On Tuesday, May 8th, 2012, Presidential Candidate and Congressman Ron Paul, Chairman of the Financial Services Committee on Domestic Monetary Policy and Technology, along with 11 other members of the committee, discussed legislation dealing with the Unconstitutional Federal Reserve System.
I covered the hearing as best as I could, it was moving rather quickly, and many voices were speaking once after another while also being long (my list of excuses), that said, I think I did cover the general experience and discussion within the hearing well.
First is opening statements, followed by discussion on legislation, followed by discussion by ranking economists.
Opening Statements Of Interest:
- Fed has been around for 100 years, has generally gone under the radar.
- We need to remember what Constitutional money is and decide how we deal with that the related facts.
- Supply and demand is only half of all transactions, the other half is the monetary issue.
- We need to be able to define the dollar, there is no legal definition of the Federal Reserve note, even though it is a pledge to pay something.
- The general attitude is that if something doesn’t work out with the Federal Reserve notes, we just need more regulation to fix that and it’s not a big deal.
- Federal Reserve ignoring rising prices in healthcare, education, food, and energy.
- I am a skeptic of the mandates given to the Federal Reserve in reference to its goals and policies in dealing with the mandate.
H.R. 4180, the Sound Dollar Act, introduced by Rep. Kevin Brady (comments by Rep. Kevin Brady):
- We acknowledge Congressman Paul’s work towards restoring Sound Money and bringing the Federal Reserve and the issues it has created to the forefront of the debate in the Nation.
- The Federal Reserve’s inflationist and interventionist policies have led to the housing crisis and the current crisis we are facing.
- The Federal Reserve’s inflationist and interventionist policies have led to the robbing of the value of the average American’s savings and the rise in prices the average American faces.
- Protecting the purchasing power of the dollar protects the employment and stability standards that the Fed allegedly protects with its “dual” mandate.
- We require the Fed to articulate its mandates and hold the various bureaus accountable and require more transparency.
- Mr. Chairman (Ron Paul), I would prefer to be grilled by Congressman Schweikert than you sir (laughter).
- I think some of the Fed’s policies during the financial crisis did help, but since then, have caused certain problems.
Questions on the Sound Dollar Act:
Q (Rep. Paul): I like the name of the bill, but how does your bill define the definition of the Sound Dollar?
A (Rep. Brady): It is defined by the statistics of prices and policy, not by any formal definition.
Q (Ron Paul): How do you define it based on policies based off the price inflation in certain industries compared to others? For instance, education, healthcare, food, and energy prices have increased and are increasing due to monetary inflation, whereas relatively de-regulated industries like technology experience falling prices.
A (Rep. Brady) : Within the Sound Dollar Act, we require the Fed to monitor and report back on asset prices including Gold, agriculture, and housing.
Q: Do you believe we need the Federal Reserve as a lender of last resort?
A (Rep. Brady): Yes, I believe the Fed still has roles in lending to solvent banks, but not to contribute to the current crisis.
Comment by Rep. Frank on Rep Brady’s Bill: I don’t think we should pass this bill because it doesn’t accomplish anything by setting no standards as Mr. Garrett and Chairman Paul pointed out.
Q (Garrett): Where is the Constitutionality for this legislation?
A (Rep. Brady): I don’t think we should open up Monetary policy to being subject to Congress since the coining of money by Congress has been contracted out to the Federal Reserve.
H.R. 3428, introduced by Rep. Barney Frank (comments by Rep. Frank):
- I have filed legislation to remove the Regional Presidents from certain voting abilities.
- The regional Federal Reserve officials are picked by bankers.
- Bankers pick members of the board who form policy, which is greatly un-democratic.
- Inflation is not at the point where it has created a problem for the American people, the Federal Government has made money off of the Fed’s policies.
- I think it would be of great error to repeal the dual-mandate.
- The dual-mandate is not in the Constitution, neither is the Federal Reserve, which is one area I agree with my colleagues.
- I think the Federal Reserve has been very helpful and that its policies have helped the economy.
Questions on Rep. Franks H.R. 3428:
Q (Ron Paul): I want to ask you a question on Mr. Frank on the appointees on whether they are approved by the Senate or not. Many are concerned about the private nature of the Federal Reserve and whether it is a Government nature or private nature.
A: I think there is a problem with the self-selection of members by the Federal Reserve who set policy for the rest of us.
Q: Why do you think altering the private/Government nature of the Federal Reserve would affect anything?
A (Rep. Frank): I think setting interest rates is a Government function and the private entity participation in the Federal Reserve is wrong, but their roles are Government roles.
Q: Can you comment on the diversity of the representation within Federal Reserve officials employment history?
A (Rep. Frank): I think that this is Corporatism, and the dominance in the Federal Reserve by former bankers is wrong, and that professional diversity doesn’t exist. I think various professions should be included, along with various races and genders. I don’t think private citizens should be setting the policy for other private citizens without being elected.
They shouldn’t be voting to set global monetary policy without being elected, and the positions within the Federal Reserve are generally self-selected.
Comment by Rep. Brady on Rep Franks Bill: I think it’s a mistake to open up the Board of Governors to being appointed because it will further politicize the positions of the Federal Reserve.
Q (Garrett): Where is the Constitutionality for this legislation?
A (Rep. Frank): What it says in the Constitution that important Government officers should be voted on by the Congress.
Second Panel (questions by Congressman Paul & other members listed when possible, does include answers & explanations by various Economic Professors):
Dr. Herbener: The Fed has too much authority, it has discouraged prudent behavior with its artificial interest rates which it has kept near 0. It has loaded the US economy with printed money without any public debate or public approval. The Fed has too much authority and has a goal it can never accomplish, no one besides the market should be picking the “winners and losers” in the economy.
The Fed simply does not know the optimal standards it is mandated to create, and thus, does damage and creates more difficulty, especially in situations which require market actions which the Fed cannot accomplish. Devaluing the currency and discouraging consumer prudence with the artificial interest rates is the nature of the Federal Reserve. The Federal Reserve and Central Banks do not fight inflation, they create it. The reforms being proposed do not solve the problem, and the Fed should be replaced with competitive currencies and/or a commodity standard.
Dr. Taylor: The dual-mandate creates high unemployment, such as in the 70s, where interventionist policy was high, unemployment was through the roof. I disagree with those who claim that removing the dual mandate would create unemployment.
The dual-mandate is not the whole answer, which is why I agree with the Chairman in that the Federal Reserve should completely report money growth and future policies. If there is an emergency, they need to come back to Congress and explain why they will or should deviate from policy they previously agreed to enact.
The Fed purchased 77% of the Government’s debt last year, and the working hand in hand with the Government by the Fed is a problem.
Would you be in favor of a report on M3 (by Congressman Ron Paul)?
I would be favor in that, as that would be constructive, but it would require the Congress to ask questions about the M3, and not just allow the Fed to dictate strategy.
Dr. Galbraith: The Federal Reserve is different than the European Central Bank in that it cannot be independent of Congress because it is a creature of Congress under the Constitution. Unemployment is not going away and there are limits to which what the Federal Reserve can accomplish. I don’t believe the Federal Reserve must sacrifice one mandate at the expense of the other, and I believe Congress should continue to provide oversight to the Federal Reserve.
I think that largely, the crisis we face is due to the de-regulation of the Financial Industry. We are much better off with a large Government that can stabilize the situation at this time.
I do not have an answer to how large the Fed balance sheets can get Congressman Schweikert.
Where does the authority for the Federal Reserve come from, Constitutionally (by Congressman Paul)?
I would be cautious to tangle with you on this Chairman Paul, but I believe it comes from the coining money role given to the Congress and contracted out during the Federal Reserve Act.
Dr. Rivlin: I believe the dual mandate has served the United States well, and that removing it would damage the US Economy. I believe in a strong independent central bank, and changing this would create chaos within the US and global economy. Their objective should be a rise in the standard of living of people over the long-run. Let the economy create jobs but continue to fight inflation.
Monetary policy makers did not tighten soon enough in the stagflation of the 70s. In the 90s we held off tightening because there was little inflation, and partly thanks to the Fed, we had a good decade and balanced the budget. I think raising interest rates during the Dot com bubbel would have tipped the economy into an recession. Operating under the dual-mandate the Fed has kept inflation in control for three decades. The theory that inflation is a threat to the American economy at this time is unwarranted.
I think asset bubbles are a large problem, but will not answer to Fed actions. I’m not worried about the Fed’s large balance sheet and a bond bubble, but the worry should be about inflation, which we do not have right now.
How worried are you about the world financial situation (asked by Congressman Ron Paul)?
I am very worried about Europe, and the long-run debt situation with Europe is trouble, but the focus for them and us should be getting out of the recession.
Has the Dual-Mandate interrupted or troubled the Federal Reserve in any way (Member Clay):
No it hasn’t, setting monetary policy is very difficult, we weren’t really worried about inflation. We had strong growth in the economy and fiscal restraint along with a balanced budget during my period of service.
Dr. Klein: The Fed is not antagonistic to the various branches of the Federal Government. I think the Federal Government and the Fed work hand in hand in creating the financial crisis.
How worried are you about the world financial situation (asked by Congressman Ron Paul)?
I think it’s a huge financial crisis, both in Europe and the US, not only the crisis itself, but the response to the crisis by the monetary authority. We haven’t seen overall rises in the price level, but if you look at the money pumped in the system, there’s no study or theoretical model in which there aren’t long-term consequences. The worst is yet to come.
Do you think the Federal Reserve’s Monetary Policy execution would be effective if it set explicit inflation targets and were held accountable? (asked by Rep. William Lacy Clay)
Dr. Herbener: Not really… I think when the Fed engages in any kind of expansionary monetary policy, they always generate the same ill effect in the economy, like credit expansion, which leads to mal-investment. These lines of malinvestment, the sort of thing we saw in the 1920s,very similar in the 1980s, so even if there were price level targets, it would be followed by mal-investment, inflation, and the necessary liquidation.
Dr. Klein: I think that posing the problem as a trade off between inflation targeting as opposed to targeting nominal income is sort of a false dichtomy. Something that Rep. Paul mentioned, you increase productivity, resulting in decreases in pricing, there’s no reason we should expect or desire stable 2% price level. In a growing economy, we should and could see the price level fall, as we’ve seen with increased productivity.
Dr. Taylor: We already have a target of 2% and the problem still exists as we see this interventionist policy, so we need more to be done.
Dr. Galbraith : I think explicit targets can be useful, in the humphrey-hawkins law there were targets, but they took 22 years before it actually happened. The difficulty is setting too difficult a target and allowing too long of a timeframe, it should be more interactive.
Dr. Rivlin: I would agree with Dr.Galbraith as long as you don’t take it too seriously.
How big do you think the balance sheet can or should get (asked by Congressman Schweikert)?
Dr. Taylor: Well I already think it’s too big… I think the quantitative easing were not appropriate, which is why the balance sheet is so big. I think if we did the interventions during the crisis the sheet would have been back to normal, there will be a bubble if it stays this large and there already is a bubble. The problem is more the Fed causing bubbles, I see this in the housing bubble and others before, and lets not forget that the Fed has and is causing bubbles.
Dr. Klein: I agree with the Fed being the cause of the bubbles and I agree with Doctor Taylor it’s not just the overall size of the bubbles but the composition of the bubbles.
Dr. Galbraith: As I said earlier I don’t have a view on how big the balance sheet may get… but one has to evaluate the composition of the sheet, and there comes a point when you do need to address those questions.
Dr. Herbener: The real problem is how exactly is the Fed going to unwind the balance sheet, not just how big is it going to get, but how they unwind and how large will the consequences be.
Dr. Rivlin: I think the world thinks we are a safe investment and it’s more that Congress hasn’t stepped up to face the problem. We cannot have a rapid reduction in national borrowing because it would derail the recovery.
How many of you believe the Fed should be abolished (asked by Rep. Green)?
2 of the members believe it should be abolished, explanation (answers were limited to 10-20 seconds):
Dr. Herbener: There is no instance in which the Federal Reserve can help the economy.
Dr. Klein: I don’t believe there should be a Central Bank in America, we do not have a Central Dairy, or a Central Automotive agency…In my writtent testimony I give reasons why it is harmful to the economy.
Dr. Rivlin: I feel strongly that we need a strong and independent central bank.
Dr. Taylor: I think we should reform the Fed… the policy isn’t working, but it has worked well before when it intervenes less.
Dr. Galbraith: I think that on the whole the 20th century was better than the 19th and that is thanks to the Fed.
The 20th century was better than the 19th, reform is necessary, but the evidence for a Central Bank is better than the evidence against it. The idea that the world’s greatest economy can function without a central bank is bizarre.
Would we be at a disadvantage without a Central Bank while other Countries have a Central Bank (asked by Rep. Green)?
Dr. Rivlin:I think we would be and we would lose as our pre-eminence as a strong power.
Dr. Galbraith: I think it would make US Treasury bonds much riskier.
Dr. Klein: Of course it depends how a reform occurs.. but people are fleeing from the dollar and heading towards hard metals.
Dr. Taylor: I don’t recommend abolishing the Fed, just reforming it.
Dr. Herbener: I would back the dollar by gold.