Fed President Attacks Ron Paul
by Gary North: The
Symbolic Debt Ceiling
who advocate "Ending the Fed" might better turn their considerable
talents toward ending the fiscal debacle that has for too long run
amuck within their own house. The Fed does not create government
debt; fiscal authorities do. ~ Richard Fisher (Jan. 12, 2011)
When the president
of any regional Federal Reserve Bank stands in front of a bunch
of Harvard University graduates to tell them about how the economic
mess is not really the FED's fault, you know what's coming. It came.
It is clear
who his target was: Ron Paul. I am not the only person to see this.
article on the Fortune site spotted it. It was written
by a standard, gold-hating, unknown journalist employed by Fortune.
only quibble with Texas, it seems, is with the Fed-bashing focus
of one of the Lone Star state's representatives in Congress, who
in Fisher's view might do well to turn his energies to actually
doing something rather than grandstanding about the hugeness of
the gold standard.
It ended: "In
short, audit this, Ron."
is clearly a sniveler. Nevertheless, I will "audit this" on Dr.
Paul's behalf. He does not need me to do this, but I enjoy having
a little fun at the expense of a Federal Reserve president. As for
the sniveler, who cares?
me about Fisher's speech is his attempt to cover up his obviously
personal attack by the use of misleading rhetoric. There are no
"lawmakers" who advocate ending the FED. There is only one, and
there has been only one in Congress over the last 35 years. When
Fisher refers to "their considerable talents," he is using the rhetoric
Well, two can
play that game, and I am better at it that Fisher is.
Let me show
you how it's done.
is the president of the Dallas FED. He is a disciple of Irving Fisher,
the founder of monetarism. In a
puff piece on Irving Fisher written by a staff economist for the
Dallas FED, and published we know not when (the editor of the
in-house journal does not bother with such an irrelevant detail)
in Vol. X, No. 1, the author begins with this cheerleading quotation
from Richard Fisher.
the first quarter of the 20th century, Irving Fisher was one of
America's most celebrated economists. But sadly, most Americans
today have not heard of him. Even as his reputation among the public
faded with the years, his reputation within the economics profession
has steadily risen. Fisher (no relation to the undersigned, though
I would like to claim access to his gene pool) was a pioneer in
many theoretical and technical areas of economics that today are
the foundation of central bank policy. One such achievement was
the creation of indexes to measure average prices, the bedrock for
all current monetary policy. His was a storied and successful career
even if, by the time of his death, Fisher's own finances and reputation
as an economic prognosticator lay in ruins. We hope readers will
find his life story interesting as they learn more about this pioneer
of monetary economics.
was the biggest fool in the history of American academic economics.
This is not to say he was the worst American economist. But he was
the most influential economist who ever self-destructed in full
public view. He self-destructed because his economic theory was
wrong. He made predictions in terms of it the worst predictions
ever made by a prominent American academic economist. They ruined
him, both professionally and financially.
In his 1912
Theory of Money and Credit, Ludwig von Mises devoted a lot
of space to Fisher's theory of money, which was statistical and
aggregative. Fisher proposed that age-old chimera, the creation
of a commodity-standard money. You know: the famous and ever-elusive
basket of currencies. It has never been attempted. No politician
favors it. No economist has ever shown how it could work: enforcement,
choice of commodities, etc. It would have to be a government standard.
Mises showed why it could not work in practice and why it did not
hold up in theory (pp. 399406). In short, it was an academic
construct that had no contact with political or banking reality.
It would not be the last.
out how Fisher proposed a mathematical way to measure value. Fisher
might as well have proposed a mathematical way to measure love .
. . or contempt. Mises refuted him thoroughly (pp. 4245).
the first major proponent of the quantity theory of money. Mises
disposed of the theory (pp. 14245, and following).
All of this
would be a matter of arcane economic debating except for this: Fisher's
theory was picked up by the economics profession. It is the basis
of all measurements of prices. He is the founder of the price index.
His ideas were adopted by Milton Friedman and, through him, spread
to the Chicago School of monetarists.
In the Great
Depression, he got his reward. In the fall of 1929, he publicly
made the announcement that finished his reputation. The Wikipedia
entry summarizes what happened.
prices have reached what looks like a permanently high plateau."
Irving Fisher stated on October 21 that the market was "only shaking
out of the lunatic fringe" and went on to explain why he felt the
prices still had not caught up with their real value and should
go much higher. On Wednesday, October 23, he announced in a bankers
meeting security values in most instances were not inflated. For
months after the Crash, he continued to assure investors that a
recovery was just around the corner.
He had invented
the Rolodex. He lost his fortune in the depression. He had invested
his sister-in-law's fortune. She lost everything. At the time of
his retirement in 1935, he was destitute. Yale let him stay in his
faculty home rent-free.
He then retroactively
invented an explanation of the collapse of prices: debt deflation.
He blamed the depression on the repayment of debt. He did not blame
fractional reserve banking. He did not blame the contraction of
money due to bank failures. This theory was as wrong as his monetary
theory had been.
of debt contraction is dominant today. It guides the policies of
Bernanke and the rest of the world's central banks. This is why
they are all inflating.
been two streams of economic opinion in the modern non-Communist
world: Fisher's monetarism and Keynes' fiscalism. Their representative
economists take pot shots at each other, but they are Siamese twins.
Governments run deficits, and central banks finance them. The economists
are agreed on this, however: Mises was wrong, the gold coin standard
was wrong, and government intervention is the correct policy in
monetary affairs. They march arm-in-arm on this point: no society
should trust a free market monetary system based on contract law.
is on the monetarist side. This is the key to understanding his
Harvard Club speech.
STREET MAN OF THE PEOPLE
He began his
analysis with this insight:
Federal Reserve is structured to balance "inside the Beltway" influences
with "outside the Beltway" thinking.
With this as
the foundation, you can imagine how accurate the rest of the speech
is. He continued:
governors of the Fed, in Washington, are appointed by the president
of the United States and confirmed by the Senate. The 12 bank presidents,
like me, who operate the System in the field and also sit on the
Federal Open Market Committee (FOMC) with the Fed governors, are
not. Instead, we are selected by, and serve at the pleasure of,
boards of directors drawn from the citizenry of our districts.
Here it is,
folks: the Party Line that goes back to the secret meeting at Jekyll
Island in 1910. The first-name-only conspirators deliberately created
the 12 regional banks to fool the public about the fact that the
FED was a central bank.
too strong a word? Not according to Frank Vanderlip, one of the
conspirators, who wrote in his 1935 autobiography:
was as secretive, indeed I was as furtive as any conspirator. Discovery,
we knew, simply must not happen, or else all our time and effort
would have been wasted. If it were to be exposed that our particular
group had got together and written a banking bill, that bill would
have no chance whatever of passage by Congress. I do not feel it
is any exaggeration to speak of our secret expedition to Jekyll
Island as the occasion of the actual conception of what eventually
became the Federal Reserve System.
regional banks were set up to provide the illusion of regionalism.
From day one, the New York FED has been the main bank. Its president
always has a vote on the Federal Open Market Committee (FOMC), which
sets monetary policy. The other presidents rotate in and out, making
a coup unlikely.
As for the
system of representation locally who gets onto the regional
bank boards the Federal Reserve Bank of San Francisco provides
the evidence of bank control.
nine directors of each Reserve Bank are evenly divided into three
classes, designated A, B, and C. Class A directors represent commercial
banks that are members of the Federal Reserve System. Class B and
Class C directors represent the public interest and cannot be officers,
directors, or employees of any bank. Class B and Class C directors
encompass the broad economic interests of the District, including
industry, agriculture, services, labor, consumers, and the nonprofit
sector. Class A and Class B directors are elected by member commercial
banks in the District. Class C directors are appointed by the Board
last sentence? Did you read it right? You did. The local commercial
banks elect the A and B directors, and the Board of Governors in
Washington, a government agency, whose domain name ends in .gov,
appoints the others. But Fisher wants us to believe that "we are
selected by, and serve at the pleasure of, boards of directors drawn
from the citizenry of our districts."
Where did he
grow up? The Wiki entry informs us.
first-generation American, Fisher was born in Los Angeles, California
but grew up in Mexico. His father was Australian, while his mother
was South African, of Norwegian descent. Following graduation from
Admiral Farragut Academy, he attended the United States Naval Academy
in Annapolis, Maryland from 1967 to 1969, before transferring to
Harvard University, where he earned a bachelor's degree in economics
in 1971. From 1972 to 1973, he studied Latin American studies at
Oxford University. Completing his education in 1975, he earned an
M.B.A. from Stanford University.
The eyes of
Texas may be upon him now, but not for most of his life. He represents
the elite, which is why he gave his speech at the Harvard Club.
Then he added
this: "On the policy front, the job of the Fed Bank presidents is
to bring a Main Street perspective to the table."
Stop that laughing!
I'm telling you to stop it right now.
I was asked by the Dallas Fed board to become president of the Bank,
I then met with Alan Greenspan. I asked the Chairman how I could
best serve the System. His answer was crisp: "Just speak to the
truth," he said.
No, I really
mean it. Stop that laughing. We are all dignified adults here. This
is very serious.
STANDS UP TO CONGRESS
served as John the Baptist to the FED. He does not cry out from
the wilderness. That has been Ron Paul's task for 35 years. But
he has been crying out in the outer court of the temple. As
with all FED members, he is there to protect the moneychangers.
So, he cries
out in the name of Irving Fisher against Keynes' spiritual heirs,
who he says have gone mad fiscally. He admits that the FED has added
massively to its balance sheet, meaning the monetary base. He says,
"Thus far, and no farther."
this action, we have run the risk of being viewed as an accomplice
to Congress' fiscal nonfeasance. To avoid that perception, we must
vigilantly protect the integrity of our delicate franchise. There
are limits to what we can do on the monetary front to provide the
bridge financing to fiscal sanity. Last Friday, speaking in Germany,
[European Central Bank President] Jean-Claude Trichet said it best:
"Monetary policy responsibility cannot substitute for government
He went on
to say this.
entire FOMC knows the history and the ruinous fate that is meted
out to countries whose central banks take to regularly monetizing
government debt. Barring some unexpected shock to the economy or
financial system, I think we have reached our limit. I would be
wary of further expanding our balance sheet. But here is the essential
fact I want to emphasize today: The Fed could not monetize the debt
if the debt were not being created by Congress in the first place.
If he had been
Pinocchio, he would have fallen nose-first across the podium due
to the shift in equilibrium.
Reserve System can monetize anything it wants to, and has. It has
monetized over $1.2 trillion in Fannie Mae and Freddie Mac bonds
two agencies that were officially private in August 2008.
Congress had nothing to do with that decision, except to allow the
FED to monetize the debt of a newly nationalized pair of bankrupt
agencies. Bernanke went along with Hank Paulson's unilateral nationalization
of $5 trillion in mortgage debt. Not only did he go along with it,
he bankrolled it.
a look at a chart of the asset holdings of the Federal Reserve.
Notice how the FED sold has off Treasury debt and replaced it
with toxic Fannie/Freddie agency debt.
the shuck on the rubes of the Harvard Club, Fisher then escalated
lawmakers who advocate "Ending the Fed" might better turn their
considerable talents toward ending the fiscal debacle that has for
too long run amuck within their own house. The Fed does not create
government debt; fiscal authorities do. Deficits and the unfunded
liabilities of Medicare and Social Security are not created by the
Federal Reserve; they are the legacy of those who control the purse
strings the Congress, working with the president.
This is the
same old Punch and Judy show that monetarists and Keynesians have
been playing ever since 1936. The monetarists condemn the national
government for its spending, but only after the government has bailed
out the big banks and large corporations that were threatened with
bankruptcy during the recession that was caused by the central bank's
prior monetary inflation. The Keynesians remain silent during the
boom phase, never calling on the central bank to stabilize money.
Then they complain during the recession that the central bank is
being too tight with the monetary base. The result of this Punch
and Judy show is the astronomical increase in both the monetary
base and debt. Neither side ever convinces the other to put on the
brakes and stop both the expansion of money and the increase in
debt. Only the Austrians do recommend this, in boom times and busts.
They are represented only by Ron Paul. And we know what Fisher thinks
of Ron Paul.
Here is a rule
governing the legitimate use of rhetoric. You use clever language
and images to call attention to the facts. You are not supposed
to lie about the facts in order to mislead your audience. For example,
you are allowed to identify your target as an intellectual weasel,
but always with the facts to back it up. Your audience will remember
"intellectual weasel," but that is legitimate when your target really
Why did Bernanke
go along with Paulson and buy all that Fannie/Freddie debt? Because
he is a Keynesian, but a Keynesian who is a believer in Friedman's
monetarism. He is therefore a follower of Irving Fisher's 1930s
theory of credit deflation not the contraction of fractional
reserve banking as the cause of the Great Depression.
Fed has reduced the cost of business borrowing to the lowest levels
in decades. It has seen to it that liquidity is widely available
to banks and businesses. It has kept the economy from deflating
and it has kept inflation under control. This has helped raise the
He is still
one of the boys. He is still a true disciple of Irving Fisher. He
is still inside the courts of the temple.
One of these
days, someone will overturn the tables of the moneychangers. It
can't happen soon enough for me.
This man claims
that the FED is outside the beltway. He claims that regional FED
banks represent Main Street. He says that the FED buys all that
Congressional debt. With this as background, he offers a challenge:
leaders of our government cannot attempt to talk their way out of
the problem like their predecessors did. They must fix the problem.
Now. If they fail to do so, then the election, for all its hoopla,
will prove to have been nothing more than a case of putting old,
rancid wine in new bottles.
I think this
assessment will prove to be prophetic. I also believe that Bernanke
will load up the FED's balance sheet with rancid wine.
If there were
an ETF for rancid wine, I would be a buyer.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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