• Tag Archives Federal Reserve
  • Elizabeth Warren And Sherrod Brown Fight Fed Audit, Foreclosure Transparency

    Top progressive senators are running away from a bill authored by Sen. Rand Paul (R-Ky.) to audit both the Federal Reserve’s monetary policy operations and millions of foreclosures. Their aversion could doom any chance for public transparency surrounding the widespread abuse that banks deployed against homeowners in the aftermath of the financial crisis.

    Both Sen. Elizabeth Warren (D-Mass.) and her fellow financial reform advocate, Sen. Sherrod Brown of Ohio, the top-ranking Democrat on the Senate Banking Committee, have come out against Paul’s proposal, which would for the first time provide a public accounting of the central bank’s monetary policy maneuvers and its transactions with foreign central banks.

    “Sen. Brown has supported recent actions that have brought historic levels of transparency to the Federal Reserve,” spokeswoman Meghan Dubyak told The Huffington Post. “But he does not see how this legislation will benefit working Americans.”

    Warren and Brown insist they’re on board with more transparency in the Fed’s regulatory operations, but they’re drawing the line at monetary policy.

    “I oppose the current version of this bill because it promotes congressional meddling in the Fed’s monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy,” Warren said in a statement provided to HuffPost.

    Still, this idea of “political independence” is difficult to reconcile with basic principles of democratic accountability. It’s also a distortion of the concept underlying the 1913 law that created the Fed.

    “That independence is of course independence from the executive branch,” University of Texas economist James Galbraith testified at a House hearing in 2009. “It is not and cannot be independence from the Congress itself. The Federal Reserve may be delegated certain functions by the Congress, but the Congress can always choose to hold it accountable … It’s a legal independence of a kind that other regulatory institutions have had over the course of our history. It’s not an independence which is specific to monetary policy per se.”

    The Fed is the world’s most powerful economic institution, and its monetary policy operations are its strongest tools, setting interest rates that have tremendous influence over U.S. growth, inflation and the prices of key assets. The Fed’s arrangements with foreign central banks and governments even give it a significant role in foreign policy. Yet despite its vast political reach, the Fed is far less accountable to the democratic process than other policy-setting agencies in the American government.

    While the Fed’s Board of Governors, based in Washington, D.C., is a public agency, the central bank’s 12 regional branches are private-sector entities. Two-thirds of the directors of each regional branch are selected by commercial banks in the region, and many of those directors help select the presidents of each branch. Many of these regional presidents, in turn, play a role in setting monetary policy alongside the Board of Governors.

    There have always been political dimensions to the Fed’s activities. During the financial crisis, Ben Bernanke, then Federal Reserve chairman, and Tim Geithner, then president of the New York Fed, worked closely with Treasury Secretary Henry Paulson on various bailout activities, with Bernanke even helping sell Congress on a $700 billion bailout bill.

    Regional Fed Presidents, meanwhile, have never been immune to political thinking. Dallas Fed President Richard Fisher ran for Senate as a Democrat before joining the Clinton administration as a trade official. San Francisco Fed President John C. Williams has been a career Fed economist, but also served as senior economist at the White House Council of Economic Advisers under President Bill Clinton. Minneapolis Fed President Narayana Kocherlakota signed a petition organized by the libertarian Cato Institute opposing President Barack Obama’s stimulus plan a few months before he took office.

    “I don’t understand progressives’, like Senator Elizabeth Warren, opposition to the idea of legislation to audit the Fed,” one aide to Paul told HuffPost. “Some Democrat opposition seems more partisan than principled.”

    Source: Elizabeth Warren And Sherrod Brown Fight Fed Audit, Foreclosure Transparency

  • 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