My Thoughts on the FED « Kevin Tracy

My Thoughts on the FED

Posted By Travis Gearhart at 8:22 pm on December 29, 2009

The Federal Reserve System. Founded in 1913 “in response to prior financial panics and bank runs, the most severe of which being the Panic of 1907“, was founded on an ungrounded belief that capitalism was to blame for financial disasters. Many of us that read/write for/comment on this site probably shake our head at this comment, and I’m one of them. I don’t believe that the creation of the Federal Reserve was necessary, and was created mostly for political reasons. Not necessarily to “control the economy” (I don’t adhere to that theory), but instead to use as a political stunt to show that the government is supposedly doing everything possible to help the people.

The current responsibilities of the FED include (list from Wikipedia):

To address the problem of banking panics

To serve as the central bank for the United States

To strike a balance between private interests of banks and the centralized responsibility of government

To supervise and regulate banking institutions
To protect the credit rights of consumers

To manage the nation’s money supply through monetary policy to achieve the sometimes-conflicting goals of

maximum employment
stable prices, including prevention of either inflation or deflation^[33]
moderate long-term interest rates

To maintain the stability of the financial system and contain systemic risk in financial markets

To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

To facilitate the exchange of payments among regions
To respond to local liquidity needs

To strengthen U.S. standing in the world economy

Now, in theory, I agree: the Federal Reserve wasn’t needed to accomplish these things. However, my main argument against the elimination of the Federal Reserve is that it is far too late for such a thing to happen. At this point, the FED is so ingrained into our system that ripping this bureaucratic nightmare leech could result in fatal blood loss (to use a less than flattering analogy). Will I concede that the FED has, in many cases, caused more harm that good? Absolutely. However, let’s say that tomorrow the Federal Reserve System ceases to exist (not realistic in the least bit, but lets pretend for a moment). The panic that it would bring amongst investors would see the stock market crash to almost nothing. Suddenly, businesses that are relying on the FED to keep interest rates artificially low would close down over night, and massive lay offs and unemployment rates would finally slam that nail into our coffin.

Do I think that the FED should be held accountable for their mistakes? Absolutely. In fact, I have an entire Economic Bill of Rights that I believe should be passed. Not only would such legislation be more realistic than the elimination of the FED, it would accomplish what many of us on here want (accountability and transparency) with out completely demolishing the economy. The Economic Bill of Rights, which I found in the book “Common Sense Economics” and fell in love with, are as follows:

a. No government shall use its regulatory powers to take private property, either partially or in its entirety, for public use without paying the owner the full market value of the property taken.

In recent years state and local governments in particular have used regulations to take or control private property without compensation, even though the property owner had violated the rights of no one. The courts have generally allowed them to do so as long as a legislative body deemed that the action was “in the public interest” or that the taking did not deny the owner all uses of his or her property. This is an open door to abuse that must be closed.

b. The rights of individuals to compete in a business or profession and/or buy and sell legally tradable goods and services at mutually acceptable terms shall not be infringed by Congress or any of the States.

The freedom of individuals to compete in business and engage in voluntary exchange activities is a cornerstone of both economic freedom and progress. Price controls, business and occupational entry restraints, laws restricting the exchange of goods and services across state boundaries, and other government regulations that restrain trade should be prohibited.

c. Congress shall not levy taxes or impose quotas on either imports or exports.

The U.S. Constitution already prohibits the imposition of these trade restraints on exports. This prohibition should also be extended to imports. The freedom to trade is a basic human right, just like freedom of speech and freedom of religion. There is no reason why Americans should no be permitted to buy from and sell to whomever will give them the best deal, even if the trading partner lives in another country.

d. A 3/4ths approval of both Houses of Congress shall be required for all expenditure programs of the federal government. At least 2/3rds approval of the legislative branches of state government shall be required for the approval of expenditures by state governnments.

Remember, if a project is really productive, there will always be a method of finance that will result in everyone gaining. Thus, the super majority provisions need not eliminate projects that truly increase wealth. They will, however, make it more difficult for special interests to use government as a tool for plunder. They will also help keep the spending activities of governments as the local level where competition among governments provides a stronger incentive to serve the interests of all citizens.

e. A 3/4ths approval of both Houses of Congress shall be required before the federal government is permitted to borrow any funds to finance a deficit in its annual budget.

This will reduce the inclination of Congress to spend beyond its means.

f. A 3/4ths approval of both Houses of Congress shall be required for the federal government to mandate any expenditures by either State governments or private business firms.

If this provision is no included, Congress will use mandated expenditures to escape the prior spending and borrowing limitations.

g. The function of the Federal Reserve System (FED) is to maintain the value of currency and establish a stable price level. If the price level either increases or decreases by more than four percent annually during two consecutive years, all Governors of the FED shall be required to submit their resignations.

This provision would make it clear what the FED is supposed to do. If the FED establishes monetary stability, it is doing its part to promote economic stability and progress.

Now, would even this be quite the undertaking? Of course. However getting something like this passed as opposed to the elimination of a humongous bureaucratic machine is much much more realistic. So there you go, my thoughts on the FED. Lets have some constructive comments, shall we? Yes, I do in fact have a brain, and with that brain I think for myself instead of following the leader. I haven’t heard one other person with this particular viewpoint on the FED or economic policy, and while I know it’s not perfect, nothing ever is. Non-constructive comments will not be addresssed.

Comments (11)

11 Comments »

Comment by LD Jackson on December 29, 2009

Speaking about the FED, there is one thing about them that I find extremely amusing. All they have to do is say something that even remotely sounds off key and financial people across this country start screaming and running for their lives. They sound entirely too much like a bunch of little girls running from the bogeyman. Sometimes, it is not even what they say, but how they say it, or what they do not say. It’s silly to see them all carrying on like that, but our financial system seems to hang on every word from the FED.

In reality, they are so ingrained into our economic policy and our government that I can’t see them ever being abolished. It’s like the Fair Tax. Even though it may be a good thing for our country, there isn’t a chance it will ever be passed into law. Doing so would take away the power our government has over the economics of America and they are not about to stand still and watch that happen.

I especially like item D. in your economic policy ideas. Even though I have been told that the pork barrel and other wasteful spending is a very small percentage of the spending bills, I can’t bring myself to believe that. Anything we can do to eliminate such spending and the special interest groups who push for that spending, I am all for it.

Comment by Chris on December 30, 2009

I would certainly support this economic bill of rights as it would end both our domestic and foreign interventions. This would create a de facto non-interventionist foreign policy.

While Ron Paul could argue a persuasive argument that we’d be better off ending the Fed tomorrow morning even if the consequence was a complete market collapse, that’s not what he advocates. Instead Paul advocates for the legalization of competition in money.

1) Repeal the legal tender laws – The constitution says that gold and silver are to be used as legal tender…why not legalize the constitution?
2) remove taxes on currency – Why do you owe capital gains tax when the Fed turns on the printing press?
3) Remove superfluous coinage laws. – Allow people to melt down their gold and silver and have the government verify its weights and measure.

This will cause people to slowly but surely reject federal reserve notes in favor of real money. No economic collapse. Couple that with auditing the Fed and the Congress will slowly but surely remove the powers of the Federal Reserve because of the crap they’e been pulling.

Comment by Travis Gearhart on December 30, 2009

Larry, thanks for my next Fair Tax post idea, lol, check it out on Friday for the response.

Chris, I reviewed it and aside from free trade (which I am 100% for) I don’t see anything that would necessarily make us a non-interventionalist country. It’s an interesting list of ideas from Paul, the biggest issue I have is item number three. To me that would actually favor those that have large ammounts of gold and silver (usually those with large sums of money anyways) and would not only make people in the higher ups of society regect the paper money, but would make paper money worth less as a whole. That rings a little too close to actually favoring the wealthy over the poor for me. Interesting theories though, again, I’m caught when it turns to that part of my mind that wonders if it could possibly be implemented. It would be easier to get restrictions passed (like the proposed ideas in my post) than to eliminate the FED, and would have many of the same desired effects.

Comment by Chris on December 30, 2009

e. A 3/4ths approval of both Houses of Congress shall be required before the federal government is permitted to borrow any funds to finance a deficit in its annual budget.

We talked about our equation (SS+MCare/MCaid+DoD+Interest) last time. Either the 3/4th approval is a meaningless barrier that automatically gets approved like our debt limit or it ends our foreign interventions. We can’t operate our foreign policy on a balanced budget. Thus the de facto non-interventionist foreign policy.

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I disagree that the economic bill of rights would have many of the same desired effects as allowing for competition in currency. A 4% inflation allowance means that 50% of your wealth/purchasing power will have been confiscated through inflation in 17 years. Inflation is a monetary phenomenon. If you don’t eliminate the FED, you don’t achieve the desired effects.

Comment by Travis Gearhart on December 30, 2009

I don’t think it will end up with non-interventionist forign policy, it would just make our overseas operations more focused and adequate, since allocating the funds would become more difficult. And you’re assuming that the FED would find a way to consistently allow 4% per year. If the rules are out there that anything over 4 gets you fired, I don’t think they’d allow it to get that close every year.

Comment by Chris on December 30, 2009

If you don’t think that would result in a non-interventionist foreign policy, then where are you cutting in those four programs plus interest…that politically can be done in order to balance the budget?
You can’t even cut $250 Billion from that, much less $1.4 Trillion over the entire budget.
__
On the 4%, who gets to hold the measuring stick? The government is reporting current inflation at 1.8%, but if you use the methodology that was used prior to Bill Clinton being elected to office, it’s over 5%. See shadowstats.com

Comment by briand on December 30, 2009

The Fed sets the fractional reserve rate which allows banks to loan money into existence. This is why banks own nearly everyone’s houses even though a banker could not even know how to hold a hammer let alone build a whole house. We pay banks interest on created money in order to maintain a house that they own. We pay taxes on the interest that the banks loan to the government. We purchase less with what we make because they create the inflation. The Fed is a front for the banking industry and it is an instrument of oppression that siphons away the wealth that producers create. Then they get bailed out if they make any mistakes. And we have had previous national banks that were eliminated before. It may seem an unrealistic goal at this point, but three years ago a Fed audit would not have flew. I think Jim Rogers could be right when he predicts that there will be no Fed in ten to twenty years from now.

Comment by Travis Gearhart on December 30, 2009

Chris, Brian, you both make some very good points, I just wish I was as optimistic. The elimination of the FED means a great many changes to a system that has been ingrained into our economy, and I simply can’t see a viable elimination (even in the next ten to twenty years). I could be wrong, and with any luck we’ll all live long enough for you two to say “I told you so”, or vice versa. As I wrote in my piece, a great many of the points you guys have made I’ve read before in several differnet books/articles, and I agree with the theory behind a lot of the points, but politically speaking I see the flaws as far as whether or not they could truly happen as planned. Thats probably why I couldn’t be an economist for a living. A politician with an interest in economics and a board of economic advisors, like Reagan had? Definately.

Comment by Travis Gearhart on December 30, 2009

Also, to address Chris’s point about foreign policy, the ammendment doesn’t state that the funds 100% WOULDN’T be borrowed, jut that it would be much harder to borrow the funds with out a super majority. That doesn’t mean that we wouldn’t have the troops, just that more time would be needed to be sure that good decisions were being made and that wasteful spending wasn’t happening (I’m sure we could disagree on wasteful vs. unwasteful spending, but regardless).

Comment by Chris on December 30, 2009

It says the funds can’t be borrowed without 3/4th approval. Either everything gets approved and it’s a token amendment, or HHS and DoD fight for their respective piece of the pie. I don’t see how DoD can possibly win that fight.

Comment by briand on December 31, 2009

I hope your are right about this Travis because I fear that our debt based money system is unsustainable, and it is probably true that the Fed will not be tossed out the window until it has completely made a mess of everything. Politically it is the same right & left wing populism that brought on the Fed audit that will bring on it’s demise. I would prefer to extol the virtues of the free market and I feel no need to make political calculations. If you are not an elected official then it is odd that this should concern you. The market is very efficient at setting exchange rates, the Fed is not. There is always a lag between the start of a problem and then the time it is perceived. Another lag between the perception and the decision of what should be done. There is a further lag between when the action is taken and when it’s effects are felt. Central planning simply does not work.

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