STAFF NEWS & ANALYSIS
Bashing Central Banks – Does Rand Paul Know What He's Talking About?
By Staff News & Analysis - February 11, 2015

Rand Paul's Know-Nothing Fed Bashing … See if you can spot the errors in Senator Rand Paul's push to audit the Federal Reserve, which he laid out Friday in Des Moines: "Anybody here want to audit the Fed?" Paul asked from the stage. "Anybody feel that the Fed's out to get us?" … "They'd be bankrupt, they'd be insolvent," he said. "Liabilities are $4.5 trillion; their assets are $57 billion. Do the math. They are leveraged 80-1. They are leveraged three times greater than Lehman Brothers was when Lehman Brothers went bankrupt. Why do we give 'em a pass? Because they've got a printing press, and they can print up some more money." – Bloomberg

Dominant Social Theme: We need the Fed because it organizes the economy and makes it calmer.

Free-Market Analysis: This Bloomberg editorial begins with an elaborate apology regarding a mis-statement that Rand Paul referred to US$57 trillion in Fed assets in a recent speech when he actually said US$57 billion.

But the article doesn't back down any further regarding Rand Paul's supposed financial illiteracy regarding the Federal Reserve – which neither he nor his father Ron Paul believe is constitutional or necessary.

Here's more:

Nonetheless, I stand by my contention that Paul is mistaken in several important ways. Paul's main error was in his calculation of the Fed's leverage. Leverage is the ratio of debt to equity. Paul is treating the Fed's $57 billion of assets — whatever those are — as the central bank's equity. But it's not.

When the central bank buys assets, it pays for them (mostly) by giving the seller some reserves at the Fed — basically a checking account. Those reserves are what Paul is referring to when he talks about the Fed's "liabilities." But when the Fed buys assets, on the day it buys them, the value of those assets must equal the value of the reserves the bank swaps for the assets. So the Fed's "equity," calculated as total assets minus total liabilities, would then be zero … But that doesn't make sense.

The article goes on to highlight other points that Paul is supposedly wrong about. According to the article, he mis-defines leverage and also Fed liabilities. Paul's analysis of the Fed and his campaign to audit its books is "based on emotion," the article concludes.

The article moves on to try to analyze why so many are "deeply suspicious" of the Fed. It even cites Thomas Jefferson and his quote that "the central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution."

Andrew Jackson, by shutting down the US's then-second central bank, continued this tradition of "anti-Fedism" … a tradition the article magnanimously attempts to comprehend, stating that it is "natural" for people to be suspicious of such a technocratic process. It is the Fed's state-granted charter to inflate or deflate money on a daily and weekly basis that fuels suspicion as such decisions have an impact on the family pocketbook, often a ruinous one.

However, the article then goes on to defend the Fed, stating that inflation and deflation are part of a natural economic cycle that has nothing to do with Fed decisions. "Before 1913, when the Fed was founded, inflation and deflation spiked up and down wildly."

This is true, but it likely has more to do with post-Civil War financial consolidation and stock market expansion than with the natural state of a non-manipulated economy. The US economy was a lot less manipulated before the Civil War than after.

And even free-market economist Murray Rothbard admitted to us long ago that business cycles were probably inevitable. But his point would be that such cycles were milder than what we have to do, not more powerful.

Also, business cycles – especially before the Civil War in the US – tended to be regional in nature. If one area was in recession or experiencing inflation, you could travel somewhere else. But that's not the direction the world is trending toward today. As centralization of all kinds grows, there are fewer regions and nations unaffected by the larger monetary trend. The BIS itself coordinates central banking around the world.

The article makes the case for the Fed as an agency that is trying to slow business cycle variations. "In recent years, it has adopted a 2 percent inflation target, meaning that it tries to ensure that inflation happens at a slow, steady, predictable rate."

But logically speaking it is monopoly central banking itself that creates modern-day monetary swings. And setting a low inflation target probably only aggravates these swings because more money usually exacerbates economic instability.

In truth, central banking technocrats cannot know how much money an economy needs or the rates that an economy demands to function. Price-fixing is no alternative.

The article concludes by explaining that if the central bank "were more open to the public," and launched more persuasive PR campaigns, then people would understand them better and be less suspicious.

We think it's the other way round: The more people know about central banking, the less tolerant of the process they become. Which explains why central banks don't do much more to defend themselves than they do now.

Central bankers in the past decade have taken to defending their practices by offering the public a certain amount of "openness." But this openness has limits and still doesn't explain how these facilities claim to be able to manage trillion-dollar economies via price fixing.

After Thoughts

Is it possible that defending central banking isn't practical because the process itself is ultimately indefensible?

Posted in STAFF NEWS & ANALYSIS
  • Propaganda Flood

    “But whether it works or not, this kind of intervention, which suddenly reduces both the value of people’s bank accounts and of their debt…”

    This sentence from Noah ‘Brain Worms’ Smith says it all. Whether the FED’s monetary intervention works or not, he is all for it. While expecting a logical argument from Noah might be too much, readers should at least be entitled to a modicum of coherence.

    • Earn nest

      I notice that QE has continued under no name these past couple of months.

      • Tom kauser

        1200+months

  • The One Bank that rules the world must be VERY pleased with whoever wrote this article for Bloomberg! Give that boy a promotion! Thomas Jefferson was RIGHT. Andrew Jackson was RIGHT and when he was asked, on his death bed, his biggest accomplishment in life his answer was “I killed the bank!”. This from the man who almost single handedly won the war of 1812 in the Battle of New Orleans.

  • PatrickHenry1789

    I sure am glad the DB trudges through all of this garbage at publications such as Bloomberzerk so I don’t have to. I just cant stomach it anymore.

  • Earn nest

    Congress had the right to COIN money. They never had the right to allow others to print pure fiat. Yet they send us to jail for coining silver.

  • TG Molitor

    The “takedown” of Rand Paul by Noah Smith is a weird one: Ignoratio elenchi: Smith’s argument (which the subtext says “the Fed is necessary”) may or maybe not be logically valid, but it fails nonetheless to address the issue in question: Paul’s call to audit the Fed. But then he (sort of) does, by suggesting the Fed “could be more transparent to head off blundering unawares such as Paul.” Is Smith (Noah, that is, not Adam) calling for an audit of the Fed, or for the Fed to get better at controlling the narrative? It’s the latter for sure.

    • Bill Ross

      Beware of falsely framed arguments of “necessity”:

      http://www.nazisociopaths.org/modules/article/view.article.php/c7/45

      Start by asking “to who”? (follow the “money”)

    • At this point it is very difficult for any central bank to “take control of the narrative.”

      • TG Molitor

        Wouldn’t you say the Swiss central bank did a good job at controlling the narrative to defeat the gold reserve referendum?

        • When was the last time the Swiss Bank faced a referendum like that …

          • Bruce C

            And I would add that the exact wording of the referendum was poor. There was the spirit of the thing and the actual law. There will be more such referendums coming up, I can assure you.

  • Tom kauser

    Paul is following the footsteps of his daddy who raised millions on Humphrey hauckens days? Few people understand and less would after an audit? It isn’t the balance sheet as much anymore as access to bond interest payment!
    The FED is like baseball all cash flow? THE FED RUNS OUT OF MONEY WHEN THE WORKERS AND DEALERS STOP WORKING AND DEALING?

  • stevor

    The Federal Reserve DOES NOT have the authority to make “money”. They “make” it from smoke and charge us “interest” (extortion money). Only the Treasury has the Constitutional authority and IF they did it as they ought to, they WOULD NOT CHARGE “interest” of BILLIONS of dollars, which would have reduced our “national debt” by that amount.

    • deltajent

      “Make” money? The only way to make money is to coin it after digging it out of the ground. OTOH, central banks generate *currency* either by monetizing debt or by simply “printing” it ex nihilo (“quantitative easing”). Monetary illiteracy will be the death of us.

      • Money is what people as a group wish to use. There are no particular rules … only observations.

        • Bill Ross

          “people as a group wish to use”

          until “somebody” decided people are too stupid to choose and, compelled “allowable money”

          historically, “there can only be one” (medium of exchange) was, from within a agrarian / barter economy, those who felt “entitled to tax” were stuck with a tithe and, the necessity to warehouse a percentage of goods extracted. Then, gold became the “medium of exchange” (un-counterfeitable). Initially, a transfer of power to the productive, then co-opted by the “money changers” (coin shavers, etc) who seized and have not yet been forced to relinquish “control”.

          “Divine Rights of Kings” had real issues with REAL money (and, those who controlled it) limiting their “power” (ability to influence) to have silly unproductive endeavors such as war. Problem “solved”, for the short term by being able to “print” resources for war, etc, at will. This is how Nixon, by decreeing / reneging gold convertibility “null and void” managed to extend the Vietnam war, whose costs far exceeded the productive capacity of the US, as does the perpetual “war by, of terror”.

          Also, historically, income tax was “sold” to pay for war. Well, you get what you pay for.

        • deltajent

          And historically as a group Americans wished to use gold and silver coin as money, denominated in dollars and denoting specific weights of the metals. This choice was enshrined in the US Constitution, and is therfore the law of the land–not that that makes any difference to anyone now. Bank notes, which ignorant moderners mistakenly call “money” were used as currency alongside the coin, and were exchangeable on demand for actual money. Things started to seriously go downhill when the state commanded its counterfeit notes be accepted for payment and duped the good trusting folks on Main Street to believe that pieces of paper with dead criminals’ pictures on them were “dollars,” and finally that mere base metal slugs were dimes, quarters, and halves.

          • FEEuser

            Yes, isn’t it odd how we are ruled by “legislation” instead of the Constitution?

  • Laird Minor

    David Stockman has some cogent things to say about this, too. http://davidstockmanscontracorner.com/audit-the-fed-and-shackle-it-too/. Worth a read.

    • The feedbacks are very interesting. The pro-Fed fellow paid us a visit recently.

  • Libertarian Jerry

    Follow the “money.” A fiat paper currency and electronic digital credit conjured out of thin air backed by government bonds created out of nothing,backed by nothing that buys real goods and services in the market economy. Quite a racket. To add insult to injury we have the Income Tax where the sweat of our labor is converted into paper money that is taxed to pay the interest on the debt that backs our fiat currency. The Political Class benefits by getting the goods and services in the market without creating any real value in exchange at which time the banker monopoly benefits by owning the nation plus 5%. The only people that lose is the Economic Class that creates real wealth and is vilified and penalized for doing so.

  • Tom kauser

    Its like a poker game where playing with the chips is the game. The side bets make the world go round and replaces the dealer as the card game. Capitial was created when the EIC got its loan and more importantly its charter?

  • Tom kauser

    The banks buy discounted bonds from the fed and holds them to maturity. Thebanks win by getting its principal back and an interest payment winning twice and never touching main street or the middle class economy?
    The bank bailout of yesteryear did away with the need to resort to fractional banking any longer and the ” who is in control” narrative along with it!

  • acudoc1949

    All the booms and busts throughout our history have to do with the fraudulent creation by bankers of fiduciary media in the form of banknotes or checkable deposits not backed by gold or silver. These same bankers somehow assumed that what they were doing (manufacturing purchasing power) was upright and moral. It isn’t. You do not declare a sow’s ear a purse and thereby escape retribution. Fraud is fraud whether it is defended by technocratic jargon or not.

  • Jan Christian

    What a sweet article! You don’t understand me! Please try to understand me! How interesting that all it takes is to make a comment about someone’s reputation and in doing so you present destructive doubt around the person’s reputation. Likewise, just say the opposite – “Oh, I am so misunderstood” can extract sympathy from victims who have been viciously assaulted. What a charade. One more reason to draw our ire about the fed! Thomas Jefferson must be turning in his grave . Check out Dr. Missler’s articles on his Christian website to see much more about the crimes being committed by the IMF and other organizations.

  • Christoph Weise

    Stop the discussions and end the FED

  • Philip

    Philip, ThanksDB another great article. Apropos The IMF The following sentences were selected from Article IX, Sections 1 to 9 : The fund shall possess full juridical personality. Shall have immunity from judicial process .
    Property and assets of the Fund, wherever located and by whom- ever held, shall be immune from search, requisition, confiscation, ex- propriation, or any other form of seizure by executive or LEGISLATIVE ACTION’
    The archives shall be held inviolable.. . . all property and assets shall be free from restrictions, regulations,controls, and moratoria of any nature.The officers and personnel shall be immune from legal processes, immigration restrictions, alien registration requirements, and national service obligations ; shall be immune from taxation and customs duties, immune from liability for taxes and duties.
    No taxation of any kind shall be levied on any obligation or security, dividend or interest of the Fund

    This was taken from The Empire of “THE CITY” E C KNUTH It also applies to the Bank of England. The book is a PDF must read. It also outlines the diplomats and politicians making sure there will be a WORLD WAR 111. The meetings of the post WW1 were completely controlled by the International financiers, some named, to ensure a WW 11. Thanks DB you are the most honest site of any out there. Philip

    • Thanks for writing and the kind words.

    • WinChll

      The officers and personnel shall be immune from legal processes

      Until a Divine law takes retribution. “JUSTICE”.

      completely controlled by the International financiers,

      What ever happened to the expression “all roads lead to Rome’?

  • NAPpy
  • Bruce C

    I’m surprised Rand Paul even brought this up, especially in the way he
    did. First of all, as he’ll probably find out, most people don’t know
    much if anything about central banks and the Fed, and I highly doubt
    many of them think that “the Fed’s out to get us.” Secondly, it seems
    unwise to attack the Fed using quantitative arguments, at least
    initially, and for several reasons. It risks opening oneself to
    technical errors (as what just happened) and making such claims
    undermines his own argument that ‘the Fed should be audited’ –
    presumably to discover its true financial condition, and yet he claims to know it. Furthermore, even
    seemingly objective statements like “the Fed is leveraged 80-to-1” are
    actually rhetorically subjective because there is no reference point to
    judge it. (For example, the US has a national debt of $18 trillion, but
    is that necessarily “a lot”? What will it be when it’s $22 trillion?
    Japan has a debt-to-GDP ratio of 245%. Is that “a lot”? Nobody really
    knows, or to put it differently, it’s debatable.)

    IMO the better
    approach is to talk about the practical problems of central banking in
    popular terms, emphasizing its un-Constitutional “right” to control our
    country’s currency and to set interest rates (the price of money). Also
    its ability to undermine the Constitutional political process by
    enabling government deficit spending by buying government debt with
    counterfeit currency, yet indenturing the citizenry without their
    permission.

    • Bruce, there is a huge amount of anti-Fed material on the Internet. You may not fully comprehend the antipathy. There have been regular anti-central bank protests in Germany for instance, though they are not much covered by the mainstream.

      • Bruce C

        Good.

        Maybe Paul’s comments will be more well received than I think. Still, it’s dicey too get too involved in technical debates since all of the facts may not be known – hence the need for an audit. Technical debates, at least initially, can offer too many opportunities to confuse or deflect the real issues.

    • alaska3636

      The Fed is leveraged infinite-to-1. It’s only “assets” are government bonds which are inherently worthless as history shows us.

      • Bruce C

        Maybe so, but that’s an example of a statement that can sound apocryphal to the “uninitiated”. Besides, until recently US government bonds were considered “as good as gold” because of the productivity of the American people and the taxing authority of the US government, which is defended even by the US Constitution.

  • Haywood Jablome

    People can’t name the three branches of government. They can’t name one of their Senators. They couldn’t find Russia on a map if you put a gun to their heads. I would love to think more information would help (and I do think the readers of this site would gain insight) but for the majority of the sheeple, it would make no difference whatsoever. To paraphrase George Carlin…”think about the average person you know, and then realize that half of the population is dumber than they are.” And they vote. That, my friends, is scary.

  • Praetor

    Bloomer’s must think we, us, the unwashed masses still live in the 15th century, and they, them, our elite masters live in the 21st century. Because, Bloomy is Preaching like the Preachers of a bygone time, standing above the ignorant uneducated parishioner, unable to read that book. Believing and living on every word uttered by the mighty Dumberg. The trouble that BlahBlahBerg has, is the Cardinals of Doom will through his dwarf bum into Purgatory, the minute his usefulness has waned, and that time is coming. They don’t even know the differents between a Billion, and a Trillion, how ignorant can they be. When the lies are no longer effective, what will they turn to, the TRUTH. Bloomberg playing like OReally, the no spin zone.

  • Freespirit

    Possibly Americans can learn from Canadians :

    Canadians sued the Bank of Canada to stop it from Borrowing from Private
    Banks and to return Canada to DEBT FREE money and they WON.

    It is NOT perfect but, not-with-standing Canada is one of the most FRUGAL
    nations on this Planet, things should improve even more now because it IS a
    step in the right direction.….that is, no longer borrowing, by Governments
    from Private Banks, to pay for Government expenditures,such as Infrastructure,
    healthcare, education etc., which in effect was CREATING DEBT money AND
    contrary to the Canadian Constitution ( BNA 1867).

    Rothschild and Warburg BANKING fraudster parasites, will not be toasting any wins
    over this, and I suspect they will not go down, without a fight. No criminal(s)
    like(s) to be denied his or THEIR ”ill-gotten” gains

    Now if the Bank of Canada does not go to the Supreme court, in appeal which it is not
    expected to do, life for Canadians, over the long period, should improve even
    more

    Here is the story : https://www.youtube.com/watch?v=40Jz0LPQAQY AND

    an UPDATE by a young “average” Canadian :

    https://www.youtube.com/watch?feature=player_embedded&v=9XzTSHlVfyU

    It is not perfect.

    Ideally a true FREE MARKET system of different competing currencies, and truly
    COMPETING Banks especially within a country, would provide the greatest
    safe guard, and guarantee of an HONEST service for customers AND
    a profitable business, for the Bankers.

    Anything is better than the present Private MONOPOLY by the Bank of Canada,
    in Canada and the Federal Reserve in the United States

  • Greg Jaxon

    “Audit the Fed” is the perfect slogan for the “Weak Tea” party even if a strict audit found insufficient collateral to support outstanding cash + Fed deposits. On it’s own it does not ask for Freedom. It asks for saintlier central planning.
    “End the Fed” made a better chant from the masses even if they’d been ill-informed.
    But one potent slogan that I’d love to hear a crowd chanting is “Open the Mint”:
    i.e. coin bullion at cost for anyone who feels the world is demanding more standardized “money”.

    The Pauls’ monetary arguments always come from the Quantity Theory of Money quadrant.
    That essentially ACCEPTS the Fed’s definition of money (if not the need for a central planner).
    At least “Open the Mint” takes the “Quantity” variable away from all consideration. It sizes the specie money supply per the wishes of the citizenry. “No Legal Tender” should be the second verse of the chant – if paper contracts had to attain liquidity by virtue of their terms, rather than the power of a court to coerce their acceptance, there would arise perfectly fine, trustable, monies other than bullion gold. As multile media of exchange start to circulate, the very idea that there is one and only one Quantity of it would eventually be seen to be a simplistic fantasy.

  • FEEuser

    Does Rand Paul really even believe these Fed-bashing ideas? Or, is he just grandstanding? I think Ron Paul does. I don’t know about Rand.

    For all intents and purposes, Rand Paul has been playing the Great Game, going along to get along, and, in spite of all rhetoric to the contrary, seems fully wedded to a political system now quite literally in extremis. His father has spoken publicly, repeatedly, and definitively, against central banking and in favor of the right of secession. To the best of my knowledge, Rand has not.

    As for the FED, so we audit it. What then? Do we “reform” it? How? By reducing its powers? Who is going to do that? Is the power elite going to stand idly by while that happens?

    Rand seems to be in David Stockman’s camp in that he thinks the FED can be “shackled to stop it from destroying the national economy.” See: http://davidstockmanscontracorner.com/stockman-slap-handcuffs-on-the-fed-before-its-too-late/.

    Stockman has some very good ideas. His recent book, “The Great Deformation,” is an extraordinarily detailed and well written indictment of the follies of economic interventionism and central banking and the havoc they have wrought on the American economy. Unfortunately, Stockman seems to be in the camp that the FED can be “reformed.” For the life of me, I cannot understand how Stockman can accumulate such an incredible amount of information about the depredations of the FED and economic and political centralization, and write about them so eloquently, without also drawing the conclusion that the FED is an engine of economic mass destruction so powerful that it cannot be “shackled.”

    The DB makes the interesting observation that “In truth, central banking technocrats cannot know how much money an economy needs or the rates that an economy demands to function. Price-fixing is no alternative.”

    Stockman made a similar observation in reference to monetary policy during the Nixon administration and Milton Friedman’s doctrine of floating paper money and a “fixed” rate of growth: “the Federal Reserve couldn’t control Friedman’s single variable, which is to say, the ‘money supply’ as measured by the sum of demand deposits and currency (M1).” (page 261).

    Further, Stockman writes that [FED chairman, William McChesney] “Martin learned that the only thing the Fed could roughly gauge was the level of bank reserves in the system. Beyond that there simply weren’t any fixed arithmetic ratios, starting with the “money multiplier.” (Ibid.)

    In short, the bankers seem to be trying, in various ways and with highly technical and specialized terminology, to leave the impression upon the public that they can control the economy with something approaching the predictability, repeatability, and laboratory precision, of physics. That is simply not the case. That is the same sort of faulty theory and fatal hubris which John Maynard Keynes fell victim to, and which Henry Hazlitt so methodically tore apart in his magnum opus, The Failure of the “New Economics.” (1959).

    Why anybody would want to carry on with central banking in light of these facts I can’t imagine. Asking for an “audit” of the FED is like asking for a review of the Ptolemaic model of the solar system. Tinkering at the margins of the banking and political systems while Rome burns is worse than a waste of time; it is suicidal.

    Are the ideas of Rand Paul on central banking worth debating? Are the ideas of Rand Paul on ANYTHING worth debating? Perhaps he is best thought of as a mere Hegelian distraction put in our path by power elite propagandists. I am inclined to believe the latter.

    Any politician who deigns to run for president of a hopeless, terminal, and disintegrating political order cannot possibly be on board with Libertarians on central banking, or much, if anything, else.

    In reality, presidents don’t have nearly as much power as people think they do. We all know what happened to the last president (JFK) who tried to roll back empire building, the war machine, and central banking.

    What other platform could Rand safely be entertaining than to carry on the wishes of the power elite in all their essentials? Ever since November 22, 1963, all presidential candidates have been on notice that if they pursue any other course of action than that designated for them by the power elite, they will have bullets waiting for them. Rand Paul knows this perfectly well.

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