Monday, June 29, 2009

Ron Paul at Cato on Federal Reserve Transparency

I posted this on my blog over at Bureaucrash Social, but since that's a password-gated community right now, I'm re-posting it here. Enjoy!

The Cato Institute hosted three speakers this Wednesday in the F. A. Hayek Auditorium in its DC office. The topics under discussion were Dr. Paul’s bill to audit the Federal Reserve (HR 1207) and the relationship between the Federal Reserve, the private sector, Congress, and the Treasury.

Dr. Paul’s bill would expand the GAO’s authority to audit the Federal Reserve. The current law, originally passed in 1978, allows only a limited audit process. For instance, the Federal Reserve’s dealings with foreign central banks are not currently subject to audit. HR 1207 removes this and other restrictions, fully opening the Fed’s books to public scrutiny. Dr. Paul stressed that the bill wouldn’t allow Congress to interfere in the Fed’s decision making process; it only makes a full record of the central bank’s activities publicly available.

Appearing on the panel with the Texan congressman were Gilbert Schwartz of Schwartz & Ballen LLP, formerly Associate General Counsel to the Federal Reserve, and Bert Ely, president of Ely & Company, Inc.

Schwartz emphasized that while the Federal Reserve and other agencies were partially to blame for the financial crisis, Dr. Paul’s bill was unnecessary at best and at worst had the potential to hurt the economy by undermining the Federal Reserve’s independence. He pointed out that although the Fed lending to private sector institutions outside of the banking industry is unusual, it is not unprecedented and is authorized by law. Section 13(3) of the Federal Reserve Act authorizes the Fed to lend to businesses “in unusual and exigent circumstances,” and was used to lend to farmers and other business owners in the 1930s. Schwartz also pointed out that some of the expansion in the monetary base has been undercut by $700 billion in increased deposits with the Fed. Although by Schwartz’s admission, the Fed might be criticized for a lack of openness, he saw its intervention as instrumental to preventing a total economic collapse, citing the chaos caused by the collapse of Lehman Brothers as evidence.

The third member of the panel, Bert Ely, pointed out how the balance sheets of the Fed and the Treasury are interconnected and identified several areas where current policy could be reexamined. His central question was whether the Fed’s power to lend to private industry without Congressional approval should exist at all, and whether it makes sense for that power to rest with the Fed rather than another agency such as the Treasury. Ely said that Congress should address these questions and, depending on the answers, change existing laws.

Congressman Paul posed a question which he challenged opponents of his bill to answer. “Why not?” Most objections to an audit don’t hold water. Merely opening the Fed’s books is not an assault on its independence. Concerns that an audit would endanger the trust foreign central banks have in the Fed are based on a slippery-slope scenario where auditing leads to meddling. Paul pointed out that the Fed is losing trust anyway, for reasons unrelated to an audit, and that we shouldn’t be more afraid of exposing the truth than we are of the consequences of potentially shrouding the Fed’s failures in secrecy. The other main argument against an audit is that making the Fed’s internal discussions public would upset the marketplace in ways the Fed would not intend. Paul pointed out that under the current system, rampant guessing surrounds every meeting of the Fed’s directors, and that this has much the same effect. Schwartz added that there was a time when the Fed didn’t even release its interest rate target as determined at an internal meeting until months or years afterwards, and there were doomsday predictions about the effect that making the information known immediately would wreak havoc with the economy. These predictions haven’t panned out, Schwartz said, and there’s no reason to suspect that additional transparency would cause any more speculative behavior than exists currently.

In short, the bill is a common-sense measure. Where disagreements exist, they’re about what to do next. Paul wants to legalize competing currencies; practically, this would mean allowing people to pay their debts in gold and to enter into contracts with payments denominated in gold. He predicts that monetary reform is coming whether we like it or not, and that to prepare, we need to have information about what went wrong in the past as well as a failsafe in the form of a legal competing currency. Regarding the current monetary regime, Paul simply said “this system has ended.” He sees a chain of central bank failures dating back to the Fed’s creation in 1913 as ample evidence, and said of our current crisis, which he views as another failure of the Federal Reserve System, “this is the big one.”

Schultz had a different take. He said that the message that more transparency is needed is getting to the Fed, and said of Paul’s bill, “I’m not sure this legislation corrects the problem.” Ely said that future actions should take into account the many different roles the Fed plays, and that each role should be examined separately.

Regardless of which direction Congress decides to go with monetary policy reform, it is clear that the issue of the Federal Reserve’s role is going to be a part of the national dialogue moving forward. HR 1207 would provide a basis for that discussion. Once we know what the Fed has been up to, we’ll have a better idea of what to do next. Said Paul, “That’s when we’ll have a lot more fun."

An audio recording of the event is available at

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