Senator Rand Paul woke up the Washington political scene on October 25th by leaking that he intends to place a “Senatorial hold” on the upcoming Presidential nomination of Janet Yellen to be the next Chairperson of the U.S. Federal Reserve, unless Senate Majority Leader Harry Reid allows his “Audit the Fed” bill to go to a Senate floor vote.
Since its 1913 founding, the U.S. Federal Reserve has been allowed to operate in such relative secrecy that it has been described as “like a hall of mirrors and the Fed is that big one at the end that makes everything else look like its upside-down.” Rand Paul’s goal is to unite conservative Tea Partiers, liberal progressives, and millennials in a grand coalition to restrain the crony capitalism between Washington, D.C. lobbyists and Wall Street money interests.
The Dodd-Frank Wall Street Reform Act’s one-time mandated audit of emergency lending activities during the 2008 Financial Crisis is the only published glimpse into the secretive financial dealings of the Fed. The audit divulged that the Fed had directly loaned over $16 trillion to selected banks and corporations. Few doubt the importance of the Fed providing temporary liquidity to stabilize markets after the huge investment firm of Lehman Brothers filed bankruptcy on September 15, 2008. But for the last five years, the Fed has continued to use its money printing capability to dramatically subsidize big bank profitability with artificially low interest rates, causing small banks to shrivel and seniors who rely on the income from savings deposits to suffer badly.
Current Federal Reserve Chairman Ben Bernanke has vigorously opposed annual audits of the Fed by claiming that any transparency might hamper the Fed’s ability to quickly and creatively spur an economy that is teetering on recession. But many left, right, and libertarian economists believe the Fed’s discretionary actions only serve the interests of the powerful and are often counter-productive to small businesses and American workers.
Five years after the banks were bailed out by the American taxpayers, the U.S. banking system is generating record profits thanks to $3.6 trillion of the Fed’s generosity. But despite the Fed printing money, over the last two years employment has been treading water by growing at the same 1.7% rate as the annual population growth. Failing to grow jobs faster than new entrants join the labor force also caused the duration period of unemployment to rise from 10-20 weeks from 1980 to 2009 to 35-40 weeks recently.
The Fed also allowed a substantial increase in risk taking by financing banks’ dominate position in leveraged derivative speculation. Powered by the Fed’s cheap money, trading and investment banking activities generated more than forty per cent of JPMorgan’s annual profit of $24.4 billion reported in July. Without a Fed audit, no outsider can be exactly sure how much risk American banks are taking with derivatives. But with the world’s annual economy of only $72 trillion and the outstanding derivatives having grown rapidly to $700 trillion, the leverage must be enormous.
Since the Federal Reserve System is officially owned by its member banks and its Board and Chairman are appointed by the Senate, the Fed supposedly acts as an “independent entity within government.” However, the Federal Reserve’s activities have almost never been subject to any oversight by Congress. Consequently, the Federal Reserve seems to be “independent of government.”
Perhaps the real reason Congress has taken a hands-off approach is the Fed is highly profitable, and, under Federal Reserve Act Section 7(b), a big cut of that profit is paid each year as a dividend to the federal government. Although under law the Fed’s dividend is supposed to “supplement the gold reserve held against outstanding United States notes” and pay down the “outstanding bonded indebtedness of the United States,” Congress has been spending the Fed’s $80 billion dividend for many years.
Rand Paul, under the Standing Rules of the United States Senate, has the right to prevent a motion for the nomination of Janet Yellen from reaching a vote on the Senate floor. Majority Leader Harry Reid has used the same Senate rules to prevent a vote on Paul’s “Audit the Fed” bill, introduced with 25 bipartisan sponsors in February 2013.
Over 70% of the American public has favored auditing the Fed for years, but it was Rand Paul’s father, former Congressman Ron Paul, that became a rock star on college campuses championing a millennial revolt to force the audit and eventual abolishment of the Federal Reserve for debasing the dollar and crony capitalism.
By forcing Harry Reid and his Senate allies who secretly oppose “Audit the Fed” to go on record with a very unpopular roll call vote, Senator Paul is demonstrating his principled leadership and the building of a powerful new coalition of American voters.