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Ron Paul Struts His Stuff

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August 17, 2009

Republican Congressman Ron Paul of Texas has become quite a popular guy, lately.  Back on February 26, he sponsored his own bill, the Federal Reserve Transparency Act, (HR 1207) which would give the Government Accountability Office authority to audit the Federal Reserve and its member components, requiring a report to Congress by the end of 2010.  On July 29, a Rasmussen poll revealed that 75 percent of those surveyed were in favor of auditing the Federal Reserve, with only 9 percent opposed to such a measure.  Lew Rockwell’s website recently featured an article by Anthony Gregory, discussing the Rasmussen poll results and the popularity of Ron Paul’s proposed legislation:

While much of the hostility toward Obama’s domestic policy might be seen in partisan terms, distrust of the Fed completely transcends typical ideological or partisan lines.  While all Congressional Republicans support Ron Paul’s bill to audit the Fed, so do more than a hundred Democrats, demonstrating the impact of the wide public outrage over the Washington-Wall Street shenanigans since the financial downturn.

The Federal Reserve, a centerpiece in the bipartisan establishment, an essential component in both war finance and economic management, is now the least trusted government agency.  More than two thirds of Americans do not believe the Fed is doing a good job.  Two years ago, virtually no one even talked about the Fed; it was an obscure institution assumed to be necessary, wise and uninteresting.  Anyone who brought it up was accused of being outside the sphere of respectable opinion.  Now its champions are on the defensive, and they are desperately scrambling to restore public awe for the central bank behind the curtain.

But the opposition to Obama’s economic policies, both on the right and on the anti-corporate left who view his ties to the banking industry with suspicion, along with a growing disappointment on the left as it concerns civil liberties and war, may eventually constrain Obama.

The mistrust of the Fed, discussed by Mr. Gregory, was based on a Gallup Poll, also conducted during July, which revealed that the Federal Reserve is now “the least trusted” of all government-related entities.

Despite protests from the academic world and an unsupportive editorial from The Washington Post, support for Ron Paul’s bill continues to gain momentum.  Howard Rich, Chairman of Americans for Limited Government, wrote a favorable commentary on this proposal, pointing out that he initially thought it was a rather strange idea.  He eventually looked at the situation with this rationale:

From its founding in 1913, the Fed has existed as an island of almost total independence — setting interest rates, managing inflation and regulating banks according to the will of its Chairman and seven-member Board of Directors.

It cannot be audited. Its ledger is not disclosed. Its meetings are private. Its decisions are not up for debate.

Of course, this ongoing shroud of secrecy ignores the fact that the Fed — as it exists today — is a completely different animal than it was even two years ago.

No longer merely a “regulatory” agency, the Fed has used the current economic crisis as an excuse to dramatically expand its role.  With zero transparency, accountability and effectiveness, it has printed and loaned trillions of dollars since mid-2007 in a costly and unsuccessful effort to mitigate fallout from the sub-prime mortgage crisis.

The question of where those trillions of dollars went is exactly what is on the minds of most people demanding more accountability from the Fed.  Was any favoritism involved in determining what banks received how much money?  Dean Baker wrote an opinion piece for The Guardian, arguing against the re-appointment of Ben Bernanke for another term as the Fed chairman.  The subject of favoritism in the Fed’s response to last fall’s financial meltdown was apparently a matter of concern to Mr. Baker:

By this measure, Bernanke’s performance is very poor.  He has refused to provide the public, or even the relevant congressional committees, with information on the trillions of dollars in loans that were made through the Fed’s special lending facilities.  While anyone can go to the Treasury’s website and see how much each bank received through Tarp and under what terms, Bernanke refuses to share any information on the loans that banks and other institutions received from the Fed.

Where we do have information, it is not encouraging.  At the peak of the financial crisis in October, Goldman Sachs converted itself from an investment bank into a bank holding company, in part so that it could tap an FDIC loan guarantee programme.  Remarkably, Bernanke allowed Goldman to continue to act as an investment bank, taking highly speculative positions even after it had borrowed $28bn with the FDIC’s guarantee.

The idea that the Federal Reserve could loan trillions of dollars to unidentified beneficiaries on secret terms has resulted in outrage from across the political spectrum.  In his rebuttal to The Washington Post‘s editorial criticizing Ron Paul’s Fed transparency initiative, Independent (and self-avowed socialist) Senator Bernie Sanders of Vermont had this to say:

This legislation wouldn’t undermine the Fed’s independence, and it wouldn’t put Congress in charge of monetary policy.  An audit is simply an examination of records or financial accounts to check their accuracy.

We must not equate “independence” with secrecy.  No matter how intelligent or well-intentioned the Fed chairman and his staff may be, it isn’t appropriate to give a handful of people the power to lend an unlimited supply of money to anyone it wants without sufficient oversight.

Absolute power corrupts absolutely.  The American people have a right to know what is being done with their hard-earned taxpayer dollars.  This money does not belong to the Fed; it belongs to the American people.

The tremendous upsurge in support for the Federal Reserve Transparency Act was obviously what motivated Ron Paul to write an essay on the matter for Sunday’s edition of The Philadelphia Inquirer.  With such a strong wind at his back, he confidently trashed the arguments of his opponents and began the piece with this assertion:

The Federal Reserve’s unprecedented intervention into the U.S. economy has inflamed more Americans than almost any other issue in recent memory.

Congressman Paul then proceeded to pound away at the criticism of his bill, reminding me of a boxer, who sees blood flowing down into his opponent’s eyes:

The most conservative estimates place the potential cost of the Federal Reserve’s bailouts and guarantees at about $9 trillion. That is equivalent to more than 60 percent of the U.S.economy, all undertaken by one organization, and almost all of those transactions are exempt from congressional oversight and public scrutiny.

The Fed and its apologists are using bogeymen to deflect criticism.  If the Fed were audited, they argue, monetary policy would be compromised as Congress tries to direct the Fed’s actions, and the Fed’s record of economic stability and low inflation would come to an end.  Nothing could be further from the truth.

*   *   *

The Fed’s mismanagement created the Great Depression, the stagflation of the 1970s, and now our current economic crisis. Over the nearly100 years of the Fed’s existence, the dollar has lost nearly 95 percent of its purchasing power.  A “mild” rate of inflation of 2 percent per year means that a baby born today will see the dollar’s purchasing power erode by a further 75 percent over his lifetime.  If this boondoggle is the Fed’s definition of stability and sound management of the dollar, I would hate to see what instability looks like.

Yet that is exactly what we face today and in the near future with a federal government and a Federal Reserve working hand in hand to bail out favored Wall Street firms with sums of money that have quickly reached absurd proportions.

*   *   *

The fact that a single entity, the Federal Reserve, has dominated monetary policy for so long has been detrimental to the economy.  As long as we try to keep up the fictions that the Federal Reserve works to benefit the American people, 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 boom and bust of the business cycle.

A 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.

When one sees a former Republican Presidential primary contender enjoy this type of momentum, the inevitable question is whether Ron Paul might make another run for the White House.  Justin Miller had this on his mind last month when he discussed this subject for The Atlantic:

Paul is just as plausible a candidate to run for the Republican nomination as are Mitt Romney, Sarah Palin, or Mike Huckabee who were tested in polls this month.  Like them, Paul’s run for the White House (twice) before and has said he isn’t opposed to doing it again, albeit he said it’s “unlikely.”  What’s more likely, based on the circumstantial evidence, is that the Republican voters would receive Paul better than they did last year.  Feature him in polls from now on and we can test this hypothesis.

As President Obama continues to alienate the liberal base of the Democratic Party, Ron Paul might be just the person the Republicans would want to nominate in 2012.  He’ll be 77 years old at that point — just in time for a single term.

Fed Up With The Fed

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July 20, 2009

Last week’s news that Goldman Sachs reported $3.44 billion in earnings for the second quarter of 2009 provoked widespread outrage that was rather hard to avoid.  Even Jon Stewart saw fit to provide his viewers with an informative audio-visual presentation concerning the role of Goldman Sachs in our society.  Allan Sloan pointed out that in addition to the $10 billion Goldman received from the TARP program, (which it repaid) Goldman also received another $12.9 billion as a counterparty to AIG’s bad paper (which it hasn’t repaid). Beyond that, there was the matter of “the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company”.   Sloan lamented that despite this government largesse, Goldman is still fighting with the Treasury Department over how much it should pay taxpayers to buy back the stock purchase warrants it gave the government as part of the TARP deal.  The Federal Reserve did more than put Goldman on the fast track for status as a bank holding company (which it denied to Lehman Brothers, resulting in that company’s bankruptcy).  As Lisa Lerer reported for Politico, Senator Bernie Sanders questioned whether Goldman received even more assistance from the Federal Reserve.  Because the Fed is not subject to transparency, we don’t know the answer to that question.

A commentator writing for the Seeking Alpha website under the pseudonym:  Cynicus Economicus, expressed the opinion that people need to look more at the government and the Federal Reserve as being “at the root of the appearance of the bumper profits and bonuses at Goldman Sachs.”  He went on to explain:

All of this, hidden in opacity, has led to a point at which insolvent banks are now able to make a ‘profit’.  Exactly why has this massive bleeding of resources into insolvent banks been allowed to take place?  Where exactly is the salvation of the real economy, the pot of gold at the end of the rainbow of the financial system?  Like the pot of gold and the rainbow, if we just go a bit further…..we might just find the pot of gold.

In this terrible mess, the point that is forgotten is what a financial system is actually really for.  It only exists to allocate accumulated capital and provision of insurances; the financial system should be a support to the real economy, by efficiently allocating capital.  It is entirely unclear how pouring trillions of dollars into insolvent institutions, capital which will eventually be taken out of the ‘real’ economy, might facilitate this.  The ‘real’ economy is now expensively supporting the financial system, rather than the financial system supporting the real economy.

The opacity of the Federal Reserve has become a focus of populist indignation since the financial crisis hit the meltdown stage last fall.  As I discussed on May 25, Republican Congressman Ron Paul of Texas introduced the Federal Reserve Transparency Act (HR 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve as well as its member components, and require a report to Congress by the end of 2010.  Meanwhile, President Obama has suggested expanding the Fed’s powers to make it the nation’s “systemic risk regulator” overseeing banks such as Goldman Sachs, deemed “too big to fail”.  The suggestion of expanding the Fed’s authority in this way has only added to the cry for more oversight.  On July 17, Willem Buiter wrote a piece for the Financial Times entitled:  “What to do with the Fed”.  He began with this observation:

The desire for stronger Congressional oversight of the Fed is no longer confined to a few libertarian fruitcakes, conspiracy theorists and old lefties.  It is a mainstream view that the Fed has failed to foresee and prevent the crisis, that it has managed it ineffectively since it started, and that it has allowed itself to be used as a quasi-fiscal instrument of the US Treasury, by-passing Congressional control.

Since the introduction of HR 1207, a public debate has ensued over this bill.  This dispute was ratcheted up a notch when a number of economics professors signed a petition, urging Congress and the White House “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”  An interesting analysis of this controversy appears at LewRockwell.com, in an article by economist Robert Higgs.  Here’s how Higgs concluded his argument:

All in all, the economists’ petition reflects the astonishing political naivite and historical myopia that now characterize the top echelon of the mainstream economics profession. Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions.  Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy — its monetary order — cannot produce money and set interest rates better than free-market institutions can do so.  It is high time that they extended their education to understand that central planning does not work — indeed, cannot work — any better in the monetary order than it works in the economy as a whole.

It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.

Close down the Federal Reserve?  It’s not a new idea.  Back on September 29, when the Emergency Economic Stabilization Act of 2008 was just a baby, Avery Goodman posted a piece at the Seeking Alpha website arguing for closure of the Fed.  The article made a number of good points, although this was my favorite:

The Fed balance sheet shows that it injected a total of about $262 billion, probably into the stock market, over the last two weeks, pumping up prices on Wall Street.  The practical effect will be to allow people in-the-know to sell their equities at inflated prices to people-who-believe-and-trust, but don’t know.  Sending so much liquidity into the U.S.economy will stoke the fires of hyperinflation, regardless of what they do with interest rates.  In a capitalist society, the stock market should not be subject to such manipulation, by the government or anyone else.  It should rise and fall on its own merits.  If it is meant to fall, let it do so, and fast.  It is better to get the economic downturn over with, using shock therapy, than to continue to bleed the American people slowly to death through a billion tiny pinpricks.

So the battle over the Fed continues.  In the mean time, as The Washington Post reports, Fed Chairman Ben Bernanke takes his show on the road, making four appearances over the next six days.  Tuesday and Wednesday will bring his semiannual testimony on monetary policy before House and Senate committees.  Perhaps he will be accompanied by Goldman Sachs CEO, Lloyd Bankfiend, who could show everyone the nice “green shoots” growing in his IRA at taxpayer expense.

More Bad Press For Goldman Sachs

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July 16, 2009

They can’t seem to get away from it, no matter how hard they try.  Goldman Sachs is finding itself confronted with bad publicity on a daily basis.

It all started with Matt Taibbi’s article in Rolling Stone.  As I pointed out on June 25, I liked the article as well as Matt’s other work.  His blog can be found here.  His article on Goldman Sachs employed a good deal of hyperbolic rhetoric which I enjoyed  —  especially the metaphor of Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.  Nevertheless, many commentators took issue with the article, especially focusing on the subtitle’s claim that “Goldman Sachs has engineered every major market manipulation since the Great Depression”.  I took that remark as hyperbole, since it would obviously require over 120 megabytes of space to document “every major market manipulation since the Great Depression” — so I wasn’t disappointed about being unable to read all that.  Some of Taibbi’s critics include Megan McArdle from The Atlantic and Joe Weisenthal at Clusterstock.

On the other hand, Taibbi did get a show of support from Eliot “Socks” Spitzer during a July 14 interview on Bloomberg TV.  Mr. Spitzer made some important points about Goldman’s conduct that we are now hearing from a number of other sources.  Spitzer began by emphasizing that because of the bank bailouts “Goldman’s capital was driven to virtually nothing — because we as taxpayers gave them access to capital — they made a bloody fortune” (another vampire squid reference).  Spitzer voiced the concern that Goldman is simply going back to proprietary trading and taking advantage of spreads, following its old business model.  He argued that, a result of the bailouts:

. . . their job should be, from a macroeconomic perspective, to raise capital and put it into sectors that create jobs.  If they’re not getting that done, then why are we supporting them the way we have been?

This sentiment seems to be coming from all directions, in light of the fact that on July 14, Goldman reported second-quarter profits of 3.44 billion dollars — while on the following day, another TARP recipient, CIT Group disclosed that it would likely file for bankruptcy on July 17.  On July 16, The Wall Street Journal ran an editorial entitled:  “A Tale of Two Bailouts” comparing Goldman’s fate with that of CIT.  The article pointed out that since Goldman’s risk is subsidized by the taxpayers, the company might be more appropriately re-branded as “Goldie Mac”:

We like profits as much as the next capitalist.  But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business.  Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail.  But that is all but impossible now and for the foreseeable future.  Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week’s tale of two banks, it’s that it won’t be enough to give the Federal Reserve a mandate to “monitor” systemic risk.  Last fall’s bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share.  Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer’s dime.

Robert Reich voiced similar concern over the fact that “Goldman’s high-risk business model hasn’t changed one bit from what it was before the implosion of Wall Street.”  He went on to explain:

Value-at-risk — a statistical measure of how much the firm’s trading operations could lose in a day — rose to an average of  $245 million in the second quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation.  Which means you and I are still indirectly funding Goldman’s high-risk operations.

*   *   *

So the fact that Goldman has reverted to its old ways in the market suggests it has every reason to believe it can revert to its old ways in politics, should its market strategies backfire once again — leaving the rest of us once again to pick up the pieces.

At The Huffington Post, Mike Lux reminded Goldman that despite its repayment of $10 billion in TARP funds, we haven’t overlooked the fact that Goldman has not repaid the $13 billion it received for being a counterparty to AIG’s bad paper or the “unrevealed billions” it received from the Federal Reserve.  This raises a serious question as to whether Goldman should be allowed to pay record bonuses to its employees, as planned.  Didn’t we go through this once beforePaul Abrams is mindful of this, having issued a wake-up call to “Turbo” Tim Geithner and Congress.

As long as we keep reading the news, each passing day provides us with yet another reminder to feel outrage over the hubris of the people at Goldman Sachs.