Wikinvest Wire

"End the Fed" legislation reintroduced

Thursday, February 05, 2009

Earlier this week, Rep. Ron Paul (R-Texas) reintroduced legislation to abolish the Federal Reserve. While it's not likely to go any further than it did last time, efforts like this are an important first step toward making substantive changes in the future:

Madame Speaker, I rise to introduce legislation to restore financial stability to America's economy by abolishing the Federal Reserve. Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary policies. This represents a real, if hidden, tax imposed on the American people.

From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial "boom" followed by a recession or depression when the Fed-created bubble bursts.
How can you argue with any of this?

While the "lender of last resort" function of the Fed makes a good deal of sense, the "master of the economy" and "master of the money" roles do not.

They never did (unless you're a banker or a politician).
With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America's exports or the low rate of savings should be enthusiastic supporters of this legislation.

Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

In fact, Congress' constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation's founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true freemarket economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans' standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.

14 comments:

Anonymous said...

Why does lender of last resort make sense? They are not lending out their own property. In printing up more to lend as a last resort, they are taking from everyone else and handing it over (i.e. gifting not lending) to the screw ups. Without this backing, naughty banks would go belly up every time their reserve ratios dropped to low ... as it should be. Instead, our situation now is the whole economy goes bankrupt when everyone's collective reserves (real savings) drop too low.

Dan said...

Yeah, I've not yet been convinced by the arguments for a lender of last resort either.

Tim said...

The reason I said that is because, if you have a fractional reserve banking system (which is a whole different discussion), then you'll always have unnecessary runs on the bank driven by emotion and fear rather than underlying poor fundamentals of individual banks. By "lender of last resort" I meant lending to banks during such periods.

Anonymous said...

Tim - I will say it again. The Austrian focus on the FED is like Steve Keen said "Calling our current financial system a “fiat money” or “fractional reserve banking system” is akin to the blind man who classified an elephant as a snake, because he felt its trunk. We live in a credit money system with a fiat money subsystem that has some independence, but certainly doesn’t rule the monetary roost—far from it."

And we can see that now. Bernanke's infusion of fiat money into the system is doing nothing.

This situation sure is discrediting (no pun intended) Bernanke, Greenspan and Friedman, but by no means makes Austrian theory correct.

how screwed are we?? said...

Is this true?

http://www.glennbeck.com/content/articles/article/198/21091/

Anonymous said...

I went through The Roving Cavaliers of Credit. It's interesting but, after the first time through, it strikes me as one of the many arguments today that "the debt is really, really big this time - way too big for the Fed to fix it", not appreciating what our elected leaders and the Fed are capable of doing. I plan to look at it some more.

Dan said...

@ how screwed are we??

Yes, that is indeed a hyperlink.

Anonymous said...

Tim,

There aren't any unnecessary bank runs. A run happens when the fraud of issuing claims against non-existent assets is revealed. This is a normal and healthy process whereby the fraudsters are eliminated. A central bank just allows the fraud to be conducted on a larger scale.

Anonymous said...

I have been thru that Steve Keen piece and, like many other deflationists, he confuses money and credit (horribly, actually). If you want to understand this issue better (i.e., how you can convince yourself of almost anything once you confuse the two), listen to this interview where James Turk takes Mish to school on the subject - http://commoditywatch.podbean.com/2008/08/24/inflation-or-deflation-part-1/. Tim brought this interview to my attention last year and it has helped me understand the issues better.

Jubilee Year said...

Thanks for the link, Anon, I just listened to it, but Turk does not school Mish on that subject.

You can define deflation away, by claiming it is only a measure of money, or you can look at reality, and see that what he calls "wealth destruction" IS deflation, in action.

Mish is factually correct: all debt bubbles historically have ended in deflation. Japan went through deflation, even though their monetary supply did not shrink.

Mish nails it: money supply can expand, all in the balance sheets of banks, while the real economy deflates.

Banks don't want to give, and consumers don't want to take on, loans in a deflationary period (because loans are guaranteed losers)!

The black hole of deflation will suck everything in until debt and excess inventory are liquidated.

The only solution is to cancel the debt itself, starting, at the bare minimum, with massive amounts of mortgage debt -- to stop the core housing deflation which is driving the rest.

Tim said...

I read the Keen article again this morning and come away less impressed the closer I look (it's interesting to read some of the comments, as if they're really saying, "The emporer's clothes are lovely, aren't they?).

In digging into that first chart, wondering how any self-respecting analyst could provide legends "Fiat Money Injection", "Total Credit Money & Loans", and "Total Money" while citing no sources, the closest reference [3] was tracked down in hopes of getting to the source data and, lo and behold, this is a paper written in 1990 by one of the daffiest economists of our time - Edward Prescott. See Unmeasured Savings.

There are many other aspects of this paper that fall apart quickly upon further scrutiny, but I have better things to do.

VP said...

Don't worry the senators don't really care they aren't in any hurry to help, they have the best health care and are well payed, "Let them eat cake"

kingcalvin said...

Yes... the Fed has issues. I think Ron Paul's stock will rise as this crisis crushes the American Economy.

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