Fresh Produce 8.5.09

1. The New Reality on Wall St., or, why the stock market will keep rallying.

2. Gary North explains why the Fed is afraid of Ron Paul - and the American people - very clearly. Highly recommended.

3. The UK government plans to install CCTV cameras in the homes of 20,000 "problem families". I kid you not.

4. John Stossel brings attention to a great Barron's article and the problem of the Cake Party. We will be eating spinach for some time, basically.

An Overview of the "Audit the Fed" Debate

The debate over H.R. 1207 and S. 604 is achieving quite a bit of publicity. I would like to compile some of the questions and resources surrounding it. To be clear - the audit gives the Government Accountability Office (GAO) additional power to examine

• The Fed’s discount window operations
  
• Funding facilities
  
• Open market operations
  
• Agreements with foreign banks and governments

With that said, lets take a look at the arguments for, and against, auditing the Fed.

Why should we audit the Fed?

In The Case Against The Fed, Murray Rothbard argues that the Fed enjoys a greater secrecy and independence than even the CIA.

The CIA and other intelligence operations are
under control of the Congress. They are accountable: a Congressional committee supervises these operations, controls their budgets, and is informed of their covert activities. It is true that the committee hearings and activities are closed to
the public; but at least the people's representatives in Congress insure some accountability for these secret agencies.

...

The FederalReserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation's vital monetary system, is accountable to nobody—and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue.

...

So: if the chronic inflation undergone by Americans, and in almost every other country, is caused by the continuing creation of new money, and if in each country its governmental "Central Bank" (in the United States, the Federal Reserve)
is the sole monopoly source and creator of all money, who then is responsible for the blight of inflation? Who except the very institution that is solely empowered to create money, that is, the Fed (and the Bank of England, and the Bank ofItaly, and other central banks) itself?

Rothbard's first chapter is excellent, and highly relevant to this post. I would strongly recommend reading it in its entirety.

Ron Paul articulates:

Claims are made that auditing the Fed would compromise its independence. However, by independence, they really mean secrecy. The Fed clearly cherishes its vast power to create and spend trillions of dollars, diluting the value of every other dollar in circulation, making deals with other central banks, and bailing out cronies, all to the detriment of the taxpayer, and to the enrichment of themselves. I am happy to challenge this type of “independence.”

They claim the Fed is endowed with special intellectual abilities with which to control the market and that central bankers magically know what the market needs. We should just trust them. This is patently ridiculous. The market is a complex and intricate thing. No one knows what the market needs other than the market itself. It sends signals, such as prices, that should be reacted to and respected, not thwarted and controlled. Bankers are not all-knowing and cannot ignore the rules of supply and demand. They might act as if they are, but their manipulation of the market just ends up throwing it wildly off balance, which gives us the boom and bust cycles.

They claim the Fed must remain apolitical. No organization is apolitical that relies on the President to appoint the Chairman. In fact, it is subject to the worst sort of politics – power to create trillions of dollars and affect the value of every dollar in the country without the accountability of direct elections or meaningful oversight! The Fed typically enacts monetary policy that is favorable to particular administrations close to elections, to the detriment of long-term considerations. They do this partly because of the political appointee process for the Chairmanship.

Ron Paul recently articulated the conflict between the people and the Central Bankers in this appearance on MSNBC:




Over at Campaign For Liberty, Peter Orvetti asks "What's the Establishment Got to Hide?"

A dollar today is worth less than one-twentieth what it was worth on the day the Federal Reserve was created 96 years ago. Yet over all that time, the unelected Fed has never had to face the full scrutiny of our elected representatives that other powerful agencies must. Even our intelligence agencies must report to Congress -- but not the Fed, which has helped rack up an $11 trillion national debt, and an additional $13 trillion in dubious loans and bailouts.

The Fed will not say where that money is going. Chairman Ben S. Bernanke has refused to tell Congress, and why should he? There is no means to compel him, and no way to find out what he’s been doing. The Federal Reserve Transparency Act would change that.

C-SPAN covers an excellent debate with Tom Woods and others (including Warren Coats, former IMF official) on the pros and cons of auditing and abolishing the Federal Reserve. The basic positions are:

• Audit and abolish the Fed and replace it with private commodity money and private banking.
• Strip the Fed down to the sole task of protecting the value of the dollar.
• It is too impractical to end the Fed without creating economic instability, so another plan is needed.

It is a very good video, if you have the time I recommend it.

The Smith Family Foundation hosts a very similar debate with George Selgin, Peter Schiff, Steven Axilrod (former member of the Federal Reserve's Board of Governors), and a political science professor from Columbia University:



I just want to point out that at minute 58 Axilrod exposes the political interests of the Fed and its Board of Governors.

Why shouldn't we audit the Fed?

Too Big To Bail makes the case that to audit the Fed is essentially to end it, and we should not forget that ultimately it was Congress that created the Federal Reserve system and as such they should be blamed for it. In other words, we are to blame for it, and blaming Bernanke and the Fed for our woes is misplaced anger. As he states,

Don’t get me wrong. I think the idea of a Fed and fiat currency, are bad ideas. I just think we should stop the classic congressional game where we create a problem and then complain about the Fed as if they are to blame. We created the beast and now are not happy with it. We can pull the plug whenever we want. But doing so would be an admission that we screwed up, not the Fed. The issues everyone has seems to be with the institution per se. And we created the institution.

So within the very framework that we set up, the Fed’s argument in favor of independence seems to make perfect sense. Of course, I question the whole framework, but given the situation, it does make sense.

Fed Chairman Ben Bernanke speaks on the issue, and claims that the audit would nullify Fed independence -




And from his article in the WSJ:

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

The Washington Post also thinks auditing the Fed is dangerous:

Though the bill has attracted 276 co-sponsors in the House and 17 in the Senate, it is wrongheaded in the extreme. By opening up the Fed's most sensitive interest rate and credit policies to public second-guessing, the bill would create a risk -- real and perceived -- of monetary policy bent to suit congressional overseers. This would destroy financial markets' faith in the Fed and, by extension, the value of the U.S. dollar, just as surely as a political "audit" of the Supreme Court's deliberations would undercut public faith in the justice system. ... The Federal Reserve Transparency Act is an unserious answer to a serious question.

If I may, the serious question is the existence of the Federal Reserve itself. As I find more sources I will update this post and continue to compile them. I hope this is a good start for you, though.

Who owns the Fed?

You would think this question would have an easy answer. Is it public or is it private? If it is public, we the people own it. If it is private, well, the shareholders own it. So who owns the Federal Reserve? Let me google that for you.

Here's what the Fed has to say about the matter:

"The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects."

Maybe it is just me but that is confusing. Why is "owned" in quotations? So it is not a profit-making institution, but an independent entity within the government. If that is the case, why did a Federal District Court in California rule that the Federal Reserve is a private corporation? See here:

"Plaintiff, who was injured by vehicle owned and operated by a federal reserve bank, brought action alleging jurisdiction under the Federal Tort Claims Act. The United States District Court for the Central District of California, David W. Williams, J., dismissed holding that federal reserve bank was not a federal agency within meaning of Act and that the court therefore lacked subject-matter jurisdiction. Appeal was taken. The Court of Appeals, Poole, Circuit Judge, held that federal reserve banks are not federal instrumentalities for purposes of the Act, but are independent, privately owned and locally controlled corporations."

And further,

"Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank's nine member board of directors. The remaining three directors are appointed by the Federal Reserve Board."

And,

"Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purpose of the FTCA (Federal Tort Claims Act), but are independent, privately owned and locally controlled corporations."

It is worthwhile to read the ruling in its entirety, but "independent, privately owned and locally controlled corporations" doesn't seem to jive with "an independent entity within the government". Maybe the District Judge was confused. I certainly am. Lets see if this handy chart from the Richmond, VA Fed can help us...



So the member banks (commercial banks like Citi, JP Morgan, etc.) are the shareholders in the local Federal Reserve banks, and they appoint two-thirds of the board of directors which manage the local banks. Each banks' board of directors appoints a president, five of whom in turn sit on the Federal Open Market Committee. Stop me when I hit public ownership land, by the way. The Federal Open Market Committee is comprised of five presidents from regional banks, and seven members of the Board of Governors. The Board of Governors is appointed by the President and confirmed by the Senate. The Board of Governors appoints the other third of the board of directors at local Federal Reserve banks, and is advised by a Federal Advisory Council comprised of a representative from each of the twelve regional banks.

Aside from all the confusion, I don't see any public ownership in there at all. There is some public representation - the Board of Governors and their appointment of 1/3 of each banks' board of directors. That is not much. Anyway, who owns the Fed?

Here is an excerpt from an article written by former N.Y. Attorney General Eliot Spitzer on the cozy relationship between the N.Y. Fed and Wall St: (italics mine)

"Given the power of the N.Y. Fed, it is time to ask some very hard questions about its recent performance. The first question to ask is: Who is the New York Fed? Who exactly has been running the show? Yes, we all know that Tim Geithner was the president and CEO of the N.Y. Fed from 2003 until his ascension as treasury secretary. But who chose him for that position, and to whom did he report? The N.Y. Fed president reports to, and is chosen by, the Fed board of directors.

So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros. It was not a group of typical depositors worried about the security of their savings accounts but rather one whose interest was in preserving a capital structure and way of doing business that cried out for—but did not receive—harsh examination from the N.Y. Fed."

Spitzer appears to be suggesting that Geithner works more for Wall St. than he does for the Fed. This quasi-conspiracy theory about Geithner is also advanced by former Assistant Treasury Secretary Paul Craig Roberts (@ 2:50) :

The Federal Reserve system has all the pomp and veneer of a government institution:

• The name implies a Federal agency
• The public face, Chairman of the Board of Governors, is appointed by the President
• It was created in name of the "public interest", to protect the value of the dollar and provide economic stability
  
• Has regulatory power over other private corporations
• Non-profit organization
• Has a special .gov web address
  

Despite these embellishments, the District Court of California found it to be a private corporation, and we don't know who the major shareholders currently are. So who owns the Fed? We don't really know. It sure isn't the American people. It appears to me that the Federal Reserve banks are by and large owned by member banks, possibly other foreign central banks, and are "directed" mostly by people who have ties to the banking industry. Can you see why conspiracy theories begin to emerge? Until we can have a proper audit of the Fed, we won't know who owns it.

Support Ron Paul's bill to audit the Fed. Why? 'Cause he pwns the Fed!

Fresh produce 6.25.09

Mish has a fantastic post today using Dr. Seuss to explain economic realities.

1. Thidwick the Big-Hearted Moose, an illustrated tale.

2. While the Fed is getting more power, no one is forcing them to face the consequences of a recent cover up.

3. Spezify is a very interesting new search engine. Compare it to Wolfram Alpha and Bing. Or the classic.

4. Legislators in Cali want to pay for their debts in IOU's. My question is, who in their right mind would lend them money?

Elihu Root and the Federal Reserve

Senator Elihu Root (1845 – 1937) in his prescient understanding of central banking and easy credit:

“Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community. . . . Bankers are not free from it. They are human. The members of the Federal Reserve board will not be free of it. They are human. . . . Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.”

Who knows if he had heard of the Austrian Business Cycle Theory, but for someone speaking during the creation of the current US central bank, he had a clear vision of what would happen in 2008. This reference was made known to me by a good speech from Thomas Woods.