Audit the Fed

gildomar

What do people think of the Audit the Fed bill which overwhelmingly passed in the House last week? Good idea or bad idea? Why or why not?

Evo

Please post a link to it so members don't have to search.

Thanks.

gildomar

Sorry about that.

http://newyork.newsday.com/news/nati...tiny-1.3861707

edward

There has already been a limited audit of the FED by the GAO.

http://www.cnbc.com/id/43855944/GAO_...ith_Loan_Rules

I have a feeling that there are going to be some real surprises with a total audit depending on how far back they go. As with Fannie and Freddie, Fed members now and previous, are well embedded in Washington and on both sides of the isle.

chiro

Something that is as systemic to the economy and thus society at large (not just the US but the world) should be audited.

It's always a good idea that the more you have something that affects everything else, the more careful you need to be about how that thing functions and how it impacts everything else.

This is a reason why you have regulations, paperwork, red-tape and other such mechanisms to (at least attempt to) protect the other dependents.

For an entity with that much power, influence, and ability to affect the system in any way (don't think in terms of good and bad, but just any action), it makes a lot of sense to have something like this audited in a lot of detail.

binzing

chiro says it all pretty much. I have absolutely no understanding of how something SO huge, so central could ever be allowed to go so unwatched, it's downright irresponsible IMO.

edward

It all started with a duck hunting trip.

http://en.wikipedia.org/wiki/Jekyll_...ederal_Reserve

Locrian

I'm mostly with Chiro, except that I wouldn't want audits done at the congresscritters whim. Even if there is nothing to hide (no snickering, you), audits are expensive in time and money. Instead of letting Congress weild them like a club, put them on a regular rotation and have the appropriate party handle it.

JonDE

I was actually going to suggest just this same thing. Although I'm not sure what "the appropriate party" means.

I don't understand why we don't audit each and every department in rotation every 4-5 years or so. The company I work for audits each of our over 100 locations, each and every year. In the case that anyone fails, they get re-audited again at some point that year. I wont tell you what happens if you fail twice. If my company can do it each and every year and feel that it is beneficial, I think it would be safe to assume that the government can do it every 4-5 years.

chiro

I'd imagine that they probably have a very good documentation and record/filing system so the idea of getting information in a 4/5 year period is very generous IMO.

The only thing though that I would caution against doing it in a 4/5 year period is that "a lot can happen in 4/5 years" (especially for something like a central bank, particularly in points of crisis where a lot can happen in a day or a week).

CAC1001

IMO, it's a horrible idea. This bill is because of Ron Paul, who has always been very paranoid about the Federal Reserve.

It isn't really unwatched. The reason it has to act independent is so as not to have monetary policy politicized and subjected to the whims of politics. It already is politicized to some degree, but having an outright politicized central bank can be very dangerous to the economy. But the Fed is very accountable to Congress and must be audited, issue annual reports, and report to Congress. If subjected to the whims of politics, then you have people elected based on popularity influencing the control of the money supply, something that is difficult for guys with Ph.Ds in economics who spend their entire lives researching and trying to understand the subject.

chiro

A PhD in economics has nothing on someone who has worked within a variety of business environments who really understand markets, the flow of credit, and the issues regarding exchange and liquidity.

These people are going to understand economics a lot better than any PhD.

The idea of a central bank not having more oversight and auditing so that it doesn't 'damage' the economy is outright ludicrous.

A central bank (or any centralized system) has a much greater capacity to destroy the economy than anything or anyone else period: all centralized systems as an analog to this central bank will always have this property.

Politicians will always make things political: that's their job unfortunately to do so. The thing is that when you have such a huge dependency and case for systemic risk in relation to an entity known as a central bank, you need to be extra-anal about making sure it doesn't abuse its power and does it's job.

IMO, these central banks do nothing but trouble: any centralized system is in danger of being abused and history has a great track record of showing this. It is much better to have localized economies, diversity, and a lot of competition (and no monopolies) because this situation is more shock-proof to abuse and disasters.

You want an example of what's happening now? Look at the Euro-zone. This is a failed experiment: all the economies have different needs and produce differently and look what has happened in an attempt to expect all countries to perform not only under one economic constraint, but also a political one.

When things get centralized, things go wrong: we've had the US central bank since 1913 (almost a century) and your dollar has lost about 97% of its value since then. Retaining value of a currency is a lot easier when things are decentralized because it means that it's harder to game the system.

This whole centralization experiment is a failure and it's destroying far more than it ever has given in any form of a contribution.

CAC1001

Would have to completely disagree there. That's like saying an experienced race car driver understands the physics of race cars better then a physicist who studies the subject a lot. There is even a saying: "businessman make the worst economists." For example, look at Donald Trump. Smart businessman? Yes, I'd say. Knowledgable about economics? He seems like a total idiot in that subject from what I've seen.

And a politicized central bank has an even greater capacity to destroy the economy, because now the decisions regarding monetary policy are getting made based on politics as opposed to economic acumen.

They already do that. That's why it has to report to Congress regularly, issue annual reports, and be audited here and there.

The Federal Reserve is an imperfect solution to the problem of who will control monetary policy. It's the third attempt in U.S. history at getting a central bank correct. The first two were government-run operations and had to be shut down due to corruption. Of course, a purely privately-owned central bank would be a bad idea too. The Federal Reserve is not purely private, although many among the Libertarian crowd think it is (Ron Paul included). But it's actually a hybrid institution. Without a central bank, you have the following options to control the money supply:

1) Gold standard (generally regarded as a terrible idea due to its inflexibility and also the lack of supply of gold, although this is what the Libertarians want)

2) President in control of the money supply (BAD idea)

3) Congress in control of the money supply - now you have the branch of government in control of spending also in control of the money supply for the economy. And in addition, they are going to make decisions on it based on politics as opposed to acumen. So again, BAD idea.

No argument there.

Inflation at a healthy, low level is not a bad thing for an economy.

Would have to disagree. On the contrary, I'd say that the Federal Reserve has been extremely successful. The strength and resiliency of the U.S. economy, currency, and Treasury instruments is unparalleled in human history.

chiro

Economists do not have working theories of economies: they get it wrong all the time, if they knew how to avert the hundred-year floods, they would but they don't.

Look at what they are trying to do now: it's insane. You can not pay off debt with debt: it just doesn't work. You don't need a PhD in economics or applied mathematics to know this: it's common sense but for a lot of these people it's not.

A businessman is able to understand their own little inner market: it doesn't mean they will understand markets in general, but they will know a lot about their own little markets that they deal with and the context of those markets.

Economists won't know this: they might have basic principles and a superficial understanding but they have no context, and people that want to manage economies need context.

Again back to common sense: in the old days you couldn't get a loan unless you had a good credit history and even then the size of your loan was limited. Nowadays the loans that have been made have had no such requirement.

Again common sense: if you don't think someone can pay back, then don't give them the loan.

Another one: leverage. Banks and financial institutions are leveraged up to ridiculous levels. What does this mean? It means if someone is leveraged up 50 to 1 and there is a movement of about 2%, it can wipe out the entire institution.

Capital requirements are there, but they are extremely low and sometimes they aren't even enforced.

You can talk about the theory of economists, but the truth is that they don't really know how markets work because if they did, and they took their job seriously to avert such catastrophes' they would have but they didn't.

People that run businesses need to know about their own markets in order to survive and Donald Trump would probably know a bit more about real estate markets than most economists, just like a mom-and-pop store would know more about their own economics of their own little market.

If you get all these people in the diversity of markets together and ask them for suggestions, they will do a hell of a lot better than a PhD crunching matrix equations on a computer because the business people have context and the economist doesn't.

Again this so called economic acumen is something I'd really like to see, because if it existed, then why all the hundred year floods (The term is from Banks and Dunn risk management book in case you are interested)?

Right now interest rates are basically zero. This hurts people that save money and want some kind of reward for doing so (i.e. interest). When this is near zero, people don't save: they borrow.

When people borrow, debt grows. When debt grows and there is no real capital problems happen: big problems.

What happens when you have more debt than you could possibly pay back? You get chaos literally: riots, breakdowns of society, and at some point, possible martial law. It's happening in Greece and it has happened in countries where they have defaulted or gone through a hyper-inflation scenario.

This is what happens when a decision like this is made and it's not good for anyone but a small select few group of people: even most business people that are rich are against this because it means that they can't sell their goods and services and grow themselves as they would in a real productive economy.

You can talk politics all you want, but the fact is that when you give one body this much power, it's only a matter of time before SHTF.

Did you see Ron Paul ask Ben Bernanke where the money went from the US FED to other central banks? He asked him if he could find out where the money in central bank swaps went and Mr Bernanke replied "Uhhh no". I can get the C-SPAN video if you want to see it.

Also there has never been a full audit: only partial audits.

The reason why Gold has still survived as a unit of value for five thousand years: it can't be counterfeited easily (but there are techniques known as salting where tungsten is put in the centre since it has the same density), it's supply is restricted, it can divided into units, and for these and other reasons, it gains trust as a unit of exchange and a store of value.

This is why gold is used. There are many ways you can use precious metals: currently one way being talked about now is the idea of a floating value standard for each piece of metal. The idea is that the value of each unit of currency is not explicit but changes based on the changing nature of the economy, and the discussion is that it can be used in parallel with a fiat currency.

But ultimately it boils down to this: fiat systems always end badly because the power of the authority who governs the management of the system is abused. The Romans tried to salt their coins to make it appear like they had more wealth than they had, and this pattern has been done to death.

Gold is a way for people to retain their wealth (inflation is a way to steal it away) and it's a way for people to establish some kind of trust in terms of the exchange of stuff.

Trust is the key word here: trust is the number 1 thing any economy and any kind of trading activity needs and right now these fiat systems are losing trust and this destroys every aspect of the economy.

Investors won't touch you because they can't trust you and when that happens what are you going to do? Well you can print more money, but then who is going to trade with you or do business with you? What are you going to do when you need oil or food that is in another continent using another currency? You're screwed is what you are going to do.

The thing about fiat currencies is that the trust element gets broken and this causes the kinds of things like panic, bank runs, dollar collapses, and so on: this always precedes these cases.

Gold for the reasons and more above, enforces trust in a way much greater than a paper note and this is why it's lasted for thousands of years.

You also might want to check how many central banks are buying gold: if it was worthless, why would they buy it?

Cmon get real. This idea that one person can make important decisions is ridiculous. The president doesn't control the money supply: people that are smart enough and with the right 'mindset' are chosen to do these jobs.

Right now we have one institution responsible for the current (but dying) world reserve currency and while it's not one man, it's not really a great deal more.

Again the point of decentralization is to get rid of a single point of failure that would ultimately lead to systemic risk: we have systemic risk right now and it has been demonstrated in so many ways. The first is the FED with it's interest rate policies and stimulus, and another one is the example recently with MF Global with its theft of customer segregated funds (some were returned but not all and they were never formally prosecuted).

We have systemic risk right now and the way to minimize this is through decentralization: centralization is what causes the potential for all the really bad systemic risk.

Yes indeed they are and Mr Bernanke did mention that to Ron Paul when he asked a question about this (again on C-SPAN).

The FED has been left alone and Ron Paul is indeed trying to do something (from getting an audit to abolishing the FED entirely depending on the question sessions and interviews that you see).

The point I am making is again that centralized things like this with a huge potential for extreme systemic risk are not good and there are so many examples in finance alone (low interest rates, LIBOR scandal, MF-Global, EURO-ZONE breakdown) that show what happens when this is the case.

It's not hard to understand from any point of view: you can take an analytic systems view or you can just take any other view, but the bottom line is that the systemic risk and potential for abuse is just too great to be given to any collection of human beings.

Inflation eventually robs people of their wealth.

This idea of creating economic activity for the sake of economic activity is also really naive. Economic activity should be based on some level of real capital in the system.

Capital is not credit: Credit is something that is made up but Capital already exists. If credit and capital are treated as one in the same, then you get problems because when there is no capital, then there is no real way to create a proper productive capacity.

Look at what is happening now: lots of credit, but where is the real capital?

Investors do not like situations of low or no capital. You need real capital to get things going not stimulus. Credit arrangements in the classical sense are based on getting back some kind of real capital for the credit being issued: in other words, you make a credit arrangement in the hope that you will get back something that is actually worth something.

Banks are not stupid: they don't want credit, they want things that have intrinsic value not related to a medium of exchange (like land and property, gold, stuff like that). They have the power to make all the credit (within limits like the ones in fractional reserve standards) they want, but ultimately they are going to be interested in getting real wealth not the stuff they can make up when they want to.

Also the other thing is that financial institutions have capital requirements (even though they are ridiculously low) so even for them, if the regulations are taken seriously, they have interest to have some kind of productive capacity with real capital in the system to keep functioning themselves.


Yeah ok.

So why now do you have downgraded credit ratings for the dollar? Why are food and gas prices so high? Why are you as a country in so much debt? Why the need to bail-out entities that would be otherwise insolvent? Why so much unemployment in a strong economy?

Why are other countries getting rid of US treasuries (like China)? Why is your own central bank buying up your own bonds? Why do you have more than 40 million US people on the electronic food card program (EBT)?

And why then do you have these other movements like the BRICS starting up if the dollar is so valuable?

These questions should really be thought about if you want to think that the US economy and it's currency are really as strong as you say they are.

chiro

Also, you might be interested in this:

www.youtube.com/watch?v=s8ooNQ0tPFE

CAC1001

That the economy is very difficult to model doesn't mean the alternative is to politicize monetary policy.

Sure, but that's like saying that a person will understand their own little individual "economy." None of that is any good for handling economic policy.

They may or may not, it depends, but these economists are seeking to manage the money supply. What businessman could replace them on that?

I agree with you wholeheartedly on the lax standards in the financial and banking industry, but that is due more to politics and greed on the part of the financial institutions then economists. Many economists have for years pointed out the flaws of such things for the reasons you cite. The economists at the Federal Reserve I think take their jobs very seriously, but they are not perfect. Markets tend to act in such a way where it only becomes obvious in hindsight why a market did what it did, whereas before the movement occurs, no one or few saw it coming.

If you are talking about suggestions for the general economy, then smart policymakers would be wise to ask both economists of different stripes and lots of business owners of all sizes to see what they have to say. However, a group of business owners is not going to know how to set monetary policy for the economy.

Like I said, the strength and resiliency of the U.S. economy and currency.

Don't confuse consumer debt with the federal debt. The national debts are why countries like Greece have rioting, because the government there is having to engage in austerity measures. And to a degree, those riots aren't because the people are really suffering, it's because they are just acting as adult children who have been coddled for many years by the government. You mention low interest rates, well what happens with high interest rates? You hamstring economic growth, you can cause unemployment to go up, more businesses to fail, and that kind of stuff can lead to real desperation and rioting on the part of people.

What you should remember is that the decisions made by the economists at the Fed involve imperfect information and also a lot of times contradictions. They are extremely complex decisions with a lot of calculated risks and no guarantees.

How is it only good for a small, select group of people? Of course most business people are against it, because higher interest rates make borrowing money more expensive. That is one of the reasons why the Fed needs to be independent of politics, because Congress always harps when the Fed raises interest rates. For example, in 1981, when the Fed hiked interest rates to kill the inflation at the time. Congress railed as the economy sank into the worst recession since the Great Depression at the time. Paul Volcker (the Fed chairman at the time) was called the worst Federal Reserve chairman in history and legislation was introduced to force the Fed by law to reduce interest rates. The only reason the Fed was able to act so brazenly was because of the support and cover given to it by the Reagan administration.

Not really. Not when it's a quasi-governmental, quasi-privatized institution that is not strictly government-run or private-sector. I'd say it is when you take such an institution as that and politicize it that the trouble will really start. The current crisis is not because of the Federal Reserve, it's because of lax financial and bank regulation. You could maybe claim that the Fed contributed to it by keeping interest rates low, which after the Dot Com bubble deflated then helped move into inflate the real-estate bubble, but aside from the lax regulation that helped cause that, do you really think that if the politicians were in charge they themselves would have raised interest rates and risked hurting the economy a lot more? Of course not. If you think the Fed should have raised interest rates, then that is all the more reason for it to be independent of politics.

Of course he wouldn't as that could politicize the operation too much.

Gold is too limited in supply for a modern economy. And a gold-backed system can be manipulated as well. Also, going onto a gold standard means subjecting the U.S. economy to the world supply of gold (which right now may well be in a bubble).

Trust is why the U.S. economy is so strong in spite of all that has occurred. Tying the U.S. money supply to the supply of gold might well erode that trust.

Much of what causes all of that has become much more understood then it was in the early days of economics, and thus only tends to happen in Third World countries.

Not saying it's worthless, but I don't place nearly as much value in it as many others. I would trust a paper note that is backed by the strength of the U.S. economy a lot more then a note backed by a piece of metal such as gold, which ultimately is pretty worthless when you get down to it. In times of economic calamity, gold has not always shown itself to be a reserve of value. High-quality jewelry has, but not gold. When the Japanese invaded China, wealthy families there traded their jewelry for things needed to survive, not gold. Gold was pretty worthless then. When Jews fled Germany, they took their jewelry with them to trade.

The Federal Reserve cannot do anything about the out-of-control spending on the part of the current Congress and President. It has warned, repeatedly, that they are taking the country over a financial cliff.

You can't decentralize the nation's monetary policy.

Some things need centralization as there's just no other choice. In terms of finance, the U.S. system is in many ways very decentralized. Decentralization can have its own problems in that it can make figuring out the source of a problem in the system very difficult. It also doesn't mean risk won't be more concentrated. The Canadian system, by contrast, is very centralized, albeit regulated to spread risk equally throughout the system. As for Ron Paul, he adheres to a very ideologically-driven set of economic beliefs and has been after the Fed for years due to his conspiratorial view of it.

Which is why the Fed is structured to be rather decentralized. Noe one aspect of it has absolute power. You give it the likes of Congress and you'll see far more abuse then could ever occur from the current Fed.

Over time, but high levels of inflation is where that's a problem.

I'm no advocate of stimulus.

1) Credit downgrade can be blamed on the Presidency and Congress, those people that folks like Ron Paul now want to have a much greater say in monetary policy it seems.

2) Food and gas prices are due to weather, turmoil in the Middle East, and other factors rather unrelated to the centrl bank.

3) Debt of the country is due to Congress, the Presidency, and politics overall.

4) Financial institutions needed to be bailed out to prevent credit from freezing up and crashing the whole economy

5) Unemployment is at what many a Third World country would consider a healthy level. Ask someone who came out of for example Ukraine right after the Soviet Union collapsed and they'd laugh at the notion of the current U.S. economy as bad. Americans consider it bad because we are so used to it having very low unemployment and higher levels of growth. The fact that the U.S.'s bonds are still so in-demand in spite of all the turmoil that is a sign of how strong the economy really is. And the economy will recover, especially if the Congress and Presidency get responsible with handling spending.

The central bank is among the largest holders of U.S. debt. That is nothing new. To the extent China is getting queasy about U.S. debt, it's again because of the fears about the excessive U.S. spending, which the Fed has no control over. 40 million people on EBT is due to the recession, itself due to the real-estate bubble and financial crises, themselves due to lackluster regulation over the financial system.

Let's see each of the BRICS go through a major economic calamity and see how they do. The U.S. economy as proven its resiliency by having survived multiple calamities. The BRICS have not.

MisterX

Are you basing this on something? Retaining the value of the dollar was not the goal.

It is a goal of most central banks that inflation should be 2 to 6 percent annually. So the dollar should retain about 1/1.02 to 1/1.06 of its value in terms of goods each year. It's been about 99 years.

1 - (1/1.02)^99 = 0.8592
1 - (1/1.06)^99 = 0.9968

So if the inflation policy objectives were achieved, the dollar was supposed to lose between 85.9% and 99.7% of its value during that time period, and 97% percent is safely within that range. There are reasons why a positive (but not too high) rate of inflation is a policy target.

In the years since 1913 the United States has become the richest and most power nation ever in the history of the Earth. Do you really want to advocate the removal of such a central piece of its economic system, without proposing a replacement?

The Federal Reserve has repeatedly infused money into our economy since the 2008 financial collapse, and if this was not done the results might have been disastrous. By this I mean, potentially, negative inflation, declining revenues, and much higher unemployment. Federal Reserve policy has helped avert an even worse economic catastrophe like the great depression.

I don't know if I am doing this enough justice, but I maybe some people will read this and understand that there are serious issues with your opinion.