I support an Audit of the Fed.
I just read a short newspaper article criticizing Rand Paul's Senate bill. The article noted that Senator Cruz has jumped on the bandwagon.
When Ron Paul began calling for an audit of the Fed, I was a bit irritated. I am well aware of the crazy conspiracy theories regarding the Fed. The secret international banking cabal is making huge profits from its ownership of the Fed, with some kind of confused notion that each dollar created is a profit for the Fed's owners. I even wrote a short paper debunking these views. Part of the conspiracy theory is that the Fed isn't audited.
As I said, giving credence to these crazy views is irritating. Sadly, any audit of the Fed would likely do little good in debunking the conspiracy theories, because these crazies won't believe the audit anyway. Still, that there was a special major audit of the Fed, sponsored by the son of Ron Paul, would require the conspiracy mongers to go further off the deep end. Good.
Of course, after the Fed got into the business of making loans to particular banks and other financial firms in big way in 2008 and 2009, an audit became especially justified. Who was bailed out and why? This is government money. Should central bank officials know that they will have to justify their decisions later? Yes, of course. Will this make them more cautious in an emergency? Most likely. Should they be more cautious because they understand that their decisions will be subject to "Monday morning quarterbacking?" Yes. It is much better than the alternative of bailouts with no accountability.
And finally, I fully support having the Fed's monetary policy actions reviewed. Should Fed officials understand that they will have to justify what they have done? Yes, of course. Might the need to do so make them more cautious? Yes. Might that result in some errors where a Fed that was less accountable would take an appropriate action? Maybe. And, of course, it might also avoid other errors due to irresponsibility. More importantly, it is better than the "rule" of no accountability.
Now, I admit that I think the Fed went way too far in 2008 and 2009 in bailing out politically connected financiers.
Further, I think the Fed's monetary policy is bad and needs fundamental change.
I think the Fed should have much less discretion, and that the Fed should have a rule imposed upon it that works tolerably well in all circumstances.
What about Fed independence? Well, I don't favor having the Treasury Secretary setting interest rates every six weeks, much less some crazy policy of just fixing them for long periods of time. Nor do I think the Treasury should determine the scope of open market operations on a day to day basis. Neither do I think Congress should be setting interest rates or targets for base money. And I also don't favor having the Treasury Secretary or Congress directing Fed lending. Political favoritism would shift from a concern to a certainty.
I do think Congress should legislate the target for monetary policy--preferably a growth path for nominal GDP. And I think the Fed should be given discretion in determining the current monetary conditions consistent with hitting the target. The Fed should expect to have its decisions reviewed, and most obviously if it misses the mandated target. And that will probably happen frequently. Here is what base money and short term interest rates did over the past year, and nominal GDP ended up off target. And Fed officials will have to explain why they thought their decisions about base money and/or interest rates were justified.
And then I read Paul's bill. It is difficult to connect Paul's bill to what the reporter said. Did the reporter even read the bill?
Showing posts sorted by relevance for query audit. Sort by date Show all posts
Showing posts sorted by relevance for query audit. Sort by date Show all posts
Saturday, January 31, 2015
Tuesday, October 27, 2009
Audit the Fed
Congressman Ron Paul has been trying to have Congress audit the Federal Reserve for years. In the past, few other Congressmen were interested. However, during the current session, he found 282 co-sponsors for HR 1207. While I have never been opposed to having Congress audit the Fed, I shared the past apathy of most members of Congress. The Fed is regularly audited by leading accounting firms. For example, Deloitte did the 2008 audit. What is the point of having an additional audit by Congress?
Worse, I worried that Congressman Paul was pandering to some of his more conspiracy-minded supporters. If you search the web for “Fed ownership,” more than nine million hits return. Most claim that the Fed is a privately-owned corporation. They further claim that the Fed pays a few cents for printing a dollar bill. Then, according to this tale, the Fed lends out the newly-created money at interest, recovering the printing cost. The secret cabal of international bankers rakes in one dollar of profit on each dollar bill. How can they get away with it? Supposedly, the Fed has never been audited. Once the Fed is audited, the “banksters’” will no longer be able to siphon off these supposedly vast profits.
This conspiracy theory is a confused mess. The Federal Reserve system is made up of twelve Federal Reserve banks. For example, Charleston is located in the district of the Federal Reserve bank of Richmond. Each Federal Reserve bank is organized as a corporation. The member banks, ordinary commercial banks located in the district, are the stockholders. For example, BB&T is part owner of the Federal Reserve bank of Richmond. Each member bank must buy stock equal to three percent of its capital, or net worth. The stock always has a price of $100, and the Federal Reserve banks issue or retire stock according to the amount each member bank is required to own. The Fed pays the banks an 8 percent dividend on that stock-- $8 per $100 share of stock.
The Federal Reserve banks pay the Treasury to have currency printed. The average cost this year is expected to be nearly nine cents per note, but that includes fives, tens, twenties, and hundreds as well as ones. While the Fed has always made loans to banks, until recently, the total amount of these loans were insignificant compared to Fed’s portfolio of government bonds. In June 2007, the Fed had $187 million lent out to banks while it had purchased $790 billion in government bonds.
The Fed makes loans to banks and purchases government bonds by adding funds to the reserve balances of banks—simply making entries in its computer. So, the immediate cost of creating money is effectively zero. The Fed then has currency printed as needed to meet withdrawals by banks from their reserve accounts. While the total amount of currency outstanding generally increases, most newly-printed currency replaces worn currency. Of the 9 billion notes printed in 2007, nearly 8 billion replaced worn currency.
Banks traditionally kept some funds in their reserve balances at the Fed, but the bulk of the money created by the Fed has been withdrawn and held in the form of currency. For example, in June of 2007, banks held approximately $9 billion in their reserve balances, while currency, both held by the public and vault cash in banks, was $811 billion.
The cost of printing currency and replacing it as it wears out is one of the Fed’s expenses. The Fed spent $576 million in 2007 to have currency printed. Other expenses include operating check clearing facilities and paying the nearly 20,000 Fed employees. Total expenses of the Federal Reserve system in 2007 were about $3.9 billion.
Up until a year ago, the primary source of revenue for the Fed was interest on the government bonds it held. It has always earned interest on the loans it makes to banks, as well as check processing fees. In 2007, the Fed earned $71 million in interest from loans to banks, $878 million in services fees, and $40 billion in interest on government bonds.
The difference between the Fed’s revenue and costs are its profits, which have been quite large. In 2007, the Fed made nearly $39 billion. What happens to those profits? A small fraction is paid in dividends to the member banks who “own” the Fed. Almost all is returned to the U.S. Treasury. In 2007, the Fed paid dividends of $992 million to its “owners” and turned over $35 billion to the U.S. Treasury.
So why have Congress audit the Fed? My view has changed because the Fed has changed. The Fed still issues currency, more than $900 billion in September, but banks now hold $884 billion in reserve accounts in the Fed, perhaps because the Fed now pays .2 percent interest on those balances. The Fed has nearly $1.8 trillion to “invest.”
More importantly, the Fed has greatly reduced its holdings of government bonds. In December 2008, Fed holdings of government bonds had fallen to $475 billion, though they increased back to $656 billion as of June. Rather than making a small amount of short term loans to depository institutions secured by government bonds, the Fed has vastly increased its lending to a variety of financial institutions. The Fed was lending $650 billion to depository institutions in December 2008 and the September figure is still $300 billion. They have accepted various sorts of collateral, including mortgage backed securities—so called toxic assets. The Fed current holds $766 billion in mortgage-backed securities.
Which financial institutions borrowed exactly how much from the Fed? The Fed refuses to say. No longer is the Fed just issuing currency and buying government bonds. It is instead directing credit to favored sectors of the economy. Is it directing credit to favored financial institutions as well? Yes Dr. Paul, is past time for an audit of the Federal Reserve.
Worse, I worried that Congressman Paul was pandering to some of his more conspiracy-minded supporters. If you search the web for “Fed ownership,” more than nine million hits return. Most claim that the Fed is a privately-owned corporation. They further claim that the Fed pays a few cents for printing a dollar bill. Then, according to this tale, the Fed lends out the newly-created money at interest, recovering the printing cost. The secret cabal of international bankers rakes in one dollar of profit on each dollar bill. How can they get away with it? Supposedly, the Fed has never been audited. Once the Fed is audited, the “banksters’” will no longer be able to siphon off these supposedly vast profits.
This conspiracy theory is a confused mess. The Federal Reserve system is made up of twelve Federal Reserve banks. For example, Charleston is located in the district of the Federal Reserve bank of Richmond. Each Federal Reserve bank is organized as a corporation. The member banks, ordinary commercial banks located in the district, are the stockholders. For example, BB&T is part owner of the Federal Reserve bank of Richmond. Each member bank must buy stock equal to three percent of its capital, or net worth. The stock always has a price of $100, and the Federal Reserve banks issue or retire stock according to the amount each member bank is required to own. The Fed pays the banks an 8 percent dividend on that stock-- $8 per $100 share of stock.
The Federal Reserve banks pay the Treasury to have currency printed. The average cost this year is expected to be nearly nine cents per note, but that includes fives, tens, twenties, and hundreds as well as ones. While the Fed has always made loans to banks, until recently, the total amount of these loans were insignificant compared to Fed’s portfolio of government bonds. In June 2007, the Fed had $187 million lent out to banks while it had purchased $790 billion in government bonds.
The Fed makes loans to banks and purchases government bonds by adding funds to the reserve balances of banks—simply making entries in its computer. So, the immediate cost of creating money is effectively zero. The Fed then has currency printed as needed to meet withdrawals by banks from their reserve accounts. While the total amount of currency outstanding generally increases, most newly-printed currency replaces worn currency. Of the 9 billion notes printed in 2007, nearly 8 billion replaced worn currency.
Banks traditionally kept some funds in their reserve balances at the Fed, but the bulk of the money created by the Fed has been withdrawn and held in the form of currency. For example, in June of 2007, banks held approximately $9 billion in their reserve balances, while currency, both held by the public and vault cash in banks, was $811 billion.
The cost of printing currency and replacing it as it wears out is one of the Fed’s expenses. The Fed spent $576 million in 2007 to have currency printed. Other expenses include operating check clearing facilities and paying the nearly 20,000 Fed employees. Total expenses of the Federal Reserve system in 2007 were about $3.9 billion.
Up until a year ago, the primary source of revenue for the Fed was interest on the government bonds it held. It has always earned interest on the loans it makes to banks, as well as check processing fees. In 2007, the Fed earned $71 million in interest from loans to banks, $878 million in services fees, and $40 billion in interest on government bonds.
The difference between the Fed’s revenue and costs are its profits, which have been quite large. In 2007, the Fed made nearly $39 billion. What happens to those profits? A small fraction is paid in dividends to the member banks who “own” the Fed. Almost all is returned to the U.S. Treasury. In 2007, the Fed paid dividends of $992 million to its “owners” and turned over $35 billion to the U.S. Treasury.
So why have Congress audit the Fed? My view has changed because the Fed has changed. The Fed still issues currency, more than $900 billion in September, but banks now hold $884 billion in reserve accounts in the Fed, perhaps because the Fed now pays .2 percent interest on those balances. The Fed has nearly $1.8 trillion to “invest.”
More importantly, the Fed has greatly reduced its holdings of government bonds. In December 2008, Fed holdings of government bonds had fallen to $475 billion, though they increased back to $656 billion as of June. Rather than making a small amount of short term loans to depository institutions secured by government bonds, the Fed has vastly increased its lending to a variety of financial institutions. The Fed was lending $650 billion to depository institutions in December 2008 and the September figure is still $300 billion. They have accepted various sorts of collateral, including mortgage backed securities—so called toxic assets. The Fed current holds $766 billion in mortgage-backed securities.
Which financial institutions borrowed exactly how much from the Fed? The Fed refuses to say. No longer is the Fed just issuing currency and buying government bonds. It is instead directing credit to favored sectors of the economy. Is it directing credit to favored financial institutions as well? Yes Dr. Paul, is past time for an audit of the Federal Reserve.
Thursday, December 29, 2011
Ron Paul (and Gary Johnson) for President
Some time ago, I endorsed Gary Johnson for President. Johnson is no longer seeking the Republican nomination for President and is now seeking the Libertarian nomination for President. I hope Johnson is able to win the Libertarian Party nomination.
As for the Republican nomination, I now support my second choice--Ron Paul. My former third choice, Jon Huntsman, now moves to the number 2 position. The South Carolina primary is coming up fast!
While Ron Paul's foreign policy views are more dovish than my own, unlike most of the other Republican candidates this year, he is pointing in the right direction. The U.S. should have withdrawn from Afghanistan (and Iraq) years ago, and war with Iran would be an expensive mistake.
Paul is calling for cuts in the level of federal government spending. I agree that the U.S. government spends way too much. While I don't think $1 trillion cuts in one year are realistic, the rapid increase in government spending and deficits in the Bush and Obama administrations makes these heavy cuts consistent with my usual rule of thumb. Cutting net federal outlays to what they were at the beginning of the Obama administration (2008,) is a $600 billion cut. Ron Paul's $1 trillion returns spending to where it was in 2006, and still leaves a $300 billion deficit (given 2011 receipts.)
For the most part, I agree with Paul's views on personal liberties issues. For example, like Paul, I think Drug Prohibition is a mistake, for much the same reasons that Alcohol Prohibition was a mistake.
Why was Gary Johnson my first choice? I think his political resume as two-term governor is better than Paul's political resume as U.S. Congress back-bencher. On a more personal note, I think Johnson's resume as entrepreneur and mountain climber is great, but in a very different way, so is Paul's background as a medical doctor and family man.
Like Gary Johnson, I describe myself as "pro-choice" on abortion. In truth, I think government should not restrict early term abortions but that it should restrict late term abortions. Paul is strongly pro-life and favors having government outlaw all abortions. Worse, he emphasizes that issue and has sent glossy brochures to my house (and I presume to thousands of other South Carolinians who have voted in past Republican primaries) emphasizing his opposition to all abortions. It is clearly very important to him. Paul, however, does believe that any government suppression of abortion should take place at the state level. So, he opposes having the Federal government outlaw abortions in states that allow the practice.
Like Gary Johnson, I believe that the U.S. should allow more foreigners to come work in the U.S. (I even liked Gringrich's statement in opposition to deporting illegal immigrants who have been in the U.S. for years.) I think Ron Paul agrees. Like Ron Paul, I don't think the U.S. taxpayers should be forced to provide social services to immigrants. I even oppose "birth right citizenship." In 2008, I was a contributor and volunteer for Ron Paul. Like other South Carolina voters, I received glossy brochures on the immigration issue in the weeks leading up to the election. I didn't like what I saw. Ron Paul did get my vote.
What about monetary policy? As far as I can tell, neither Johnson nor Paul (nor any other Republican candidate nor Obama) have much to offer. I support Paul's proposal to audit the Fed. I support Paul's effort to protect the right of citizens to use alternative monies. (This is the core Hayekian monetary reform.) I even support ending the Fed. However, given our current level of economic knowledge, I would favor replacing it with a monetary authority that I suspect Paul would consider no better than the status quo. Still, I think the Federal Reserve, as an institution, just struck out. Strike one--Great Depression. Strike two--Great Inflation. And now, strike three--Great Recession.
Paul has been able to raise lots of money. He nearly won the Iowa straw poll and has a good chance at the Iowa caucuses. He is doing great! While I like Johnson better, most voters apparently disagree. I have met Ron Paul and he is a good guy. I hope that other South Carolinians will join me in voting for him on January 21st.
As for the Republican nomination, I now support my second choice--Ron Paul. My former third choice, Jon Huntsman, now moves to the number 2 position. The South Carolina primary is coming up fast!
While Ron Paul's foreign policy views are more dovish than my own, unlike most of the other Republican candidates this year, he is pointing in the right direction. The U.S. should have withdrawn from Afghanistan (and Iraq) years ago, and war with Iran would be an expensive mistake.
Paul is calling for cuts in the level of federal government spending. I agree that the U.S. government spends way too much. While I don't think $1 trillion cuts in one year are realistic, the rapid increase in government spending and deficits in the Bush and Obama administrations makes these heavy cuts consistent with my usual rule of thumb. Cutting net federal outlays to what they were at the beginning of the Obama administration (2008,) is a $600 billion cut. Ron Paul's $1 trillion returns spending to where it was in 2006, and still leaves a $300 billion deficit (given 2011 receipts.)
For the most part, I agree with Paul's views on personal liberties issues. For example, like Paul, I think Drug Prohibition is a mistake, for much the same reasons that Alcohol Prohibition was a mistake.
Why was Gary Johnson my first choice? I think his political resume as two-term governor is better than Paul's political resume as U.S. Congress back-bencher. On a more personal note, I think Johnson's resume as entrepreneur and mountain climber is great, but in a very different way, so is Paul's background as a medical doctor and family man.
Like Gary Johnson, I describe myself as "pro-choice" on abortion. In truth, I think government should not restrict early term abortions but that it should restrict late term abortions. Paul is strongly pro-life and favors having government outlaw all abortions. Worse, he emphasizes that issue and has sent glossy brochures to my house (and I presume to thousands of other South Carolinians who have voted in past Republican primaries) emphasizing his opposition to all abortions. It is clearly very important to him. Paul, however, does believe that any government suppression of abortion should take place at the state level. So, he opposes having the Federal government outlaw abortions in states that allow the practice.
Like Gary Johnson, I believe that the U.S. should allow more foreigners to come work in the U.S. (I even liked Gringrich's statement in opposition to deporting illegal immigrants who have been in the U.S. for years.) I think Ron Paul agrees. Like Ron Paul, I don't think the U.S. taxpayers should be forced to provide social services to immigrants. I even oppose "birth right citizenship." In 2008, I was a contributor and volunteer for Ron Paul. Like other South Carolina voters, I received glossy brochures on the immigration issue in the weeks leading up to the election. I didn't like what I saw. Ron Paul did get my vote.
What about monetary policy? As far as I can tell, neither Johnson nor Paul (nor any other Republican candidate nor Obama) have much to offer. I support Paul's proposal to audit the Fed. I support Paul's effort to protect the right of citizens to use alternative monies. (This is the core Hayekian monetary reform.) I even support ending the Fed. However, given our current level of economic knowledge, I would favor replacing it with a monetary authority that I suspect Paul would consider no better than the status quo. Still, I think the Federal Reserve, as an institution, just struck out. Strike one--Great Depression. Strike two--Great Inflation. And now, strike three--Great Recession.
Paul has been able to raise lots of money. He nearly won the Iowa straw poll and has a good chance at the Iowa caucuses. He is doing great! While I like Johnson better, most voters apparently disagree. I have met Ron Paul and he is a good guy. I hope that other South Carolinians will join me in voting for him on January 21st.
Sunday, November 1, 2009
Why Audit the Fed?
Once upon a time, the Fed purchased government bonds and issued currency. But that changed last year. Follow the link to Bloomberg . I suppose that Geithner using his position as President of the New York Fed to hand out taxpayer money to special interests is what made President Obama consider him an excelent choice for Secretary of the Treasury.
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