October 01, 2009

The “Audit the Fed” Conspiracy

Like Dan McCarthy, I wholeheartedly support HR 1207. Though I must admit, I?ve always felt there was something deeply disingenuous about the movement to audit the Federal Reserve. The people who are really behind the bill?Ron Paul, Tom Woods, the Campaign for Liberty, and sympathetic journalists like me?aren?t in the least interested in looking at the Fed’s books so as to make recommendations on how to run a more efficient Term Asset-baked securities Loan Facility. Nor are they (or rather, we) much interested in “transparency” as an end in itself.

Without exception, Fed Auditors think the whole institution of Central Banking is unwise and immoral, not to mention un-Constitutional, and that America’s economic problems and enormous debt overhang ultimately derive from this systems of “fiat” (paper) money, fractional reserve banking, and the cartelization of financial institutions. The audit, we hope, would be like turning over a rock in the woods to reveal swarms of worms and maggots underneath: once the curtain is drawn on the Fed, and the people are able view the orgy of money printing and market manipulation that?s been taking place over the decades, they’ll recoil in horror and demand that the institution be abolished tout de suite. In this rosy scenario, shortly after the audit is finished, America would be back on Gold. 

I find this plan totally Quixotic, but I endorse it!   

Now, focusing on the audit (while knowing deep down that it?s only a “first step” towards Gold) has allowed the Paulistas to secure some useful allies in the short run, including many lefties who definitely don’t like Wall Street bankers but have no interest whatsoever in Ron Paul’s hard-money, free-market philosophy (Dennis Kucinich is a good example.) But this strategy has also unleashed a red-herring (and completely useless) debate on the Fed’s “independence” and whether Congress or Fed Chairmen would be better, less politically encumbered interest-rate fixers and money printers:   


Freddy, fears about what Congress might do to the money supply if the Fed is audited are understandable but misplaced. Contra Bartlett, you?re more likely to get Zimbabwe-style hyperinflation under the Fed than with Congress dictating the money supply?politicians, for all they are in bed with Wall Street, are still more vulnerable to public discontent than the Federal Reserve is. I don?t see the public clamoring for Congress to inflate the currency. Indeed, there would be a backlash if inflation occurred under congressional oversight, the kind of backlash that throws a Jerry Ford or Jimmy Carter out of office. The difference is, Congress rather than the executive would feel the brunt of the backlash, and would have a more direct means than the president for taming inflation if Congress chose to do so. Congressmen can?t be trusted to do the right thing, but they can usually be trusted to do what?s in their own interests. Political survival being their paramount interest.

Would Congress be better behaved with the printing press? Who knows? Barney Frank might wanna ?make it rain??  Also, there?s no real evidence that ?accountability? to the public is actually that meaningful. Since the Fed?s inception, the dollar has lots 95 percent of its value, yet only now?in 2009?are we seeing the mere beginnings of a serious public debate about the Fed?s mission.

Moreover, Fed chairmen who, in hindsight, were pretty responsible, like Paul Volker, were universally despised during their tenures precisely because they were ?taking away the punch bowl.? Volker raised the Fed rate into the high teens in the late ?70s and early ?80s (a move that?s unthinkable today), and he was attacked from the right and left alike. No one gave him credit (no pun intended) for being the only man in Washington who was actually able to whip inflation. And since large portions of the American public support government financed healthcare and all sorts of entitlements, why would anyone expect them to be particularly responsible when it comes to their representatives? fiddling with interest rates? And come on: most voters just don?t understand or care about monetary issues. If prices go up, they?re simply going blame ?greedy businessmen? and Mid East dictators. 

And on deeper level, this ?independence? debate?which, by the way, is exactly the one that the Establishment wants us to have?really misses the point.   

I’m reminded of a panel discussion I attended last winter entitled “Is the Fed Broken?” in which George Selgin, who’s very much in the hard-money, anti-Fed camp, argued, ironically, No, the Fed isn’t “broken”?because saying that’s it’s broken implies that it could possibly be fixed!

What’s distinctive about this kind of “Austrian School” analysis is that it emphasizes that fractional reserve banking is inherently bankrupt: if you deposit a buck in your local bank, and it gets loaned out 9 times, then your money (that is, your private property) really isn?t there, no matter what it says on your statements. The ?insurance? offered by the FDIC and the Fed qua ?lender of last resort? is no insurance at all, since, in the case of a national bank run, the Fed would have to engage in massive printing to make sure everyone can withdraw their funds. You?d get your savings out alright, but it wouldn?t be worth jack squat! 

From this point of view, Ben Bernanke and Alan Greenspan aren?t, in fact, crazed and reckless money-printers; to the contrary, they?re paragons of central banking wisdom, who through their price-fixing skill and acumen have been able to hold off systemic catastrophe for longer than many thought possible. Central Bankers will all fail in the long run?that is, every paper money in the history of the world has always progressively lost value and eventually gone to zero (and always at a rapid pace near the end of its life.) But our beloved Maestros have been wildly successful, at least for now, at preventing Americans from having to make recourse to the proverbial wheelbarrow. 

Come to think of it, I’d bet that a total breakdown of the global fiat standard is a more likely scenario than sound currency reform in Washington, DC.

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