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  • Sen. Rand Paul: The Fed Is Crippling America

    On Jan. 12, Congress is scheduled to vote on the “Audit the Fed” legislation (H.R. 24/S. 264), which, if passed, would bring to an end to the Federal Reserve’s unchecked—and even arguably unconstitutional—power in the financial markets and the economy.

    We aren’t the first to be wary of the powers of central banks. Founding Father Thomas Jefferson viewed the powers of central banks as being contrary to the protections of the Constitution. As Jefferson wrote: “I sincerely believe that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

    In a similar vein, the great Austrian economist Ludwig von Mises also recognized that limiting government power in the realm of money was a matter of liberty, not merely economics. Mises explained that “the idea of sound money … was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

    How far we have come as a country that these words from Jefferson and Mises sound so foreign today. Perhaps we have all been blinded by the credit and equity bubbles that surround us. But what better wake-up call to rally support for legislation that would shine a bright light on the government institution that today has created these bubbles, subsidizes small subsets of the population (thus amplifying wealth inequality), and enables endless government debt?

    The Fed was intended to be an apolitical body, a concession to placate the naysayers. But today, the Fed isn’t even shy about entering the political fray: witness Federal Reserve Chair Janet Yellen’s income inequality speech riddled with Democratic talking points during the 2014 elections.

    The Fed is, indeed, a political, oligarchic force, and a key part of what looks and functions like a banking cartel. During the 2007-08 financial crisis, the Fed’s true nature was clear to anyone paying attention. As the Treasury began bailing out the investment banks from the consequences of their profligate risk-taking (and in some cases fraudulent schemes), the Fed moved in tandem, further purchasing the underwater assets of these institutions, as well as actually paying interest to the commercial banks (hemorrhaging from risky loans) for reserves they kept parked at the Fed.

    To be sure, Fed officials came up with opaque jargon to describe such operations, but the stark reality is that the Fed was treating risky assets as good collateral, and in the fall of 2008 began literally paying banks to not make loans to their customers.

    Even today, the recent policy announcement has doubled the rate of this massive implicit taxpayer subsidy to the banks—what they call “interest on reserves.” In the textbook rate-hike case, the Fed sells off assets (or slows the rate of purchases) in order to reduce the supply of reserves. Then, the equilibrium price of borrowing reserves (i.e., fed funds rate) rises. In contrast, now and for the foreseeable future, as indicated by the Fed’s guidance statements, the Fed is raising rates by increasing interest on reserves.

    As of Dec. 17, the Fed is paying 50 basis points on both required and excess reserves. So the Fed, itself, is increasing how much it will pay to “borrow” reserves from the commercial banks. Given the estimated $2.6 trillion in excess reserves, at 50 basis points that means the Fed will be paying commercial banks some $13 billion in annual income. Right now, the Fed is paying the same on required and excess reserves, though that in principle could differ.

    As the Fed keeps raising interest rates through this same mechanism, the amount paid to commercial banks will only mushroom. You can forgive analysts for not discussing this; it was not even mentioned in the Fed’s Dec. 16 announcement.

    As the Fed pays commercial bankers more in interest payments, there is dollar-for-dollar less for the Treasury; in other words, for a given level of federal expenditures, the deficit is that much higher. Therefore, the U.S. taxpayer is subsidizing commercial banks to not make loans to their customers—or rather bribing them to charge their customers higher interest rates on loans. And, the U.S. taxpayer is going deeper into debt to provide this bank subsidy.

    This is but one aspect of the farce that is today’s Fed policy. In addition, we actually don’t know the full extent of or the precise recipients of the Fed’s asset purchases and bailouts as its balance sheet exploded from about $900 billion in August 2008 to almost $4.5 trillion today.

    Source: Sen. Rand Paul: The Fed Is Crippling America | TIME


  • RAND PAUL: Here’s why we should audit the Fed

    It is no secret that the Federal Reserve’s unchecked printing press causes recessions and increases income inequality. Allowing the Fed to inflate our money supply will artificially keep interests rates low, but at what cost? Their acts can no longer go unchecked, which is why I am proud to carry forth my father’s original ‘Audit the Fed’ legislation, which will receive a vote in the Senate in early January.

    In 2009, Senator Cruz drafted a legal brief praising President Obama’s American Recovery and Reinvestment Act, a stimulus bill that increased deficit spending by over $800 billion. In the brief, Senator Cruz argued that the bill’s handouts will “directly impact the economy” and “further the greater purpose of economic recovery for America,”

    Earlier this month, Cruz then blamed the Great Recession not on the Federal Reserve’s artificial lowering of interest rates, but on its failure to continue pushing them down in a timely manner. Cruz said that the Federal Reserve’s decision to “[shift] to a tighter monetary policy…set the stage for the financial crisis.”

    On the campaign trail, Senator Cruz has further demonstrated his unwillingness to rein in artificial credit expansion by repeatedly calling for the Fed to follow “rules-based” monetary policy. This means that he still wants to control the money supply in order to meet the requirements of a mandate or equation.

    I couldn’t disagree more strongly. No true fiscal conservative should ever support the artificial lowering of interest rates—not in 2008, not now, not ever. Doing so is the equivalent of signing a death warrant for our country’s low income earners.

    Former Federal Reserve Governor Kevin Warsh refers to the Fed’s easy-money policies as the reverse Robin Hood effect. “If you have access to credit—if you’ve got a big balance sheet—the Fed has made you richer,” he said in an interview. “This is a way to make the well-to-do even more well-to-do.”

    The reason for this is simple: big banks, corporations, and government entities receive the Fed’s newly-created money long before anyone else, and they bid up the prices of goods before the rest of us can get to purchasing them.

    Source: RAND PAUL: Here’s why we should audit the Fed – Business Insider


  • Yellen urges Congress to be wary of Fed reforms

    Federal Reserve Chairwoman Janet Yellen urged lawmakers to tread lightly when it comes to overhauling the central bank, warning that proposed changes could undermine its ability to support the economy.

    In prepared testimony, Yellen will tout the Fed’s own efforts to boost its transparency as a way to discourage lawmakers from pushing their own proposals to bring the Fed under stricter oversight.

    “Efforts to further increase transparency, no matter how well intentioned, must avoid unintended consequences that could undermine the Federal Reserve’s ability to make policy in the long-run best interest of American families and businesses,” she said.
    Yellen’s testimony Wednesday before the House Financial Services Committee will come one day after that panel held a hearing in which Republicans blasted the Fed as being unaccountable.

    While Yellen will argue in her testimony that Fed tweaks could subject the central bank to political pressure and make it less effective, GOP lawmakers have argued the Fed holds up its political independence as a way to avoid scrutiny.

    “The Fed’s clamor for independence is its underpinning for circumventing any sort of congressional accountability,” said Rep. Sean Duffy (R-Wis.) on Tuesday.

    The relationship between the Fed and Republicans has been touchy ever since the Fed embarked on an unprecedented run of monetary stimulus following the recession. But the dynamic took a turn for the worse recently, as the Fed has refused to comply with demands for documents lawmakers seek in conjunction with a probe into a 2012 leak of sensitive Fed information.

    The Financial Services panel went so far as to issue subpoenas for some documents, at which point the Fed refused to provide them, citing an ongoing criminal probe into the matter by the Department of Justice.

    Lawmakers have pushed a number of ideas to overhaul the Fed, from reworking its structure, requiring additional top-ranking Fed spots to be confirmed by the Senate or even requiring the Fed to set monetary policy based on an explicit rule.

    Yellen has pushed back against all those ideas…

    Source: Yellen urges Congress to be wary of Fed reforms | TheHill