Unemployment continues to plague our economy. In spite of constant claims that we have just turned the corner into recovery, the jobs reports remain grim with no real signs of improvement. While Keynesian economists and big government apologists scratch their heads about persistent unemployment in spite of unprecedented government “investment” in the economy, free market economists understand the problem perfectly well. In short, they understand that we are looking to the Federal Reserve to solve an unemployment crisis that the Fed itself largely created.
For example, the Fed is supposed to maintain full employment as half of its “dual mandate”. But the Fed simply has the wrong tools to do this. In fact, its credit expansion and manipulation of interest rates cause harm when they are applied to “help” the economy. As we saw with the housing boom and bust, Fed-created inflation cannot be sustained without harmful consequences. The Fed’s artificial boom led to the unemployment we’re suffering today. The Fed is not a small business or a manufacturer that creates value or increases productivity to sustain real job growth. It literally destroys value by printing more money, and distributing it through sweetheart deals to well connected banks and corporations (including foreign banks!). The only success the Fed has had in maintaining full employment has been on Wall Street where it props up crony banks and investment houses to prevent them from going bankrupt as they should. Instead, they survive to malinvest another day while their executives enjoy jackpot bonuses.
The Fed also pumped up employment in the housing industry with artificially low interest rates that created an unsustainable demand for housing. Millions jumped into this sector when the money was loose and the bubble inflating. Besides the many who bought houses they could not afford and now face foreclosure, there were also those who became employed in housing related fields. These people invested time and money in training and spent years establishing careers in real estate, mortgage lending, construction and contracting, careers that all vanished into thin air with the burst of the bubble. Now they face considerable disruption in their lives as they struggle with unemployment, underemployment and decisions about retraining for different careers. This amounts to a tremendous amount of unnecessary waste that would not have occurred had the housing industry been allowed to develop naturally according to market demands.
Jobs are properly created by entrepreneurs who are willing to work hard and take calculated risks. Jobs are also created through real increases in productivity, resulting from re-invested profits or conservative borrowing at market interest rates. But the Fed has made those risks impossible to calculate, and made borrowing money artificially cheap. As a result, economic growth has been chilled while unemployment skyrockets.
Until those in power understand the harm they do with central economic planning, we will continue to slide backwards and lose jobs. The Fed needs to stay out of the job creating business altogether and the federal government needs to focus on its constitutional duties. Just when we need government to back off, we hear about more government intervention in the economy in the form of more spending, only they call it “investment”. It is more properly called “malinvestment”, and the resources that are funneled into industries by government policies will only hurt employment more in the long run.
Monday
REAL RESPECT FOR THE CONSTITUTION
I am pleased that the Constitution has received a lot of attention in recent weeks, thanks to the tea party movement. The 112th Congress kicked off with a reading of the Constitution on the floor of the House. It goes without saying that Members of Congress should have read the Constitution many times, and should continue to study it.
Citing the particular clause of the Constitution that authorizes newly introduced legislation is a reasonable suggestion, yet in reality it will do little to restrain unconstitutional growth of the federal government. We have had such rules in the past and no benefit came of it.
The laws that are passed reflect the preferences and personal agendas of those in charge. For too long those agendas have expanded government at the expense of personal liberty, regardless of which political party was in charge. This expansion of government clearly violated the Constitution, yet it was always argued that this or that program somehow conformed to that “living” document.
By misinterpreting the general welfare clause, the interstate commerce clause, and the “necessary and proper” clause, Congress has justified every conceivable expansion of the federal government. Congress also has misinterpreted the 14th Amendment and legislated as though it had repealed the 10th Amendment. Sadly, Congress has also systematically abdicated its prerogatives and responsibilities to the executive branch over many decades.
Too many people, in and out of Congress, grew up being taught that the Constitution was a “modern living document.” Though the authors allowed for flexibility through the amendment process, this process has been ignored for the sake of speed and convenience. As a result, the Constitution now has little actual meaning.
Our Constitution should be viewed as law, and Members of Congress should be expected to follow, respect, understand, and uphold the law. But a document is just a piece of paper if those who represent us and promise to obey it ignore it instead. Celebrating the Constitution without this understanding will do nothing to restore the greatness of America.
Simply praising the document distracts from the need for Members to resist special interests, political self-interests, emergency needs in times of crisis, fear-based economic myths, and the persistent temptation to seek security over liberty while ignoring personal responsibility and self-reliance.
I wonder: will this welcomed renewed interest in the Constitution lead to a healthy reassessment of all of our policies? Will there be no more wars without an actual congressional declaration? Will the Federal Reserve Act be repealed? Will only gold and silver be deemed legal tender?
Will we end all unconstitutional federal departments, including the Department of Energy, Education, Agriculture, Commerce, Health and Human Services, Homeland Security, and Labor?
Will the Patriot Act be repealed and all warrantless searches stopped?
Will the TSA be abolished?
Will the IRS's unconstitutional collection powers end?
Will executive and judicial quasi-legislative powers end?
Will we end the federal war on drugs?
Will we end the federal government's involvement in medical care?
Will we end all of the federal government's illusionary insurance programs?
Will we ban secret prisons, trials without due process, and assassinations?
Will we end our foreign policy of invasion and occupation?
For America to once again become the standard for a free society, our love of liberty and desire for peace must far surpass any public display of fidelity to the Constitution. We must first look to strong moral character, respect for the rule of law, and an understanding of the proper role of government in a free society.
Citing the particular clause of the Constitution that authorizes newly introduced legislation is a reasonable suggestion, yet in reality it will do little to restrain unconstitutional growth of the federal government. We have had such rules in the past and no benefit came of it.
The laws that are passed reflect the preferences and personal agendas of those in charge. For too long those agendas have expanded government at the expense of personal liberty, regardless of which political party was in charge. This expansion of government clearly violated the Constitution, yet it was always argued that this or that program somehow conformed to that “living” document.
By misinterpreting the general welfare clause, the interstate commerce clause, and the “necessary and proper” clause, Congress has justified every conceivable expansion of the federal government. Congress also has misinterpreted the 14th Amendment and legislated as though it had repealed the 10th Amendment. Sadly, Congress has also systematically abdicated its prerogatives and responsibilities to the executive branch over many decades.
Too many people, in and out of Congress, grew up being taught that the Constitution was a “modern living document.” Though the authors allowed for flexibility through the amendment process, this process has been ignored for the sake of speed and convenience. As a result, the Constitution now has little actual meaning.
Our Constitution should be viewed as law, and Members of Congress should be expected to follow, respect, understand, and uphold the law. But a document is just a piece of paper if those who represent us and promise to obey it ignore it instead. Celebrating the Constitution without this understanding will do nothing to restore the greatness of America.
Simply praising the document distracts from the need for Members to resist special interests, political self-interests, emergency needs in times of crisis, fear-based economic myths, and the persistent temptation to seek security over liberty while ignoring personal responsibility and self-reliance.
I wonder: will this welcomed renewed interest in the Constitution lead to a healthy reassessment of all of our policies? Will there be no more wars without an actual congressional declaration? Will the Federal Reserve Act be repealed? Will only gold and silver be deemed legal tender?
Will we end all unconstitutional federal departments, including the Department of Energy, Education, Agriculture, Commerce, Health and Human Services, Homeland Security, and Labor?
Will the Patriot Act be repealed and all warrantless searches stopped?
Will the TSA be abolished?
Will the IRS's unconstitutional collection powers end?
Will executive and judicial quasi-legislative powers end?
Will we end the federal war on drugs?
Will we end the federal government's involvement in medical care?
Will we end all of the federal government's illusionary insurance programs?
Will we ban secret prisons, trials without due process, and assassinations?
Will we end our foreign policy of invasion and occupation?
For America to once again become the standard for a free society, our love of liberty and desire for peace must far surpass any public display of fidelity to the Constitution. We must first look to strong moral character, respect for the rule of law, and an understanding of the proper role of government in a free society.
ON GUN CONTROL AND VIOLENCE
The terrible violence in Arizona last weekend prompted much national discussion on many issues. All Americans are united in their sympathies for the victims and their families. All wonder what could motivate such a horrible act. However, some have attempted to use this tragedy to discredit philosophical adversaries or score political points. This sort of opportunism is simply despicable.
We are fortunate to live in a society where violence is universally denounced. Not one public official or commentator has attempted to justify this reprehensible act, yet the newspapers, internet, and airwaves are full of people trying to claim it was somehow motivated by someone else’s political rhetoric. Most disturbing are the calls to use government power to censor certain forms of speech, and even outlaw certain types of criticism of public officials. This was the completely apolitical act of a violent and disturbed man. How sad that the attempted murder of the Congresswoman who had just read the First Amendment on the House floor would be used in efforts to chill free speech! Perhaps some would feel safer if the Alien and Sedition Acts were reinstated.
Also troubling are the renewed calls for stricter gun control laws, and for government to “do something” to somehow prevent similar incidents in the future. This always seems to be the knee jerk reaction to any crime committed with a gun. Nonsensical proposals to outlaw guns around federal officials and install bulletproof barriers in the congressional gallery only reinforce the growing perception that politicians view their own lives as far more important than the lives of ordinary citizens. Politicians and a complicit media have conditioned many citizens to view government as our protector, leading to more demands for government action whenever tragedies occur. But this impulse is at odds with the best American traditions of self-reliance and individualism, and it also leads to bad laws and the loss of liberty.
Remember - liberty only has meaning if we still believe in it when terrible things happen and more government security is demanded. Government cannot make us safe by mandating security any more than it can make us prosperous by decreeing an end to poverty.
We need to reaffirm the core American value of individual responsibility. Consider the young man who had the courage to tackle the shooter and prevent further carnage because he himself had a concealed weapon. Without that gun, he could have been yet another sitting duck. When peaceful citizens are armed, they at least have a chance against armed criminals.
Advocates of gun control would urge us to leave our safety to law enforcement, but eyewitness reports indicate it took police as much as 20 minutes to arrive on the scene that day! Since police cannot be everywhere all of the time, a large part of our personal safety depends on our ability to defend ourselves.
Our constitutional right to bear arms does not create a society without risks of violent crime, and neither would the strictest gun control laws. Guns and violence are a fact of life. The question is whether it is preferable to be defenseless while waiting for the police, or to have the option to arm yourself. We certainly know criminals prefer the former.
We are fortunate to live in a society where violence is universally denounced. Not one public official or commentator has attempted to justify this reprehensible act, yet the newspapers, internet, and airwaves are full of people trying to claim it was somehow motivated by someone else’s political rhetoric. Most disturbing are the calls to use government power to censor certain forms of speech, and even outlaw certain types of criticism of public officials. This was the completely apolitical act of a violent and disturbed man. How sad that the attempted murder of the Congresswoman who had just read the First Amendment on the House floor would be used in efforts to chill free speech! Perhaps some would feel safer if the Alien and Sedition Acts were reinstated.
Also troubling are the renewed calls for stricter gun control laws, and for government to “do something” to somehow prevent similar incidents in the future. This always seems to be the knee jerk reaction to any crime committed with a gun. Nonsensical proposals to outlaw guns around federal officials and install bulletproof barriers in the congressional gallery only reinforce the growing perception that politicians view their own lives as far more important than the lives of ordinary citizens. Politicians and a complicit media have conditioned many citizens to view government as our protector, leading to more demands for government action whenever tragedies occur. But this impulse is at odds with the best American traditions of self-reliance and individualism, and it also leads to bad laws and the loss of liberty.
Remember - liberty only has meaning if we still believe in it when terrible things happen and more government security is demanded. Government cannot make us safe by mandating security any more than it can make us prosperous by decreeing an end to poverty.
We need to reaffirm the core American value of individual responsibility. Consider the young man who had the courage to tackle the shooter and prevent further carnage because he himself had a concealed weapon. Without that gun, he could have been yet another sitting duck. When peaceful citizens are armed, they at least have a chance against armed criminals.
Advocates of gun control would urge us to leave our safety to law enforcement, but eyewitness reports indicate it took police as much as 20 minutes to arrive on the scene that day! Since police cannot be everywhere all of the time, a large part of our personal safety depends on our ability to defend ourselves.
Our constitutional right to bear arms does not create a society without risks of violent crime, and neither would the strictest gun control laws. Guns and violence are a fact of life. The question is whether it is preferable to be defenseless while waiting for the police, or to have the option to arm yourself. We certainly know criminals prefer the former.
TOWARD SENSIBLE MONETARY POLICY
Last week the 112th Congress was sworn in. I am pleased that I will be chairing the Monetary Policy Subcommittee of the Financial Services Committee, which has oversight of the Federal Reserve. Obviously, this position will facilitate my efforts to ensure the Fed provides the American people with more information about what they have been doing with and to our money. Not surprisingly, since my chairmanship was announced, apologists for the Fed have been recycling the old canard about how increased transparency threatens the Fed’s so-called political independence.
By independence, they are referring to the Fed’s ability to greatly impact the economy with virtually no meaningful oversight. We only recently learned that the bankers at the Fed were able to use the latest financial crisis to bail out Wall Street cronies and foreign central banks with billions of dollars that were created and wasted, instead of appropriated and voted on by representatives of the people. The Fed and its supporters in Congress vehemently fought even this small bit of transparency and without this one-time provision in the financial reform act forcing disclosure, we would still not have this information. Indeed, we are in the dark on so much of what the Fed has done. This is extremely dangerous for our country, yet this power and secrecy is defended as some kind of public good, which is patently ridiculous.
Our government is based on a system of checks and balances. With no check on the Fed, it is no surprise it has thrown the economy wildly off balance. The solution is not to re-inflate the bubbles the Fed created, or to continue to devalue the currency, or to throw billions at failing banks and corporations. The solution is to return sanity and freedom to monetary policy. Forcing the entire country to use a medium of exchange that is subject to the whims of elite bankers and their cronies on Wall Street is not sanity. Hoping that an unchecked, all-powerful, behemoth banking cartel will solve any economic problem is not sanity.
The problems the Fed was originally created to solve now look miniscule compared to the problems it has created. If “political independence” erodes the purchasing power of the currency by 98%, destabilizes the economy with radical booms and busts, all while increasing unemployment and tipping us ever closer to hyperinflation, perhaps it is time to try a little transparency and accountability instead. Better still – we should try giving the people true economic freedom.
Make no mistake: the Fed is not truly independent of political pressure. Its chair is appointed by the president, and it is a creature of Congress. Congress has a duty, albeit a neglected one, to exercise oversight of the Fed. However, even if it was politically independent, it is not independent of the influences of Wall Street. One only has to look at the revolving door between the Fed and the big banks to know that. Disclosures on TARP funds confirm this.
It is nothing short of cruel and criminal for Congress to stand idly by while the life savings of Americans are inflated away to nothing. It is high time Congress insist on getting complete information on what the Fed has been doing, and for whom. My hope is that exposing the truth will demonstrate the insanity of the status quo and more people will call for sensible changes, such as legalizing competing currencies.
By independence, they are referring to the Fed’s ability to greatly impact the economy with virtually no meaningful oversight. We only recently learned that the bankers at the Fed were able to use the latest financial crisis to bail out Wall Street cronies and foreign central banks with billions of dollars that were created and wasted, instead of appropriated and voted on by representatives of the people. The Fed and its supporters in Congress vehemently fought even this small bit of transparency and without this one-time provision in the financial reform act forcing disclosure, we would still not have this information. Indeed, we are in the dark on so much of what the Fed has done. This is extremely dangerous for our country, yet this power and secrecy is defended as some kind of public good, which is patently ridiculous.
Our government is based on a system of checks and balances. With no check on the Fed, it is no surprise it has thrown the economy wildly off balance. The solution is not to re-inflate the bubbles the Fed created, or to continue to devalue the currency, or to throw billions at failing banks and corporations. The solution is to return sanity and freedom to monetary policy. Forcing the entire country to use a medium of exchange that is subject to the whims of elite bankers and their cronies on Wall Street is not sanity. Hoping that an unchecked, all-powerful, behemoth banking cartel will solve any economic problem is not sanity.
The problems the Fed was originally created to solve now look miniscule compared to the problems it has created. If “political independence” erodes the purchasing power of the currency by 98%, destabilizes the economy with radical booms and busts, all while increasing unemployment and tipping us ever closer to hyperinflation, perhaps it is time to try a little transparency and accountability instead. Better still – we should try giving the people true economic freedom.
Make no mistake: the Fed is not truly independent of political pressure. Its chair is appointed by the president, and it is a creature of Congress. Congress has a duty, albeit a neglected one, to exercise oversight of the Fed. However, even if it was politically independent, it is not independent of the influences of Wall Street. One only has to look at the revolving door between the Fed and the big banks to know that. Disclosures on TARP funds confirm this.
It is nothing short of cruel and criminal for Congress to stand idly by while the life savings of Americans are inflated away to nothing. It is high time Congress insist on getting complete information on what the Fed has been doing, and for whom. My hope is that exposing the truth will demonstrate the insanity of the status quo and more people will call for sensible changes, such as legalizing competing currencies.
Wednesday
WHAT I THINK....HOSSEIN ASKARI AND NOWREDDINE KRICHENE
The fascinating two-year "rumble" that has been threatening since the November 2010 mid-term United States elections will unfold after the new congress is seated this week. The feature bout on the card will pit: in the right corner, Ron Paul, the Texas Republican congressman, a graduate of Duke University Medical School, 1988 presidential candidate and author of the best-selling 2009 book End the Fed; and in the left corner, Ben Bernanke, chairman of the board of governors of the US Federal Reserve System, MIT PhD economist, former chairman of the Council of Economic Advisors and Fed governor.
This dream prize fight should take place because the Republicans have "mischievously" nominated Ron Paul as the chair of an important sub-committee of the House Financial Services Committee, namely the sub-committee on domestic monetary policy and technology, which scrutinizes US monetary policy.
The two combatants, Paul and Bernanke, have sharply opposite views in ideology and policy-making.
Paul, a well-known libertarian, belongs to a school of thought that rejects Keynesian economics, and abhors fiscal deficits and a government that polices the world. He supports the market mechanism, including for interest rate determination, supports bankruptcies, and dislikes bailouts and moral hazards, advocates the gold standard and a safe and stable dollar, and is critical of the law that banishes the use of gold in domestic circulation.
Bernanke's approach to economic policy is well known and speaks for itself. As a key policy-maker under the George W Bush and Barack Obama administrations, he was the architect of extremely loose monetary policy that earned him the alias "Ben the helicopter" and has provided the foundation for recent financial developments in the United States, resulting in financial turmoil with a severe recession, unprecedented peacetime fiscal deficits and rising public debt. He is a strong supporter of Keynesian economics and quite relaxed about the dangers of inflation and inflationary expectations. His near-zero interest rate policy has reduced income from savings and distorted prices.
Since the nomination of Paul to chair the domestic monetary policy sub-committee, media and academic circles have become intrigued as to how the relationship between the congress and the Fed will evolve. In particular, to what extent will he be able to implement the ideas that he has advocated since the early 1970s, calling for sound money, a return to gold, and culminating with the elimination of the Fed?
To say that Paul faces great challenges is an understatement. If his tenure as a head of the sub-committee ends with no change in US monetary policy and at the Fed, then all of his ideas could be seen as rhetoric, with his supporters becoming discouraged at discovering the gap between his ideas and political realities.
If, however, Paul succeeds in reforming US monetary policy and the Fed, he would set an important historical precedent, with his supporters gaining confidence in their ability to make hitherto difficult changes in the US financial system.
Even before round 1, Paul has started to dampen expectations. Although he has re-emphasized his belief that the Fed should be abolished, he has cautioned that turning ideas into reality takes time and effort. He has noted that his first action on the job will be to "think things through and not over-do things too soon." When asked if he intends to get rid of the Fed, the congressman replied: "Not right up front, but obviously that is the implication. Even in my book about ending the Fed, I talk about not turning the keys and locking the doors, I talk about a transition."
The congressman spoke about how he would go about reining in the Fed and the reasons he believes it is vital to do so. "I'll have plans for hearings to find out how much information we can get. Obviously it is very popular with the American people to audit the Fed, to know what they are doing. They can spend trillions of dollars and we don't know where it goes. They have a bigger budget, they spend more money than the congress does, and yet we have no oversight. It was never intended that a secret body like this could create money out of thin air and spend it, take care of some banks and big business and foreign banks while the American people struggle."
These statements indicate that Paul has quickly become more pragmatic and has toned down his plans for radical reforms, possibly handing the banner of radical reform to future generations after Americans have suffered even more from financial turmoil and chaos.
Relegating reforms to future generations could be a disappointing message to Paul's supporters. However, it may not be, as it appears that Paul's priority is to audit the Fed's operations. This would be in line with legislation he introduced, incorporated into the Dodd-Frank Act of July 2010, enabling the Government Accountability Office (GAO) to audit the accounts of the Fed.
For those who are familiar with Paul's ideas, this priority falls short of their expectations. The urgency does not seem to lie in auditing the Fed's operation as much as to prevent further erosion of the value of money and spreading economic malaise. The urgency for his supporters is to stop the hemorrhage before washing away the blood.
Although a physician by training, Paul has displayed detailed knowledge of monetary economics and documented the adverse effects of the Fed's policies. He has pointed out that, contrary to its mandate to promote price stability, the Fed has promoted price instability.
Looking at the pre-Fed era, the US consumer price index (CPI) declined at an annual average of 0.5% and real gross domestic product (GDP) grew at an annual 4% during 1800–1912; this would have been labeled grave deflation by Bernanke and would have been considered as a danger to the economy.
During the Fed era, the CPI rose at 3.5% per year and real GDP at 3.25% per year during 1913–2009. Hence a dollar bought almost twice as much goods in 1912 as it did in 1800; and in 2009 it bought less than 5% of the goods it bought in 1913.
Paul pointed out that the Fed was a joint creation of the government and Wall Street to provide an "elastic" monetary system, with the real and hidden purpose being service to the interests of Wall Street.
In fact, there may not have been a more opportune time to think about radical monetary reforms than the present, with more Americans aware of the economic and financial policies, the impact of Fed policies on the US economy and in the face of a declining standard of living for the large majority of Americans.
The standard of living has been declining; impoverishment increasing, and the era of "opulence" as described by the late Professor John Kenneth Galbraith only a dim memory. A large number of Americans are still living out the financial nightmares of 2007–2009, with millions of foreclosures and general bankruptcies. It could be the best time for popular support for Paul's ideas.
Paul has been an influential member of congress and has been member of the banking committee; yet despite his strong views and statements and sharp criticism of the Fed in the past few years, he was unable to initiate reforms that would rein the Fed's expansionary monetary policies. Recently, some House Republican members wrote to Bernanke urging him to renounce the new quantitative easing program, which will inject $600 billion into the economy. Their letter was simply ignored by the Fed.
This state of affairs and the absolute power of the Fed to impose policies regardless of strong policy disagreements illustrate the urgency of hearings and reform. It is congress that created the Fed in 1913; it is congress that has imposed mandates on the Fed, including the reforms that set up the rate-setting Federal Open Market Committee in 1933 or the mandate of full-employment in 1946. It is congress that could legislate reforms on the Fed.
While Paul's long-time career in congress has been rich in ideas and prophetic of the financial crisis, it has nonetheless been marked with very few substantive initiatives for monetary reform.
Paul has clearly stated that he does not intend to shut down the Fed, admitting that doing so would require far-reaching reform. However, it is his intention that the idea has to be nurtured over generations until new leaders are elected with this goal in mind or until the Fed has caused such economic and social damage that the electorate chooses leaders with the explicit mandate of shutting down the Fed.
Hence, by stepping backward from the cherished idea in his book, he may lead supporters and politicians to consider his views as a form of utopia rather than a position that can become operational in the near future. Prior to Paul, the well-known University of Chicago and London School of Economics professor Harry Johnson was critical of the existence of the Fed as a policy-making body and proposed transforming it to an agency within the US Treasury, but this idea was never pursued.
Short of shutting down the Fed, which would require considerable campaigning within the political establishment and proposing the details of the monetary system that would emerge after such a closure, there are many less revolutionary ideas proposed by reformists during the 1930s and later, most recently by Paul and other critics of the Fed.
Subjecting money supply to a fixed rule was emphasized much earlier by the Currency School and translated in the United Kingdom into Sir Robert Peel's act in 1844 that separated the Bank of England into an issue department and a banking department, with the issue of currency tightly determined by the amount of gold in hand.
The advocates of the fixed-money rule, such as economists Irving Fisher, Henry Simons, and Milton Friedman, believed that the Fed should only control monetary aggregates according to fixed increment rates between 2% and 4%, ensure safety of the banking system, and renounce setting interest rates or controlling the unemployment rate.
Besides versions of the currency school theory, reformists during the 1930s proposed the establishment of 100% reserve banking, which would eliminate money creation and destruction by banks, thus making banking safe and eliminating financial crises.
A less radical reform advocated in the past as well as recently is to drop the Fed's mandate to achieve full employment as this mandate may be inconsistent with the role of a central bank as a monetary agency responsible for managing liquidity and ensuring banking safety; this mandate may have led the Fed into printing money, resulting in banking crises and inflation.
Paul has considered gold as the pillar of the monetary system that he envisions and supports. Ever since the collapse of the gold standard in 1914, some authors have kept on advocating a return to gold. While the metal has its supporters, it has more adversaries among professional economists. Gold was the common currency that unified all other currencies in a fixed exchange arrangement under the gold standard. The president of the World Bank has also recently proposed a return to a gold standard. Such a move would be much more difficult than president Richard Nixon's decision to abolish dollar convertibility in 1971, in turn destroying the fixed exchange arrangement adopted under the Bretton Woods system in 1944, which had afforded gold a continuing role in the monetary system.
However, if Paul manages to re-introduce a form of the gold standard or abolish laws that forbid the circulation of gold, he would have accomplished a great deal of the reform program that he has campaigned for since the early 1970s. The menu of reforms for Paul as head of the domestic monetary policy sub-committee is, therefore, not limited.
Paul doesn't appear to think that Bernanke is better or worse than the previous Fed chairman, Alan Greenspan. It is, instead, the monetary system that needs a radical overhaul. He has predicted that under the present Fed-dominated system the economy will deteriorate, inflation will become very high, and that the American people will become poorer. He holds congress responsible for fiscal management, bailouts, re-inflation of housing prices, and authorizing Fed policies.
He has noted that foreign central banks have been buying gold and getting out of the US dollar and that the dollar may loose its status as a reserve currency. In such a scenario, he does not believe that the Special Drawing Rights (or SDRs) issued by the International Monetary Fund or any other currency could replace the dollar – only gold could. As a representative of the American people, he believes that congress may have to consider substantive monetary reforms that would restrain excessive powers of the Fed.
As it turns out, a large majority of congressmen are supportive of the Fed, believe that printing money is the solution to end recessions and high unemployment, and are critical of Paul's ideas, claiming that the overwhelming majority of Republican congressmen are not supportive of his approach to economic and financial policy.
The 2010 November elections may have already sent a clear message of what the electorate thinks. As Americans pay higher prices on a daily basis for gas and food, as more suffer the humiliation of unemployment and foreclosures and are deprived because of economic inequities, more of the electorate will support candidates with platforms calling for fiscal and financial reforms.
For Paul, the US is on the verge of a currency crisis that may undermine the very existence of the Fed: "What I really fear is that when the Fed comes to an end it will not be by my planning but it will end with a catastrophic financial dollar crisis. This crisis when it comes, and I think we're approaching it, affects everybody because it's such an important currency. I think we're moving into very, very dangerous times."
Let the rumble begin!
This dream prize fight should take place because the Republicans have "mischievously" nominated Ron Paul as the chair of an important sub-committee of the House Financial Services Committee, namely the sub-committee on domestic monetary policy and technology, which scrutinizes US monetary policy.
The two combatants, Paul and Bernanke, have sharply opposite views in ideology and policy-making.
Paul, a well-known libertarian, belongs to a school of thought that rejects Keynesian economics, and abhors fiscal deficits and a government that polices the world. He supports the market mechanism, including for interest rate determination, supports bankruptcies, and dislikes bailouts and moral hazards, advocates the gold standard and a safe and stable dollar, and is critical of the law that banishes the use of gold in domestic circulation.
Bernanke's approach to economic policy is well known and speaks for itself. As a key policy-maker under the George W Bush and Barack Obama administrations, he was the architect of extremely loose monetary policy that earned him the alias "Ben the helicopter" and has provided the foundation for recent financial developments in the United States, resulting in financial turmoil with a severe recession, unprecedented peacetime fiscal deficits and rising public debt. He is a strong supporter of Keynesian economics and quite relaxed about the dangers of inflation and inflationary expectations. His near-zero interest rate policy has reduced income from savings and distorted prices.
Since the nomination of Paul to chair the domestic monetary policy sub-committee, media and academic circles have become intrigued as to how the relationship between the congress and the Fed will evolve. In particular, to what extent will he be able to implement the ideas that he has advocated since the early 1970s, calling for sound money, a return to gold, and culminating with the elimination of the Fed?
To say that Paul faces great challenges is an understatement. If his tenure as a head of the sub-committee ends with no change in US monetary policy and at the Fed, then all of his ideas could be seen as rhetoric, with his supporters becoming discouraged at discovering the gap between his ideas and political realities.
If, however, Paul succeeds in reforming US monetary policy and the Fed, he would set an important historical precedent, with his supporters gaining confidence in their ability to make hitherto difficult changes in the US financial system.
Even before round 1, Paul has started to dampen expectations. Although he has re-emphasized his belief that the Fed should be abolished, he has cautioned that turning ideas into reality takes time and effort. He has noted that his first action on the job will be to "think things through and not over-do things too soon." When asked if he intends to get rid of the Fed, the congressman replied: "Not right up front, but obviously that is the implication. Even in my book about ending the Fed, I talk about not turning the keys and locking the doors, I talk about a transition."
The congressman spoke about how he would go about reining in the Fed and the reasons he believes it is vital to do so. "I'll have plans for hearings to find out how much information we can get. Obviously it is very popular with the American people to audit the Fed, to know what they are doing. They can spend trillions of dollars and we don't know where it goes. They have a bigger budget, they spend more money than the congress does, and yet we have no oversight. It was never intended that a secret body like this could create money out of thin air and spend it, take care of some banks and big business and foreign banks while the American people struggle."
These statements indicate that Paul has quickly become more pragmatic and has toned down his plans for radical reforms, possibly handing the banner of radical reform to future generations after Americans have suffered even more from financial turmoil and chaos.
Relegating reforms to future generations could be a disappointing message to Paul's supporters. However, it may not be, as it appears that Paul's priority is to audit the Fed's operations. This would be in line with legislation he introduced, incorporated into the Dodd-Frank Act of July 2010, enabling the Government Accountability Office (GAO) to audit the accounts of the Fed.
For those who are familiar with Paul's ideas, this priority falls short of their expectations. The urgency does not seem to lie in auditing the Fed's operation as much as to prevent further erosion of the value of money and spreading economic malaise. The urgency for his supporters is to stop the hemorrhage before washing away the blood.
Although a physician by training, Paul has displayed detailed knowledge of monetary economics and documented the adverse effects of the Fed's policies. He has pointed out that, contrary to its mandate to promote price stability, the Fed has promoted price instability.
Looking at the pre-Fed era, the US consumer price index (CPI) declined at an annual average of 0.5% and real gross domestic product (GDP) grew at an annual 4% during 1800–1912; this would have been labeled grave deflation by Bernanke and would have been considered as a danger to the economy.
During the Fed era, the CPI rose at 3.5% per year and real GDP at 3.25% per year during 1913–2009. Hence a dollar bought almost twice as much goods in 1912 as it did in 1800; and in 2009 it bought less than 5% of the goods it bought in 1913.
Paul pointed out that the Fed was a joint creation of the government and Wall Street to provide an "elastic" monetary system, with the real and hidden purpose being service to the interests of Wall Street.
In fact, there may not have been a more opportune time to think about radical monetary reforms than the present, with more Americans aware of the economic and financial policies, the impact of Fed policies on the US economy and in the face of a declining standard of living for the large majority of Americans.
The standard of living has been declining; impoverishment increasing, and the era of "opulence" as described by the late Professor John Kenneth Galbraith only a dim memory. A large number of Americans are still living out the financial nightmares of 2007–2009, with millions of foreclosures and general bankruptcies. It could be the best time for popular support for Paul's ideas.
Paul has been an influential member of congress and has been member of the banking committee; yet despite his strong views and statements and sharp criticism of the Fed in the past few years, he was unable to initiate reforms that would rein the Fed's expansionary monetary policies. Recently, some House Republican members wrote to Bernanke urging him to renounce the new quantitative easing program, which will inject $600 billion into the economy. Their letter was simply ignored by the Fed.
This state of affairs and the absolute power of the Fed to impose policies regardless of strong policy disagreements illustrate the urgency of hearings and reform. It is congress that created the Fed in 1913; it is congress that has imposed mandates on the Fed, including the reforms that set up the rate-setting Federal Open Market Committee in 1933 or the mandate of full-employment in 1946. It is congress that could legislate reforms on the Fed.
While Paul's long-time career in congress has been rich in ideas and prophetic of the financial crisis, it has nonetheless been marked with very few substantive initiatives for monetary reform.
Paul has clearly stated that he does not intend to shut down the Fed, admitting that doing so would require far-reaching reform. However, it is his intention that the idea has to be nurtured over generations until new leaders are elected with this goal in mind or until the Fed has caused such economic and social damage that the electorate chooses leaders with the explicit mandate of shutting down the Fed.
Hence, by stepping backward from the cherished idea in his book, he may lead supporters and politicians to consider his views as a form of utopia rather than a position that can become operational in the near future. Prior to Paul, the well-known University of Chicago and London School of Economics professor Harry Johnson was critical of the existence of the Fed as a policy-making body and proposed transforming it to an agency within the US Treasury, but this idea was never pursued.
Short of shutting down the Fed, which would require considerable campaigning within the political establishment and proposing the details of the monetary system that would emerge after such a closure, there are many less revolutionary ideas proposed by reformists during the 1930s and later, most recently by Paul and other critics of the Fed.
Subjecting money supply to a fixed rule was emphasized much earlier by the Currency School and translated in the United Kingdom into Sir Robert Peel's act in 1844 that separated the Bank of England into an issue department and a banking department, with the issue of currency tightly determined by the amount of gold in hand.
The advocates of the fixed-money rule, such as economists Irving Fisher, Henry Simons, and Milton Friedman, believed that the Fed should only control monetary aggregates according to fixed increment rates between 2% and 4%, ensure safety of the banking system, and renounce setting interest rates or controlling the unemployment rate.
Besides versions of the currency school theory, reformists during the 1930s proposed the establishment of 100% reserve banking, which would eliminate money creation and destruction by banks, thus making banking safe and eliminating financial crises.
A less radical reform advocated in the past as well as recently is to drop the Fed's mandate to achieve full employment as this mandate may be inconsistent with the role of a central bank as a monetary agency responsible for managing liquidity and ensuring banking safety; this mandate may have led the Fed into printing money, resulting in banking crises and inflation.
Paul has considered gold as the pillar of the monetary system that he envisions and supports. Ever since the collapse of the gold standard in 1914, some authors have kept on advocating a return to gold. While the metal has its supporters, it has more adversaries among professional economists. Gold was the common currency that unified all other currencies in a fixed exchange arrangement under the gold standard. The president of the World Bank has also recently proposed a return to a gold standard. Such a move would be much more difficult than president Richard Nixon's decision to abolish dollar convertibility in 1971, in turn destroying the fixed exchange arrangement adopted under the Bretton Woods system in 1944, which had afforded gold a continuing role in the monetary system.
However, if Paul manages to re-introduce a form of the gold standard or abolish laws that forbid the circulation of gold, he would have accomplished a great deal of the reform program that he has campaigned for since the early 1970s. The menu of reforms for Paul as head of the domestic monetary policy sub-committee is, therefore, not limited.
Paul doesn't appear to think that Bernanke is better or worse than the previous Fed chairman, Alan Greenspan. It is, instead, the monetary system that needs a radical overhaul. He has predicted that under the present Fed-dominated system the economy will deteriorate, inflation will become very high, and that the American people will become poorer. He holds congress responsible for fiscal management, bailouts, re-inflation of housing prices, and authorizing Fed policies.
He has noted that foreign central banks have been buying gold and getting out of the US dollar and that the dollar may loose its status as a reserve currency. In such a scenario, he does not believe that the Special Drawing Rights (or SDRs) issued by the International Monetary Fund or any other currency could replace the dollar – only gold could. As a representative of the American people, he believes that congress may have to consider substantive monetary reforms that would restrain excessive powers of the Fed.
As it turns out, a large majority of congressmen are supportive of the Fed, believe that printing money is the solution to end recessions and high unemployment, and are critical of Paul's ideas, claiming that the overwhelming majority of Republican congressmen are not supportive of his approach to economic and financial policy.
The 2010 November elections may have already sent a clear message of what the electorate thinks. As Americans pay higher prices on a daily basis for gas and food, as more suffer the humiliation of unemployment and foreclosures and are deprived because of economic inequities, more of the electorate will support candidates with platforms calling for fiscal and financial reforms.
For Paul, the US is on the verge of a currency crisis that may undermine the very existence of the Fed: "What I really fear is that when the Fed comes to an end it will not be by my planning but it will end with a catastrophic financial dollar crisis. This crisis when it comes, and I think we're approaching it, affects everybody because it's such an important currency. I think we're moving into very, very dangerous times."
Let the rumble begin!
Tuesday
RECIPE FOR A SUCCESSFUL 2011
The year 2011 brings in a host of opportunities and challenges to America. Will we accelerate toward economic insolvency by continuing the policies that have created this crisis, or will a new Congress elected on the energy of the Tea Party movement find the courage to change course?
With the new Republican majority in the House I will have the opportunity as a subcommittee chairman to take a careful look at our domestic monetary policy. I am excited by the prospect of real oversight of the Federal Reserve, but I also hope to focus on the important ways in which our foreign policy and monetary policy are related. Just last week the Financial Times reported that the limited oversight of the Federal Reserve allowed by the passage of a watered-down version of my Audit the Fed bill revealed that approximately 55 percent of the loans made available under the largest Federal Reserve bailout program, the Term Auction Facility, went to foreign banks! This is but one example of the real cost to Americans of maintaining its empire overseas, and it cries out for more transparency and oversight.
This is why it is key for us to understand that our foreign policy and current economic crisis go hand in hand. Some have promised to lead us back to fiscal responsibility while asserting that any reduction in our foreign and military spending is off the table. They would like us to believe that we should not only continue spending as much on the military as the rest of the world combined, but they actually call for an even more aggressive US policy abroad. They believe we should continue to bomb Pakistan, Yemen, Afghanistan, and elsewhere; that we must impose even more crippling sanctions on countries like Iran while moving steadily on to yet another Middle East war that is not in our interest. They represent the failed policies of the past and they would like to lead us down a dead-end street. We must resist the temptation of their neo-con inspired scare-mongering.
There will be much work for us to do in the next year and in the next Congress. We need look no further than the grossly unconstitutional and immoral policies of the Transportation Security Administration – demanding that we either be irradiated or fondled to travel in our own country – to see that those who would deprive us of our civil liberties on the empty promise of full security will not be giving up easily. We must continue standing up to them and we must not compromise. We must not allow the out-of-control Department of Homeland Security to impose an East German-like police state in the US, where neighbors are encouraged by big brother or big sister to inform on their neighbors. We must not accept that government authorities should hector us via television screens as we go about our private lives like we are living in Orwell’s 1984.
I am optimistic that the incoming Members of Congress understand the importance of what they have been entrusted with by the American people. But I do hope that those who elected them will watch their actions -- and their votes in Congress – carefully. An early indication will be the upcoming vote on re-authorization of the anti-American PATRIOT Act. Defeat once and for all of this police-state legislation will be a great way to start 2011 and the 112th Congress. We must move ahead with confidence. Our numbers are growing. Happy New Year!
With the new Republican majority in the House I will have the opportunity as a subcommittee chairman to take a careful look at our domestic monetary policy. I am excited by the prospect of real oversight of the Federal Reserve, but I also hope to focus on the important ways in which our foreign policy and monetary policy are related. Just last week the Financial Times reported that the limited oversight of the Federal Reserve allowed by the passage of a watered-down version of my Audit the Fed bill revealed that approximately 55 percent of the loans made available under the largest Federal Reserve bailout program, the Term Auction Facility, went to foreign banks! This is but one example of the real cost to Americans of maintaining its empire overseas, and it cries out for more transparency and oversight.
This is why it is key for us to understand that our foreign policy and current economic crisis go hand in hand. Some have promised to lead us back to fiscal responsibility while asserting that any reduction in our foreign and military spending is off the table. They would like us to believe that we should not only continue spending as much on the military as the rest of the world combined, but they actually call for an even more aggressive US policy abroad. They believe we should continue to bomb Pakistan, Yemen, Afghanistan, and elsewhere; that we must impose even more crippling sanctions on countries like Iran while moving steadily on to yet another Middle East war that is not in our interest. They represent the failed policies of the past and they would like to lead us down a dead-end street. We must resist the temptation of their neo-con inspired scare-mongering.
There will be much work for us to do in the next year and in the next Congress. We need look no further than the grossly unconstitutional and immoral policies of the Transportation Security Administration – demanding that we either be irradiated or fondled to travel in our own country – to see that those who would deprive us of our civil liberties on the empty promise of full security will not be giving up easily. We must continue standing up to them and we must not compromise. We must not allow the out-of-control Department of Homeland Security to impose an East German-like police state in the US, where neighbors are encouraged by big brother or big sister to inform on their neighbors. We must not accept that government authorities should hector us via television screens as we go about our private lives like we are living in Orwell’s 1984.
I am optimistic that the incoming Members of Congress understand the importance of what they have been entrusted with by the American people. But I do hope that those who elected them will watch their actions -- and their votes in Congress – carefully. An early indication will be the upcoming vote on re-authorization of the anti-American PATRIOT Act. Defeat once and for all of this police-state legislation will be a great way to start 2011 and the 112th Congress. We must move ahead with confidence. Our numbers are growing. Happy New Year!
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