Fed Up
Ron
Paul, 05.15.09, 07:10 PM EDT
Audit
the Federal Reserve.
The Federal Reserve's recent and unprecedented actions
in the realm of monetary policy have provoked a backlash among the American
people. Trillions of dollars worth of loans and guarantees have been provided
to Wall Street firms, while Main Street Americans suffocate under harsh taxation,
the prospect of higher debt levels and increasing inflation. These events have
awakened many Americans to problems with the Fed's loose monetary policy, the
bubbles it has created in the past and the potential hyperinflation it might
cause in the future.
One of the fallacies of modern economics is the idea that a central bank is
required in order to keep inflation low and promote economic growth. In
reality, it is the central bank's monetary policy that causes inflation and
depresses economic growth. Inflation is an increase in the supply of money,
which in our day and age is directly caused or initiated by central banks. All
other things being equal, inflation results in a rise in prices. A so-called
"mild" rate of inflation of 3% per year leads to a 56% rise in prices
over a 15-year period. Even a "low" rate of inflation of 2% per year
leads to a 35% rise over that same period. How is that conducive to long-term
growth?
A common misconception is that the Fed is completely independent of
political pressures. While the Fed has far too much authority to make
agreements with foreign governments and central banks, or create temporary
liquidity facilities, the governors and--more important--the chairman, are
appointed by the president.
The chairman is the dominant figure
within the Board of Governors and the Federal Open Market Committee, the public
face of the Fed, and he must be reappointed by the president every four years,
with the advice and consent of the Senate.
Thus, his job security as
chairman is dependent on keeping the president and the Senate pleased. Every
time the chairman acts, it is with the knowledge that within four years he will
be called to the carpet to account for his actions. This necessarily leads to a
focus on short-term economic growth, reflected in the Fed's attempt to manage
and publicize certain statistical economic indicators.
While I am a proponent of eliminating
the Federal Reserve System altogether, I believe that as long as the Federal
Reserve exists it should be fully audited. According to current federal law,
the Fed's agreements with foreign governments and central banks--and, more
important, its open market and monetary policy operations--are exempt from an
audit by the General Accounting Office. As the GAO observed in
the 1970s, the last time the issue of an audit really came to the fore,
"We do not see how we can satisfactorily audit the Federal Reserve System
without authority to examine the largest single category of financial
transactions and assets that it has." The Fed has such broad power to
intervene in the economy and to engage in agreements with foreign governments
and central banks that it is unconscionable that such actions are exempt from
oversight.
The Fed's open market operations are
not at all neutral in allocating credit. The Fed creates new balances out of
thin air and uses those new balances to purchase Treasury bills from banks.
Thus the banking sector is the first to get the use of the new money created in
these bank balances. As this new money circulates through the economy, prices
rise, and individuals further down the chain experience a higher cost of living
before their salaries rise.
The fact that a single entity, the
Federal Reserve, engages in and has a monopoly on monetary policy has
detrimental effects on the economy. As long as we try to keep up this fiction,
that the Federal Reserve has a long-term focus, that attempting to fix interest rates will not
distort the economy, and that the Fed can end a recession by injecting
liquidity, we will never free ourselves from the booms and busts of the
business cycle.
The necessary first step to restoring
economic stability in this country is to audit the Fed, to find out the
multitude of sectors in which it has involved itself and, once the audit has
been completed, to analyze the results and determine how the Fed should be
reined in. Proposals to push the Fed back into the shadows, or to give
it an even greater role as a guarantor of systemic stability, are as misguided
as they are harmful.
If Congress fails to scrutinize the
Fed and the actions of its unelected bureaucrats, it will only have itself to
blame as this country's economy crashes and burns.
U.S. Congressman Ron Paul
represents the 14th district in