The Federal Reserve, that private organization that determines interest rates and the availability of money in America, is going to be examined by a congressional committee whose chairman is worried it is setting the nation up “for a much larger crash in future.”
The plans for a review of Fed actions were announced today by U.S. Rep. Ron Paul, who heads the Domestic Monetary Policy and Technology Subcommittee.
The hearing will focus on the Fed’s recent practice of essentially loaning money to large banks and others for no interest at all.
“The Federal Reserve is relentless in pursuing a policy of zero interest rates, as manifest by their decision last week to engage in another round of quantitative easing and keep the federal funds rate at zero for another three years,” Paul said.
Fed Chairman Ben Bernanke announced just days ago another round of money printing by the U.S. government.
The Fed’s third attempt at such a maneuver will involve having the government buy $40 billion in mortgage-backed securities per month, with no set end date.
The central bank’s objective is to keep interest rates low, and thus trigger more spending and more hiring. The Fed has been trying to impact the economy for the duration of Barack Obama’s tenure in the White House, but its usual tool – lowering interest rates – is ineffective now since those rates have been approaching zero for most of that time.
Paul for years has advocated a full audit of the Federal Reserve, which routinely shrouds its actions in secrecy. Just last week, the U.S. House on a 327-98 vote adopted a bill that would set an audit process in motion. It now is going to the Senate, where Sen. Harry Reid previously has been receptive to the idea, although there’s no word whether he’ll take time for it now.
“The Fed is intent on ignoring that their policy of low interest rates in the past brought us the financial crisis of 2008 and their zero interest rate policy of today is prolonging the agony while sowing the seeds for a much larger crash in future,” Paul said today.
“Their manipulation of interest rates – essentially price setting – can only ever have destructive effects on the American economy. Artificially low interest rates continue to cause malinvestment and misallocation of resources throughout the economy. Savers and investors suffer from negative real interest rates, while the federal government takes advantage of the Fed’s zero interest rate policy to run up gargantuan fiscal deficits.
“These problems cannot and will not be remedied until the Fed stops manipulating the price of money,” he said.
The hearing is called, “The Price of Money: Consequences of the Federal Reserve’s Zero Interest Rate Policy,” and will be held on Sept. 21st, at 9:30 a.m. in room 2128 of the Rayburn House Office Building in Washington.
Among those expected to testify are James Grant, editor of Grant’s Interest Rate Observer, and Lewis E. Lehrman, senior partner, L.E. Lehrman & Co.
U.S. Rep. Ron Paul, R-Texas
Paul long has argued that the Federal Reserve simply is illegal. Some of his concerns have revolved around Article 1, Section 8 of the Constitution, which assigns to Congress the right to coin money.
There is no mention in the Constitution of a central bank, and it wasn’t until the Federal Reserve Act of 1913 that the Fed was created.
Paul previously has said, “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 percent of its purchasing power, aided and abetted by the Federal Reserve’s loose monetary policy.”
And he’s proposed repeatedly the idea of auditing the Fed to determine exactly what it has been doing and then begin making corrections. With a book titled “End the Fed,” he’s made no secret of his ultimate goal.
That the Fed is at least partly to blame for the financial problems that have developed in the U.S. seems not to be in dispute.
Bernanke said it was the Fed that caused the Great Depression, the worldwide economic downturn that persisted from 1929 until about 1939. It was the longest and worst depression ever experienced by the industrialized Western world. While originating in the U.S., it ended up causing drastic declines in output, severe unemployment and acute deflation in virtually every country on earth. According to the Encyclopedia Britannica, “the Great Depression ranks second only to the Civil War as the gravest crisis in American history.”
At a Nov. 8, 2002, conference to honor economist Milton Friedman’s 90th birthday, Bernanke, then a Federal Reserve governor, gave a speech at Friedman’s old home base, the University of Chicago.
After citing how Friedman and a co-author documented the Fed’s continual contraction of the money supply during the Depression and its aftermath – and the subsequent abandonment of the gold standard by many nations in order to stop the devastating monetary contraction – Bernanke added:
Before the creation of the Federal Reserve, Friedman and [Anna] Schwartz noted, bank panics were typically handled by banks themselves – for example, through urban consortiums of private banks called clearinghouses. If a run on one or more banks in a city began, the clearinghouse might declare a suspension of payments, meaning that, temporarily, deposits would not be convertible into cash. Larger, stronger banks would then take the lead, first, in determining that the banks under attack were in fact fundamentally solvent, and second, in lending cash to those banks that needed to meet withdrawals. Though not an entirely satisfactory solution – the suspension of payments for several weeks was a significant hardship for the public – the system of suspension of payments usually prevented local banking panics from spreading or persisting. Large, solvent banks had an incentive to participate in curing panics because they knew that an unchecked panic might ultimately threaten their own deposits.
It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function. The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon’s infamous “liquidationist” thesis, that weeding out “weak” banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics. At the same time, the large banks – which would have intervened before the founding of the Fed – felt that protecting their smaller brethren was no longer their responsibility. Indeed, since the large banks felt confident that the Fed would protect them if necessary, the weeding out of small competitors was a positive good, from their point of view.
In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. …
History records that in 1913 President Woodrow Wilson approved the Federal Reserve Act but later reflected that his actions “unwittingly ruined my country.”
Wilson said that since the U.S. system of credit is concentrated in the hands of a few, “we have become … one of the most completely controlled and dominated governments in the civilized world.”