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Another Great Idea From Ron Paul

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Congressman Ron Paul is one of the few original thinkers on Capitol Hill.  Sometimes he has great ideas, although at other times he might sound a little daft.  He recently grabbed some headlines by expressing the view that the United States “should declare bankruptcy”.  A June 28 CNN report focused on Paul’s agreement with the contention that if bankruptcy is the cure for Greece, it is also the cure for the United States.  However, as most economists will point out, the situation in Greece is not at all relevant to our situation because the United States issues its own currency and Greece is stuck with the euro, under the regime of the European Central Bank.  Anyone who can’t grasp that concept should read this posting by Cullen Roche at the Seeking Alpha website.

Nevertheless, economist Dean Baker picked up on one of Congressman Paul’s points, which – if followed through to its logical conclusion – could actually solve the debt ceiling impasse.  The remark by Ron Paul which inspired Dean Baker was a gripe about the $1.6 trillion in Treasury securities that the Federal Reserve now holds as a result of two quantitative easing programs:

“We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve,” Paul said. “We don’t, I mean, they’re nobody; why do we have to pay them off?”

In an article for The New Republic, Dr. Baker commended Dr. Paul for his creativity and agreed that having the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds as a result of quantitative easing “is actually a very reasonable way to deal with the crisis”.  Baker provided this explanation:

Last year the Fed refunded almost $80 billion to the Treasury.  In this sense, the bonds held by the Fed are literally money that the government owes to itself.

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations.  The bonds held by the Fed are assets of the Fed.  It has no obligations that it must use these assets to meet.  There is no one who loses their retirement income if the Fed doesn’t have its bonds.  In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds.  This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again.  President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases.  Maybe they could even talk a little about jobs.

Unfortunately, the next passage of Dr. Baker’s essay exposed the reason why this simple, logical solution would never become implemented:

As it stands now, the Fed plans to sell off its bond holdings over the next few years.  This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed.

And therein lies the rub:  The infamous “too-big-to-fail” banks could buy those bonds with money borrowed from the Fed at a fractional interest rate, and then collect the yield on those bonds – entirely at the expense of American taxpayers!  Not only would the American people lose money by loaning the bond purchase money to the banks almost free of charge – we would lose even more money by paying those banks interest on the money we just loaned to those same banks – nearly free of charge.  (This is nothing new.  It’s been ongoing since the inception of “zero interest rate policy” or ZIRP on December 16, 2008.)  President Obama would never allow his patrons on Wall Street to have such an opportunity “stolen” from them by the American taxpayers.  Banking industry lobbyists would start swarming all over Capitol Hill carrying briefcases filled with money if any serious effort to undertake such a plan reached the discussion stage.  At this point, you might suspect that the grifters on the Hill could have a scheme underway:  Make a few noises about following Baker’s suggestion and wait for the lobbyists to start sharing the love.

In the mean time, the rest of us will be left to suffer the consequences of our government’s failure to raise the debt ceiling.


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Libertarian Accuses Socialist Of Selling Out

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Quite a bit has been written about the Federal Reserve’s December 1 release of documents revealing the details of its bailouts to those business entities benefiting from the Fed’s eleven emergency lending programs initiated as a result of the 2008 financial crisis.  When you consider the fact that those documents concern over 21,000 transactions, all the attention should come as no surprise.

The two individuals who seem to have benefited the most from this event are Congressman Ron Paul and Senator Bernie Sanders.  The two became unlikely allies in their battle to include an “Audit the Fed” provision in the financial reform bill.  Ron Paul, the Libertarian Republican from Texas (considered the “Godfather of the Tea Party movement”) authored the book, End The Fed.  Congressman Paul sponsored the original “Audit the Fed” proposal in the House of Representatives – H.R. 1207.  Bernie Sanders, who describes himself as a democratic socialist, sponsored the watered-down “Audit the Fed” bill — S. 3217 — which replaced Congressman Paul’s version in what finally became known as the Restoring Financial Stability Act of 2010.

A recent article in The Wall Street Journal by Maya Jackson Randall recalled the backstory of how the Sanders proposal was incorporated into the financial reform bill:

Under pressure from the Obama administration, Mr. Sanders, who has described himself as a democratic socialist, made last-minute changes to his proposal; it doesn’t require audits of monetary policy, and it doesn’t require disclosure of the names of banks that use the discount window.

An unhappy Paul, a long-time Fed critic, said Mr. Sanders had “sold out.”

Who would have ever thought that a Libertarian Republican would, one day, accuse a democratic socialist of “selling out” on a bill to regulate the financial industry?

With the Republicans’ becoming the majority party in the House, the numerous committee chairmanships will now pass from the Democrats to the GOP for the 112th Congress.  Although quite a bit of concern has been expressed by liberal pundits that the banking lobby will now have unfettered control over Congress, many banking industry lobbyists are sweating over the fact that Ron Paul will be the likely Chairman of the House Financial Services Committee.  That fear and the efforts by ranking Republicans to assuage that dread were discussed in a recent article by Phil Mattingly and Robert Schmidt for Bloomberg BusinessWeek:

Five GOP leadership aides, speaking anonymously because a decision isn’t final, say incoming House Speaker John Boehner has discussed ways to prevent Paul from becoming chairman or to keep him on a tight leash if he does.  If Boehner, who will help determine who gets to chair subcommittees as early as Dec. 8, rejects Paul, he may have to contend with thousands of grassroots supporters and dozens of younger lawmakers who see Paul as a hero.  Boehner, through a spokesman, declined to comment.  “A lot of the older members probably think Ron is a little bit out of step,” says Representative Bill Posey, a Florida Republican and unabashed Paul fan.  “The depth of his knowledge on monetary policy, his understanding of it all, is second to none.”

Nevertheless, Ron Paul accused a socialist of  “selling out” by capitulating to the pressure exerted by the banking lobby through its puppet – the Obama administration.  His use of such a reproach demonstrates that Congressman Paul cannot be trusted to make certain that the House Financial Services Committee serves as a tool of the banking lobby.  Beyond that, the extreme, partisan elements of the Republican Party cannot depend on Congressman Paul to “follow the script” written to portray Obama as the socialist.

As the Bloomberg BusinessWeek article pointed out, any efforts to deprive Congressman Paul of this chairmanship will guarantee some serious blowback from the Tea Party ranks as well as the other supporters of Ron Paul.  John Boehner is in a serious double-bind here.  If he allows Paul to assume the chairmanship, Boehner’s anticipated efforts to keep Paul “on a tight leash” should provide some good entertainment.


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Ron Paul Criticizes Fed Audit Compromise

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May 13, 2010

The Federal Reserve had two big wins this week.  At least their most recent win made some sense.  Bloomberg BusinessWeek put it this way:

U.S. senators voted 90-9 yesterday to void a provision in regulatory-overhaul legislation that would have stripped the Fed of oversight of 5,000 banks with less than $50 billion in assets.  A day earlier, senators rejected a measure to allow continuous congressional audits of Fed policies.

*   *   *

Bernanke may now have a freer hand to decide when and how fast to unwind record monetary stimulus begun during the financial crisis, while being less vulnerable to criticism that the Fed favors large Wall Street financial institutions.  The Senate votes also removed a threat to the 12 regional Fed banks from a provision that would have limited the supervision of many of them to a few banks or none at all.

The amendment to the financial reform bill allowing the 12 regional Federal Reserve banks to maintain oversight of banks with less than $50 billion in assets was a bipartisan effort by Senators Kay Bailey Hutchison (R-Texas) and Amy Klobuchar (D- Minnesota).  The downside to the passage of this amendment is that it has provided the Fed with back-to-back legislative victories.  One day earlier, Congressman Ron Paul’s “Audit the Fed” amendment was replaced by a rewritten, compromise amendment, sponsored by Senator Bernie Sanders.  Senator Sanders is now being criticized for caving in to pressure exerted by President Obama, who opposed ongoing scrutiny of the Federal Reserve, under the pretext that continuous audits would interfere with the Fed’s purported “independence” in setting monetary policy.  The Sanders compromise proposed a one-time audit of the Fed to uncover information including the loans made to financial institutions by the Fed in response to the financial crisis of 2008.  The Sanders amendment was passed in a 96-0 vote.  Subsequently, Senator David Vitter (R-Louisiana) proposed an amendment (#3760) containing the stronger language of Ron Paul’s H.R. 1207, allowing for repeated audits of the Fed.  The Vitter amendment was defeated by 62 Senators opposing the measure, with only 37 Senators supporting it.  You can see how each Senator voted here.  Ultimately, the complete financial reform bill — S. 3217 (Restoring American Financial Stability Act of 2010) —  will be subject to approval by the Senate and reconciliation with the House version (H.R. 4173) before it can be signed into law by the President.

On May 11, Congressman Ron Paul expressed his displeasure with the Sanders compromise in a statement from the floor of the House of Representatives.  The New American website has the video and text of Congressman Paul’s statement here.  Ron Paul emphasized that the Fed’s use of currency swaps to facilitate the bailout fund for the sovereign debt crisis in the European Union, has provided the latest example of the need for a continuous audit of the Fed’s activities:

The reason this is so disturbing is because of the current events going on in the financial markets. We are right now involved in bailing out Europe and especially bailing out Greece, and we’re doing this through the Federal Reserve.  The Federal Reserve does this with currency swaps and they do this literally by giving loans and guarantees to other central banks, and they can even give loans to governments.  So this is placing the burden on American taxpayers — not by direct taxation, but by expanding the money supply this is a tax on the American people because this will bring economic hardship to this country. And because we’ve been doing this for so many years the economic hardship is already here [and] we’ve been suffering from it.

But the problem comes that once you have a system of money where you can create it out of thin air there’s no restraint whatsoever on the spending in the Congress.  And then the debt piles up and they get into debt problems as they are in Greece and other countries in Europe.  And how they want to bail them out?  With more debt.  But what is so outrageous is that the Federal Reserve can literally deal in trillions of dollars.  They don’t get the money authorized, they don’t get the money appropriated, they just create it and they get involved in bailing out their friends, as they have been doing for the last two years, and now they’re doing it in Europe.  So, my contention is that they deserve oversight.  Actually they deserve to be reined in where they can’t do what they’re doing.

*   *   *

Now, what has this led to?  It has led to tremendous pressure on the dollar.  The dollar is the reserve currency of the world; we bail out all the banks and all the corporations.  We’ve been doing it for the last couple years to the tune of trillions of dollars….

The real truth is that the dollar is very, very weak, because the only true measurement of the value of a currency is its relationship to gold. …  In the last ten years, our dollar has been devalued 80 percent in terms of gold.  That means, literally, that just means that we have printed way too much money, and right now we’re just hanging on, the world is hanging on to the fact that the dollar is still usable. …

So we face a very serious crisis.  To me it is very unfortunate that we are not going to have this audit the Fed bill in the Senate.  It has passed in the House, possibly we can salvage it in conference and make sure this occurs.  But since the Federal Reserve is responsible for the business cycle and the inflation and for all the problems we have it is vital that we stand up and say, you know, its time for us to assume the responsibility because it is the Congress under the Constitution that has been authorized to be responsible for the value of the currency.

At the Financial Times, John Taylor pointed out that not only is the Fed’s decision to provide currency swaps a bad idea – it might actually aggravate the EU’s problems:

Making matters worse for the future of monetary policy is the Fed’s active participation in the European bail-out.  The US central bank agreed to provide loans – technically called swaps – to the ECB so that the ECB can more easily make dollar loans in the European markets.  In order to loan dollars to the ECB, the Fed will have to increase the size of its own balance sheet.  Such swap loans were made to the ECB back in December 2007, but they did not help end the crisis or prevent the panic of autumn 2008.  Instead, they merely delayed inevitable action to deal with deteriorating bank balance sheets, thereby making the panic worse.

Was it necessary for the Fed to participate in the European bail-out?  At least as evidenced by quantitative measures such as the spread between 3-month Libor and the overnight index swap (OIS), the funding problem in the interbank markets is far less severe now than in December 2007.  The international loans also raise questions about the Fed’s independence at a time when many in Congress are calling for a complete audit of the Fed.  Even though monetary policy does not warrant such an audit, extraordinary measures such as the loans to the ECB do.  By taking these extraordinary measures, the Fed is losing some of its independence as well as adding to the perception that the ECB is losing its independence.

At some point, everyone will be forced to admit that “Fed independence” is a myth.



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Sign This Petition

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May 25, 2009

For some reason, the Boston College School of Law invited Federal Reserve Chairman, B.S. Bernanke, to deliver the commencement address to the class of 2009 on May 22.  While reading the text of that oration, I found the candor of this remark at the beginning of his speech, to be quite refreshing:

Along those lines, last spring I was nearby in Cambridge, speaking at Harvard University’s Class Day.  The speaker at the main event, the Harvard graduation the next day, was J. K. Rowling, author of the Harry Potter books.  Before my remarks, the student who introduced me took note of the fact that the senior class had chosen as their speakers Ben Bernanke and J. K. Rowling, or, as he put it, “two of the great masters of children’s fantasy fiction.”  I will say that I am perfectly happy to be associated, even in such a tenuous way, with Ms. Rowling, who has done more for children’s literacy than any government program I know of.

Meanwhile, that great master of children’s fantasy fiction (and money printing) is now faced with the possibility that someday, someone might actually start looking over his shoulder in attempt to get some vague idea of just what the hell is going on over at the Federal Reserve.

The Federal Reserve’s resistance to transparency has been a favorite topic of many commentators.  For example, once Ben Bernanke took over the Fed Chairmanship from Alan Greenspan in 2006, Ralph Nader expressed his high hopes that Bernanke might adopt Nader’s suggested “seven policies of openness”.  Dream on, Ralph!

Speaking of children’s fantasy fiction, one expert on that subject is Congressman Alan Grayson.  As the Representative of Florida’s Eighth Congressional District, his territory includes Disney World.  Thus, it should come as no surprise that back in January of 2009, as a new member of the House Financial Services Committee, he immediately set about cross-examining Federal Reserve Vice-Chairman Donald Kohn about what had been done with the 1.2 trillion dollars in bank bailout money squandered by the Fed after September 1, 2008.  Glenn Greenwald of Salon.com provided a five-minute video clip of that testimony along with an audio recording of his 20-minute interview with Congressman Grayson, focusing on the complete lack of transparency at the Federal Reserve.

Better yet was Congressman Grayson’s questioning of Federal Reserve Board Inspector General Elizabeth Coleman on May 7.  In one of the classic “WTF Moments” of all time, Ms. Coleman admitted that she had no clue about the “off balance sheet transactions” by the Federal Reserve, reported by Bloomberg News as amounting to over nine trillion dollars in the previous eight months.  If you haven’t seen this yet, you can watch it here.  After reviewing this video clip, Yves Smith of Naked Capitalism was of the opinion that Coleman was not stonewalling, but instead was “clearly completely clueless”.  Ms. Smith pointed out how opacity at the Federal Reserve may be by design, with the apparent motive being obfuscation:

But there is a possibly more important issue at stake.  The interview is with the Inspector General of the Federal Reserve Board of Governors.  The programs are actually at the Federal Reserve Bank of New York.  For reasons I cannot fathom, the Board of Governors is subject to Freedom of Information Act requests, while the Fed of New York has been able to rebuff them.

So I take Coleman’s inability to answer key questions to be a feature, not a bug.  The Fed of New York probably can answer Congressional questions, is taking care to limit what it conveys to the Board so as to keep the information from Congress and the public.  Note in the questioning the emphasis on “high level reviews”.

In order to shine a bright light on the Federal Reserve, Republican Congressman Ron Paul of Texas has introduced the Federal Reserve Transparency Act, (H.R. 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve and its member components, and require a report to Congress by the end of 2010.  On May 21, Congressman Alan Grayson wrote to his Democratic colleagues in the House, asking them to co-sponsor the bill.  Among the many interesting points made in his letter were the following:

Furthermore, the Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system.  The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury’s balance sheet.  With discussions of allocating even more power to the Federal Reserve as the “systemic risk regulator” of the credit markets, more oversight over the central bank’s operations is clearly necessary.

The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress.  The public does not know where trillions of its dollars are going, and so has no meaningful control over the currency or this unappropriated “budget”.  The extraordinary size of these lending facilities combined, the extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional prerogative to appropriate public monies and control the currency.

You can do your part for this cause by signing the on-line petition.  Let Congress know that we will no longer tolerate “children’s fantasy fiction” from the Federal Reserve.  Demand an audit of the Federal Reserve as well as a report to the public of what that audit reveals.