Category Archives: Federal Reserve

Alexander Hamilton Supports Auditing the Federal Reserve

The Republican Party may add the call for an audit of the Fed to its party platform. Bloomberg.com reports:

Republicans are considering including a plank in their party platform calling for a full audit of the central bank.

Prodded by the failed primary bid of longtime Fed critic Ron Paul — and the grassroots enthusiasm the Texas congressman’s cause inspired among bail-out weary Tea Party activists and small government advocates — Republicans are entertaining a prospect that has long made them and some of their financial supporters cringe.

Paul, in an interview, warned that if Romney’s backers resist the effort, it could result in a politically distracting and messy fight in front of the national media. “It’s good economics and it’s good legislation, but it’s also good politics, because 80 percent of the American people agree with it,” Paul said. If Republican leaders “exclude it, I would think some of my supporters would be annoyed and feel strongly enough to take it to the floor under the rules.”

When Congress established the First Bank of the United States in 1791 at Alexander Hamilton’s recommendation, the Treasury Department was given the power to inspect the bank’s books at any time. Furthermore, while the Treasury oversaw the First Bank of the United States, the House of Representative repeatedly audited Hamilton and the Treasury Department, each time finding nothing wrong.

While it is important for the Federal Reserve to be independent, just as the First Bank of the United States was independent, this powerful government-created institution needs oversight. All publicly-traded corporations are audited by CPAs and federal government agencies are  audited  by the General Accounting Office. The Federal Reserve should be bound by rules similar to those established for government agencies and public corporation.

If we are to have a government-granted monopoly over money printing (something the Founders would have opposed), it should at least be subject to the principles of checks and balances that our Founding Fathers held so dear. A regular audit of the quasi-government agency known as the Federal Reserve is something the Founders would have supported to prevent the accumulation and misuse of power.

Alexander Hamilton’s Treasury Department had oversight over the First Bank of the United States. Today’s Treasury and Congress should have similar oversight over today’s central bank, which is much more powerful than the national bank of 200 years ago.

Schooling Ben Bernanke on the merits of gold

Yesterday, Federal Reserve Chairman Ben Bernanke got all confused when asked whether gold is money and why central banks hold gold instead of diamonds. Watch the last 32 seconds of this youtube clip:

I know I am not the Chairman of the Federal Reserve, but at least I’ve heard about fungibility. Heck, even wikipedia mentions:

Diamonds are not fungible because diamonds’ varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size.

In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid.

If the Fed Chairman needs more information about why gold is money, he should google “why gold is money.” Now, I just need a good answer as to why pieces of paper with pictures of Presidents on them are considered money.

Deflation bad for government, not so much for you and me.

According to Marketwatch, Federal Reserve Chairman Ben Bernanke warned against deflation:

He also said the risk of deflation, a steady decline in prices and wages, remained a threat.

He stressed to the Senate panel that deflation would increase debt burdens and lower living standards.

If prices and wages declined at the same rate, how would that hurt us? We’d make less, but our expenses would go down. Yes, it would hurt somebody in debt, but it would help the person holding that debt, i.e. savers.

Now, who would get hurt the most? Who owes the most money of anybody? THE UNITED STATES GOVERNMENT.

What the Federal Reserve fears is the real value of the government’s debt increasing, making it harder to pay back. Furthermore, in a deflationary environment, the Fed would lose its ability to keep rates low and inflate the money supply. How so? Currently, if inflation is about zero, the Fed can keep interest rates near zero as well. But if we have deflation of two percent, the Fed can’t really lower rates below zero, so the inflation adjusted interest rates would be two percent. In effect, the government will be paying a two percent interest rate, increasing its deficit and expanding the debt, and the Fed will lose control of interest rate policy.

Irish bailout in perspective. Hello Weimar Republic.

According to this article:

Lenihan said Ireland needed less than euro100 billion ($140 billion) to use as a credit line for its state-backed banks, which are losing deposits and struggling to borrow funds on open markets.

Ireland has been brought to the brink of bankruptcy by its fateful 2008 decision to insure its banks against all losses — a bill that is swelling beyond euro50 billion ($69 billion) and driving Ireland’s deficit into uncharted territory.

To put this in perspective, Ireland has approximately 4.5 million citizens. So Irish banks have already lost about $15,333 per person and Ireland will be receiving a credit line of up to $31,111 per person.

<Sarcasm> Good thing the EU and IMF do not actually have to produce and sell any goods to provide these funds. God bless the power of printing money out of thin air and dropping it from helicopters. If the EU, IMF, and Federal Reserve didn’t have these powers, we’d be seeing a financial crisis the likes of which we have not seen in generation. <End Sarcasm>

We always joke about our government fiddling while Rome burns. But in this case, the government is actually doing something. Too bad it is the wrong something. Instead of throwing water on the fire, they are putting piles of paper money onto the fire. And as we learned from the Weimar Republic, paper money burns just as well as firewood, but is much cheaper.

“Ireland on the brink” with no way out

Marketwatch reports:

Ireland on the brink as budget crunch looms

Austerity threatens growth, but markets leave Dublin little choice

After promising a 15 billion euro ($20.7 billion) austerity package of spending cuts and tax hikes, Ireland’s government may be facing its last chance to avoid a bailout by persuading markets that the country can repay its debts.

Yields on government bonds have soared in recent days as investors increasingly fear that the only long-term option for Ireland will be a bailout from Europe. But sympathy for Brian Cowen’s Fianna Fail–led coalition is almost nonexistent among Dubliners, who see the government as the biggest villain in the collapse of the Irish economy…

Please read the whole article, but I’ll summarize it in just a few words: Ireland is damned if they do and damned if they don’t. If Ireland does nothing, it will be unable to repay its debts. In other words, it will default if it is not given a bailout. But the EU will not bail out Ireland if it does not reduce its deficit.

If Ireland chooses to reduce its deficit, which it is trying to do, it will require massive tax increases and/or huge cuts in spending. Either will result in massive protests and economic harm.

Western governments have been spending more than it could afford for nearly a century now. In the US, it started in 1913 with the emergence of the Federal Reserve and ratification of the income tax amendment. It got worse with the two world wars, Great Depression, and breaking from the gold standard. Now, countries like Ireland, Greece, Portugal, and Spain have only years, if not months, to get their houses in order. After 100 years of failure, we are now paying the price.

Federal Reserve blames Congress and President for problems

Marketwatch reports in a story titled Fed says Congress needs better growth plan: Central bankers urge tax, regulatory reforms, pro-trade policy:

Top Federal Reserve officials on Monday said the central bank has done everything it can to help a weak U.S. economy. The rest is up to Congress and the White House.

The Fed is correct here. Not only have they “done their part,” they’ve actually done too much. Our current economic problem is not something the Fed can fix. There’s no shortage of money. There’s no credit freeze. There’s nothing the Fed can do. (So why don’t they stop their quantitative easing?)

The economic problems come from the fiscal side. High taxes and unpredictable government interference has scared away capital and risk taking. The report continues:

In separate speeches, three senior Fed executives said Washington needs to fashion better tax and regulatory policies that encourage businesses to invest in the U.S. and create jobs.

“It is absolutely imperative that the Congress and the president attack the long-run budget problems the nation faces,” St. Louis Federal Reserve President James Bullard said in a speech to Wall Street financial analysts in New York.

“The Federal Reserve cannot and should not do it alone,” he said. “Other policymakers must bear their burden and do their part to encourage more-robust economic growth and establish the conditions for stronger employment.”

In a speech Monday in San Antonio, [Dallas Federal Reserve President Richard] Fisher warned that the Fed’s credibility could be lost if global investors perceive that the U.S. is trying to inflate its way out of debt.

All three said U.S. lawmakers have to figure out ways to boost the nation’s competitiveness and develop better long-term growth policies. They urged Washington to streamline regulations, simplify the U.S. tax code and pursue more free-trade deals to open foreign markets to American goods.

Fisher said fewer businesses want to invest in the U.S. because they can get a better return on their investment in other countries.

“The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed,” Fisher said.

The question remains though: Who is most incompetent? The Federal Reserve? Congress? The President? They are all so totally incompetent that there is only one way out of this mess: the government, that is all three of the above, has to get out of the way. Stop interfering in the economy. Reduce taxes. Reduce spending and return a large portion of the economy back to the free-enterprise system. The economy will not thrive until they do so.

China vs. United States on monetary policy.

China continues its verbal assault on the United States’ quantitative easing plan:

China announced new measures Tuesday to curb inflows of foreign speculative capital, as senior government officials stepped up criticism of excessively loose monetary policies abroad, such as those of the Federal Reserve.

Tuesday’s announcements were accompanied by fresh criticism from Beijing officials of loose monetary policies abroad and consequent risks in emerging markets.

Chinese Finance Minister Xie Xuren blamed excessively loose monetary policies by issuers of major currencies as compounding fiscal and debt risks.

The comments, made during a meeting with a delegation of British trade representatives, including U.K. Chancellor of the Exchequer George Osborne, appeared to be thinly veiled criticism of the Federal Reserve’s latest quantitative easing moves.

Similarly, Chinese Vice Premier Wang Qishan said Tuesday that volatility in global markets was negative for market confidence and that he saw excessively liquidity globally.

Many believe China is an evil communist country that enslaves its people and destroys its environment. While some or all that may be true, China appears to be the good guy when it comes to monetary policy. How is it possible that Communist China understands that creating paper money out of thin air does nothing but create economic distortions while the United States is blind to that reality?

Maybe, instead of having Chinese study economics and business in American universities, we should send some of our student to China to learn economics because they seem to have a better grasp of it.