For it before they were against it - Audit the Fed Edition

In case you didn't hear, an amendment to the financial reform legislation by Senator Bernie Sanders (I-VT) passed today. The amendment allows for a one time audit of the the activities of the Federal Reserve that are currently not audited (such an audit is prohibited by law).

The problem is that the amendment that passed is a weakened version of Sanders' original amendment that would have allowed for future audits as well. It is reported that the request to weaken the amendment came from the White House as well as other sources.

Open Congress notes how Senator David Vitter (R-LA) sought to revive the tougher version:

Thanks to Sen. David Vitter [R, LA], something very similar to the original Sanders amendment is going to get a vote today as well. In addition to removing the special protections from audits for the Fed from U.S. code, the Vitter amendment adds new language to help preserve the Fed’s political independence

Open Congress also notes that Tom Harkin (D-IA) and Ben Cardin (D-MD) were both co-sponsors of the original Sanders amendment. The both voted no on the Vitter version.

Ron Wyden (D-OR) was also a co-sponsor of the original and voted yes on the Vitter version.

Would we waste a fiscal crisis?

Matthew Yglesias concedes there is a need to correct our fiscal balance over the longer term. While he doesn't see the political will to do anything substantial in that regard at this time, he speculates that changing conditions could also change the political calculus:

The other factor here is that while you can easily look at a budget projection and forecast a coming fiscal crisis, we’re not actually in a fiscal crisis. Interest rates are quite low and there’s just no real way to cut the deficit back further within the bounds of current politics. The actual arrival of a crisis will presumably expand the bounds of what can be put on the table.

I fear that it is simply too much to hope that our leaders will do something about this situation before such a crisis arises

While I would like to hope that such a crisis would expand the bounds of possibilities, the example of the Lehman Brothers collapse suggests that this might not be the case. Institutions that rely on short term financing of debt are vulnerable to rapid changes in lenders' willingness to lend. When that willingness runs out, then the hard choices have to be made.

Now the U.S. is no Lehman Brothers, but I'm not sure that a true fiscal crisis would really open up the available options. Yglesias is referring to the possibility of raising taxes or cutting spending in meaningful ways on programs that, absent a crisis, are absolutely off limits (Social Security, Medicare, and defense).

Another possibility is that, like the failed financial institutions of this crisis, the government would simply turn to the Federal Reserve to inflate away our debt. This would be incredibly short-sighted, and ultimately worse, since we would need to continue to borrow at the higher interest rates resulting from inflation. That said, it doesn't mean our policymakers won't try it once they are confronted with an actual fiscal crisis.

What's Driving Commodity Prices

Professor James Hamilton has been examining the increase in dollar commodity prices and their tendency to move together on his blog Econbrowser. Last week's price drop offers some additional insight into the phenomenon.

Hamilton argues that there is a more convincing explanation for commodity prices than a strengthening of the world economy or inflation fears:

A more natural interpretation of Friday's commodity price moves would be based on the role of low short-term interest rates in encouraging the commodity price boom. The sooner U.S. employment recovers, the sooner the Fed will start raising interest rates, and the sooner the game of putting borrowed cash into commodities would be up...

The Fed is accustomed to thinking of unemployment as the key predictor of inflation, and of relative commodity prices as a separate factor beyond its direct control. I read Friday's market moves as one more suggestion that commodity price inflation may have more to do with U.S. monetary policy, and less to do with U.S. employment, than many within the Fed are prepared to acknowledge.

While it's true that low interest rates do not automatically mean an expansion of money in the economy, there would seem to be something to the notion that low costs of borrowing can have in inflationary impact on assets. As people are able to borrow relatively cheaply they may be inclined to bid-up asset prices. This seems to be at least part of the story of the housing bubble.

The way that interest rates, reserve requirements, savings habits (at home and abroad), and demand for currency interact is complicated and from what I can tell is not a settled question among the academics.

If in fact we are entering an era where a common side effect of low interest rates are asset price bubbles (even minor ones) Central Banking would seem to be little more than squeezing a balloon. And as anyone with kids can tell you eventually the balloon pops, then the crying starts.

The Fed Audit Roller Coaster

Ron Paul's bill HR1207 to audit the Federal Reserve continues to make news, at least in the blogosphere. Some recent coverage indicated that Barney Frank (D-MA) has indicated Paul's bill will pass the House in October. This is important because Frank chairs the House Financial Services Committee.

The excitement even seemed to catch the more sober blogs like Open Congress who recently titled a post "Audit the Fed" Bill Will Pass This Fall.

Apparently, this was pronouncement was based on a faulty transcript of Frank's remarks and was overly optimistic.

From RonPaul.com:

The transcript is missing an essential sentence, which is marked in bold:

That will be part of the overall federal regulation that we are redacting. This will probably pass in October.”

(Accurate transcript here.)

With “This will probably pass in October”, Frank is referring not to HR 1207, but to his own financial regulation bill, which might or might not include some aspects of Ron Paul’s HR 1207. The preceding sentence, “That will be part of the overall federal regulation that we are redacting,” is for some reason missing from the widely distributed transcript, and has therefore been completely ignored by bloggers and commentators.

In recent weeks Ron Paul repeatedly warned against just this sort of thing happening: that HR 1207 might become part of a more comprehensive financial regulation bill and be watered down so that it appeases the angry masses without instituting any real changes. It would be an irony of history if that happened — if HR 1207 were watered down and integrated into an unconstitutional bill that Ron Paul would have to vote against.

Based on the corrected transcript, Frank is talking about making information on what the Fed buys public, not on Paul's bill itself.

For more on the Ron Paul bill to audit the Fed click here.

Ron Paul's Fed bill continues to make its way

Open Congress reports that the Ron Paul Fed Bill is continuing to make its way through the legislative process and may get a hearing in the House. (My initial post on it is here, and a follow up here.)

House Financial Services Committee Chairman Rep. Barney Frank [D, MA-4] now seems to be tentatively supporting the bill. Jane Hamsher spoke to Frank and got little more information:

I asked him if he supported the bill. “Not in every exact detail,” he said, but he indicated that he was in favor of giving Congress more ability to oversee the Fed.

I also wanted to know if there would be committee hearings on the bill. He said that before the August recess “there will be a hearing on that particular bill and others,” both in Mel Watt’s Subcommittee on Domestic Monetary Policy and Technology and Dennis Moore’s Subcommittee on Oversight and Investigations.

The report, however, includes this sad note:

It’s also worth mentioning that it’s very unlikely that this bill will get anywhere in the Senate. For one, it only has two co-sponsors in the Senate at this point, even after all the citizen lobbying that has gone into supporting it. Secondly, Fed transparency is basically a populist push, and members of the Senate, needing to be re-elected only every 6 years, are generally less responsive to the people

In general, I think the Senate's more deliberative (and less activist) approach is a good thing. In theory, the Senate should help save us from legislation created in haste, which could possibly be more damaging than whatever perceived ill it is crafted to address. On the other hand, when a deliberative body does little more than preserve the status quo or insure all change is made in microscopic increments, that is definitely not a good thing.

Ron Paul's Fed Bill Gaining Momentum

Ron Paul's bill to bring transparency to the actions of the Federal Reserve once seemed an idealistic but unrealistic crusade. Or, at the very best, a remote possibility. Not so any more.

The Open Congress blog reports:

UPDATE 3: The bill has officially reached (and surpassed) majority co-sponsorship status, a just-issued press release from Ron Paul reports:

Audit the Fed Bill Reaches Crucial Benchmark

Washington, D.C. – Congressman Ron Paul’s Federal Reserve Transparency Act, HR 1207, has reached and surpassed the level of 218 cosponsors in the House of Representatives, which means it is now cosponsored by a majority of the members.

The 218th cosponsor was Dennis Kucinich (OH-10), and the bill has since received its 222nd cosponsor.

“The tremendous grass-roots and bipartisan support in Congress for HR 1207 is an indicator of how mainstream America is fed up with Fed secrecy,” said Congressman Paul. “I look forward to this issue receiving greater public exposure.”

Hearings on Federal Reserve transparency are expected within the next month, as part of the Financial Services Committee’s series of hearings on regulatory reform.

This is great news for those that believe the Fed is in need of greater oversight and accountability. If this doesn't include you, watch this video:



Still don't think the Fed needs more oversight?

The Next Bubble?

Scary words from economist Simon Johnson:

By not changing incentives for powerful bank insiders, we are lining ourselves up for another big “moral hazard trade” – think of this as a bailout by the Federal Reserve of everyone, but especially banks. Current and future bank executives will take risk again – but next time it will be risk with the public’s money. A housing bubble led to the current difficulties but the meta-bubble is a rise in financial services as a share of the economy, which has been underway since the 1980s. In the latest manifestation of the ensuing shift in economic and political power towards the financial sector, an unsustainable “Fed bubble” is potentially underway. This may lead to outcomes that are considerably worse than what we have seen so far. [E.A.]

Johnson is a proponent of revised regulation for the financial industry, and he is optimistic that the will exists to make it happen. If there was some way to insure that we implement the correct regulation, rather than just any regulation, I might share some of his zeal for a new regulatory regime.

There are two major hurdles to this outcome. First, it is difficult, if not impossible, to know for certain what the optimal regulatory scheme is. Second, even if it were knowable, the reality of our political system may make implementation impossible.

Given this, I am even more frightened by his warning regarding the existence of a Fed bubble, and what its end might mean for the economy.

Fed Up: Why we need small government populism

There's been something of a dust-up over a purchase of Goldman Sachs stock by the Chairman of the New York Federal Reserve; a purchase made while Goldman had business before the Fed, which is also Goldman's regulator.

Over at Slate, Eliot Spitzer has a great piece describing the special place of the New York Fed in our financial system and how it is entirely dominated by the large financial institutions it is supposed to be regulating. Here's the takedown:

So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?

It is now clear that there is something even worse than too much regulation, worse, even, than too little regulation. Namely, a public regulatory scheme that is little more than a thin veneer covering a privately controlled system utilized to deliver private gain.

Not illegally mind you, this is strictly above board. It is the use of access and influence to provide maximum value for shareholders, the primary duty of those that run public companies.

There is nothing wrong with trying to deliver value to shareholders, but the means for doing so used to be production of valuable goods and services. If we have entered a time when the means to deliver shareholder value is by having the ear of government officials, we have truly entered the age of decadent capitalism.

This phenomenon highlights the limits of effective regulation. When regulation is complex and carried out in secret, there will be those that will find ways to game the system. Always.

Minimal regulation intended to prevent only the most calamitous outcomes, enforced in full view of the public is the best hope we have of preserving our own welfare and preventing the very real human suffering that results when government serves the interests of business before it serves the interests of the people.

Ron Paul takes on the Fed (again).

Rather than just tilt at the windmill that is the Fed, Representative Ron Paul has decided he might try a different tactic this year and attempt to see just what it is that goes on inside it. To that end, he has proposed The Federal Reserve Transparency Act of 2009 (H.R. 1207).

According to the OpenCongress Blog:

Far from ending the Fed, the bill calls for a full Government Accountability Office (GAO) audit of the central bank to be completed before the end of 2010 and submitted to Congress for review.

After his annual frontal assault attempting to destroy the Fed fails year after year, it appears Paul is now attempting his own form of institutional asymmetric warfare.

I have added the widget on the right where you can access the latest information on the bill as it makes its way through Congress.

The OpenCongress blog sums up nicely why this is so important:

In the past year or so, the Federal Reserve has given banks more than $2 trillion in loan guarantees in an attempt to forestall the economic crisis. But information on where all this money has gone and what kind of securities the Fed has accepted in exchange is unavailable. Since the Fed is a quasi-public institution, they aren’t obliged to tell us, even though they are pushing around public money. “The contrast is pretty clear,” says Sen. Bernard Sanders [I, VT], who is sponsoring the Senate version (S.604), “if you want to know who received the money under TARP, go to the website, it’s there. If you want to know who received the money from the Fed, it ain’t there.”

In the Politico, Ron Paul writes, “if this audit reveals what I suspect and Congress has finally had enough, it can also pass my legislation to abolish the Federal Reserve.” Whether you support ending the Fed, like Ron Paul, or fixing the Fed in order to restore the health of our financial system, finding out what the Fed is up to – and where they have been failing – is essential to moving forward. It may sound trite, but transparency is crucial for solving our economic crisis.

It was White House Chief of Staff Rahm Emanuel that advised not to let the current crisis go to waste. Who knew that Ron Paul would take this advice to heart.