Under the banner of increasing Federal Reserve transparency, Congressman Ron Paul has sponsored a bill that would subject the Fed's monetary policies to an audit by the Government Accountability Office (GAO). The bill is a veiled attempt to undermine the Fed's independence. If it passes, it will cripple policy making—particularly when it comes to inflation.
It is completely appropriate to hold the Fed accountable for its decisions. But the Paul bill, H.R. 1207, will only produce redundancies: Congress already has multiple ways of finding out what the Fed is doing and why.
The Fed produces a report and testifies twice a year before Congress about its monetary policy actions. During this testimony, the Fed is forced to explain what it has done, and elected officials question the Fed about its choices. In addition, the Fed makes the minutes from its monetary policy meetings available to the public, and Fed officials routinely give speeches explaining their approach.
What's more, it is highly doubtful that the GAO has the technical competence to evaluate monetary policy. If it did try to conduct these audits, at best it would merely rehash known information. At worst, the GAO would generate confusion by offering its own analysis.
Economic theory and massive amounts of empirical evidence make a strong case for maintaining the Fed's independence. When central banks are subjected to political pressure, authorities often pursue excessively expansionary monetary policy in order to lower unemployment in the short run. This produces higher inflation and higher interest rates without lowering unemployment in the long term. This has happened over and over again in the past, not only in the United States but in many other countries throughout the world.
The Fed's independence is critical to its credibility. During the financial crisis, this credibility allowed the Fed to take extraordinary action to prevent a possible depression without triggering inflation. But eventually the Fed will have to scale back its unprecedented monetary accommodation. When it does move to tighten monetary conditions, it must be allowed to do so without political interference.
Weakening the Fed's independence now might raise the risk of inflation, which would cause borrowing costs to rise and would lower prospects for a strong economic recovery. For these reasons, we joined over 400 prominent economists in July when we signed a petition opposing the type of incursion on the Federal Reserve that Mr. Paul is proposing.
Fortunately, Congress is considering an amendment to the bill that would prevent the negative consequences of the original Paul legislation. This amendment, put forward by Rep. Mel Watt (D., N.C.) would change the focus of the bill by instructing the GAO to audit the new lending facilities at the Federal Reserve that were authorized under the 13(3) "unusual and exigent circumstances" clause of the Federal Reserve Act. The 13(3) lending authority, which had not been used by the Fed since the Great Depression, was the basis for many of the most controversial decisions made during the crisis, including the rescue of AIG and the establishment of new lending facilities.
This audit would involve oversight of the operational integrity of these facilities' accounting, internal controls, and protection against losses. It would also disclose the borrowers from these facilities one year after the facilities are closed. The audit would produce new, important information that is not otherwise available and would play to the strengths of the GAO. And the amendment would exempt the Fed's normal monetary policy actions from the audit.
We strongly support an amendment of this type because it will increase the Fed's accountability without compromising its monetary independence. We also believe that the lag in disclosing the names of borrowers would enable Congress to have appropriate oversight over these facilities without compromising their effectiveness. Earlier disclosure would diminish the efficacy of these facilities because of the so-called stigma problem: If borrowing from emergency lending facilities is immediately made public, the markets would know that the borrowers might have financial difficulties, which would make it harder for the borrowers to operate.
No one can be fully comfortable with all the unprecedented actions that the Fed has taken to limit the damage from the financial crisis. We appreciate the frustration of the public and members of Congress who want a better understanding of what has happened. Forming a committee of experts to write a report on the crisis might help reassure the public and provide some lessons for crisis management in the future. But the Paul bill, as originally written, won't help with these goals and will only stifle the recovery.
Of course no mention of this...
Dylan Ratigan: The bill no longer audits the Fed. In fact, the legislation gives Congress no control over the Fed’s authority to make monetary policy. That, perhaps, is a worthwhile debate, but it does not require any transparency either in the Fed’s secret agreements with foreign central banks, not to mention the monies that are pushed out to our own banks. Committee chair Barnie Frank told his constituents back in August that Congressman Paul’s plan would pass, likely in October. For the record it is now November and there is still no vote and if there were to be a vote it would be on a gutted version of the bill! Thirteen committee Democrats currently signed on to this shell of the Fed audit bill and now we’ll wait up and see if they’ll stand up for real change or just push through more false solutions in Washington DC.
Joining us now is Republican Committee member Ron Paul who originally proposed Audit the Fed. He will present and amendment before the full vote to get real reform back into the legislation. Chrystia Freeland is also here.
Representative Paul, in brief explain to all of us why you think it is so important that the American taxpayer be able to see what is going on inside of the Federal Reserve? Why does that matter, why should we care so much?
Ron Paul: It’s because everybody uses dollars as our currency and it’s an international currency. So it is very, very important, and yet it’s managed by a small group of people really run by the Federal Reserve board chairman and they decide each and every day how much money there should be printed that week and what the interest rates should be. So they are the central economic planners. And since they can create credit out of thin air and take care of their friends and buddies, which means that the burden is placed on the taxpayers… not directly with a tax but indirectly by devaluing their money. And that means that every time a price goes up, whether it’s medical care cost or education, you’re really paying a tax.
But the thing that gripes me most is it’s done secretly and they’re supposed to be like they’re sacred and never have their books opened. But one thing good has come out of this crisis; that the American people are demanding transparency and I think that’s why I’ve gotten so many co-sponsors on this bill. We do have a 130 Democrats on this, 308 total total supporters of this bill. So it will be a shame if we don’t get this through and it is true, it is going through the committee right now and today or tomorrow I might have my chance to offer my amendment and put it into the bill.
Chrystia Freeland: Congressman Paul, who is opposed to your push for transparency, who’s fighting it?
Ron Paul: The Fed. The Fed has actually, I think for the first time in their history, hired a lobbyist and the lobbyist used to work for ENRON. So they’re diligently pumping up the fear. You know, “Oh, if we know what was going on with the Fed it would causes tremendous inflation, it would cause interest rates to go up and all sorts of things. You know, if we knew what was going we might create a financial crisis.” It’s the Fed and the banks and the big corporations and some of the politicians are in the know and getting benefits. But the system depends on the control of money. But this is not new, this is historic.
The king in the old days always had control of the money, they did it in different ways. They clipped coins, diluted the metal, printed money. Today it’s really sophisticated; it’s done secretly with a computer and that’s why it has made it so much more dangerous than ever before.
Dylan Ratigan: Let’s just back away for a second because the Fed lobbyist some of the CEOs, some of the bank CEOs quite honestly might have a point. What if we were to look inside the Federal Reserve as you suspect, I certainly suspect it and I think Christian Freeman suspects it, anybody who understands how our financial system was built over the past 10 years suspects, that all those trillions of dollars that the Federal Reserve… that were collateralized… they’ve taken from the banks, is worth far less than it’s currently been represented as. So let’s say that that the 8 trillion of the Fed may be only worth 4 trillion. And everybody is basically trying to cover up the fact that there is this huge hole, this huge fraud has been perpetrated by the banks and the fraud would reveal itself truthfully if they were to audit the Federal Reserve and that would cause panic. Let’s assume they’re right, let’s assume that you’re right, let’s assume that this is worthless crap at the Fed, how do you deal with that fallout if, in fact, we get what we want and they open the closet. And what do you think is in there is in there, which is nothing?
Ron Paul: But pretending it’s worth 8 trillion is worth 2 trillion or even less doesn’t solve our problems. It just delays the agony. For me it would be like in medicine someone had cancer and we treated him with aspirin and we said, “Oh you don’t want to know the truth, and we don’t give you a real treatment”. You have to know the truth and you have to have a real treatment and today they won’t look at the real truth and the cause of the business cycle and the cause all the financial bubble and then the bursting of that bubble. What they’re doing is they’re saying, “Oh, all we need are more regulations, and what we need to do is prop up all the bad debt. We don’t want liquidation of debt, we don’t want the prices down, let’s stimulate housing” and on and on. So they’re doing everything that caused the bubble before to try to re-inflation the bubble, and believe me, they’re not going to be able to do it this time.
Chrystia Freeland: Congressman Paul, I agree with you that there is a little bit of an irony in the fact that in curing a crisis which was cause by too much money pumped out, one of the cures turns out to have been spending more government money. But don’t you have to agree that that cure has turned out to be pretty effective? We haven’t had a second great depression, the financial crisis has more or less been resolved. Isn’t that better than having a total freezing of the financial system, which it looked as if we might face last fall?
Ron Paul: Not long term. What if it turns out that we’re in 1930 and we have another 15 years of problems ahead of us. So, no. I think we’re still kidding ourselves. They say the GDP is up, but they printed money and they spent the money and when government spends money the GDP goes up.
Chrystia Freeland: Isn’t that better than the alternative of the entire economy just screeching to a halt?
Ron Paul: No, it really isn’t. You have to bite the bullet, you have to admit the truth, you have to make the right corrections. We used to do this. We’ve never had a perfect system; there was always abuse of the gold standard, but when they got out of whack they allowed the correction to occur rather quickly. The best example is the depression of 1920 and 1921. It lasted about a year and people did go bankrupt and it was really tough, but it’s not even an historical event. It was the introduction by Hoover and Roosevelt that the politicians can’t have hands off; you have to, “now that you have this sophisticated Federal Reserve, we’ll never allow recessions to occur.” They took the recessions of the early 1930 and turned it into a depression. So though you can do it is better. It is kind of like getting somebody off drugs. What you’re talking about is you don’t want the withdrawal symptoms, and I admit there will be withdrawal symptoms. But, keeping them on the drug which is easy money, easy spending and huge deficits and all that, that will kill the patient. And the patient remains the dollar and we’re going to be on the verge of killing the patient and when you see gold up at $1100 an ounce, that is a little bit of a warning sign. That might only be the beginning of what we’re going to see.
Dylan Ratigan: But what if you just decided is that you didn’t care about the children? If you don’t care about children, isn’t it better just to ignore it? To heck with the kids, it’s easier for me to just print the money and go out to dinner, don’t you think?
Ron Paul: Well, yea. That is live high on the hog, and maybe the bankers won’t come and get us. But the bankers always come, and in this case it’s the market that is coming. When an individual lives beyond his or means, they must be forced to live below their means. When a country does it, they will be forced to live below their means. And I believe that the lowering of our standard of living actually has been going on for about ten years, because the good jobs have been disappearing. The standard of living isn’t really going up. So we’re holding back the correction and it doesn’t look so bad. So yeah, we didn’t crash into a depression but what we’re doing is preventing the good policies to come back which means free markets, sound money and limited government, balanced budgets. All these things are totally rejected here because this place in Washington DC is run by Keynesians. Keynesians leaning towards socialism now because we’re buying up the companies. No, it cannot solve our problems.
Dylan Ratigan: It’s also easier to print money. You will appreciate this story, Congressman Paul, and then I’m going to let you go. I was talking to a couple of bankers the other day as to why it is that they’re still trying to keep 80% of their swap market, which is the crooked insurance market, in private? And they said, “Well, because if we bring it into public then we’ll have to post collateral, and we don’t have any collateral”. And so it’s easier just to keep it in secret than to bring the entire credit default swap market into public and reveal that there is actually nothing there for the market that is 9 times the size of the global economy.
Ron Paul: But you haven’t learnt the language yet. They’re just illiquid, temporarily illiquid. But if you use ‘worthless’ instead of ‘illiquid’ then why should the taxpayer ever be stuck for something that is worthless, and that is what’s happening.
Dylan Ratigan: Well, listen, keep us posted. I think that the most interesting part in this context and the context of the conversation at MSNBC and the political context, because there is such self-evident aspect to this point is why are our politicians so hesitant to get their hands dirty and do the hard work, as troubling as it may be? And why do they continue to indulge the political expedience of money printing because it’s quite simply an easier road to take?
Ron Paul: I think you got it there.
Dylan Ratigan: Alright Congressman Paul, thank you. Keep us posted