United States House of Representatives
Committee on Financial Services
Subcommittee on Domestic Monetary Policy
Hearing on
"The Price of Money: Consequences of the Federal Reserve's Zero Interest Rate Policy"
September 21, 2012
Hearing on the Price of Money Sept 21, 2012
Showing posts with label Federal Reserve. Show all posts
Showing posts with label Federal Reserve. Show all posts
Saturday, September 22, 2012
Tuesday, September 18, 2012
The Magnitude of the Mess We're In
The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.
Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don't want, but need, to hear.
Where are we now?
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.
The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.
The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens' and institutions' purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.
The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?
The Fed's policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.
The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed's Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury's traditional debt management.
This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.
The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.
Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It's up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.
This is all bad enough, but where we are headed is even worse.
President Obama's budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.
Under the president's budget, for example, the debt expands rapidly to $18.8 trillion from $10.8 trillion in 10 years. The interest costs alone will reach $743 billion a year, more than we are currently spending on Social Security, Medicare or national defense, even under the benign assumption of no inflationary increase or adverse bond-market reaction. For every one percentage point increase in interest rates above this projection, interest costs rise by more than $100 billion, more than current spending on veterans' health and the National Institutes of Health combined.
Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.
What does this spending and debt mean in the long run if it is not controlled? One result will be ever-higher income and payroll taxes on all taxpayers that will reach over 80% at the top and 70% for many middle-income working couples.
Did you know that the federal government used the bankruptcy of two auto companies to transfer money that belonged to debt holders such as pension funds and paid it to friendly labor unions? This greatly increased uncertainty about creditor rights under bankruptcy law.
The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why an independent agency of government should have this power.
When businesses and households confront large-scale uncertainty, they tend to wait for more clarity to emerge before making major commitments to spend, invest and hire. Right now, they confront a mountain of regulatory uncertainty and a fiscal cliff that, if unattended, means a sharp increase in taxes and a sharp decline in spending bound to have adverse effect on the economy. Are you surprised that so much cash is waiting on the sidelines?
What's at stake?
We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar's role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.
Suppose you were offered the job of Treasury secretary a few months from now. Would you accept? You would confront problems that are so daunting even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. Our first Treasury secretary famously argued that one of a nation's greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt "foreign and domestic, was the price of liberty."
History has reconfirmed Hamilton's wisdom. As historian John Steele Gordon has written, our nation's ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s. Today, government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential, national purpose.
The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.
The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.
The authors are senior fellows at Stanford University's Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.
Source: WSJ - The Magnitude of the Mess We're In
Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don't want, but need, to hear.
Where are we now?
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.
The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.
The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens' and institutions' purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.
The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?
The Fed's policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.
The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed's Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury's traditional debt management.
This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.
The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.
Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It's up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.
This is all bad enough, but where we are headed is even worse.
President Obama's budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.
Under the president's budget, for example, the debt expands rapidly to $18.8 trillion from $10.8 trillion in 10 years. The interest costs alone will reach $743 billion a year, more than we are currently spending on Social Security, Medicare or national defense, even under the benign assumption of no inflationary increase or adverse bond-market reaction. For every one percentage point increase in interest rates above this projection, interest costs rise by more than $100 billion, more than current spending on veterans' health and the National Institutes of Health combined.
Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.
What does this spending and debt mean in the long run if it is not controlled? One result will be ever-higher income and payroll taxes on all taxpayers that will reach over 80% at the top and 70% for many middle-income working couples.
Did you know that the federal government used the bankruptcy of two auto companies to transfer money that belonged to debt holders such as pension funds and paid it to friendly labor unions? This greatly increased uncertainty about creditor rights under bankruptcy law.
The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why an independent agency of government should have this power.
When businesses and households confront large-scale uncertainty, they tend to wait for more clarity to emerge before making major commitments to spend, invest and hire. Right now, they confront a mountain of regulatory uncertainty and a fiscal cliff that, if unattended, means a sharp increase in taxes and a sharp decline in spending bound to have adverse effect on the economy. Are you surprised that so much cash is waiting on the sidelines?
What's at stake?
We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar's role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.
Suppose you were offered the job of Treasury secretary a few months from now. Would you accept? You would confront problems that are so daunting even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. Our first Treasury secretary famously argued that one of a nation's greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt "foreign and domestic, was the price of liberty."
History has reconfirmed Hamilton's wisdom. As historian John Steele Gordon has written, our nation's ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s. Today, government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential, national purpose.
The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.
The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.
The authors are senior fellows at Stanford University's Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.
Source: WSJ - The Magnitude of the Mess We're In
Friday, September 14, 2012
Federal Reserve Announces Unlimited QE3: $40 Billion a Month
For immediate release
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.
Source: FOMC Statement on September 13
Read also:
Business Insider - BEN BERNANKE DEFENDS UNLIMITED QE, AS MARKET GOES TOTALLY WILD
Telegraph - Debt crisis: as it happened - September 13, 2012
Reuters - Fed bets big in new push to rescue U.S. economy
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.
Source: FOMC Statement on September 13
Read also:
Business Insider - BEN BERNANKE DEFENDS UNLIMITED QE, AS MARKET GOES TOTALLY WILD
Telegraph - Debt crisis: as it happened - September 13, 2012
Reuters - Fed bets big in new push to rescue U.S. economy
Wednesday, September 5, 2012
Ron Paul Lecture - "The Great Enabler: The Rise of the Federal Reserve and the Growth of Government"
Congressman Ron Paul delivered this Congressional lecture on "The Great Enabler: The Rise of the Federal Reserve and the Growth of Government." The introduction was given by Senator Rand Paul. As a continuing educational tool this lecture was filmed and is provided to the public.
Congressman Paul explains in this lecture the Federal Reserve's role as the enabler of big government. Through purchases of government debt, the Fed allows the government to spend beyond its means and contributes to the growth of the welfare-warfare state. If leviathan government is to be countered, understanding monetary policy and the fundamental role it plays in the relentless growth of government is a necessary first step.
Ron Paul Lecture - "The Great Enabler: The Rise of the Federal Reserve and the Growth of Government"
Rep. Ron Paul sponsored this Congressional lecture on "What Is the Fed's Future?", the final lecture in a three part series on the Federal Reserve System for Congressional staff. As a continuing educational tool this lecture was filmed and is provided to the public. The lecture was delivered by Dr. Roger Garrison, Professor Emeritus of Economics at Auburn University.
Dr. Garrison's lecture describes how the economic precepts on which the Fed operates are fundamentally flawed, making it only a matter of time before the Fed is the creator of its own demise. By contrasting the Keynesian macroeconomic theory upon which the Fed is based with the Austrian macroeconomic theory, what Garrison calls the capital-based framework, Dr. Garrison illustrates the market-distorting effects of the Fed's actions on the structure of production. Using this comparison, Professor Garrison provides a simple yet comprehensive explanation of how the Fed's monetary policy actions created the housing bubble and the subsequent financial crisis. He concludes by highlighting the bleak future for the Fed's ability to manage the economy, and emphasizes the necessity of decentralized banking.
"What is the Fed's Future?" with Roger Garrison -- Ron Paul Fed Lecture Series, Pt 3/3
Other lectures in the Fed series:
Pt. 1: Why Was the Fed Created? -- http://www.youtube.com/watch?v=JeIljifA8Ls
Pt. 2: What Does the Fed Do? -- http://www.youtube.com/watch?v=pRipVd5wxhI
Pt. 3: What Is the Fed's Future? -- http://www.youtube.com/watch?v=IdX60JgPTmA
Related: Ron Paul Money Lecture Series
Pt. 1: "What is Money" -- http://www.youtube.com/watch?v=vowbrq_g5NM
Pt. 2: "What is Constitutional Money?" -- http://www.youtube.com/watch?v=k6gMkKmQSW4
Pt. 3: "What About Money Causes Economic Crises?" -- http://www.youtube.com/watch?v=npJ0CUT8d_Y
Congressman Paul explains in this lecture the Federal Reserve's role as the enabler of big government. Through purchases of government debt, the Fed allows the government to spend beyond its means and contributes to the growth of the welfare-warfare state. If leviathan government is to be countered, understanding monetary policy and the fundamental role it plays in the relentless growth of government is a necessary first step.
Ron Paul Lecture - "The Great Enabler: The Rise of the Federal Reserve and the Growth of Government"
Rep. Ron Paul sponsored this Congressional lecture on "What Is the Fed's Future?", the final lecture in a three part series on the Federal Reserve System for Congressional staff. As a continuing educational tool this lecture was filmed and is provided to the public. The lecture was delivered by Dr. Roger Garrison, Professor Emeritus of Economics at Auburn University.
Dr. Garrison's lecture describes how the economic precepts on which the Fed operates are fundamentally flawed, making it only a matter of time before the Fed is the creator of its own demise. By contrasting the Keynesian macroeconomic theory upon which the Fed is based with the Austrian macroeconomic theory, what Garrison calls the capital-based framework, Dr. Garrison illustrates the market-distorting effects of the Fed's actions on the structure of production. Using this comparison, Professor Garrison provides a simple yet comprehensive explanation of how the Fed's monetary policy actions created the housing bubble and the subsequent financial crisis. He concludes by highlighting the bleak future for the Fed's ability to manage the economy, and emphasizes the necessity of decentralized banking.
"What is the Fed's Future?" with Roger Garrison -- Ron Paul Fed Lecture Series, Pt 3/3
Other lectures in the Fed series:
Pt. 1: Why Was the Fed Created? -- http://www.youtube.com/watch?v=JeIljifA8Ls
Pt. 2: What Does the Fed Do? -- http://www.youtube.com/watch?v=pRipVd5wxhI
Pt. 3: What Is the Fed's Future? -- http://www.youtube.com/watch?v=IdX60JgPTmA
Related: Ron Paul Money Lecture Series
Pt. 1: "What is Money" -- http://www.youtube.com/watch?v=vowbrq_g5NM
Pt. 2: "What is Constitutional Money?" -- http://www.youtube.com/watch?v=k6gMkKmQSW4
Pt. 3: "What About Money Causes Economic Crises?" -- http://www.youtube.com/watch?v=npJ0CUT8d_Y
Tuesday, September 4, 2012
Central Banks Debate Limits of Power at Jackson Hole
Central bankers who traveled to the wilds of Wyoming to figure out if more policy action was needed to curb stubbornly high unemployment heard powerful arguments on both sides of the debate, and leave with many questions unanswered.
Policymakers in Europe and the United States facing weak growth and painfully high unemployment are struggling with the issue of whether additional monetary stimulus could do more harm than good.
As the annual Jackson Hole gathering came to a close on Saturday and some of the world's most important central bankers headed back home, a former vice chairman of the U.S. Federal Reserve summed up the key issue confronting the prestigious policy retreat.
"What is holding the economy back? Why is it that we've had such incredibly accommodative monetary policy for so long (but) we've had so little growth? I think it remains a puzzle," said Donald Kohn, who is now a senior fellow at the Brookings Institution think tank in Washington.
Fed Chairman Ben Bernanke, citing "grave" concerns about stagnation in the labor market in remarks that were seen as advancing the case for another round of bond purchases by the U.S. central bank, talked about headwinds obstructing a recovery that included the debt crisis in Europe and U.S. fiscal policy.
European Central Bank President Mario Draghi canceled his attendance at the conference to stay home to prepare for a meeting on Thursday, at which he may advance a controversial plan for the ECB to buy Spanish and Italian government bonds to win time for the region to tackle its festering debt crisis.
Adam Posen, who finished his final day as a member of the Bank of England's monetary policy on Friday and is a powerful advocate for more forceful central bank action, asked the same question as Kohn: "Why has all this lower short-term interest rates failed to make the economy go go go?"
But he scornfully blamed "defeatism" by central banks concerned about interfering in the proper functioning of markets and damaging their credibility. He argued that policymakers in Europe and the United States should waste no time in extending asset purchase programs to spur growth.
"The idea that this is somehow a pristine, virgin central bank that would be tainted forever by intervening ... is a prehistoric way of thinking," he said.
A Reuters poll this week revealed a strong expectation that Draghi will expound on plans for the ECB to buy government debt to reduce crippling Spanish and Italian borrowing costs.
But the ECB is not likely to set a cap, or a defined level at which it will step into the market, on those yields, according the survey.
Economists were divided over whether the bank will cut its main refinancing rate from 0.75 percent to a record low of 0.5 percent next week. An October rate cut instead looked equally likely.
A Reuters Poll also found the Bank of England is likely to beef up its 375 billion pound quantitative easing program with a final extra 50 billion pound round of bond purchases - but not until November.
LIMITS TO THE POWER OF POLICY
From the other side of the debate, Lawrence Lindsey, who was an adviser to former Republican President George W. Bush, told central bankers to display some "modesty" about the limits of their authority and power.
Bernanke has enraged many Republicans for the Fed's aggressive action to prop up the U.S. economy, including the purchase of $2.3 trillion worth of Treasury and mortgage-backed bonds. Critics claim the Fed's bond buying has enabled profligate spending by Congress and Democratic President Barack Obama.
"We should recognize that caution in respect to the views and insight of others in society is the right way to go," Lindsey said.
A hotly debated paper presented on Saturday discussed the damage done to U.S. households by the collapse in the housing market, raising the question of what monetary policy could do to help people whose assets have been wiped out and who were now saving like crazy to rebuild them.
Alan Blinder, another former Fed vice chair who now teaches economics at Princeton, ticked off the two most blatant culprits for why the U.S. economy continued to struggle: government spending cuts and the drag from the depressed housing market.
Kohn was not convinced that various headwinds fully explained why growth had been weak for so long, and wondered whether the unusually low level of interest rates was impacting economic activity in a way that was not understood.
"We keep trying to bring spending from the future into the present with lower and lower interest rates. ... There is a lot we don't understand about what is going on," he said.
A paper presented by Edward Lazear, another former Bush aide, sought to tackle whether the rise in U.S. joblessness was simply due to economic weakness or whether it reflected a fundamental structural shift in the economy.
The question is essential because monetary policy would be traditionally aimed at cyclical unemployment, while structural changes demand intervention by the government to do things like improve skills training or change incentives to get people back to work.
Lazear concluded that most of the rise in U.S. unemployment was probably cyclical, but he left some unconvinced.
"I think it is kind of the elephant in the room for this conference - whether the U.S. economy went through some sort of structural shift associated with this very large financial crisis," said St. Louis Federal Reserve President James Bullard, who has publicly questioned the need for more Fed action.
"It sure looks like the economy was on one trend pre-crisis and it is on a very different trend post-crisis," he added. "I think the longer this goes on the stronger the evidence will be that we're on a different trend (and) ... it does have policy implications," he said.
Reservations were also voiced by several politically connected Republican economists who could be influential if their party's candidate for president, Mitt Romney, wins the White House on November 6.
"It really is a fiscal problem," said Martin Feldstein, a Harvard economist who is seen as a possible candidate to lead the Fed if Romney wins, as he pointed to the harm done by the housing collapse. "None of that is going to be fixed by monetary policy, and that is why the economy is just moving along at this very low rate with a lot of excess capacity."
Source: Reuters - Central Banks Debate Limits of Power at Jackson Hole
Policymakers in Europe and the United States facing weak growth and painfully high unemployment are struggling with the issue of whether additional monetary stimulus could do more harm than good.
As the annual Jackson Hole gathering came to a close on Saturday and some of the world's most important central bankers headed back home, a former vice chairman of the U.S. Federal Reserve summed up the key issue confronting the prestigious policy retreat.
"What is holding the economy back? Why is it that we've had such incredibly accommodative monetary policy for so long (but) we've had so little growth? I think it remains a puzzle," said Donald Kohn, who is now a senior fellow at the Brookings Institution think tank in Washington.
Fed Chairman Ben Bernanke, citing "grave" concerns about stagnation in the labor market in remarks that were seen as advancing the case for another round of bond purchases by the U.S. central bank, talked about headwinds obstructing a recovery that included the debt crisis in Europe and U.S. fiscal policy.
European Central Bank President Mario Draghi canceled his attendance at the conference to stay home to prepare for a meeting on Thursday, at which he may advance a controversial plan for the ECB to buy Spanish and Italian government bonds to win time for the region to tackle its festering debt crisis.
Adam Posen, who finished his final day as a member of the Bank of England's monetary policy on Friday and is a powerful advocate for more forceful central bank action, asked the same question as Kohn: "Why has all this lower short-term interest rates failed to make the economy go go go?"
But he scornfully blamed "defeatism" by central banks concerned about interfering in the proper functioning of markets and damaging their credibility. He argued that policymakers in Europe and the United States should waste no time in extending asset purchase programs to spur growth.
"The idea that this is somehow a pristine, virgin central bank that would be tainted forever by intervening ... is a prehistoric way of thinking," he said.
A Reuters poll this week revealed a strong expectation that Draghi will expound on plans for the ECB to buy government debt to reduce crippling Spanish and Italian borrowing costs.
But the ECB is not likely to set a cap, or a defined level at which it will step into the market, on those yields, according the survey.
Economists were divided over whether the bank will cut its main refinancing rate from 0.75 percent to a record low of 0.5 percent next week. An October rate cut instead looked equally likely.
A Reuters Poll also found the Bank of England is likely to beef up its 375 billion pound quantitative easing program with a final extra 50 billion pound round of bond purchases - but not until November.
LIMITS TO THE POWER OF POLICY
From the other side of the debate, Lawrence Lindsey, who was an adviser to former Republican President George W. Bush, told central bankers to display some "modesty" about the limits of their authority and power.
Bernanke has enraged many Republicans for the Fed's aggressive action to prop up the U.S. economy, including the purchase of $2.3 trillion worth of Treasury and mortgage-backed bonds. Critics claim the Fed's bond buying has enabled profligate spending by Congress and Democratic President Barack Obama.
"We should recognize that caution in respect to the views and insight of others in society is the right way to go," Lindsey said.
A hotly debated paper presented on Saturday discussed the damage done to U.S. households by the collapse in the housing market, raising the question of what monetary policy could do to help people whose assets have been wiped out and who were now saving like crazy to rebuild them.
Alan Blinder, another former Fed vice chair who now teaches economics at Princeton, ticked off the two most blatant culprits for why the U.S. economy continued to struggle: government spending cuts and the drag from the depressed housing market.
Kohn was not convinced that various headwinds fully explained why growth had been weak for so long, and wondered whether the unusually low level of interest rates was impacting economic activity in a way that was not understood.
"We keep trying to bring spending from the future into the present with lower and lower interest rates. ... There is a lot we don't understand about what is going on," he said.
A paper presented by Edward Lazear, another former Bush aide, sought to tackle whether the rise in U.S. joblessness was simply due to economic weakness or whether it reflected a fundamental structural shift in the economy.
The question is essential because monetary policy would be traditionally aimed at cyclical unemployment, while structural changes demand intervention by the government to do things like improve skills training or change incentives to get people back to work.
Lazear concluded that most of the rise in U.S. unemployment was probably cyclical, but he left some unconvinced.
"I think it is kind of the elephant in the room for this conference - whether the U.S. economy went through some sort of structural shift associated with this very large financial crisis," said St. Louis Federal Reserve President James Bullard, who has publicly questioned the need for more Fed action.
"It sure looks like the economy was on one trend pre-crisis and it is on a very different trend post-crisis," he added. "I think the longer this goes on the stronger the evidence will be that we're on a different trend (and) ... it does have policy implications," he said.
Reservations were also voiced by several politically connected Republican economists who could be influential if their party's candidate for president, Mitt Romney, wins the White House on November 6.
"It really is a fiscal problem," said Martin Feldstein, a Harvard economist who is seen as a possible candidate to lead the Fed if Romney wins, as he pointed to the harm done by the housing collapse. "None of that is going to be fixed by monetary policy, and that is why the economy is just moving along at this very low rate with a lot of excess capacity."
Source: Reuters - Central Banks Debate Limits of Power at Jackson Hole
Thursday, July 26, 2012
BREAKING! Federal Reserve Audit Bill Overwhelmingly Passes The House 327-98
In a rare moment of bipartisanship, the House overwhelmingly passed a bill by Rep. Ron Paul (R-Texas) to audit the Federal Reserve.
The bill, which has 270 co-sponsors, passed 327 to 98. All but one Republican -- Rep. Bob Turner of New York -- voted for it, along with 89 Democrats.
Paul teamed up with former Rep. Alan Grayson (D-Fla.) in 2010 to pass similar legislation that became part of the final Wall Street reform bill. But Paul has said new audit legislation is needed because the 2010 bill didn't go far enough. Specifically, he states on his website that the audit called for in the 2010 bill only focused on emergency credit programs and procedural issues, rather than on the substantive details of the lending transactions. The 2012 bill doesn't limit the focus of the audit.
Fed Chairman Ben Bernanke recently told the House Financial Services Committee that he agrees with the "basic premise" that the Fed should be transparent, but raised concerns that Paul's bill doesn't exempt monetary policy and deliberations from its reach.
Not including an exemption on this point could create "a political dampening effect on the Federal Reserve's policy decisions," Bernanke warned.
But Rep. Dennis Kucinich (D-Ohio) pointed out that the House vote on the bill comes on the same day that the Washington Post reported that the New York Fed "did not communicate in key meetings with top regulators that British bank Barclays had admitted to Fed staffers that it was rigging LIBOR,” the index which sets interest rates worldwide.
"The Fed creates trillions of dollars out of nothing and gives it to banks. Congress is in the dark. The Fed sets the stage for the subprime meltdown. Congress is in the dark. The Fed takes a dive on LIBOR. Congress is in the dark. The Fed doesn’t tell regulators what is going on. Congress is in the dark," Kucinich shouted on the House floor, just before the vote.
"It is time for us to bring the Fed into the sunshine of accountability," he said.
Despite the broad support in the House, a senior Senate Democratic aide signaled the bill isn't likely to go anywhere in that chamber in the near future.
"Not this work period," the aide said about the Senate acting on the bill ahead of the month-long August recess. "Don’t know about September, but I doubt it."
Another top Senate Democratic aide concurred that the bill likely won't go anywhere, but speculated it could resurface in a different form.
"We probably won’t bring it up," said the aide, adding that Paul's son, Sen. Rand Paul (R-Ky.), "will probably start insisting on this as an amendment to everything under the sun, so it's possible it comes up for an amendment vote at some point."
"It would not be the craziest amendment we've voted on," the aide said.
Source: HuffPo: Federal Reserve Audit Bill Overwhelmingly Passes The House
Congressman Ron Paul's Floor Speech on Audit the Fed July 24, 2012
Ron Paul's Audit the Fed Bill PASSES!
A Win For The Constitution - Ron Paul Gets His Bill To Audit The Fed Passed
Kucinich Stands for 99%, Demands Audit of the Federal Reserve
Harry Reid vows Federal Transparency Act will never be voted on in the Senate
Supporters of Rep. Ron Paul and sound monetary policy rejoiced online as they heard of the passage of H.R. 456, the Federal Transparency Act, on Wednesday. Their joy, however, was short-lived as within an hour of the bill passing word spread from the office of the Harry Reid. The Senate Majority Leader and Nevada Democrat has vowed the Federal Reserve Transparency Act will not be put to a vote in the Senate.
Source: Harry Reid vows Federal Transparency Act will never be voted on in the Senate
In '95 Harry Reid wanted to Audit the Fed, and now he doesn't want to because Republicans have supported it--the very definition of bipartisan hypocrisy. This is the most important institution that controls all of our money/interest rates. Very important and he won't even put it to a vote in the Senate.
Harry Reid: "I think we should audit the Federal Reserve" in 1995!
Thursday, July 19, 2012
Monetary Policy and the State of the Economy | Ron Paul vs Ben Bernanke
Before the United States House of Representatives, Committee on Financial Services, Hearing on Monetary Policy and the State of the Economy, July 18, 2012
Mr. Chairman, I thank you for calling this hearing today on monetary policy and the state of the economy. For the past few years the Federal Reserve has received criticism from all sides of the political spectrum, and rightly so, for its unprecedented intervention into the economy and its bailouts of large Wall Street banks and foreign central banks. Yet this criticism risks losing sight of the most insidious result of the Fed's actions, which is to enable the growth of government.
For nearly the first 40 years of its existence, the Fed operated as an adjunct of the Treasury Department, tasked with purchasing government debt in order to keep the government's borrowing costs low. Even after gaining its vaunted "independence" from Treasury in 1951, the Fed never shrank from enabling the growth of government. The extraordinary monetary policy of the last four years has reaffirmed that the Fed, its protestations to the contrary notwithstanding, is only too willing to enable growing government spending and massive fiscal deficits.
For centuries, banks have received special privileges from government in exchange for funding the government's wars. The creation of the Federal Reserve System in 1913 formalized and centralized this arrangement in the United States. From the very beginning, the Fed was intended to provide a more liquid market for federal government debt, enabling the growth of big government.
What we’ve seen over the last century is nothing less than the remaking of American government, thanks in large part to the Fed. Its loose monetary policy gave rise to: (i) the welfare state, encouraging dependency on government largesse and destroying the work ethic and family life of lower-income Americans; (ii) the warfare state, allowing the U.S. government to involve itself in wars of aggression around the world; and (iii) the regulatory state, the mammoth bureaucracy that relentlessly grinds away at the rights of the American people.
Little more than a decade ago, Fed economists were wringing their hands over the prospect that the federal government might pay off the national debt. Nothing could be worse for the Fed, because the Fed's monetary policy operations require the existence of government debt. Treasury debt is purchased from or sold to banks on the open market in order to influence interest rates. Without government debt, the Fed would have no idea how to conduct monetary policy. From a free market perspective this would be wonderful, as it is Fed monetary policy which largely creates the booms and busts of the business cycle. Unfortunately, the federal government has run up the national debt to unprecedented levels over the past decade, and the Federal Reserve has been right there, monetizing that debt to ensure that none of it goes unsold.
While the desire of foreign countries and private investors to purchase Treasuries was drying up, the Federal Reserve was only too willing to step in and enable the government to continue its deficit spending. The Fed's balance sheet exploded as it purchased over one trillion dollars in Treasury debt over the past few years. And before it did that, the Fed also purchased over a trillion dollars of overrated mortgage-backed securities from Wall Street banks, giving those banks the cash they needed to purchase Treasury debt of their own. Were it not for the Federal Reserve's actions, the federal government would not have been able to run trillion-dollar deficits for the past several years.
In fact, had the Federal Reserve never been created, the federal government never would have been able to run up a $16 trillion debt. No market actor would lend money to such a major debtor at such low interest rates. The only reason that banks are willing to buy Treasury debt at such low interest rates is because they can easily resell that debt to the Fed.
Without the Fed, interest rates would rise to such levels that the federal government would have no choice but to curtail its expenditures and focus only on doing what is truly necessary. With market discipline allowed to prevail, the size of the federal government would be drastically smaller. If Congress were really serious about limiting the size of government, it would eliminate the most important enabler of government profligacy by ending the Fed.
Source: Ron vs. Ben, for the Last Time
Ron Paul "We Talk About Solving A Worldwide Problem Of Insolvency By Just Printing Money"
Ron Paul "It's The Destruction Of The Currency That Destroys The Middle Class!"
Ron Paul "Under Your Philosophy I'd Say You've Done A Pretty Good Job! You Tripled Monetary Base..."
Mr. Chairman, I thank you for calling this hearing today on monetary policy and the state of the economy. For the past few years the Federal Reserve has received criticism from all sides of the political spectrum, and rightly so, for its unprecedented intervention into the economy and its bailouts of large Wall Street banks and foreign central banks. Yet this criticism risks losing sight of the most insidious result of the Fed's actions, which is to enable the growth of government.
For nearly the first 40 years of its existence, the Fed operated as an adjunct of the Treasury Department, tasked with purchasing government debt in order to keep the government's borrowing costs low. Even after gaining its vaunted "independence" from Treasury in 1951, the Fed never shrank from enabling the growth of government. The extraordinary monetary policy of the last four years has reaffirmed that the Fed, its protestations to the contrary notwithstanding, is only too willing to enable growing government spending and massive fiscal deficits.
For centuries, banks have received special privileges from government in exchange for funding the government's wars. The creation of the Federal Reserve System in 1913 formalized and centralized this arrangement in the United States. From the very beginning, the Fed was intended to provide a more liquid market for federal government debt, enabling the growth of big government.
What we’ve seen over the last century is nothing less than the remaking of American government, thanks in large part to the Fed. Its loose monetary policy gave rise to: (i) the welfare state, encouraging dependency on government largesse and destroying the work ethic and family life of lower-income Americans; (ii) the warfare state, allowing the U.S. government to involve itself in wars of aggression around the world; and (iii) the regulatory state, the mammoth bureaucracy that relentlessly grinds away at the rights of the American people.
Little more than a decade ago, Fed economists were wringing their hands over the prospect that the federal government might pay off the national debt. Nothing could be worse for the Fed, because the Fed's monetary policy operations require the existence of government debt. Treasury debt is purchased from or sold to banks on the open market in order to influence interest rates. Without government debt, the Fed would have no idea how to conduct monetary policy. From a free market perspective this would be wonderful, as it is Fed monetary policy which largely creates the booms and busts of the business cycle. Unfortunately, the federal government has run up the national debt to unprecedented levels over the past decade, and the Federal Reserve has been right there, monetizing that debt to ensure that none of it goes unsold.
While the desire of foreign countries and private investors to purchase Treasuries was drying up, the Federal Reserve was only too willing to step in and enable the government to continue its deficit spending. The Fed's balance sheet exploded as it purchased over one trillion dollars in Treasury debt over the past few years. And before it did that, the Fed also purchased over a trillion dollars of overrated mortgage-backed securities from Wall Street banks, giving those banks the cash they needed to purchase Treasury debt of their own. Were it not for the Federal Reserve's actions, the federal government would not have been able to run trillion-dollar deficits for the past several years.
In fact, had the Federal Reserve never been created, the federal government never would have been able to run up a $16 trillion debt. No market actor would lend money to such a major debtor at such low interest rates. The only reason that banks are willing to buy Treasury debt at such low interest rates is because they can easily resell that debt to the Fed.
Without the Fed, interest rates would rise to such levels that the federal government would have no choice but to curtail its expenditures and focus only on doing what is truly necessary. With market discipline allowed to prevail, the size of the federal government would be drastically smaller. If Congress were really serious about limiting the size of government, it would eliminate the most important enabler of government profligacy by ending the Fed.
Source: Ron vs. Ben, for the Last Time
Ron Paul "We Talk About Solving A Worldwide Problem Of Insolvency By Just Printing Money"
Ron Paul "It's The Destruction Of The Currency That Destroys The Middle Class!"
Ron Paul "Under Your Philosophy I'd Say You've Done A Pretty Good Job! You Tripled Monetary Base..."
Saturday, June 30, 2012
Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money | Ron Paul | Domestic Monetary Policy and Technology Subcommittee
This hearing, entitled "Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money," will be held on Thursday, June 28, at 2:00 p.m. in room 2128 of the Rayburn House Office Building.
Witnesses scheduled to testify:
Dr. John Cochran, Emeritus Professor of Economics and Emeritus Dean, School of Business, Metropolitan State College of Denver Dr. Joseph Salerno, Professor of Economics, Lubin School of Business, Pace University Dr. Lawrence H. White, Professors of Economics, George Mason University
"Fractional reserve banking underpins the entire banking system, yet its effects on society are completely ignored. Our financial system consists of vast amounts of credit pyramided on top of very small amounts of real savings-- all backstopped by explicit and implicit government guarantees. This poses significant risks to the stability of the economy and monetary system, which ought to give pause to any serious observer of financial markets. Hopefully this hearing will create a greater understanding among the American people about the nature of the banking system, and begin the movement towards serious systematic reform. The American people deserve a financial system that is stable and efficient; one that operates without taxpayer subsidies and bailouts." - Congressman Ron Paul
Hearing June 28 2012 Fractional Reserve Banking
Witnesses scheduled to testify:
Dr. John Cochran, Emeritus Professor of Economics and Emeritus Dean, School of Business, Metropolitan State College of Denver Dr. Joseph Salerno, Professor of Economics, Lubin School of Business, Pace University Dr. Lawrence H. White, Professors of Economics, George Mason University
"Fractional reserve banking underpins the entire banking system, yet its effects on society are completely ignored. Our financial system consists of vast amounts of credit pyramided on top of very small amounts of real savings-- all backstopped by explicit and implicit government guarantees. This poses significant risks to the stability of the economy and monetary system, which ought to give pause to any serious observer of financial markets. Hopefully this hearing will create a greater understanding among the American people about the nature of the banking system, and begin the movement towards serious systematic reform. The American people deserve a financial system that is stable and efficient; one that operates without taxpayer subsidies and bailouts." - Congressman Ron Paul
Hearing June 28 2012 Fractional Reserve Banking
Thursday, May 10, 2012
The Federal Reserve System: Mend It or End It? | Ron Paul | Domestic Monetary Policy and Technology Subcommittee
Rep. Ron Paul (R-TX) chaired a House Financial Services Subcommittee hearing on six legislative proposals that either reform or suggest abolishing the Federal Reserve System.
"More and more people are beginning to understand just how destructive the Federal Reserve's monetary policy has been," said Chairman Paul. "I hope that this hearing will kickstart a serious discussion on the need to rein in the Fed. 100 years is far too long for Congress to have taken a hands-off approach," Paul continued. "The Fed continues to reward Wall Street banks while destroying the dollar's purchasing power and driving up the cost of living for average Americans. This reckless behavior must come to an end"
Calls for reforming various aspects of the Federal Reserve System have existed since its creation in 1913. However, with the onset of the financial crisis of 2008-2009 and during the prolonged recession, calls for reform have escalated.
The Federal Reserve responded to the financial crisis with unconventional monetary easing, leading some to claim the Federal Reserve attempted to do too much to stimulate economic growth and set the stage for sustained inflation when the economy recovers. Slow economic growth, however, has led others to argue the Federal Reserve has not done enough and must be more accommodative in its conduct of monetary policy.
The six proposals that will be discussed by the Subcommittee on Tuesday are:
H.R. 245, introduced by Rep. Mike Pence
H.R. 1094, the Federal Reserve Board Abolition Act, introduced by Rep. Paul
H.R. 1401, the Democratizing the Federal Reserve System Act, introduced by Rep. Marcy Kaptur
H.R. 2990, the National Emergency Employment Defense Act, introduced by Rep. Dennis Kucinich
H.R. 3428, introduced by Rep. Barney Frank
H.R. 4180, the Sound Dollar Act, introduced by Rep. Kevin Brady
Opening Statement
Although it has taken nearly a century, it seems that the entire spectrum of the American political establishment has finally realized the destructive power of the Federal Reserve System. Whether left, right, or libertarian, politicians are lining up to attack Ben Bernanke and the Fed's destructive monetary policy. Where there is disagreement or lack of understanding, however, is on why the Fed's monetary policy is destructive, how it harms the economy, and what should be done about it. Today's hearing will examine the various proposals that have been put forth both to mend and to end the Fed. It is my hope that this hearing will spur a vigorous and long-lasting discussion about the Fed's problems, a discussion which will lead to concrete actions once and for all to rein in the Fed.
Much confusion exists over what the Federal Reserve System actually is. Some people claim that is a secret cabal of elite bankers, while others claim that it is part of the federal government. In reality it is a bit of both. The Federal Reserve Board is a government agency, while the Federal Reserve Banks are privately-run government-chartered institutions, and monetary policy decisions are made by the Federal Open Market Committee, which has members from both the Board and the Reserve Banks.
The Federal Reserve System is the epitome of crony capitalism. It exemplifies the collusion between big government and big business to profit at the expense of the taxpayers. The Fed's bailout of large banks during the financial crisis propped up poorly-run corporations that should have gone under, giving them an advantage that no other business in the United States would have received. The bailouts continue today, as banks maintain $1.5 trillion worth of excess reserves at the Fed, reserves which were created through the Fed's purchase of worthless securities from banks. The trillions of dollars that the Fed has injected into the system have the goal of forcing down interest rates. But the Fed fails to realize that interest rates are a price, the price of money and credit, and that forcing interest rates down will only create an even bigger bubble and an enormous economic depression when this entire house of cards comes falling down.
The Federal Reserve is statutorily required to focus on three aims when engaged in monetary policy: full employment, stables prices, and moderate long-term interest rates. In practice, only the first two have received any attention, the so-called "dual mandate." Some reformers have called for the full employment mandate to be repealed, in order to allow the Fed to focus solely on stable prices. But these critics ignore the fact that stable prices are not a desirable goal. After all, with increasing productivity and technological innovation, the natural trend for most goods is for prices to decrease. By calling for the prices of goods to remain stable, the Fed would have to inflate the money supply in order to counteract this trend towards price declines, pumping new money into the system and creating economic distortions. This is exactly what happened during the 1920s, as the Fed's monetary pumping was masked by rising productivity. The result was stable prices, but the malinvestment caused by the Fed's loose monetary policy became evident by 1929. There is no reason to expect that focusing on stable prices today would have a dissimilar outcome.
Other reformers have called for changes to the composition of the Federal Open Market Committee, the body which sets the Fed's monetary policy objectives. On Constitutional grounds, the FOMC is undoubtedly problematic, as government appointees and the heads of the private Federal Reserve Banks work together to set monetary policy objectives that directly impact the strength of the dollar. While all of the members of the FOMC ought to be confirmed by the Senate, debates about the size of the FOMC or whether Reserve Bank Presidents should make up a majority of the members or whether they should even serve at all are largely a sideshow. While the only dissent to monetary policy decisions in recent years has come from Reserve Bank Presidents, there is no reason to think that expanding the FOMC to include more Reserve Bank Presidents would lead to any greater dissent or to any substantive changes to the conduct of monetary policy.
Another proposal for reform is for outright nationalization of the Fed or its functions. No longer would the Fed create money; that function would be taken up by the Treasury, issuing as much money as it sees fit. No longer would the Treasury issue debt to cover fiscal deficits, it would just issue new money to cover budget shortfalls. If what the Fed does now is bad, allowing the Treasury to print and issue money at will would be even worse. These types of proposals hearken back to the days of the first greenbacks, which the U.S. government began issuing in 1863. A pure fiat paper currency, unbacked by silver or gold, the greenbacks were widely reviled. Only once the greenbacks were made redeemable in gold were they accepted by the American people. The current system of Federal Reserve Notes is even worse than the greenback era in that there is no hope that they will ever be redeemable for gold or silver. The only limiting factor is that the Federal Reserve System only creates new money when purchasing assets, normally debt securities. Allowing the federal government to print money without at least a nominal check on the amount issued would inevitably lead to a Weimar-like hyperinflation.
So what then is the solution? The Fed maintains that a paper standard can be adequately managed without causing malinvestment, inflation, or other economic distortions. If the Fed were omniscient and knew the wishes, desires, and future actions of all Americans, this might be possible. But the Fed cannot possibly aggregate or act on the information necessary to engage in monetary policy. The actions of hundreds of millions of individuals, all seeking to better their position in life, acting purposefully towards that aim, cannot possibly be compiled into aggregates or calculated through mathematical equations or econometric models. Neither a single person, nor the members and staff of the FOMC, nor millions of people with millions of computers working in a new Goskomtsen will ever be able to accumulate, analyze, and act upon the information required to create a centrally planned monetary system. Centrally planned fiat paper standards such as the one currently in place in this country are doomed to failure.
This brings us to the question of the gold standard. The era of the classical gold standard was undoubtedly one of the greatest eras in human history. For a period of several decades in the late 19th century, largely uninterrupted by war, the West made enormous advances. Economic productivity increased, art and culture flourished, and living standards rose so that even the poorest citizens lived a life their forebears could have only dreamed of.
But the problem with the gold standard is that it was run by the government, which exercised a monopoly over monetary affairs. The temptation to suspend gold redemption, so often resorted to by governments throughout history, reared its head again with the outbreak of World War I. Once the tie to gold was severed and fiscal restraint thrown to the wind, undoing the damage would have required great fiscal austerity on the part of governments. Emancipated from the shackles of the gold standard, the Western world proceeded to set up a gold-exchange standard which lasted not even a decade before the easy money policies it enabled led to the Great Depression. While returning to the gold standard would certainly be far better than maintaining the current fiat paper system, as long as the government retains the power to go off gold we may end up repeating the same mistakes that occurred from 1934 to 1971 as the government went first off the gold coin standard and finally off the gold bullion exchange standard.
The only viable solution for monetary stability is to get government out of the money business permanently. The way to bring this about is through currency competition: allowing parallel currencies to circulate without any one currency receiving any special recognition or favor from the government. Fiat paper monetary standards throughout history have always collapsed due to their inflationary nature, and our current fiat paper standard will be no different. The Federal Reserve is currently sowing the seeds of its own destruction through its loose and reckless monetary policy. The day of reckoning may still be many years in the future, but given the lack of understanding on the part of the Federal Reserve's decision makers, it is quickly coming upon us.
It is imperative that the American people be educated on the dangers of the Fed and the importance of restoring sound money. Now that nearly 50 years have elapsed since silver was removed from circulation, fewer and fewer Americans have firsthand familiarity with real money. The laying of the groundwork must begin today, so that the American people will be prepared for the day when the mirage the Fed has created evaporates completely.
Ron Paul Opening Statement - Federal Reserve Subcommittee Hearing - May 8, 2012
Congressman Paul Subcommittee Hearing "The Federal Reserve System: Mend It or End It?" PART 1
Panel II
• Dr. Jeffrey M. Herbener, Chairman, Economics Department, Grove City College
• Dr. Peter G. Klein, Associate Professor, Applied Social Sciences and Director, McQuinn Center for Entrepreneurial Leadership, University of Missouri
• Dr. John B. Taylor, Mary and Robert Raymond Professor of Economics, Stanford University and George P. Schultz Senior Fellow in Economics, Hoover Institution
• Dr. Alice Rivlin, Senior Fellow, Economic Studies, Brookings Institution, and former Vice Chair, Federal Reserve Board of Governors
• Dr. James K. Galbraith, Lloyd M. Bentsen, Jr. Chair in Government/Business Relations, LBJ School of Public Affairs, University of Texas at Austin
Congressman Paul Subcommittee Hearing "The Federal Reserve System: Mend It or End It?" PART 2
"More and more people are beginning to understand just how destructive the Federal Reserve's monetary policy has been," said Chairman Paul. "I hope that this hearing will kickstart a serious discussion on the need to rein in the Fed. 100 years is far too long for Congress to have taken a hands-off approach," Paul continued. "The Fed continues to reward Wall Street banks while destroying the dollar's purchasing power and driving up the cost of living for average Americans. This reckless behavior must come to an end"
Calls for reforming various aspects of the Federal Reserve System have existed since its creation in 1913. However, with the onset of the financial crisis of 2008-2009 and during the prolonged recession, calls for reform have escalated.
The Federal Reserve responded to the financial crisis with unconventional monetary easing, leading some to claim the Federal Reserve attempted to do too much to stimulate economic growth and set the stage for sustained inflation when the economy recovers. Slow economic growth, however, has led others to argue the Federal Reserve has not done enough and must be more accommodative in its conduct of monetary policy.
The six proposals that will be discussed by the Subcommittee on Tuesday are:
H.R. 245, introduced by Rep. Mike Pence
H.R. 1094, the Federal Reserve Board Abolition Act, introduced by Rep. Paul
H.R. 1401, the Democratizing the Federal Reserve System Act, introduced by Rep. Marcy Kaptur
H.R. 2990, the National Emergency Employment Defense Act, introduced by Rep. Dennis Kucinich
H.R. 3428, introduced by Rep. Barney Frank
H.R. 4180, the Sound Dollar Act, introduced by Rep. Kevin Brady
Opening Statement
Although it has taken nearly a century, it seems that the entire spectrum of the American political establishment has finally realized the destructive power of the Federal Reserve System. Whether left, right, or libertarian, politicians are lining up to attack Ben Bernanke and the Fed's destructive monetary policy. Where there is disagreement or lack of understanding, however, is on why the Fed's monetary policy is destructive, how it harms the economy, and what should be done about it. Today's hearing will examine the various proposals that have been put forth both to mend and to end the Fed. It is my hope that this hearing will spur a vigorous and long-lasting discussion about the Fed's problems, a discussion which will lead to concrete actions once and for all to rein in the Fed.
Much confusion exists over what the Federal Reserve System actually is. Some people claim that is a secret cabal of elite bankers, while others claim that it is part of the federal government. In reality it is a bit of both. The Federal Reserve Board is a government agency, while the Federal Reserve Banks are privately-run government-chartered institutions, and monetary policy decisions are made by the Federal Open Market Committee, which has members from both the Board and the Reserve Banks.
The Federal Reserve System is the epitome of crony capitalism. It exemplifies the collusion between big government and big business to profit at the expense of the taxpayers. The Fed's bailout of large banks during the financial crisis propped up poorly-run corporations that should have gone under, giving them an advantage that no other business in the United States would have received. The bailouts continue today, as banks maintain $1.5 trillion worth of excess reserves at the Fed, reserves which were created through the Fed's purchase of worthless securities from banks. The trillions of dollars that the Fed has injected into the system have the goal of forcing down interest rates. But the Fed fails to realize that interest rates are a price, the price of money and credit, and that forcing interest rates down will only create an even bigger bubble and an enormous economic depression when this entire house of cards comes falling down.
The Federal Reserve is statutorily required to focus on three aims when engaged in monetary policy: full employment, stables prices, and moderate long-term interest rates. In practice, only the first two have received any attention, the so-called "dual mandate." Some reformers have called for the full employment mandate to be repealed, in order to allow the Fed to focus solely on stable prices. But these critics ignore the fact that stable prices are not a desirable goal. After all, with increasing productivity and technological innovation, the natural trend for most goods is for prices to decrease. By calling for the prices of goods to remain stable, the Fed would have to inflate the money supply in order to counteract this trend towards price declines, pumping new money into the system and creating economic distortions. This is exactly what happened during the 1920s, as the Fed's monetary pumping was masked by rising productivity. The result was stable prices, but the malinvestment caused by the Fed's loose monetary policy became evident by 1929. There is no reason to expect that focusing on stable prices today would have a dissimilar outcome.
Other reformers have called for changes to the composition of the Federal Open Market Committee, the body which sets the Fed's monetary policy objectives. On Constitutional grounds, the FOMC is undoubtedly problematic, as government appointees and the heads of the private Federal Reserve Banks work together to set monetary policy objectives that directly impact the strength of the dollar. While all of the members of the FOMC ought to be confirmed by the Senate, debates about the size of the FOMC or whether Reserve Bank Presidents should make up a majority of the members or whether they should even serve at all are largely a sideshow. While the only dissent to monetary policy decisions in recent years has come from Reserve Bank Presidents, there is no reason to think that expanding the FOMC to include more Reserve Bank Presidents would lead to any greater dissent or to any substantive changes to the conduct of monetary policy.
Another proposal for reform is for outright nationalization of the Fed or its functions. No longer would the Fed create money; that function would be taken up by the Treasury, issuing as much money as it sees fit. No longer would the Treasury issue debt to cover fiscal deficits, it would just issue new money to cover budget shortfalls. If what the Fed does now is bad, allowing the Treasury to print and issue money at will would be even worse. These types of proposals hearken back to the days of the first greenbacks, which the U.S. government began issuing in 1863. A pure fiat paper currency, unbacked by silver or gold, the greenbacks were widely reviled. Only once the greenbacks were made redeemable in gold were they accepted by the American people. The current system of Federal Reserve Notes is even worse than the greenback era in that there is no hope that they will ever be redeemable for gold or silver. The only limiting factor is that the Federal Reserve System only creates new money when purchasing assets, normally debt securities. Allowing the federal government to print money without at least a nominal check on the amount issued would inevitably lead to a Weimar-like hyperinflation.
So what then is the solution? The Fed maintains that a paper standard can be adequately managed without causing malinvestment, inflation, or other economic distortions. If the Fed were omniscient and knew the wishes, desires, and future actions of all Americans, this might be possible. But the Fed cannot possibly aggregate or act on the information necessary to engage in monetary policy. The actions of hundreds of millions of individuals, all seeking to better their position in life, acting purposefully towards that aim, cannot possibly be compiled into aggregates or calculated through mathematical equations or econometric models. Neither a single person, nor the members and staff of the FOMC, nor millions of people with millions of computers working in a new Goskomtsen will ever be able to accumulate, analyze, and act upon the information required to create a centrally planned monetary system. Centrally planned fiat paper standards such as the one currently in place in this country are doomed to failure.
This brings us to the question of the gold standard. The era of the classical gold standard was undoubtedly one of the greatest eras in human history. For a period of several decades in the late 19th century, largely uninterrupted by war, the West made enormous advances. Economic productivity increased, art and culture flourished, and living standards rose so that even the poorest citizens lived a life their forebears could have only dreamed of.
But the problem with the gold standard is that it was run by the government, which exercised a monopoly over monetary affairs. The temptation to suspend gold redemption, so often resorted to by governments throughout history, reared its head again with the outbreak of World War I. Once the tie to gold was severed and fiscal restraint thrown to the wind, undoing the damage would have required great fiscal austerity on the part of governments. Emancipated from the shackles of the gold standard, the Western world proceeded to set up a gold-exchange standard which lasted not even a decade before the easy money policies it enabled led to the Great Depression. While returning to the gold standard would certainly be far better than maintaining the current fiat paper system, as long as the government retains the power to go off gold we may end up repeating the same mistakes that occurred from 1934 to 1971 as the government went first off the gold coin standard and finally off the gold bullion exchange standard.
The only viable solution for monetary stability is to get government out of the money business permanently. The way to bring this about is through currency competition: allowing parallel currencies to circulate without any one currency receiving any special recognition or favor from the government. Fiat paper monetary standards throughout history have always collapsed due to their inflationary nature, and our current fiat paper standard will be no different. The Federal Reserve is currently sowing the seeds of its own destruction through its loose and reckless monetary policy. The day of reckoning may still be many years in the future, but given the lack of understanding on the part of the Federal Reserve's decision makers, it is quickly coming upon us.
It is imperative that the American people be educated on the dangers of the Fed and the importance of restoring sound money. Now that nearly 50 years have elapsed since silver was removed from circulation, fewer and fewer Americans have firsthand familiarity with real money. The laying of the groundwork must begin today, so that the American people will be prepared for the day when the mirage the Fed has created evaporates completely.
Ron Paul Opening Statement - Federal Reserve Subcommittee Hearing - May 8, 2012
Congressman Paul Subcommittee Hearing "The Federal Reserve System: Mend It or End It?" PART 1
Panel II
• Dr. Jeffrey M. Herbener, Chairman, Economics Department, Grove City College
• Dr. Peter G. Klein, Associate Professor, Applied Social Sciences and Director, McQuinn Center for Entrepreneurial Leadership, University of Missouri
• Dr. John B. Taylor, Mary and Robert Raymond Professor of Economics, Stanford University and George P. Schultz Senior Fellow in Economics, Hoover Institution
• Dr. Alice Rivlin, Senior Fellow, Economic Studies, Brookings Institution, and former Vice Chair, Federal Reserve Board of Governors
• Dr. James K. Galbraith, Lloyd M. Bentsen, Jr. Chair in Government/Business Relations, LBJ School of Public Affairs, University of Texas at Austin
Congressman Paul Subcommittee Hearing "The Federal Reserve System: Mend It or End It?" PART 2
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