STAFF NEWS & ANALYSIS
Congress Grows Fed Up Despite Central Bank's Push
By Staff News & Analysis - November 23, 2009

The Federal Reserve's strategy to fend off a barrage of attacks from Congress, largely centered on low-key diplomacy by Chairman Ben Bernanke, isn't succeeding so far. Many Democrats and Republicans praise Mr. Bernanke for candor and accessibility. But some say the financial crisis — and public antipathy to the Fed — requires an overhaul of the central bank's responsibilities and tighter congressional oversight. "Even though I'm a fan of Ben Bernanke, I do think that what happened during this last crisis did undermine some of the credibility of the Fed," said Sen. Bob Corker (R., Tenn.), who sits on the Senate Banking Committee. The result: The Fed now faces the prospect of the biggest changes to its governing statute since 1935. The Senate Banking Committee is considering legislation to strip the Fed of its role supervising big banks — despite the Fed's insistence that doing so would cripple its ability to prevent and manage financial crises. The House Financial Services Committee voted Thursday to undo a 1978 law that shields Fed interest-rate decisions from congressional auditors — overruling protests from Mr. Bernanke and predecessors Alan Greenspan and Paul Volcker, as well as the Obama administration and committee Chairman Barney Frank (D., Mass.). Both chambers are moving toward altering the Fed's governance, particularly reducing the role that private bankers play in overseeing the 12 regional Fed banks created in 1913 as a counterbalance to the Fed board in Washington. And both houses are likely to embrace President Barack Obama's proposal to shift the Fed's financial consumer-protection duties to a new agency, arguing that the Fed failed to protect consumers during the housing boom. Anger toward the Fed "seems to be at a fairly high pitch right now," said Alice Rivlin, a former Fed vice chair. "There's an anti-Fed mentality. Some of this anger is generalized and has to do with the bailouts and the rescue." – Wall Street Journal

Dominant Social Theme: Is the criticism of the Fed getting out of control?

Free-Market Analysis: Well, no. But since our modest paper is devoted on a regular basis to examining the promotions of the monetary elite and its relationship to free-markets, let us take a moment to analyze more precisely what a central bank is and does. Then we can figure out just what this article means (more below) and whether it is making good points or not. (And it should be, shouldn't it, given where it appears and who is quoted?)

So … First off, let us look a little more closely at the task of central banking. In America, where one of the biggest central banks operates, the bank is mainly responsible for keeping the price of money stable and the workforce as close to full employment as possible. The American central bank is also supposed to "regulate" banks and make sure that they do not get into trouble by having too many obligations and too little cash.

In order to perform functions such as those mentioned above, a central bank fixes the price and quantity of money by printing it (in one way or another). It is this lawful ability to print money that gives central banks their awesome power and authority. Central banks have been granted this authority because there is no other way for countries to assure their economies of continued solvency – or so we are told. Without a central bank (of last resort), one panic or financial crisis or another would prove overwhelming and the foundations of the system would crumble, leaving citizens exposed to financial ruin and endless poverty.

All right we hope the above is a fair, if simplistic analysis of what a central bank is SUPPOSED to do, and the way they have been positioned by the monetary elite that runs them – and urges them on the rest of us. In fact, we shall now argue the unsettling truth is that history (300 years of it) reveals sadly that almost every function performed by a central bank likely works in REVERSE of what is promised.

Central banks are supposed to avert financial panics, but it seems that they cause them. Central banks are supposed to stabilize currency, but in fact these banks erode currency mightily over the years by printing more than economies can absorb. Central banks in some cases are supposed to contribute to the stabilization of the work force, but the boom/bust cycles of Western currencies are getting worse and worse, the longer the central banking epoch continues.

Why do central banks harm the very economies they are supposed to help? Because central banks almost ALWAYS print too much money (because they can, they will), which causes people to think that they are doing better than they really are. The overproduction of currency tricks people into making investments they shouldn't make and can affect the entire fabric of a nation over time, fooling people into taking jobs that seem to provide a scintillating future but that really are merely the frothy excrescence of one monetary mania or another. When the tide recedes, so do the jobs and, in some cases, whole industries. That's often why public officials and savvy economists will sound a dirge after an extremely bad boom-bust cycle, saying that the jobs "aren't coming back." Of course they're not. They weren't real to begin with.

Now, to economics. As much as people like to decry it, economics is a hard science in that there are easily observable rules that common sense (among other elements) shows us are not EVER broken. They are as immutable as the laws of physics (more-so, since the laws of physics seem to change from time to time). What are the laws of economics?

Well, one of them is Marginal Utility, the idea that ONLY the market can discern the appropriate fluctuations of prices, especially at the margins where prices are likely most variable. This is perfectly common-sensical. Nobody (except maybe a Keynesian economist or a politician) would insist that a one-size-fits-all law or a regulation can determine a price better than the buyers and sellers involved in a given transaction.

The second unbreakable law of economics is Supply and Demand. The law of supply and demand overlaps marginal utility. The law of supply and demand shows us that prices fluctuate based on whether a service or product is desirable. The more desirable a product or service, the more expensive it will be, all other things being equal. Again, this is common-sensical.

Adam Smith (who is not always beloved by Austrian economists for a variety of reasons) described the processes of the free-market itself as an "Invisible Hand." Here is a definition from Wikipedia (yes, not always accurate, but this is a perfectly good one in our opinion): "In economics, the invisible hand, also known as the invisible hand of the market, the term economists use to describe the self-regulating nature of the marketplace, is a metaphor first coined by the economist Adam Smith in The Theory of Moral Sentiments. For Smith, the invisible hand was created by the conjunction of the forces of self-interest, competition, and supply and demand, which he noted as being capable of allocating resources in society. This is the founding justification for the laissez-faire economic philosophy."

Who would disagree with the above-described mechanics of the market? There are many who might object to the OUTCOMES these days (hence socialism, etc.) but it is hard to argue with facts. Markets through marginal utility and the work of the invisible hand create prices and these prices are the "best" prices available based on the pool of buyers and sellers at the time and place of the transaction.

We believe if you approached most reputable economists (even socialist ones) and almost any EU or American politician or top bureaucrat, they would agree (essentially) with what we've just laid out above. These are definitions that are COMMONLY accepted in the Western world. They are taught in economic classes. They are not debatable. They are simply just natural truths.

Given this, dear reader, we ask the following question: Why then is the entire Western economic system based on the monetary outcomes of central banking WHICH ARE NOT DEFENSIBLE ECONOMICALLY OR PROCEDURALLY.

Strange, isn't it?

There is only one way a monetary system CAN work properly. That is if the money-stuff is regulated by the MARKET, not by the hand of man. Historically, the way this occurred (sorry Brownians) is through the informal (and formal) use of a gold-and-silver private monetary standard. Gold was the financial and banking medium and silver was the "people's money." There was a ratio between them so that it was easy to tell if someone or some group was fiddling with the standard. When the ratio went out of whack, people knew funny business was afoot.

This simply "honest money" standard is EASILY implementable today. There is plenty of gold and silver around. And people would use scrip (paper notes linked to their gold and silver) along with electronic methodologies to provide all the convenience of modernity while retaining the benefits of real money.

The benefit of such a system is that the quantity of money is market driven. If there is too much money in the system and the prices of gold and silver drop, then people begin to hoard gold and silver and mines shut down. When the price stabilizes and begins to go up, people un-hoard and mines reopen. It is a SELF-REGULATING market-driven system based on the invisible hand and marginal utility. It is a helluva lot better than what we've got now.

Here's some more from the above article:

For years, the Fed's legislative strategy relied largely on relationships Alan Greenspan built over a period of decades, both socially and professionally, with senior members of Congress from both parties. Mr. Bernanke, in contrast, isn't a Washington insider and didn't begin cultivating Congress until he succeeded Mr. Greenspan in 2006. Now the Fed is relying heavily on his personal credibility and the plaudits he gets — at least from some members of Congress — for helping to steer the U.S. economy away from the abyss last fall.

Earlier in the year, Mr. Bernanke went over the heads of the politicians to defend the Fed directly to the public, appearing on CBS's "60 Minutes," for instance. Recently, though, his public appearances have been more conventional, in part because of reluctance to challenge Congress directly before the Dec. 3 hearings in the Senate on his nomination for a second four-year term. Instead, he and other Fed governors have been meeting privately with members of Congress.

At a recent meeting, Mr. Bernanke was "not at all confrontational. He was in to listen to the points that were raised and to get a sense of what the Fed might be doing and where we were headed with financial reform," said Sen. Jack Reed (D., R.I.). "It was more or less just trying to identify issues we were concerned about and be prepared to respond."

The Fed's ability to influence Congress is diluted by public anger. A July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%. Treasury Secretary Timothy Geithner, a former president of the Federal Reserve Bank of New York, is a stalwart Fed ally, but has his own credibility problems on Capitol Hill.

The persistence of antipathy to the Fed is alarming top officials at the central bank — and economists and business executives who believe a Fed independent of elected politicians is essential to avoiding inflation. The legislative provision that would allow the congressional Government Accountability Office to audit Fed monetary policy, pushed successfully in the House Financial Services Committee by Rep. Ron Paul (R., Texas), is causing particular alarm. Ms. Rivlin deemed it "quite dangerous with respect to the independence of the Fed."

"I think it is going to be seen as weakening the independence of monetary policy with consequent negative implications," Mr. Frank said, criticizing the Paul provision. "I think people will be worried about the impact on the dollar, on the interest rate — and I think that one may be revisited when we get to the floor."

During Mr. Greenspan's long tenure as Fed chairman, the Fed was celebrated for keeping unemployment and inflation low, but occasionally criticized for Mr. Greenspan's resistance to regulation. That criticism has grown as politicians and the public look for people to blame for the financial crisis and deep recession.

In this analysis, we have gone to some length to spell out the economic and methodological foundations of Western economics (hope we haven't bored you, but it's important!). Why? Because we want to illustrate the toxic soup of confusion surrounding modern monetary policy. This article in the Wall Street Journal, if carefully examined (and with all due respect), is a perfect example of muddled monetary thinking and reporting.

There is talk in the article of an "independent monetary policy," of the Fed "steering the US economy away from the abyss," of an independent Fed as necessary to "avoid inflation." But even a rudimentary reading of economics shows us that over the long term it is impossible to fix prices – and that money in this regard is just another commodity.

The Fed can be as independent as it wishes – it can even fly off to the moon – but it is still a central bank, and its leaders gather regularly to further destroy the economy by fixing the price and quantity of the money. The Fed can supposedly steer the economy away from an "an abyss" but even a cursory reading of economics (see above) will offer the logical conclusion that an entity involved regularly in fixing the price of a commodity is actually preparing that commodity for a chaotic upheaval of price and quantity. Finally, the Fed's independence has NOTHING to do directly with inflation. The Fed, like any other central bank, manufactures inflation by printing too much money. And with most central banks most of the time the bias is always upward (the pressure is usually to print more and more). Whether a central bank is "independent" or not, it will inevitably print too much money, thus injecting price-inflation into the economy.

If one is clear-headed about the monetary conversations going on today, it is not hard to discern the manipulations to which they are prone. It is, however, the Internet, in our opinion, that has exposed the workings of these manipulations to a vast number of people. It is not that hard to understand, after all. And most people are very smart, at least some of the time, if they have information at hand and are able to read.

After Thoughts

In the above article, we find many of the glib distortions affecting the conversation about money. Money is mis-defined, as is "inflation" and the ability of the Fed (regardless of its independence) to fulfill its requisite role. All this is wrapped up in a well-written presentation and offered to readers within the covers of America's most prestigious financial journal. But, jeez! … Do the editors of the Wall Street Journal (and we have asked this before) ever read the Internet? How can they continue to issue this kind of monetary reporting when there are alternative outlets offering rational, free-market truths? No wonder people are angry. They are upset, as in the past, that their wallets have been drained by monetary mismanagement. But this time around, they are also upset because they have likely figured out they are being lied to. The Internet is easily accessible. It is very possible the anger will grow until untruths are moderated.

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