Audit the Fed — and Shackle it, Too

By David Stockman, David Stockman’s Contra Corner:

The reason to be fearful about the economic and financial future is that we are in the thrall of a mainstream consensus that is downright meretricious. In attacking Rand Paul’s audit legislation, for instance, one of the time-servers on the Fed Board of Governors, Jerome H. Powell, let loose the following gem:

“As recent U.S. history has shown, elected officials have often pushed for easier policies that serve short-term political interests…..”

Perhaps Mr. Powell is a descendent of Rip Van Winkle and missed the last 20 years of history while doing LBOs at the Carlyle Group and helping Congress improve upon its enviable record of fiscal management while at the Bipartisan Policy Center. But whatever he was doing—snoozing or otherwise distracted—it most assuredly was not gathering evidence that “elected officials” were putting undue pressure on the Fed for “easier policies.”

There is exactly zero evidence that “politicians” had anything do with zero interest rates.  And ZIRP defines the ultimate level of “ease” according to Bernanke himself, who famously described his policies as positioned at the “zero bound.”

Indeed, given the very earliest expected date for “lift-off” in June, the Fed will have pinned the money market rate at zero for 80 months running. This unprecedented tsunami of “easy money”, of course, happened with nary a Congressman or Senator darkening the door at the Eccles Building.

Folks, this whole chorus of Fed governors—yesterday’s lineup included Richard Fisher and Charles Plossner—defending the sacred “independence” of the Federal Reserve is downright Kafkaesque. Rather than protecting the American public from meddling politicians, it is the American public that desperately needs protection from the depredations of an unelected monetary politburo that runs the entire financial system.

Say you have saved a quarter million bucks over a lifetime of working and scrimping, but wish to keep it safe and liquid in your retirement years. Well thank you “independent” governors of the Fed for the privilege of owning a bank CD that generates 40 bps or the grand sum $2.75 per day. That’s one visit to Starbucks each morning, but forget the cappuccino. It’s just black coffee for you!

In fact, the last time there was any significant agitation on Capitol Hill about the Fed being too tight was in the early 1990s. Back then that same quarter million dollar nest egg would have earned about $12,000 per year, not $1,000 as it present, or whole lot of Starbucks and other living expenses, too.

Stated differently, in their madcap pursuit of monetary “ease,” our unelected financial suzerains at the Fed have implemented the most sweeping income transfer in history. By chopping upwards of 300 basis points off the historic after-tax and after-inflation return on liquid savings, the Fed annually pilfers $250 billion from the nation’s $8 trillion of depositors and savers.

Needless to say, the money extracted from the hides of savers ends up in the income statements of the US banking system. There it gets booked as retained earnings and proffered as evidence that the Fed has put bank balance sheets back into the pink or health; or it is with increasing frequency allocated to dividends and buybacks, thereby fueling the Fed’s so-called  “wealth effects” levitation of the financial markets.

But however these extractions from the nation’s savers are channeled, they amount to nothing less than a giant fiscal policy maneuver; and one so repugnant to any sense of fairness and private property rights that it would otherwise have been laughed out of any standing committee on either side of the Capitol. So there is an easy money problem all right, but it originates in the Keynesian groupthink resident in the Eccles Building, not populist legislators attempting to one-up William Jennings Bryan or Wright Patman.

Come to think of it, we have actually not had a single Federal funds rate increase in nearly 10 years. Not even once, not even 25 basis points. In fact, during the 121 meetings the Fed has held during this century, it has either cut interest rates or held them constant 100 times.

But do not attribute that chronic, massive bias toward “ease” to untoward pressures from Capitol Hill. That outcome is the product of doctrine, not politics. It flows from utterly misguided and self-serving ideology of a handful of central bankers and their amen chorus on Wall Street that claims economic growth, jobs and improving living standards can be delivered by hitting the send button on the Fed’s printing press.

Back in the day, there was always a corporal’s guard of populists on Capitol Hill who pilloried the Fed for being too “tight”. Even the redoubtable Republican Senate Leader, Howard Baker, once braced Paul Volcker with a demand to “get your foot off the necks” of American business. But that was long ago, and by the end of the century not a peep emanated from Capitol Hill on the subject of tight money.

Nevertheless, it was actually after Congress went radio silent on the matter of monetary policy that the Fed’s balance sheet exploded. Indeed, during the first 86 years of its existence, the Fed’s balance sheet resembled the fabled Ohio State offense.  About $5 billion and a cloud of dust—year after year for decades running.

So be the year 2000, it had printed from thin air enough money to buy $500 billion of assets. By contrast, during the 13 weeks after the Lehman event, Bernanke printed $1.3 trillion and that was not owing to any Congressional mandate or gun to his head. Indeed, it was Bernanke and his Wall Street sidekick, Hank Paulson, who went up to Capitol Hill and put a gun to their heads, scarring them witless with a phony alarm that Great Depression 2.0 was just around the corner unless the Fed opened the monetary spigots, and Congress added $700 billion of TARP on top.

In all, the Fed’s balance sheet has expanded by 9X since the time on the eve of the dotcom bust that the last disciple of Wright Patman was carried out of the House chambers. So you have to think there must be something else behind all this sudden gumming from the Eccles Building about preserving the Fed’s independence.

Actually, there is. What our monetary politburo is really worried about is that Rand Paul is on to something that is fundamentally threatening to the regime. Namely, that ZIRP has crushed savers and rewarded Wall Street gamblers with free money for their carry trades, and that QE has been a bonanza for the fast money traders who front run the Fed but has done virtually nothing for the main street economy.

And here’s their even bigger fear. When this current massive financial bubble comes crashing down for the third time this century—and that may happen any time soon—the torches and pitchforks are sure to come out.

At length, there will be legislation, but not merely an audit. In the fullness of time it will become evident that the problem is, in fact, undue influence and “capture.” That is, capture by Wall Street and the subordination of monetary policy to the palpable fear in the Eccles Building of a hissy fit in the casino.

And that goes to the heart of the matter. Congress not only needs to audit the Fed; it should shackle it entirely by abolishing the FOMC and eliminating its discretion to peg interest rates, expand its balance sheet, and intervene proactively in the financial markets.

There is no need to replace the 12-member monetary politburo with a gaggle of 535 legislators on Capitol Hill. We have something called the free market, and that is the place where the right money market rate should be set by the interaction of users and suppliers of cash; where the yield curve should find its appropriate shape based on the interaction of savers and borrowers and the continuous flow of new information about the real world; and where the capital markets can perform god’s work of allocating debt and equity at prices which are honestly discovered by at-risk investors and issuers.

At the end of the day, American capitalism does not need recycled political hacks like Jerome H. Powell or clueless school marms like Janet Yellen to thrive. If we need a Fed at all, it is the one designed by Carter Glass 100 years ago. That is, a bankers bank that was intended to provide standby liquidity at a penalty above the free market interest rate in consideration for good collateral originating from inventory and receivables in the real economy. By David Stockman, David Stockman’s Contra Corner

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  9 comments for “Audit the Fed — and Shackle it, Too

  1. Petunia says:

    A central bank owned by banks is institutionalized corruption anyway you look at it. While I do favor a central bank run by the treasury, which is why we have a treasury in the first place, I fear the financial illiteracy of our elected officials. A bunch of lawyers is not what we need to formulate financial policy. Most housewives have a better financial grasp of the world than anyone in Congress.

    • Robert says:

      Ask yourself: what does any nation, with a functioning Treasury Department (as existed in the U.S. before 1913) have any need for a “central bank?” In fact, the very term was something of a dirty word and not used in the MSM until Greenspan. And deservedly so: the Fed has been providing trillions virtually interest-free to the very banks that own it. The only cabinet member to go to jail, Albert Fall of Teapot Dome notoriety, did so for accepting an interest-free loan. QE is virtually that, and limited only to the extent that new debt is created.

  2. Dan Romig says:

    Thomas Jefferson:
    “If the American people ever allow private banks to control the issue of their money …the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless …”

    The Fed is a private, repeat private banking cartel run by a few families who’ve been banking for centuries. It was created by President Woodrow Wilson in 1913.

    Woodrow Wilson:
    “Some of the biggest men in the United States are afraid of something. They know there is a power somewhere, so organized, so subtle, so watchful, so interlocked, so complete, so pervasive that they had better not speak above their breath when they speak in condemnation of it.”

    Professor Mujahid Kamran:
    “The U. S. is a country controlled through the privately owned Federal Reserve, which in turn is controlled by a handful of banking families that established it by deception in the first place.”

    Of course, President Obama will continue this power by replacing Attorney General Eric Holder with Loretta Lynch. Ms Lynch sat on the Board of Directors of the Federal Reserve Bank of New York from 2003 to 2005. The person she worked for there was Timothy Geithner, President of the Federal Reserve Bank of New York before becoming Secretary of the Treasury.

    The Who said it best, “Meet the new boss, same as the old boss.”

    • mick says:

      I know many people think this has no chance of succeeding, so they’re not following it. But let me make a case that may change your mind.
      The bill was previously stopped by the Democrats, but now the Republicans are supporting it and will likely pass it through the house.

      Obama and his veto pen are next. Obama is of course against this bill, but the timing is interesting because Obama will first have to veto Keystone pipeline bill. That will cost him a ton of political capital, which he will be in desperate need of if he wants to veto the Audit the FED bill, which not only has bi-partisan support, but also has 75% support with Americans.

  3. NY Geezer says:

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

    I believe that the above from Von Mises is applicable to any discussion of the Fed and other Central Banks.

    We have reached a point in credit expansion where debt has partially replaced taxes as the means to support government and much of the world’s dependent population. In the US we are probably at a point where debt could completely replace taxes. Maybe it should be used to completely replace taxes just as it is being used to inflate assets without end.

    Some raise the Von Mises argument that this cannot be done for long. But that raises the question how long is long? One month even one year is unacceptably short, but how about a decade, or 2 decades. In this economy 2 decades is an eternity. A brewing war might cut that period short anyhow.

    Obviously, nothing is permanent. Not governments, not empires, not monetary systems, and certainly not debt.

    The argument that we are borrowing from our children and grandchildren is fallacious. Everybody knows that what cannot be repaid will not be repaid. It appears to me that we are really borrowing from those who have a lot of money, e.g., savers, pension funds, oligarchs, drug lords, and wall street types, and the corrupt or obscenely rich who can’t seem to buy enough “safe” bonds. It also appears obvious to me that there is no intention of repaying most of this debt.. Borrowing has become the means by which money is voluntarily extracted by trickery from those who would otherwise successfully prevent the extraction of their money by straight forward taxation.

    • Petunia says:

      I agree, the financial industry always knew what it was doing. The politicians and regulators were aiding and abetting, and they too knew what they were doing. Somehow they thought there would be no consequences and so far they have been right, but the world is very fragile now. The reset they are aiming for might not come out they way they expect.

  4. Orlando says:

    David: I think you’re partially right. Yes the free market, not the FED should set interest rates. However, the most notable downside to the creation of the FED is that, over the last century, it has resulted in the confiscation of the monetary base from the American people, giving it to the banks and the government. Until this process is reversed, there will be no ‘free’ market setting interest rates or capital or labor markets of any kind in the USA.
    The process of returning the ownership of money to the people is not something that anyone in the room is talking about, that is the biggest problem with the central bank and the USA right now.

  5. Julian the Apostate says:

    As much as I despise Andrew Jackson his solution to the “banking problem” actually worked until 1913, when the Progressives derailed it…the burst of energy unleashed put the underpinning under everything we have today. I know I know that’s ‘old school’.

  6. Christoph Weise says:

    Audit the FED and the american people shall end the FED faster than Mrs. Yellen could yell

Comments are closed.