Free Ride Is Over
by Gary North: The
Federal Reserve vs. Widows
took over as Chairman of the Board of Governors of the Federal Reserve
System on February 1, 2006. On February 9, 2011, his free ride ended.
On that day, Paul Ryan's House Budget Committee grilled him.
yet to appear before Ron Paul's Subcommittee on Monetary Policy.
Whether Bernanke will ever agree to testify before that subcommittee
remains an open question. If the House does not compel him to show
up, he may be able to escape stiff cross-examining. If the House
refuses to compel him to testify, then the House once again has
capitulated on a bipartisan basis. We shall see.
not used to tough questions. Some
of the questioning wound up on YouTube within hours.
You may not
perceive the extraordinary nature of all this. You can be sure that
he perceives it. For almost a century, representatives of the Federal
Reserve have been dealt with deferentially by Congress. In theory,
the Federal Reserve answers to Congress. In fact, Congress asks
The sign of
the FED's operational autonomy is the absence of any independent
audit by any agency of the United States government. This includes
any audit of the gold that the FED legally has stored for the government
since 1933. The last audit of the gold in Fort Knox was in 1953.
There has never been an independent audit of the gold inside the
vault of the New York Federal Reserve Bank (privately owned) at
33 Liberty Street, New York City.
and 1974, no one got inside the vault at Ft. Knox, where (supposedly)
147 million ounces of gold are stored. In 1974, Congressman Phil
Crane (R-Ill) strongly suggested to the Secretary of the Treasury
that a group of citizens and a few congressmen be allowed to tour
the facility. Secretary Simon got this approved. This was the first
tour of the Ft. Knox vault since Roosevelt toured it during World
War II. That had been the only other tour. An
account of the 1974 tour is here.
Ron Paul has
introduced a bill to audit all of the nation's gold. His 2009 bill
to audit the FED was held up by Barney Frank. Although a majority
of the House co-sponsored the bill, Frank never allowed it to get
to the floor of the House for a vote. A gutted version was allowed
into the bank reform law of 2010.
audit of the FED by the General Accounting Office or other government
agency should determine three things: (1) how much U.S. gold is
in all depositories; (2) the fineness of the gold (coin melt is
only 90% gold and is not suitable for delivery to the metals markets);
(3) which nations and central banks have title to the gold in the
The FED has
of course strenuously resisted any audit. An audit is officially
rejected by the FED for this reason: it would be an infringement
on the autonomy of the FED. Bernanke
told Congress what the situation was in 2009. The FED, not Congress,
was in charge. He said that the FED should not be subject to an
audit by Congress.
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.
"Wait a minute,"
you may be thinking. "The Federal Reserve is legally an agency of
the U.S. government. The government should audit every agency."
That sounds nice, but the government does not audit agencies with
real autonomy and serious power, such as the CIA and the National
Security Agency (NSA). The FED is different. Unlike those agencies,
12 of its administrative agencies, the regional FED banks, are privately
owned organizations. This is why their Web addresses end in .org,
find a government agency that is not subject to an audit by the
government, we can be sure we are dealing with an agency that possesses
real power. The FED possesses such power.
of two Congressional committees are openly critical of the FED.
This has not happened before. The only chairman as hostile to the
FED as Ron Paul is, was Wright Patman of east Texas. He was a left-wing
Populist. He was a greenbacker. He favored a pure fiat currency,
unbacked by even the pretense of gold. From 1929 to 1976, he was
a thorn in the side of the FED. During World War II, he teamed up
with Jerry Vorhis, a California Congressman who shared his greenback
views. Together, they got a law signed that forced the FED to repay
to the Treasury all interest income from Treasury bonds that was
not used for operating expenses. That has put a significant lid
on FED income over the last six decades. In 2010, it
paid back $78.4 billion, up from $47 billion in 2009.
removed as chairman of the Banking Committee in a coup engineered
by Democrats. He died in March of 1976, a month before Ron Paul
was elected to Congress in a special election to fill a recently
vacated position. Paul is as hostile to the FED as Patman was, but
on a different basis: a free market monetary standard in which the
U.S. government is not involved. He thinks gold would become the
monetary unit of preference.
had another House chairman share his views of the Federal Reserve.
Ron Paul knows that, within the Tea Party, there is significant
hostility to the FED. For the first time in post-World War I history,
there is a significant minority of voters who know that the FED
is an autonomous agency in control of monetary policy. They do not
think the FED should be trusted by Congress or anyone else.
faces a situation never faced by a FED Chairman before. What he
says is not simply reported in the financial press. It winds up
on YouTube within a few minutes. This is not what he meant by "transparency."
YouTube existed for only a year before Greenspan left office. Bernanke
is subject to criticism on the Web in a way that Greenspan avoided,
because Greenspan was always ready to inflate to overcome recession.
Today, the FED inflates, but unemployment remains persistently high
higher than it did in any post-World War II recession. His
statement to the Budget Committee was subdued.
indicators of spending and production have been encouraging on balance,
the job market has improved only slowly. Following the loss of about
8-3/4 million jobs from 2008 through 2009, private-sector employment
expanded by a little more than 1 million in 2010. However, this
gain was barely sufficient to accommodate the inflow of recent graduates
and other new entrants to the labor force and, therefore, not enough
to significantly erode the wide margin of slack that remains in
our labor market. Notable declines in the unemployment rate in December
and January, together with improvement in indicators of job openings
and firms' hiring plans, do provide some grounds for optimism on
the employment front. Even so, with output growth likely to be moderate
for a while and with employers reportedly still reluctant to add
to their payrolls, it will be several years before the unemployment
rate has returned to a more normal level. Until we see a sustained
period of stronger job creation, we cannot consider the recovery
to be truly established.
There was not
much lipstick for this pig. The job market is locked in recessionary
mode, and nothing that the FED or the government has done has put
people back to work. Bill Clinton's promise to end welfare as we
have known it looked good for a decade, but it has been replaced
by a politically permanent dole.
remains concerned about the stubborn resistance to recovery in the
job market. People know that an economy that cannot provide jobs
is a sub-par economy. Yet the total number of Americans employed
today is the same as in 1999, while
the population has moved from 279 million to 313 million.
The job market
is paralyzed. This is why Bernanke cannot hide. The voters are pressuring
Congress to do something. The Democrats lost the House in 2010 because
of the lack of jobs. If unemployment had been at 6%, the Democrats
would probably have won. It was not the Federal deficit that did
them in. It was the deficit plus no jobs.
is so bad today that something in the range of 17
million college graduates are working in jobs that require only
high school graduate's skills. These people serve as the reserve
army of the underemployed.
There is little
likelihood that new college graduates will find an improved job
market in the next two years. For high school graduates, it will
be even worse. They are in competition for jobs that are being filled
by college graduates low pay, low responsibility, entry-level
talk his way out of this corner. He is not an inspiring speaker
anyway. Greenspan was lively, even though he spoke in gibberish.
Paul Volcker was something of a spellbinder, if only because of
his 6'7" frame and his Red Auerbach cigar. Nobody remembers G. William
Miller, who served for 18 months under Carter. Arthur Burns smoked
a pipe and had the air of a kindly banker explaining things to a
small businessman looking for a loan. That takes us back to 1970.
So, Bernanke's dishwater dull testimony puts him at a disadvantage
in the era of YouTube. He makes his case the way a professor makes
his case to a group of freshmen at a community college. He drones
on and on about how things are getting better, but not much better.
wants things to get much better. The public is going to remain disappointed.
ON A STRING
has been applied to Federal Reserve policy since at least 1935.
The FED expands the monetary base, but commercial banks may not
lend as much as they are legally entitled to lend, given the increase
in the FED's holdings of paper, meaning the FED's balance sheet,
meaning the monetary base. Until 2008, there was no post-War case
of pushing on a string. It was discussed by analysts who predicted
price deflation in the early 1970s, but that turned out to be the
most inflationary peacetime decade in American history. The deflationists
looked silly even more silly than Keynesians who said that
price inflation would end recessions. It didn't.
Keynesians are in high cotton. They are seen by the financial media
as the only economists with a plan of action. Bernanke is their
most highly placed representative. But, in the area of job creation,
the old magic is no longer working. The monetary base is rising,
but there is not much consumer price inflation, but there is also
no consumer price deflation. Why? The answer appears to be the theory
of pushing on a string.
You can lead
a horse to water, but you can't make him drink. You can lead a banker
to a business in need of financing, but you can't make him lend.
The fact that an opportunity exists is not the same as a booming
ahead for local banks. Businesses are sitting on near-cash assets
because the economy is fragile, and managers want liquidity in any
future crisis. They cannot trust the banks to lend in a recession.
The banks are not lending today. The solution is near-cash reserves.
So, the fact that businesses are sitting on liquid reserves is no
guarantee that they will put these reserves to work by starting
new projects, buying new equipment, and hiring unemployed workers.
is like no other. The level of skepticism has persisted. This is
why Bernanke's words ring hollow.
recently, however, we have seen increased evidence that a self-sustaining
recovery in consumer and business spending may be taking hold. Notably,
real consumer spending rose at an annual rate of more than 4 percent
in the fourth quarter. Although strong sales of motor vehicles accounted
for a significant portion of this pickup, the recent gains in consumer
spending appear reasonably broad based.
line in "Jerry McGuire" seems appropriate: "Show me the money!"
Clara Peller's line in the 1984 Wendy's ads ring even truer: "Where's
is now out of control. Bernanke keeps hammering on this, because
it is true. He told the Budget Committee that the projections of
the Congressional Budget Office regarding the budget deficits are
grim. Then he tossed this hand grenade. Its projections are low-ball.
CBO's long-term budget projections, by design, do not account for
the likely adverse economic effects of such high debt and deficits.
But if government debt and deficits were actually to grow at the
pace envisioned, the economic and financial effects would be severe.
Sustained high rates of government borrowing would both drain funds
away from private investment and increase our debt to foreigners,
with adverse long-run effects on U.S. output, incomes, and standards
of living. Moreover, diminishing investor confidence that deficits
will be brought under control would ultimately lead to sharply rising
interest rates on government debt and, potentially, to broader financial
turmoil. In a vicious circle, high and rising interest rates would
cause debt-service payments on the federal debt to grow even faster,
resulting in further increases in the debt-to-GDP ratio and making
fiscal adjustment all the more difficult.
to look for the silver lining. He did not offer any. He ended with
this: "Our nation cannot reasonably expect to grow its way out of
our fiscal imbalances, but a more productive economy will ease the
tradeoffs that we face."
Read it again.
He has broken with the dominant Keynesian-monetarist-supply side
mantra. He has said that, if Congress does not cut spending, there
is no way to grow our way out of a fiscal crisis.
not going to cut spending. He knows that. We all know that. The
reality of this can be seen in this
clever video on the deficit as a row of shot glasses.
we find ourselves on the highway to fiscal hell. The Congress is
unrepentant. The President has proposed a $53 billion, six-year
expenditure on high-speed trains. As to who will ride on these trains,
we are not told. At what price per ticket? We are not told. To get
from where to where? Why? It is all a little vague, but the fact
that it will cost $53 billion to build, let alone operate, is not
give lots more testimonies. He will not find an audience of subservient
listeners. The members of the committees are aware that the economy
back home is in bad shape. Bernanke is trying to pass on the Old
Maid of unemployment to them. "It's Congress's fault. Blame Congress."
They are not going to cut spending. Then how will they shift blame
away from themselves? The target is obvious: the FED.
free ride is over. So is the Federal Reserve's.
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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