The Board of Governors orders an annual external audit of the financial statements of the Board and the Reserve Banks.3 The current independent auditor is Deloitte and Touche.4 Each Reserve Bank publishes its audited financial statements, and the Board of Governors publishes the audited combined Reserve Bank financial statements and the Board's financial statements in its annual report to Congress. The Reserve Banks and the Board comply voluntarily with the internal control requirements of the Sarbanes-Oxley Act. The external auditors also perform an evaluation of internal controls over financial reporting.
So -- we already have an audit every year. Why do we need another one?
There are two answers to that question. The first is downright scary:
the Texas Republican’s proposal requiring audits of the central bank’s interest-rate decisions is getting traction.
The absolute last thing we need is for anyone to second guess the Fed's interest rate decisions. That would make the country's interest rates the whim of politicians. What would happen is easy to predict. Any attempt to raise rates would be stopped cold because someone would object. They would argue "that will hurt one of my constituents." And we'd be left with low rates until inflation destroyed the economy.
The second is people want "transparency" for all the Fed's transactions. This would also be a mistake of epic proportions. Currently -- and for the entire history of the Federal Reserve -- it has engaged in "open market operations." In other words, it has purchased various securities at various times in order to implement monetary policy. This is what all central banks do to carry out their mandate. And again -- the Fed has done this since they were formed; it is standard procedure. Making these trades transparent would tell all of Wall Street exactly what security the Fed is buying. Congratulations -- you have driven up the cost of performing monetary policy. Brilliant.
The audit the Fed crowd has gotten completely out of hand. If their proposals are implemented the US economy will be crippled to the point of economic deadlock. If you thought the economic fallout in 2008 was extreme -- you ain't seen nothin' yet.
9 comments:
Hasn't, the Fed has been doing a lot more than open market operations? What about Maiden Lane and non recourse loans given to banks with what is probably trash as collateral? Those are essentially gifts, no?
Are they included in that audit that already happens? Do we know who these gifts went to? Do we know who paid them back and who defaulted?
When the banks finish paying back they TARP money, will they also pay back these hidden gifts before they return to their old ways of doing business?
Have to disagree, BD. Paul's economic theories are loony, but there are not-loony folks on the left in agreement with this initiative. To broad-brush them all as 'birthers' is not nice.
Your argument is founded on the assumption that the Fed is neutral to begin with, notwithstanding the mountain of evidence that they are biased towards low inflation and unnecessarily high unemployment. (N.B. Galbraith, Greider, etc.) As JKG the elder pointed out in a different context, the remedy for a retrograde bias is a countervailing one. cheers.
Max --
What is wrong with low inflation? In addition, unemployment has been pretty good for the last 25 or so years (current times excepted).
the Texas Republican’s proposal requiring audits of the central bank’s interest-rate decisions is getting traction.
Cite? I thought he wanted to audit their books. How would one audit their interest-rate decisions? And don't give me nonsense about the Fed's independence. Or do you forget Burns and Nixon?
What's wrong with Johnnie Walker? Too much is what's wrong, just like too-low inflation is bad for employment. I'd say for the past 25 years unemployment has been higher than necessary, with dramatic social consequences. See Baker and Bernstein: link.
The problem with inflation is once you let the genie out of the bottle it's hard to get back in. Let's say you let inflation run to 5%. Then you see a one month blip of 6%. "It's only a month; don't do anything." but then you have a second month -- and before you know it it's out of hand with the only policy option a massive spike in rates. Against that backdrop, I'll take 2-3% any day of the week. In addition, high inflation hurts everybody. And there's no way to control inflation at a specific rate for a continual period of time; interest rate policy is simply too blunt a tool for that.
As for unemployment, it depends what rate you want to use. Under U-6 the rate has been high but under the standard rate, we've fluctuated between high levels and low. the problem there is unless you can eliminate the business cycle, that's what's going to happen. You can ameliorate the pain but you can't prevent the problem.
In the latter 90s we observed unusually low rates of unemployment that, contrary to the conventional wisdom, did not lead to excessive inflation. That tells me we were missing out for a long while, when rates were 5+. That last percentage point or two is a big deal for very vulnerable people.
Six percent inflation is probably high, four or five I would say not. How much extra unemployment is it worth to you to stay at 2 or 3% inflation?
I'd also disagree that inflation 'hurts everybody.' Unexpected inflation certainly hurts bondholders, but insofar as wages, Soc Sec benefits, and asset prices follow inflation, other people not so much.
Once you are north of 6%, my instinct would be to worry, but I have a job!
I would argue that the late 90s was economically abnormal. The advent of the internet really revolutionized so many things and effected so many different parts of business that it can't be recreated; it was a once-in-a-lifetime event -- unless you can somehow recreate the "next big thing" that has the same impact. But even then, I'd still argue that the productivity gains of the internet/tech revolution of that time are difficult to recreate.
Inflation doesn't hurt wageholders if they get raises commensurate to the rate of inflation.
Have you made an effort to read the Paul/Grayson amendment yet? The audit is an amendment (69B) in Barney Frank's HR 3996 (which ironically gives the Fed new broader powers).
The Paul/Grayson amendment:
· Removes the blanket restrictions on GAO audits of the Fed
· Allows audit of every item on the Fed's balance sheet, all credit facilities, all securities purchase programs, etc.
· Retains limited audit exemption on unreleased transcripts and minutes
You'll just hate these next two:
· Sets 180-day time lag before details of Fed's market actions may be released
· States that nothing in the amendment shall be construed as interference in or dictation of monetary policy by Congress or the GAO
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