Audit The Federal Reserve?

[southern california guy]

I stumbled onto this when I doing an internet search on Ronald Reagan. Apparently Ron Paul was one of the people pushing for it.

I confess that I don't really understand what is meant by an audit, and pros and cons of it. Could somebody help?

[NotreDame]

Well, Ron Paul outlines some of the pros on his webpage here (relevant portion pasted below.)  The fed prints money out of thin air and does all sorts of crazy things with it.  Not all are disclosed and without auditing you can never no if the fed is being honest (which is why public companies have auditors sign off on their quarterly statements as proof they aren't cooking the books.) 

 

It looks like Ron Paul is also suspicious of them engaging going in derivative deals with domestic and foreign banks (ie. the "agreements with banks" that the GAO cant' see, currency swaps, etc), which would probably be "off the books" to some degree (or perhaps entirely.)  Keep in mind that currency swaps are (thanks to Goldman Sachs) what allowed Greece to run a higher deficit than allowed by the EU (by using off the book currency swap derivatives) and what provided the catalyst to plunge them into their current debt crisis.

 

There are also people that think the Fed manipulates all sorts of markets and just refuses to tell anyone. 

 

I could google around for more later.  It's not a simple topic since it helps to fist understand the fed and banking, but that takes time.

 

(bolding below is mine)

 

Ron Paul introduced bill H.R. 1207 on February 26, 2009 with the following speech to Congress:

    Madame Speaker,

    I rise to introduce the Federal Reserve Transparency Act. Throughout its nearly 100-year history, the Federal Reserve has presided over the near-complete destruction of the United States dollar. Since 1913 the dollar has lost over 95% of its purchasing power, aided and abetted by the Federal Reserve’s loose monetary policy. How long will we as a Congress stand idly by while hard-working Americans see their savings eaten away by inflation? Only big-spending politicians and politically favored bankers benefit from inflation.

    Serious discussion of proposals to oversee the Federal Reserve is long overdue. I have been a longtime proponent of more effective oversight and auditing of the Fed, but I was far from the first Congressman to advocate these types of proposals. Esteemed former members of the Banking Committee such as Chairmen Wright Patman and Henry B. Gonzales were outspoken critics of the Fed and its lack of transparency.

    Since its inception, the Federal Reserve has always operated in the shadows, without sufficient scrutiny or oversight of its operations. While the conventional excuse is that this is intended to reduce the Fed’s susceptibility to political pressures, the reality is that the Fed acts as a foil for the government. Whenever you question the Fed about the strength of the dollar, they will refer you to the Treasury, and vice versa. The Federal Reserve has, on the one hand, many of the privileges of government agencies, while retaining benefits of private organizations, such as being insulated from Freedom of Information Act requests.

    The Federal Reserve can enter into agreements with foreign central banks and foreign governments, and the GAO is prohibited from auditing or even seeing these agreements. Why should a government-established agency, whose police force has federal law enforcement powers, and whose notes have legal tender status in this country, be allowed to enter into agreements with foreign powers and foreign banking institutions with no oversight? Particularly when hundreds of billions of dollars of currency swaps have been announced and implemented, the Fed’s negotiations with the European Central Bank, the Bank of International Settlements, and other institutions should face increased scrutiny, most especially because of their significant effect on foreign policy. If the State Department were able to do this, it would be characterized as a rogue agency and brought to heel, and if a private individual did this he might face prosecution under the Logan Act, yet the Fed avoids both fates.

    More importantly, the Fed’s funding facilities and its agreements with the Treasury should be reviewed. The Treasury’s supplementary financing accounts that fund Fed facilities allow the Treasury to funnel money to Wall Street without GAO or Congressional oversight. Additional funding facilities, such as the Primary Dealer Credit Facility and the Term Securities Lending Facility, allow the Fed to keep financial asset prices artificially inflated and subsidize poorly performing financial firms.

    The Federal Reserve Transparency Act would eliminate restrictions on GAO audits of the Federal Reserve and open Fed operations to enhanced scrutiny. We hear officials constantly lauding the benefits of transparency and especially bemoaning the opacity of the Fed, its monetary policy, and its funding facilities. By opening all Fed operations to a GAO audit and calling for such an audit to be completed by the end of 2010, the Federal Reserve Transparency Act would achieve much-needed transparency of the Federal Reserve. I urge my colleagues to support this bill.

[PhuturePriest]

We don't need to audit the Federal Reserve, we need to get rid of it.

[NotreDame]

We don't need to audit the Federal Reserve, we need to get rid of it.

 

I imagine that Ron Paul would agree and he'd argue that by actually auditing everything the fed does and exposing it to the public, the people would come around to wanting to restrict and/or even end Fed activity.

[Winchester]

This is another issue that amuses me. I have many friends who argue against monopolies. They generally support the Federal Reserve, which is a banking monopoly. I am amused by this because I am a bad person.

[PhuturePriest]

I imagine that Ron Paul would agree and he'd argue that by actually auditing everything the fed does and exposing it to the public, the people would come around to wanting to restrict and/or even end Fed activity.

 

"There should be NO Federal Reserve system!" - Ron Paul

[NotreDame]

"There should be NO Federal Reserve system!" - Ron Paul

 

Further reading:

http://archive.lewrockwell.com/rothbard/frb.html

[John Ryan]

I find it somewhat comical that people have been fooled into thinking the Federal Reserve is such a diabolical institution. I understand why Ron Paul who adheres to Austrian Economics thinks that the fundamental idea of a central bank that interferes with the holy free-market is disastrous and unethical. Yet, somehow I doubt many of the people who are led into believing the Federal Reserve is monstrous know much about Austrian Economics, much the less understand Austrian Business Cycle theory. While I admire the Austrians philosophical rigor, I think the general theory makes too many leaps in logic and their theory of the business cycle makes no sense to me. I find it quite comical that many staunch free-market Austrian despise the rather free mechanism of fractional-reserve banking. I guess the free market does not work so well after all if you have to make modern banking illegal. 

 

Empirically, I find the assertion to be equally absurd. In the period prior to the Federal Reserve (and under the gold standard) monstrous deflation and economic crises were insanely commonplace. Crises like the one we are experience now where so mundane for national economies. 

[John Ryan]

Further reading:

http://archive.lewrockwell.com/rothbard/frb.html

 

I find it difficult to take anything Murray Rothbard says seriously. I think he is literally a psychopath. In his Ethics of Liberty his worship of the market and his idea of liberty leads him to such evil conclusions such as that a parent has no positive duty to ensure his or her child lives or dies. Rothbard vehemently denies that any authority should stop parents from letting their children from starve to death. It is absurd to force parents to feed their children. What an immoral burden! I do not think this is an ad hominem attack, because such a logic is intimately tied together with his entire philosophical system. In other words, I think everything Rothbard writes about the economy is based on his moral belief that intervention in the free-market is immoral, not that interventionism is somehow less supportive of human flourishing. Rothbard would not give a darn if half the population starved to death.

 

An Austrian I was talking tried to justify the philosophy, not by saying that somehow free market economics will increase our relative prosperity (that somehow freeing up labor markets will raise everybody's wages), but rather that a human being can live a decent life compared to third world countries on 10,000 USD a year. 

Edited December 4, 2013 by John Ryan

[NotreDame]

Thanks Mr. John Ryan.  Thanks for all your opinions.  I am guessing we can chalk you up as against auditing the Fed?

[Winchester]

I find it somewhat comical that people have been fooled into thinking the Federal Reserve is such a diabolical institution. I understand why Ron Paul who adheres to Austrian Economics thinks that the fundamental idea of a central bank that interferes with the holy free-market is disastrous and unethical. Yet, somehow I doubt many of the people who are led into believing the Federal Reserve is monstrous know much about Austrian Economics, much the less understand Austrian Business Cycle theory. While I admire the Austrians philosophical rigor, I think the general theory makes too many leaps in logic and their theory of the business cycle makes no sense to me. I find it quite comical that many staunch free-market Austrian despise the rather free mechanism of fractional-reserve banking. I guess the free market does not work so well after all if you have to make modern banking illegal. 

 

Empirically, I find the assertion to be equally absurd. In the period prior to the Federal Reserve (and under the gold standard) monstrous deflation and economic crises were insanely commonplace. Crises like the one we are experience now where so mundane for national economies. 

 

Do you think that credit expansion did not occur prior to the Federal Reserve?

 

There's nothing uniquely Austrian in the common opposition to the Federal Reserve's monopoly privileges, fractional reserve banking, or even in believing that credit expansion causes problems. ACBT is a particular explanation of the mechanism, and while I'm not entirely convinced it's covered all the bases, it's far more logical than the prevailing "schmoo" theory used to "jumpstart" the economy.

 

There was a tendency to view drops in prices as a sign of depression. Turns out there's more to depressions, and that falling prices can occur without any depression at all. It's not a surprise that pro-inflationists have unreasonable fears of deflation. 

 

Not every alleged gold standard is equal. Banks can and do coordinate credit expansion even with a gold standard.

[Winchester]

I find it difficult to take anything Murray Rothbard says seriously. I think he is literally a psychopath. In his Ethics of Liberty his worship of the market and his idea of liberty leads him to such evil conclusions such as that a parent has no positive duty to ensure his or her child lives or dies. Rothbard vehemently denies that any authority should stop parents from letting their children from starve to death. It is absurd to force parents to feed their children. What an immoral burden! I do not think this is an ad hominem attack, because such a logic is intimately tied together with his entire philosophical system. In other words, I think everything Rothbard writes about the economy is based on his moral belief that intervention in the free-market is immoral, not that interventionism is somehow less supportive of human flourishing. Rothbard would not give a darn if half the population starved to death.

 

An Austrian I was talking tried to justify the philosophy, not by saying that somehow free market economics will increase our relative prosperity (that somehow freeing up labor markets will raise everybody's wages), but rather that a human being can live a decent life compared to third world countries on 10,000 USD a year. 

You've read the entire book?

 

I myself haven't, but in my understanding of his philosophy from other works, the rejection that C has a right to inflict penalties or use aggression on B is not an approval of B's actions, even if those also involve the suffering of A, unless B is aggressing against A.

 

This also doesn't indicate that one "doesn't care". I, for instance, don't believe in throwing prostitutes or their customers in rape cages, but I do not approve of prostitution.

Edited December 4, 2013 by Winchester

[NotreDame]

So... I wasn't going to take this post seriously, but I have plenty of free time, so in case some of the lurkers are interested in learning more about different economic ideas, here goes...

 

>>> I find it somewhat comical that people have been fooled into thinking the Federal Reserve is such a diabolical institution.

 

Glad you think I got fooled and that you find it funny.  Thank you.

 

>>> I understand why Ron Paul who adheres to Austrian Economics thinks that the fundamental idea of a central bank that interferes with the holy free-market is disastrous and unethical.

 

You understand why Ron Paul thinks that?  Why is that then?  Is it because he's been fooled like the rest of us. 

 

>>> Yet, somehow I doubt many of the people who are led into believing the Federal Reserve is monstrous know much about Austrian Economics, much the less understand Austrian Business Cycle theory.

 

OK, glad you think most of us are holding opinions based on ignorance.  Right back at ya!

 

>>> While I admire the Austrians philosophical rigor, I think the general theory makes too many leaps in logic and their theory of the business cycle makes no sense to me.

 

Care to give some examples of these leaps in logic?  BTW - Sometimes if something doesn't make sense to me, I stop and wonder if I really understand it at all.

 

>>> I find it quite comical that many staunch free-market Austrian despise the rather free mechanism of fractional-reserve banking.

 

What is free market about a banking system that exists only via the existence of numerous regulatory agencies, taxpayer funded bailous, federally run deposit insurance, and thousands, if not millions of pages of regulations?

 

>>> I guess the free market does not work so well after all if you have to make modern banking illegal. 

 

#1 - Non sequitur.  #2 - removing laws supporting and protecting banks, doesn't make banking illegal anymore than repealing obamacare would make health insurance illegal.

 

>>> Empirically, I find the assertion to be equally absurd. 

 

Which assertion?

 

>>> In the period prior to the Federal Reserve (and under the gold standard) monstrous deflation and economic crises were insanely commonplace.

 

First, deflation means that a person's real wages and real savings go up.  What's so bad about that?  

 

In nominal terms there were periods with large decreases in industrial production but in real terms many of these "panics" were actually periods of growth.   Even in nominal terms, the frequency of economic "crises" increased after the introduction of the fed relative to the period before.

 

 

>>> Crises like the one we are experience now where so mundane for national economies.

 

Actually, crises like we have now, where unemployment and prices rise at the same time, are much worse than what we had before (where prices would go down during periods of increased unemployment) and would have been unheard of prior to the fed.  Now?  They are common-place. 

 

---

 

OK, so if you want to learn about the biggest difference between the austrian theory and the rest when dealing with a recovery (or attempted recovery), it has to do with the hetergeneous nature of capital:

 

http://www.fee.org/the_freeman/detail/austrian-capital-theory-why-it-matters

 

and here is a little bit on inflationary recessions.  Probably not the best article, but the most convenient overview via google:

 

http://mises.org/econsense/ch67.asp

 

 

Edited December 4, 2013 by NotreDame