A Regional Fed President Torpedoes Bernanke

Recently by Gary North: Central Banks Are On the Defensive

Two events took place last week that would have been inconceivable a year ago. First, on February 20, Ron Paul won CPAC’s straw poll for the Republican Party’s nominee for President of the United States in 2012. CPAC is the Conservative Political Action Conference. He routed Mitt Romney: 31% to 22%. Sarah Palin did far worse: 7%.

Second, Charles Plosser gave a speech hostile to Federal Reserve policy. Plosser is the President of the Federal Reserve Bank of Philadelphia. He went public with his concerns. He delivered a speech to the World Affairs Council of Philadelphia on February 17. The WAC has chapters in major cities. It is an important outlet for people in high positions inside the Establishment. His speech is here.

He said: “The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOM.” You can say that again, Chuck!

His basic pitch was the same old story: the need for an independent central bank. That goes back to 1694: the founding of the Bank of England.

The Federal Reserve System is the enforcement arm of a banking cartel. It possesses this authority by means of a monopoly from the government. He never mentioned this. FED officials never do. They wax eloquent about checks and balances. So did he.

President Woodrow Wilson and Congress intentionally structured the Federal Reserve with checks and balances to protect and serve our diverse nation. Americans have a long history of suspicion toward the concentration of authority. So, our uniquely American form of a central bank strikes a balance between centralization and decentralization; between the public and private sectors; and among Washington, Wall Street, and Main Street. The result is a central bank that achieves a delicate balance: it permits policymakers a good deal of independence when conducting monetary policy but in return requires transparency and accountability to the American people.

Delicate balance, my foot. The system has achieved a 95% reduction of the dollar’s value since 1914, according to the inflation calculator of the Bureau of Labor Statistics.

Plosser does not trust Congress. He thinks Congress is always ready to inflate. He is correct. The problem is this: so is the FED.

Moreover, there can be a conflict between what monetary policy may be able to achieve over the short term versus its impact over the long term. For example, in the short term, it might seem expedient or even desirable to try to spur economic growth and employment by setting excessively accommodative monetary policy. Yet, this will only lead to very bad economic outcomes in the long term — including higher inflation, higher interest rates, and an eventual tightening of policy to control inflation that may be detrimental to the economy. These outcomes would be inconsistent with the long-term goals set by Congress. Delegating the decision-making to an independent central bank that can focus on long-term policy goals is a way of limiting the temptation for short-term gains at the expense of the future.

What makes him think the FED will show restraint? It didn’t in 2008.

The fiscal authorities should not think of the central bank as a source of funds or a piggy bank simply to avoid the difficult choices of cutting spending or raising taxes. Efforts to politicize central banks can be seen as a way for the fiscal authorities to strengthen their influence on the printing press to avoid difficult fiscal choices.

This is correct. What he did not mention is that the FED has almost always capitulated to Congress.

Also, to maintain the solvency and profitability of the largest banks, the FED inflates.

The highly placed members of the World Affairs Council believe the FED. They have no understanding of the FED’s history or what causes the declining value of the dollar. These people have been educated to believe the FED. Only since 2008 has a small minority of Americans finally sensed that something is wrong and the FED is the cause. These Americans are not WAC members.


Late in the speech, he fired this torpedo. He targeted the FED’s purchase of $1.2 trillion of illiquid Freddie Mac and Fannie Mae bonds in 2008.

In addition, the Fed greatly increased the size of its balance sheet and changed its composition, substituting less liquid, long-term assets, such as securities backed by mortgages guaranteed by Fannie Mae and Freddie Mac, for the short-term Treasury securities it typically held before the crisis. These policies have veered toward deciding how public money should be allocated across firms and sectors of the economy. I believe that if the government must intervene in allocating credit in this manner, such decisions properly belong to the fiscal authorities — not to the central bank.

The Federal Open Market Committee (FOMC) decided to bankroll the Federal government’s nationalization of the mortgage market in September 2008. It bought the bonds of these two bankrupt companies rather than letting the government make the decision and then increase its official debt to bail out these giants.

It is significant that Paul Volcker, the Chairman of the FED, 1979—1987, said in an interview over the weekend that the nation’s home mortgage market has to be restructured. He did not say that it must be made private. He said Congress must restructure it. The hybrid system did not work, he said: part government, part private.

If Congress restructures the system, it will not be made exclusively private. It will either be 100% government-run or else it will be a hybrid.

Plosser continued:

By making these unprecedented lending decisions, and at times being less transparent than we could have been, the Fed has opened itself up to criticism from various sources and has encouraged the idea that monetary policy decisions may be influenced by political or other special interests. This is not a healthy development.

That was torpedo #1.

I could hardly believe what I read. He is on target, except for one thing: criticism of the FED is entirely healthy. It is vital. It is growing.


He added this:

History is replete with examples in which central banks became agents for a nation’s fiscal policy or a means for a political party to remain in power. Just in the 20th century think of the hyperinflation in Germany between the Word Wars; think of Italy before the euro; think of the numerous financial crises in Latin America, and the current economic chaos in Zimbabwe to name just a few. The consequences — higher inflation, currency crises, and economic instability — are not good.

That this has happened twice in the first half of the twentieth century to European nations that lost two world wars is not surprising. That it also happened to an African tribal tyranny run by a Marxist is also not surprising.

Plosser implied that only the FED stands between us and a Congress ready to adopt hyperinflation. Let us hope that he is correct.

What he did not mention is the fact that, given the FED’s previous monetary inflation, the only way for the FED to stand in the GAP between Congress and hyperinflation is to adopt monetary stability. That will produce a depression, just as it almost did in October 2008. The FED blinked.

Plosser opposes Ron Paul’s bill to audit the FED. No surprise there. That is the #1 FED priority today — to see that this never happens.

He said: “Being independent does not mean the Fed is unaccountable. The Fed is ultimately accountable to Congress and the American people.” He said this with a straight face. This is the FED’s Party Line. That anyone still believes this is amazing. Congress merely asks an audit of the FED by a Federal government agency, and the FED goes ballistic.

The Reserve Banks’ structure also helps increase transparency by communicating economic and monetary policy objectives and actions through educational outreach and speeches like this one, as well as discussions with their boards of directors and other groups.

That is, the FED can send out well-paid Ph.D.-holding PR flaks to promote its Party Line.

The Fed has increased the degree of transparency regarding its monetary policy decisions over the past two decades. The FOMC issues a statement after each meeting, detailed minutes three weeks later, and verbatim transcripts after five years.

If the FED wanted to increase transparency, it would post a verbatim transcript of the FOMC meetings within 24 hours. Congress does this in “The Congressional Record.” Why not the FED? The FED fought this anti-delay tooth and nail two decades ago. It finally capitulated: a three-week delay.

The Fed publishes weekly balance sheets, monthly and quarterly reports, and detailed annual financial statements audited by an independent public accounting firm. The GAO also frequently audits many of the Fed’s functions, including its supervisory and regulatory functions and its services to the U.S. Treasury.

The Government Accountability Office (GAO) should audit all of the FED’s accounts, including the gold supply, every quarter. The GAO should have 100% control over the audit. This is what Ron Paul’s bill provides.


Then he fired another torpedo. He called for the sale of Freddie Mac and Fannie Mae bonds in the FED’s portfolio. Not all of them — why not? — but some.

To promote a clearer distinction between monetary policy and fiscal policy and to help safeguard the Fed’s independence, I advocate that we implement monetary policy using a portfolio that contains only Treasury securities, preferably concentrated in bills and short-term coupon bonds. Like Ulysses and the Sirens, the Fed could help preserve its independence by limiting the scope of its ability to engage in activities that blur the boundary lines between monetary and fiscal policy. Thus, as the economic recovery gains strength and monetary policy begins to normalize, I would favor our beginning to sell some of the agency mortgage-backed securities from our portfolio rather than relying only on redemptions of these assets. Doing so would help extricate the Fed from the realm of fiscal policy and housing finance. It will take some time for the Fed’s portfolio to return to its pre-crisis composition, but we should begin taking steps in that direction sooner rather than later.

Incredible! Who does he think will buy them? At what discount? And why not call for the sale of all of them? Yet even to suggest any sale is incredible. This was a torpedo into the side of the Good Ship Bernanke.

He went even further:

I also believe that the Fed’s 13(3) lending authority should be either eliminated or severely curtailed. Such lending should be done by the fiscal authorities only in emergencies and, if the Fed is involved, only upon the written request of the Treasury. Any non-Treasury securities or collateral acquired by the Fed under such lending should be promptly swapped for Treasury securities so that it is clear that the responsibility and accountability for such lending rests explicitly with the fiscal authorities, not the Federal Reserve. To codify this arrangement, I believe we should establish a new Fed-Treasury Accord, a step that I began to publicly advocate almost a year ago. This would eliminate the ability of the Fed to engage in “bailouts” of individual firms or sectors and place such responsibility with the Treasury and Congress, squarely where it belongs.

That was torpedo #2.

Finally, I think we must work harder to enhance and improve the transparency of the Federal Reserve. We have come a long way in the last 20 years, but the actions I have just mentioned — adopting an explicit Treasuries-only policy and eliminating or vastly restricting 13(3) authority through a new Fed-Treasury Accord — can help restore the public’s confidence and trust in the institution and preserve our independence to conduct sound monetary policy on behalf of the entire nation.

That was torpedo #3.

He even fired one at Greenspan and Bernanke.

Yet economic theory and the historical record suggest that turning monetary policy and thus the printing of money over to the fiscal authorities or the political process would be worse. Indeed, I would ask those who think the Fed kept interest rates too low for too long in the early part of this decade to imagine the outcome had the process been more political.


This speech was remarkable. He gave the same old bromides about FED independence, but, in doing so, he admitted that the FED has been involved in a series of unwise inflationary policies: keeping rates too low (read: still), bailing out private corporations (read: Wall Street), and bailing out the mortgage market. He wants this stopped.

So do I. A full gold coin standard would stop it, coupled with the abolition of legal tender for the currency. He did not mention this.

A speech from a FED bank president this hostile to Bernanke’s policies is an unusual event. He is still part of the FED Establishment, but he has raised questions that the media should cover, but won’t.

As word gets out on the Web, more voters will be exposed to the reality of the FED. This is a nightmare for the FED. The fact that Ron Paul won the straw poll for CPAC over the weekend indicates that word is getting out.

February 24, 2010

Gary 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.

Copyright © 2010 Gary North