Sunday, May 17, 2009
Representative Ron Paul (R-Texas) penned this commentary at Forbes, continuing in his lonely quest to rid the country of its central bank, to whom the government appears ready to grant broad new powers as the planet's regulator of "systemic risk".
The Federal Reserve's recent and unprecedented actions in the realm of monetary policy have provoked a backlash among the American people. Trillions of dollars worth of loans and guarantees have been provided to Wall Street firms, while Main Street Americans suffocate under harsh taxation, the prospect of higher debt levels and increasing inflation. These events have awakened many Americans to problems with the Fed's loose monetary policy, the bubbles it has created in the past and the potential hyperinflation it might cause in the future.Despite the former Fed chairman's protestations, even Joe the Plumber probably understands the "too loose for too long" genesis of our current problems, but the variant definitions of inflation and the evils of a two or three percent rate are a hard sell.
One of the fallacies of modern economics is the idea that a central bank is required in order to keep inflation low and promote economic growth. In reality, it is the central bank's monetary policy that causes inflation and depresses economic growth. Inflation is an increase in the supply of money, which in our day and age is directly caused or initiated by central banks. All other things being equal, inflation results in a rise in prices. A so-called "mild" rate of inflation of 3% per year leads to a 56% rise in prices over a 15-year period. Even a "low" rate of inflation of 2% per year leads to a 35% rise over that same period.
Accountability for the nation's central bank, however, is an idea that should resonate with the citizenry, given that there continues to be a misguided belief that, at some point in time, all the borrowed money must be paid back and all the books must be squared.
While I am a proponent of eliminating the Federal Reserve System altogether, I believe that as long as the Federal Reserve exists it should be fully audited. According to current federal law, the Fed's agreements with foreign governments and central banks--and, more important, its open market and monetary policy operations--are exempt from an audit by the General Accounting Office. As the GAO observed in the 1970s, the last time the issue of an audit really came to the fore, "We do not see how we can satisfactorily audit the Federal Reserve System without authority to examine the largest single category of financial transactions and assets that it has." The Fed has such broad power to intervene in the economy and to engage in agreements with foreign governments and central banks that it is unconscionable that such actions are exempt from oversight.Oh Dear! Isn't the economy already doing that?
The necessary first step to restoring economic stability in this country is to audit the Fed, to find out the multitude of sectors in which it has involved itself and, once the audit has been completed, to analyze the results and determine how the Fed should be reined in. Proposals to push the Fed back into the shadows, or to give it an even greater role as a guarantor of systemic stability, are as misguided as they are harmful.
If Congress fails to scrutinize the Fed and the actions of its unelected bureaucrats, it will only have itself to blame as this country's economy crashes and burns.
This week's cartoon from The Economist: