The case for a meaningful and recurring audit of the Federal
Reserve, because we deserve an honest, transparent government. The legislative
and judicial
battles to audit the Fed will go down in history as a textbook example of
populism vs. corporatism.
It’s official, Senator Sanders’ financial reform amendment
requesting a one-time disclosure of emergency lending by the Fed passed with a
96-0 vote. Succumbing to pressure,
Sanders’ amendment is a gutted version of his bill S.604 The Federal Reserve Sunshine
Act. H.R.1207 The Federal Reserve
Transparency Act, introduced by Congressman Ron Paul boasts 320
cosponsors and its recurring audit language passed in the House financial
reform bill as the Paul-Grayson
amendment. The two
amendments will meet in conference committee negotiations once the senate
financial reform bill passes.
Senator Vitter, an S.604 cosponsor, introduced the
Paul-Grayson language as an amendment attempting to reinstate a recurring audit
into the senate financial reform, but it was voted down 37-62.
This subject deserves attention, as President Obama,
Wall Street,
Federal Reserve
Chairman Ben Bernanke and Treasury
Secretary Tim Geithner have effortlessly lobbied against a
meaningful audit for several months through editorials,
presence on the
hill, etc.
The "Audit the Fed" movement has hardly lacked ammunition
to build coalitions between the liberal left
and conservative-libertarian
right to battle the Fed.
The Fed failed to manage the economy and dismissed
concerns of a housing bubble reported within their own FOMC meetings
by regional bank presidents in 2004. Those meeting transcripts were released
this past month. FOMC transcripts are withheld from government-public
review for five years with the excuse of market stability and political
independence to control the debate on policy.
Certainly market stability was not present while the financial
system collapsed neither was political independence shown when Fed and Treasury
officials coerced our
representatives to bailout their member banks lest stock markets
collapse and martial law be declared. Let's address the reasons for
denying a recurring audit: political independence, market stability, policy
effectiveness, etc.
Political Independence
The opposition argues an audit would strip the central bank's
political independence of setting monetary policy, but would an audit interfere
with their independence or setting monetary policy? Jim Rogers, renowned
American investor, says no.
"It cannot interfere with their independence at all.
Setting interest rates and looking after what happens in the bond market, and
they are supposed to maintain a sound currency. Why does auditing the fed
affect that? I've heard no explanation from them that has any credibility
at all."
Executing an audit requires examining and reporting
findings. There is no dictation involved unless a law is found to be
broken, upon which procedures initiate to correct the matter. No entity of government should be
exempted from our democratic form of government and the audits every individual
and business in America are subject to.
Although the cry for independence is heard often, they lack
such independence due to the structure of our government and the objectives of
monetary policy as expressed by Fed Chairman Bernanke on January 1, 2008 stating:
"With that objective, the FOMC implemented a sequence of
rate increases, beginning in mid-2004 and ending in June 2006, at which point
the target for the federal funds rate was 5.25 percent--a level that, in the
judgment of the Committee, would best promote the policy objectives given to
us by the Congress."
The Federal Reserve lacks political independence and their monetary
policy is political in nature, as it must compliment fiscal policy and the
overall economic policy objectives while accomplishing their dual mandate of
maximum sustainable employment and price stability. Which begs the question; do they ever accomplish their dual
mandate?
In his own words Fed Chairman Bernanke confirms this
complimentary relationship between policies. On January 17, 2008 he stated:
"A number of analysts have raised the possibility that fiscal
policy actions might usefully complement monetary policy in supporting
economic growth over the next year or so. I agree that fiscal
action could be helpful in principle, as fiscal and monetary stimulus
together may provide broader support for the economy than monetary policy
actions alone. But the design and implementation of the fiscal program
are critically important."
If the design and implementation of fiscal policy are
critically important in complimenting monetary policy it would require the Fed engage
in the discussion to assure the effectiveness of their own monetary policy
while being exposed to political pressure. However, the argument for an audit can be more direct and
simple. As renowned economist Murray Rothbard put it:
"These are government agencies and operations...to say that
government should be "independent of politics"...government can only
be accountable to the public and to its representatives in the
legislature." A government independent of politics is an oligarchy,
accountable to no one and would be more suitable for a dictatorship than for an
allegedly democratic country.
Market Stability
There’s the argument an audit would reveal which banks accept
money at the discount window and if not paid back in a timely manner, would be
viewed as weak. The banks would be reluctant to participate in the
discount window, known as the 'stigma problem.' It should be obvious in
the case these institutions are unable to settle discount window or auction
facility obligations in a timely manner they’re indeed weak. This problem
is demonstrative of the dilemma faced by the fractional-reserve banker: the
fear of being found insolvent otherwise known as the 'insolvent bank problem.'
If institutions like the FDIC or any consumer protection
agencies are to protect banking customers it would require this vital information
be available for anyone who desires to perform such due diligence. After
all, it is the customers' money in the banks.
More representative of the falsehood that secrecy at the
discount window is the only solution for the ‘stigma problem’ are the words by
Fed Chairman Bernanke himself identifying a rather new auction facility that
seemed to alleviate such a stigma. On January 10, 2008 Chairman
Bernanke stated:
"To address the limitations of the discount window, the
Federal Reserve recently introduced a term auction facility, or TAF, through
which pre-specified amounts of discount window credit can be auctioned to
eligible borrowers...it appears that the TAF may have overcome the two
drawbacks of the discount window, in that there appears to have been little if
any stigma associated with participation in the auction."
He went on to discuss the dilemma between banking reserves and the
target federal funds rate. While Mr. Bernanke recognized that restructuring
facilities might address the stigma problem, near 80% of the banks' customers suggest honesty
and transparency.
By denying outside analysis of discount window operations, the
Fed shields its member banks, but what is the Federal Reserve System hiding,
money or lack thereof? Could it be the very nature of a
fractional-reserve system, insolvent banks? If this were the case, than a
significant portion of FRB operations focuses on propagating recurring bailouts
and the unsound banking practices of its member banks. This arrangement of inadequate capital
reserves is culpable for the housing and financial crisis according to former
Fed Chairman Alan Greenspan.
An investigation into these matters is denied as the opposition
argues without common sense
and overlooks the current state of affairs with respect to the big
picture.
While representing the White House's opposition to a Fed audit, Deputy
Secretary of the U.S. Treasury, Neal Wolin said:
"We think that independence has served this country very
well over a long period of time. We think that countries that have had either
the reality or the perception of political influence in their central banks have had real problems, problems with
respect to inflation, with respect
to the cost and availability of credit
including to consumers and to small businesses."
This simple thinking has plagued the opposition's arguments.
With all due respect the housing market crashed, financial markets crashed and unemployment
ticked up to 9.9%. Credit is hardly available unless you
are a member bank of the Fed; to which trillions of
dollars of credit is available backed by the taxpayers. The
American public in the beginning of this century were led to believe that the
Federal Reserve System would prevent such crisis, but only since their creation
have there been such events as a Great Depression or global economic
crisis.
Protection of Monetary Policy
The justification for gutting Bernie Sanders’ amendment from an
audit into a one-time disclosure of emergency lending was to guarantee monetary
policy is not inspected. However, by allowing an inspection of emergency
lending facilities such as the TAF, the Fed has conceded such protection.
The TAF become an important supplemental tool to the discount window in
facilitating monetary policy.
Federal Reserve Chairman Bernanke himself identifies this to be
true. On January 10, 2008 he stated:
"To address the limitations of the discount window,
the Federal Reserve recently introduced a term auction facility, or TAF,
through which pre-specified amounts of discount window credit can be
auctioned to eligible borrowers. "
He followed by revealing the large amounts of taxpayer money
passing through this supplemental facility of the discount window saying:
"In December 2007, the Fed successfully auctioned $40
billion through this facility…the European Central Bank and the Swiss
National Bank lent an additional $24 billion. These two central banks
obtained the dollars from the Federal Reserve through currency swaps...we will
auction an additional $60 billion …
Lack of transparency and honesty regarding the assets,
securities and financial condition of various firms were significant factors of
the uncertainty that plagued the financial markets most noticeable in the Fall
of 2008. Alongside this was something called "regime
uncertainty" which prevented the execution of due diligence needed for major
market participants to take a position. How could they with the certainty
that the Federal Reserve and Treasury would void such due diligence through
market interventions?
The Fed Fails
The Fed has failed to achieve their dual mandate of maximum
sustainable employment and price stability. Unemployment just ticked up
to 9.9% and prices in housing, commodities like oil and gold, education and
health care have been all but stable. Prices go up when an economy is
based on cheap money.
While evidence that dissent existed amongst the FOMC in 2004
has now been released in 2010, Chairman Bernanke downplayed the deteriorating
condition of the housing market and financial industry as late as 2007 and
2008. Most savvy investors
understood the situation while Mr. Bernanke during a speech on the
subprime mortgage market on May 17, 2007 stated:
"All that said, given the fundamental factors in place that
should support the demand for housing, we believe the effect of the troubles in
the subprime sector on the broader housing market will likely be limited,
and we do not expect significant spillovers from the subprime market to
the rest of the economy or to the financial system."
On January 10, 2008 months before our largest financial
institutions like Bear Stearns, Countrywide, Washington Mutual and Lehman Bros.
collapsed or sold themselves to avoid bankruptcy, Fed chairman Bernanke stated:
"Fortunately, after a number of years of strong earnings,
most financial institutions entered the current episode in good financial
condition. Thus, notwithstanding the effects of multi-billion dollar
write-downs on the earnings and share prices of some large institutions, the
banking system remains sound. Nevertheless, the market strains have been
serious, and they continue to pose risks to the broader economy."
In the following months it was revealed, amongst others, that accounting
tricks were used to mask massive debt, assets were more of
liabilities and grossly overvalued, that the SEC-created
cartel of credit-rating agencies failed to rate risk properly, that
financial firms did not have adequate capital reserves to weather the financial
storm and that the Federal Reserve still claims no
one saw this coming.
Our central planners at the Fed, with access to information so
vital to our economic stability that it must be kept secret, were unable to
foresee any of this with the likely exception that our fractional-reserve
banking system is an insolvent system and provides cheap money.
Albert Einstein believed we still do not know one thousandth of
one percent of what nature has revealed to us, yet we are to believe a room
full of 24 is to centrally plan and regulate our economy in secrecy through the
price control of money and whose operations deny the most vital foundation of a
functional free society- honest banking and sound money. The past century
has been a history of stepping away from this foundation and has seen problems
more severe and
widespread.
With access to the most vital and secret of all information the
Fed stressed the importance of secrecy. During an FOMC meeting in 2004,
Fed Chairman Alan Greenspan said:
"We run the risk, by laying out the pros and cons of a
particular argument, of inducing people to join in on the debate, and in this
regard it is possible to lose control of a process
that only we fully understand."
Unfortunately they didn't understand the process at all.
Alan Greenspan wanted any dissent amongst the FOMC to be kept hidden.
Between the years 2000-2010, the FOMC swung the target federal
funds rate down, up and back down again. The rate has been held below 2% five
of these years otherwise it’s ranged between 6% and 0%. No wonder markets
are unstable. While understanding that financial and economic conditions
may change quickly and justify a change in policy, the point of the above is
despite their actions the financial markets collapsed and economy crashed.
Famed investor Jim Rogers has a simple understanding for it stating:
"This idea that the central bank is somehow smarter than
the rest of us...they're nothing but government bureaucrats. What
suddenly made them so smart just because they went to work for the
government?"
The Federal Reserve's Response
On November 2, 2009 8 Fed-sponsored economists circulated a
letter to our representatives in Congress opposing an audit of the Federal
Reserve. The statement read:
"Subjecting central banks to short-run political
pressure makes it more likely that the monetary policy authorities will pursue
excessively expansionary monetary policy to lower unemployment in the short run,
with an outcome of higher inflation, higher interest rates, and yet no
better performance on the unemployment rate in the long-run. This has happened over and over again in the
past, not only in the United States but in many other countries throughout
the world."
Let's consider the track record of the Federal Reserve in the
past few years. The Fed failed to manage and identify risks resulting
from their monetary policy and failed to connect the dots of poor monetary,
regulatory and fiscal policy. Insult to injury their response taken
to clean up the mess has been extending taxpayer-backed
credit to facilitate distressed sales of financial firms,
appropriating taxpayer-backed
funds to purchase stocks of financial firms, and purchasing toxic
assets that were bringing down
financial firms using taxpayer-backed credit.
What intelligent thought is required to spend trillions of
dollars purchasing everything in sight and pursuing excessively expansionary
monetary policy doubling the
money supply in mere months, at a rate not even comparable to the
previous years, in order to lower unemployment in the short run? These actions result in the redistribution
of income and wealth to the beneficiaries of such actions and will see no
better performance on the unemployment rate in the long run.
Indeed the 8 Fed-sponsored economists are very wise in that
there appears to be a force of political pressure subjecting our Federal
Reserve Bank to pursuing an unsustainable, excessively expansionary monetary
policy. It is only necessary that such political pressure be revealed
through an audit of the Federal Reserve. So in light of this revelation and
the Fed’s response to the crisis the following words of Albert Einstein come to
mind:
"We can't solve problems by using the same kind of thinking
we used when we created them."
Recognizing that despite the Federal Reserve's oversight and
interventionist management the financial markets crashed and the economy
collapsed, consider the following question. Is it possible that despite
these interventions in the market, the economy could
recover on its own?
Famed investor Jim Rogers puts this in perspective saying:
"America has had three central banks in our history, the
first two disappeared...the world didn't come to an end. America
continued to become one of the great success stories of the last 200
years." He asks, "What is this, the world would suffer badly if
the Fed were audited? Even if they found out horrible things, we should
know, shouldn't we? If the world finds great things, fine that would be
wonderful."
Conclusion
Sustainable long-term employment and economic growth will be
despite these interventions in the market. Interest rate setting is a mere form of price control of our
currency and cheap money doled out to fractional-reserve bankers combined with
poor regulatory policy and government initiatives fuel misallocations of
capital into unsustainable endeavors, as should be now obvious as experienced
with the housing bubble and financial crisis.
The question remains however, does the financial reform in the
House and Senate address the causes of the crisis? The straight answer is
no. Effective reform needs all the vital information to understand the
cause that needs to be reformed to prevent the effects. An extensive and
recurring audit of the Federal Reserve would provide this information.
Posted
May 12 2010, 03:25 PM
by
Brandon Barrios