I rise today in opposition to secrecy, in opposition to the veil of secrecy that cloaks the money changing hands in the temple of the Federal Reserve. While the money changes hands, the monied class gets richer and the middle class gets short-changed. It is more than time to part the curtain that hides the trillions of dollars that change hands. There is a revolving door from Wall Street to the Treasury to the Fed and back again. We have former Secretaries of the Treasury going from government to Wall Street and pocketing hundreds of millions of dollars.
I have called repeatedly for transparency at the Federal Reserve so Americans can see what is being done with their money supply. Every time I’ve called for transparency, people from both sides have said that transparency would only undermine the independence of the Federal Reserve. But Congress does have a role in overseeing the Fed. Congress created the Fed and right now independence has come to mean no oversight.
Some say, Oh but the Fed is audited each year. The Inspector General responsible for auditing the Fed came before Congress in May of 2009, and here’s what she had to say to a question during a House Financial Services subcommittee hearing. A Congressman asked, “What have you done to investigate the off-balance-sheet transactions conducted by the Federal Reserve which, according to Bloomberg, now total $9 trillion in the last 8 months?”
The IG fumbled, she repeated herself. She looked silly and then she said: “You know, I think it may be important at this point to,” Yadda, yadda, yadda” and then several yaddas later this bombshell:
So, don’t let anyone tell you we already have an audit of the Fed. No meaningful audit of the Fed exists and when the primary auditor and overseer of the Fed was asked about $9 trillion dollars, the Inspector General had no clue what had been purchased with $9 trillion dollars. Is there a chance, that the Fed only has our best interests at heart? Sure. But when trillions of dollars change hands, wouldn’t you want to know who got the money and did anyone enrich themselves in the process? $9 trillion is over half of our entire national debt. This is money that is being doled out, in secret, by our central bank. This is, in a sense, laundering money from the American people to bail out big banks and Wall Street.
This month, we learned that the Fed’s official balance is about to reach an astounding $4 trillion. To put that into perspective, the balance sheet of the Fed is larger than the fourth largest economy in the world – Germany. Transparency at the Fed would not hurt the Fed, but a complete lack of transparency continues to hurt and cheat the rest of us. At the very least, the American middle class deserves to know what goes on behind the curtain, what decisions are made and how they benefit the Wall Street monied class.
Being secret and reckless with trillions of dollars is only the tip of the iceberg when it comes to problems associated with the Fed. The history of the Federal Reserve has also been the history of the devaluation of the dollar. There was a time when the dollar was as good as gold. When the people grew restless or concerned that the government was debasing the currency, the people would simply express their displeasure by exchanging their paper for gold.
Convertibility was a check and balance against kings and queens and any form of government that chose to spend money they did not have. When the government “borrowed” from the currency by diluting its value, the people had recourse to protect themselves. Now, the great American dollar that was once as good as gold, is backed by promises. For many decades, the dollar was said to be backed by the full faith and credit of the US Government. Trust lingered from the historical evolution from barter to a medium that people valued such as gold or silver. The trust that exists today lingers from the thousand year history of people knowing that the currency had inherent value and that if paper substitutes were used, they could always be exchanged for something of real value.
After WWII we instituted a partial gold standard that allowed foreign countries to exchange their paper for gold–and exchange they did. During the sixties, as the US inflated and borrowed to pay for the War on Poverty and the War in Vietnam, foreign countries became skittish and turned in their dollars by the millions. Nearly half of our gold reserves were removed by foreign countries. President Nixon closed the gold window in 1971 and that was that. The last link to gold was severed. But make no mistake, the trust that remained in the dollar was derived from the historic trust engendered by convertibility of paper to gold. For decades, the full faith and credit promise allowed the Fed to continue to inflate and still the people remained relatively passive in their acceptance of an unbacked, completely discretionary paper currency.
But not without hiccups. Inflation nearly got the better of us in the 1970’s and now debt threatens to do the same. Something profound, though, occurred in the past few years beginning with the panic of 2008. The Fed began to back the dollar with not just promises but perhaps really, really bad promises. Since early 2008 the Fed has added nearly $3 trillion to its asset sheet, included among these “assets” are stuff no one else seems to want: such as bad car loans and non-performing mortgages. According to John Mauldin and Jonathan Tepper’s book, Code Red, the Fed is leveraged about 77-to-1. Think about that. That is an insane amount of leverage for any bank. The Fed is more leveraged than the balance sheets of Lehman Brothers, Bear Stearns, Freddie or Fannie before those institutions essentially failed.
Jim Rickards, Author of Currency Wars, notes, “The Fed is insolvent on a mark-to-market basis. … Of course, the Fed carries those notes on its balance sheet “at cost” and does not mark-to-market, but if they did, they would be broke. The insolvency of the Fed will become a major issue in the years ahead and may necessitate a financial bail-out of the Fed by taxpayers.” So, the once proud dollar once backed by gold, then backed by the full faith and credit of the world’s greatest economy, is now backed by used car loans and underwater mortgages. But those who trust in paper say, “Look, for 50 years now we’ve had no convertibility and amazing improvements in productivity and wealth.” Perhaps, but one might also argue that we are living on the borrowed plumage of the past, that our current acceptance of a paper currency rests on the glory of our industrial and monetary past.
No one can tell for sure what the future holds. But I for one am concerned that the panic of 2008 may not have been an anomaly but a harbinger of something far worse. I am concerned that we have papered over our problems in a sea of new currency. That quantitative easing has created an illusion of safety and security but beneath the surface lurks the seeds of another panic.
Listen to the economists who predicted the financial crisis of 2008: Economist Jim Grant recently said, “From the United States to Europe and Asia, the world’s central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory and I feel this journey will not end well. Or Nassim Taleb, Author of the Black Swan, “Someone made a mistake lending and someone made a mistake borrowing… and it is a mistake to transform private problems into public debt.” The next mistake is going to be overprint, which is going to be the way out for them, which is why I fear hyperinflation.” Or Nobel prize winner, Robert Shiller, “This financial crisis that we’ve been going through in the last five years has been one that seems to reveal the failure to understand price movement…” Not shying away from his concerns that the Fed is simply re-inflating the housing bubble in America’s largest cities, he argues, “[Housing prices] are up 12 percent in the last year. This is a very rapid price increase right now, and I believe it is accelerated somewhat by Fed policies” and “We’re in the beginnings of another housing bubble.”
Since we abandoned the sequester budgetary caps, any pretense of fiscal discipline is now gone. Politicians can attempt to obfuscate the truth with promises of spending restraint in the out years, but everybody knows that promising to cut in the out years is a pipe dream–and that all that really counts is the first two years of the Ryan-Murray plan that will add over $60 billion in new spending. What really causes China concern is not the new spending but that the total new debt added over ten years will be seven trillion dollars. China’s response to our fiscal lack of discipline was to downgrade our debt. Our seventeen trillion dollar debt is manageable only with the Fed buying it, and only with low interest rates.
China’s Dagong Global Credit Rating said in their statement on the downgrade: “The deal means only an escape from a debt default for the time being, but hasn’t changed the fact that the growth of government borrowing has largely outpaced overall economic growth and fiscal revenues.” It’s sad when the Chinese government can see major economic problems for the US that Washington continues to ignore. At current interest rates, we pay $237 billion in interest each year. If interest rates increase by just one percent, interest spending will increase by $1.2 trillion over ten years. If interest rates return to the norms of the 1980’s, the taxpayer will be on the hook for an additional $6.17 trillion in interest payments.
Most conservatives would be aghast at any talk of price controls. Conservatives realize, as most economists now do, that price controls lead to glut if the price is too high and to bare shelves if the price is too low. The Soviet Union was brought low for that very reason. No one, no matter how wise, can determine the “correct” price of bread without a marketplace. Anytime, a government tries to set prices the consequence is disastrous. But many leaders who are quite aware of the destructive nature of price controls nevertheless advocate for allowing the Fed to set the price of money, for that is what interest rates are, simply the price of money.
Like any other price, though, setting interest rates lower than the market rate encourages more use of money and more economic activity. But if rates are kept below the market rate, you interrupt the feedback loop that informs producers that they are overproducing, and the bubble expands until overproduction has reached such a point that the correction is catastrophic.
Jim Rickards explains this phenomenon: “What happens when the price signals upon which policymakers rely are themselves distorted by prior policy manipulation? First you distort the price signal by market manipulation, then you rely on the “price” to guide your policy going forward. This is the blind leading the blind.” Politicians have been complacent in letting the Fed manipulate interest rates for many reasons. Many politicians are reticent to get involved in monetary policy, they are worried of being blamed if the economy sours with monetary reforms. Many politicians believe the economy is better off with the Fed than with the panics that occurred before the Fed. But perhaps the variations in our economy of late indicate just as much instability with the Fed as before.
Some politicians acquiesce to Fed authority simply because they believe that the only way we can manage a $17 trillion debt is to create new money to buy the debt. There is some truth to the fact the big debt and deficit financing in all likelihood require a central bank to pay the debt with inflated dollars. Mauldin and Jonathan’s book, Code Red highlights this very point, “…in 2011, the Federal Reserve financed around three quarters of the US deficit; in 2012, it financed over half of it; and in 2013, it will finance most of it.” For anyone imagining a day without a Fed, they would have to propose a government that balanced its budgets annually. Without fiscal restraint you can’t ever expect monetary restraint. The opposite is where we are now. With fiscal irresponsibility, borrowing over a million dollars a minute, you need a compliant monetary policy.
But there are consequences to massive debts and corresponding massive purchases of debt by the Fed. The consequences can be gradual or abrupt. The gradual bankrupting of America proceeds apace. We pay for it with new money created by the Fed. The result is a gradual loss of purchasing power. Over the past one hundred years, the dollar has lost 96% of its value. A nation can survive such a loss but some would argue that the people hurt the most are those least able to absorb increases in prices, the poor and elderly on fixed incomes. The other possible outcome is an abrupt loss of confidence in the system. The panic of 2008 approached mass fear that the system was unsound. Reports that the emperor had no clothes were taken seriously as even the soundness of money market funds was questioned.
Our system of paper currency now backed by the promises of politicians, a $17 trillion debt, and used car loans and bad home mortgages is always one panic away from dissolution. When that day comes is uncertain. Can the Fed continue the facade; can the Fed continue the illusion of wealth that comes with freshly inked money? Time will tell, but I for one, want to know what the Fed is doing. Are individuals enriching themselves at the expense of the public? Does Fed policy enrich one group of individuals at the expense of others? What assets does the Fed hold? What informs their decision making process?
I, for one, want answers. I, for one, want transparency. President Obama’s choice of Janet Yellen as the new head of the Federal Reserve is concerning due to the policies Ms. Yellen has promoted in her history at the Fed. The Federal Reserve’s answer to economic crisis has long been simply to print more money, or what they call “quantitative easing.” Janet Yellen has been a major cheerleader for it. The Washington Post’s Neil Irwin wrote that, “Yellen has been not merely an engineer of the Fed’s policies of ‘quantitative easing’ and ‘forward guidance,’ but a consistent voice within the central bank to go further.” Will she go further? Will the same policies continue unabated? Those of us who think quantitative easing has gotten out of hand are now being asked to confirm a nominee who thinks the Fed has not done enough along these lines.
I believe the Federal Reserve is structurally flawed. As monetary historian Peter Bernholz wrote in his famous book, Monetary Regimes and Inflation, “…we draw the conclusion that the creation of money to finance a public budget deficit has been the reason for hyperinflations.” I see nothing in Yellen’s past performance at the Fed that would indicate that her policies would be any different from what we see today. In fact, I see some evidence that things might get worse.
I have introduced a bipartisan bill called Federal Reserve Transparency Act, known by many as “Audit the Fed.” The purpose of my bill is to eliminate the current restrictions on GAO audits of the Fed, along with mandating that the Federal Reserve’s credit facilities, securities purchases, and quantitative easing activities become subject to Congressional oversight. Looking into what the Federal Reserve does with our money has significant support from both parties, many members of which have heard the same concerns back home in their states and districts. The Federal Reserve is one of the most secretive institutions in our history. For decades, the people in charge at the Fed, politicians and various “experts” have insisted that such secrecy was integral to its independence and effectiveness.
I can see no reason why the American public should not be allowed to see behind the veil of secrecy at the Fed. I will continue to do what I can to part that veil. I will continue to fight for a full and persistent audit of the Fed. Audit the Fed passed the House with overwhelming bipartisan support but the majority party has resisted allowing a vote in the Senate. Today I oppose the nomination of Ms. Yellen for two reasons. I believe she will continue the gradual destruction of the dollar’s value and because I believe the time is now for a full audit of the Fed.
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