Janet Yellen's Advice to Rand Paul … Federal Reserve Chair Janet Yellen mostly succeeded in her attempt to be vague about Fed policy in her semiannual appearance before Congress on Tuesday. On one issue, however, she was unequivocal – and correct: A congressional audit of the Fed's interest-rate decisions is a very bad idea. – Bloomberg
Dominant Social Theme: Rand Paul – please back off.
Free-Market Analysis: Bloomberg seems to be uncomfortable with Rand Paul's Audit the Fed bill.
This editorial repeats many of the points of a previous one, published earlier this month. We analyzed that editorial, "Bashing Central Banks – Does Rand Paul Know What He's Talking About?"
Here's how the Bloomberg article began:
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."
It went on to explain that Paul had obviously confused the Fed's liabilities and that inserting political oversight into an "independent" facility would prove destabilizing.
Farther down in the article we summarized the editorial this way:
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.
This is the single salient point that makes Rand Paul's Audit the Fed idea a good one. Were names of the Fed's largesse actually revealed, the illogical core of this terrible economic mechanism would be further revealed. In fact, lately it's come out that the "bailouts" over the past year were very obviously focused on individuals who were in some way linked to the institution itself or to Fed officials.
Yes, the Fed is audited … but the real relationships – banker to banker – remain hidden. We are not supposed to consider these. In the current editorial, much is made of the many "audits" that the Fed undergoes.
The Fed is already "extensively audited," she said, and Senator Rand Paul's bill to audit it even more "would politicize monetary policy." Were such congressional micromanagement possible in the 1970s, she pointed out, former Fed Chairman Paul Volcker would probably not have been able to defeat inflation by pushing up interest rates to double digits and forcing the economy into a recession.
Undermining the central bank's political independence would ultimately harm the economy. Studies show that independent central bankers are better stewards of their economies than are politically appointed finance chiefs. The reason is simple: Politicians often favor easy-money policies that promote short-term growth and boost their re-election chances, even if they bring on inflation later.
There are more useful Fed changes that Paul could pursue instead: more openness in the bank's regulatory deliberations, for example, and a reduction in the power enjoyed by the New York Federal Reserve Bank. Yellen could also institutionalize what she now does voluntarily: brief lawmakers before her semiannual testimony to better prepare them.
These are almost incantatory solutions at this point, presented regularly whenever the Fed is faced with a challenge to its "independence."
In fact, the Fed is not independent. It serves a very useful purpose as the monetary engine of modern capitalism, including the banking and securities sector. It is part of an elaborate monopoly-money food chain that feeds on its predictable, inflationary output.
This is what has been recognized in the past decade, thanks in large part to Internet information that has relentlessly explained the logical flaws at the heart of the Western monetary system.
The result has been undeniable and even unstoppable. Resentment about the Fed and astonishment over the way the larger monetary system operates has been building regularly. There are active, continued protests in Berlin.
In the US, protest has begun to take a legislative form. The reason Bloomberg is paying attention to Paul is because it will be "the subject of a Senate Banking Committee hearing … has 30 co-sponsors, and a version of it has already been adopted by the House."
That's pretty powerful stuff. In the 20th century, the kind of opposition that the Fed is facing would likely never have expanded to this point. But too much information is out in the hands of the general public now. Politicians feel impelled to act.
The result, sooner or later, will probably be some sort of accommodation by the Fed – but in our view, the pressure will continue to build, nonetheless. That's because each time the Fed accommodates a request, the resultant information will only make the Fed look worse.
If the Fed tries to launch a counter PR offensive, this is not likely to work either because it will only call attention to the Fed's initial or ongoing malfeasance. There are few if any good options for the Fed.
Nonetheless, its protectors will fight bitterly and, in fact, the end result – the final defensive stratagem – is surely a kind of financial chaos. The Fed and those behind the Fed – the banking establishment basically – will leave behind only scorched earth, from what we can tell.
The general public probably will not let this matter rest. Too much is already known. But the opposition is powerful indeed and there will be a mighty price faced as the US central bank – and similar banks around the world – muster against growing challenges to their wellbeing.
The general public, unfortunately, will suffer as this anti-Fed trend continues. Over time, for those who do not examine modern trends closely the suffering may be significant, indeed.