Ron Paul Is Right

The Economist on Ron Paul and the Fed, a Critique

by Walter Block by Walter Block Recently by Walter Block: Handball Odyssey

Here is an interesting story from the Economist that mentions Ron Paul, not in a very positive light, sad to say. See my very critical comments on it, below.

The Federal Reserve under attack: Poked by pitchforks 

Nov 26th 2009 | WASHINGTON, DC From The Economist print edition

Curbs on the Fed’s independence are advancing through Congress

Populists and bankers have been at odds since America’s earliest days. Its first two central banks were shuttered in the 19th century in part because of their perceived closeness to financiers. In the wake of the financial crisis those tensions have bubbled back to the surface. The central bank is again in the cross hairs.

On November 19th the financial services committee of the House of Representatives voted — over the objections of its chairman, Barney Frank — to add a provision to a regulatory overhaul that would subject the Federal Reserve to examination by Congress’s investigative agency, the Government Accountability Office. Congress gave the GAO authority to audit the Fed in the 1970s, but exempted its monetary-policy and lending decisions. The new provision, pushed by Ron Paul, a conservative Texas Republican and Alan Grayson, a populist Florida Democrat, would eliminate the exemption. This could make the Fed less effective as a lender of last resort by making banks reluctant to borrow for fear that an audit would disclose their identity, and the Fed might become warier of raising interest rates for fear of one.

The animus towards the Fed is striking, considering that its unprecedented market interventions almost certainly averted a financial meltdown last year and a far more severe recession. But many congressmen care less about the disaster avoided than the injustice of bailed-out bankers taking home record bonuses as unemployment keeps rising. The Fed is now guilty by association, seen as too close to banks, too quick to bail them out and too generous and secretive when it does so. The Fed’s structure supplies fodder for this critique. The compromise that led to its creation in 1913 split responsibility for monetary policy between politically-appointed governors in Washington, dc, and the presidents of 12 regional banks, whose boards are appointed in part by private bankers.

The Fed and the Treasury now face the delicate task of trying to excise the Paul-Grayson provision from a regulatory overhaul they dearly want, in particular because it would create a process for avoiding future ad-hoc bail-outs. Their best hope is that the provision dies when the House bill is merged with one from the Senate. Chris Dodd, chairman of the Senate Banking Committee, has beaten back demands from senators in both parties for a similar provision. Mr Dodd’s own bill, though, is far from Fed-friendly. He would strip the Fed of its bank regulatory responsibilities and erode its independence by eliminating private bankers’ say in appointing regional Fed bank boards, and making the chairmen of those boards political appointees.

Ben Bernanke, the Fed chairman, has so far been personally spared the vitriol and seems likely to win a second four-year term; the Senate will hold a confirmation hearing on December 3rd. Tim Geithner, the treasury secretary, has been less fortunate. In his previous job as the New York Fed president he was at Mr Bernanke’s side for most of the bail-outs. A handful of congressmen have called (fruitlessly) for him to be fired. One of America’s great strengths, so Mr Geithner dryly remarked, is that anyone can criticise his decisions with the benefit of hindsight.

Now for my critical comments on this piece.

1. They mentioned Ron Paul. Any article in the mainstream press that does that, and The Economist certainly qualifies in that regard, can’t be all bad.

2. They spelled Ron Paul’s name correctly. Again, points for them.

Now for the criticisms (I am nothing if not even handed, giving credit where credit is due, but, critical where appropriate).

1. Ron is not a "conservative." Dr. Paul is, instead, a libertarian, as he never tires of mentioning. The follow up query often heard is, "Well, then, how can you be a member of the Republican party? How do you justify running for office under their banner?" And, as Congressman Paul often replies, there are liberal Republicans and conservative Republicans, why can’t there be libertarian Republicans?

2. The Economist claims that Ron Paul’s bill will "make the Fed less effective as a lender of last resort." This implies, without offering a shred of a reason in support, that the Fed is already "effective" in this regard. Where is the evidence for this contention?

3. In the view of this journal the Fed’s "unprecedented market interventions almost certainly averted a financial meltdown last year and a far more severe recession." Sure. Yeah, yeah. Without a doubt. Evidently, no one on the other side of the pond has read the Congressman’s End the Fed, nor the brilliant analysis of Tom Woods’ Meltdown.

4. What is wrong, pray tell, with being concerned about the "injustice of bailed-out bankers taking home record bonuses as unemployment keeps rising." This almost makes Ron out to be a leftist populist, concerned that some people’s salaries are too high. Nothing could be further from the truth. In the view of this libertarian (Republican) congressman, wages can rise to the stratosphere and be justified, as long as they emanate from the free choices of market participants. However, when government steps in with its subsidies, then, it is certainly legitimate to inquire into such matters.

5. "The Fed is now guilty by association." The Fed is merely an innocent bystander? No, as a plethora of Austrian economists have demonstrated, see here, here, here, here, here, here, here, here, here, here, here, here, here and here, our central bank has been intimately involved as the causal agent of the present economic malaise. The Fed has artificially lowered interest rates, encouraging entrepreneurs to misallocate resources in the direction of heavy, long-run projects (houses, cars), in the early stages of the Austrian structure of production. If you look at the business cycle for the 100 years before and after the creation of this monetary economic central planning bureau, it is relatively easy to discern its effect: destabilization of the economy. It had a dips and doodles before 1913, but afterwards it looks more like a roller coaster (I tried to find a diagram to illustrate this point, but was unable to do so. If any reader has one, please share it with me). The contrast between the two centuries would have been even greater had the 19th been earmarked by full laissez faire capitalism. It was not; it merely lacked the Fed.

6. As for Tim ("Busy Timmy") Geithner and the "benefit of hindsight," this shows a stupendous ignorance of the history of Austrian Economics, in general, and Austrian Business Cycle Theory (ABCT) in particular. Members of this school of thought have been analyzing the causes and cures of depressions since at least 1912, with the publication of this book by Ludwig von Mises. For other entries on ABCT, see here, here, here, here, here and here. For a specific anticipation of "Busy Timmy" see here. Hindsight, indeed.

The Economist has sometimes been called the modern day equivalent of De Tocqueville, an earlier and often very accurate European commentator on the U.S. condition. And, with some reason. It is often the case that this publication has seen, truly, into our condition in a way that has eluded many of us. Sadly, this is not one of those occasions.