Why are conservatives obsessed with the federal reserve?

[SimpleDon]

Clueless in Kentucky: Rand Paul's ideas about the fed make absolutely no sense

Joy, I wrote this below to be a separate thread.

I agree with auxlus and the OP that conservatives are irrational about the Fed. I don't always agree with the Fed in their actions. They base what they do on the prevailing economics which I don't agree with. But I don't expect the Fed to do any differently than that. We have to change the economics, not the Fed.

Here is an article about our favorite Austrian/Libertarian economics proponent, a man who has been inexplicably elected to the US Senate and is apparently now running to be our next president, Rand Paul.

Austrian/Libertarians are dismissive of the government's ability to do, well, anything. But the government's biggest problem currently is the interference from these people like Paul who have no firm contact with reality. The Federal Reserve Bank is among the most transparent of government agencies. They have to be, their operations can't work in secret. It does them no good to try to raise interest rates if they don't announce that they want interest rates to go up and by how much, for example.

From the blog entry which is here in the Washington Post.

... he's moved on [from Bilderberg Group and NAFTRA superhighway conspiracy theories] to peddling barely-more-coherent scare stories about Ebola, vaccines, and, above all, the Federal Reserve. In fact, during a swing to Iowa last weekend, he began his trip with an all out assault on the Fed. “Anybody feel that the Fed is out to get us?" Paul said to applause.

What's behind this odd fixation? Like his father before him, Rand Paul is a devotee of so-called Austrian economics. I say devotee, because Austrianism is a cult more than anything else. It preaches that the Fed is to blame for the economy's boom-and-bust cycle ... despite the fact that the busts have gotten smaller and less frequent since the Fed - the nation's central bank - was created.

And he like all Austrian/Libertarians they don't settle for just being wrong about the Fed causing the business cycles, they double down and are wrong about everything that their economic theories tell them about the economy. Another constant complaint that they have against the Fed, especially since the financial crisis and recession of 2008, is that the Fed's money creation is any day now, going to trigger Wiemar Republic levels of hyperinflation.

But that's no matter to Austrians who think the only important thing is whether their theories work in, well, theory, and not in, well, practice. That's not hyperbole. Austrians really say it's irrelevant whether their hyperinflation predictions come true - which makes sense, I guess, since they haven't - as long as those predictions logically follow from first principles. That makes their beliefs "true" whether or not they actually are. If that sounds loony, that's because it is. But it's the basis of Paul's attempt to control - I forgot, he's calling it an "audit" of - the Fed.

I have to explain the latter. Austrian/Libertarian economists dismiss any attempts to fit their theories to real world data, to what actually happens in the real economy. They say that if their theories don't fit the real world data it means that there is something wrong with the data! That we don't see the hyperinflation raging all around us because of the many flaws in the consumers price index, for example.

They maintain that their methodology, called praxeology, is superior to that used by other economists. Instead of wasting their time looking at how the economy that we have now actually works and analyzing data from it, they develop their theories starting out with indisputable, bedrock truths and apply irrefutable logic to them to develop their theories to come up with an idealistic economy that can never be.

I always joke that the three bedrock truths that every Austrian bases their logic on are these,

1. The government can't do anything right.
2. The gold standard is the perfect monetary system.
3. The self-regulating, self-organizing free market can exist.

And of course, none of these are even close to being true.

Why is this important? It wouldn't be if Rand Paul was a fringe conspiracy crazed blogger on the Internet. But he is considered a viable candidate for for the Republican presidential nomination. And even worse, there doesn't seem to be anyone in the Republican party who openly disagrees with him.

In fact, the three indisputable, not anywhere close to being truths above would give you a good start on the Republican Party's platform for the last fifty years or so. You would only have to add some drivel about relying on their almighty gawd, their dedication to perpetual, profitable war and some details of the class warfare in support of the already wealthy against everyone else that they intend to keep fighting.

So the question is why have the Republicans so completely adopted the tenets of Austrian economics?

It is almost always wrong in its predictions and the few that they get right they reached for the wrong reasons, predictably Rand Paul's favorite, it is always the Fed's fault. They can't separate when they are talking about the real economy that we have now from when they are talking about their fantasy economy of the never going to happen future. Small steps toward achieving their goal of separating the government from the economy have caused massive problems, for example, deregulating and the failure to regulate the financial markets triggering the Great Financial Crisis of 2008.

I have some ideas, </not a surprise>

• Austrian economics is simple to understand.
• Unfortunately our economy is complex, it stands to reason that anything that explains the complex economy will itself be complex.
• Austrian economics is math free economics.
• Austrian economics depends largely on faith, an important consideration for conservatives.
• Austrian economics is a heterodoxy, it opposes the prevailing orthodoxy, especially the few Keynesian elements "synthesized" into the orthodoxy.
• Austrian economics and the libertarian philosophy in general fits well into the narcissism of the cult of the individual that is so popular now.
• The cult of the individual among other things believes that the individual can make judgments on matters independently of recognized authority.
• The cult of the individual is popular with conservatives; climate change deniers, anti-evolution, the sanctity of racism, pro-guns for example.
• The cult of the individual is also popular with liberals; anti-GMOs, anti-Vaxx, anti-nuclear power, pro-drugs for example.

But I believe the main reason that the Republicans have adopted Rand Paul's Austrian economics is because it appears to them to provide academic support for their belief in the self-regulating, self-organizing free market that allows them the illusion that the economy can operate by itself, independently of the government. lt is important for their anti-government, pro-corporate crusade, a critical part of their class war to preserve poverty and to shrink the middle class in order to increase the incomes of the already wealthy, especially those associated with the rentiers of the financial sector.

I will once again ask my uncomfortable questions.

Why would anyone vote for people who say that the government can't work to run the government?

And then to be surprised when the government doesn't work?

======================​

 

[SimpleDon]

Paul Krugman has also weighed in on this subject, here. He believes that the class interests have something to do with it, but he goes further,

So monetary crazy is pervasive in today's G.O.P. But why? Class interests no doubt play a role -- the wealthy tend to be lenders rather than borrowers, and they benefit at least in relative terms from deflationary policies.

This is demonstrably wrong, the rich generally don't hold money, they hold real assets which lose value under deflation. Even Krugman struggles to understand deflation. He should say that the rich mistakenly believe that they lose under inflation and win under deflation. The rich have a special name for inflation when referring to its effects on their real assets, they call it "capital gains" and it is a good thing.

But I [Krugman] also suspect that conservatives have a deep psychological problem with modern monetary systems. You see, in the conservative worldview, markets aren't just a useful way to organize the economy; they're a moral structure: People get paid what they deserve, and what goods cost is what they are truly worth to society. You could say that to the free-market true believer, to know the price of everything is also to know the value of everything.

Modern money -- consisting of pieces of paper or their digital equivalent that are issued by the Fed, not created by the heroic efforts of entrepreneurs -- is an affront to that worldview. Mr. Ryan is on record declaring that his views on monetary policy come from a speech given by one of Ayn Rand's fictional characters. And what the speaker declares is that money is "the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. ... Paper is a check drawn by legal looters."

Once you understand that this is how many conservatives really think, it all falls into place. Of course they predict disaster from monetary expansion, no matter the circumstances. Of course they are undaunted in their views no matter how wrong their predictions have been in the past. Of course they are quick to accuse the Fed of vile motives. From their point of view, monetary policy isn't really a technical issue, a question of what works; it's a matter of theology: Printing money is evil.

So as I said, monetary policy should be an issue in 2016. Because there's a pretty good chance that someone who either gets his monetary economics from Ayn Rand, or at any rate feels the need to defer to such views, will get to appoint the next head of the Federal Reserve.

Certainly this tendency to having to apply morality to to the working of the economy is constantly on display here, the need to blame the poor for poverty, for example. Poverty is a strictly economic problem, wages that are too low. Or the calls to drug test welfare recipients, because to conservatives being poor apparently means having a lot of disposable income with which to buy drugs. Or wanting to punish Greece with crushing, punitive austerity because they retire at 58 and because they bought into the idiocy of deregulating their financial markets.

 

[Jarhyn]

Paul Krugman has also weighed in on this subject, here. He believes that the class interests have something to do with it, but he goes further,



This is demonstrably wrong, the rich generally don't hold money, they hold real assets which lose value under deflation. Even Krugman struggles to understand deflation. He should say that the rich mistakenly believe that they lose under inflation and win under deflation. The rich have a special name for inflation when referring to its effects on their real assets, they call it "capital gains" and it is a good thing.

But I [Krugman] also suspect that conservatives have a deep psychological problem with modern monetary systems. You see, in the conservative worldview, markets aren't just a useful way to organize the economy; they're a moral structure: People get paid what they deserve, and what goods cost is what they are truly worth to society. You could say that to the free-market true believer, to know the price of everything is also to know the value of everything.

Modern money -- consisting of pieces of paper or their digital equivalent that are issued by the Fed, not created by the heroic efforts of entrepreneurs -- is an affront to that worldview. Mr. Ryan is on record declaring that his views on monetary policy come from a speech given by one of Ayn Rand's fictional characters. And what the speaker declares is that money is "the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. ... Paper is a check drawn by legal looters."

Once you understand that this is how many conservatives really think, it all falls into place. Of course they predict disaster from monetary expansion, no matter the circumstances. Of course they are undaunted in their views no matter how wrong their predictions have been in the past. Of course they are quick to accuse the Fed of vile motives. From their point of view, monetary policy isn't really a technical issue, a question of what works; it's a matter of theology: Printing money is evil.

So as I said, monetary policy should be an issue in 2016. Because there's a pretty good chance that someone who either gets his monetary economics from Ayn Rand, or at any rate feels the need to defer to such views, will get to appoint the next head of the Federal Reserve.

Certainly this tendency to having to apply morality to to the working of the economy is constantly on display here, the need to blame the poor for poverty, for example. Poverty is a strictly economic problem, wages that are too low. Or the calls to drug test welfare recipients, because to conservatives being poor apparently means having a lot of disposable income with which to buy drugs. Or wanting to punish Greece with crushing, punitive austerity because they retire at 58 and because they bought into the idiocy of deregulating their financial markets.

Real assets don't lose value. They ARE value. Money is at best virtual value. It dreams of some day BECOMMING value. deflation can't harm real assets. Debt assets GAIN value under deflation.

 

[Harry Bosch]

Real assets don't lose value. They ARE value. Money is at best virtual value. It dreams of some day BECOMMING value. deflation can't harm real assets. Debt assets GAIN value under deflation.

Could you give an example of a real asset that dosnt lose value?

 

[Jarhyn]

Real assets don't lose value. They ARE value. Money is at best virtual value. It dreams of some day BECOMMING value. deflation can't harm real assets. Debt assets GAIN value under deflation.

Could you give an example of a real asset that dosnt lose value?

Land, lathes, factories, houses, silver, grain, companies, brands, bridges, roads... Money only has value wrt the things it can buy. Money doesn't have real value. It is traded for real value.

 

[boneyard bill]

Committee Chairman Jeb Hensarling (R., Texas) said in his opening statement, “Fed reforms are needed and I for one believe Fed reforms are coming.”

One bill introduced by Sen. Rand Paul (R., Ky.) would allow the Government Accountability Office to review the Fed’s monetary-policy decision making. Mr. Paul says the measure would improve central-bank transparency.

Ms. Yellen said she opposed the bill because it would impair the Fed’s ability to set interest rates independent of political influence.

Republicans at the hearing countered that Ms. Yellen’s calendars show the executive branch has far more access, and potentially more influence, than Congress.

Between February and December last year, Ms. Yellen held 23 meetings—including telephone calls and in-person sessions—with lawmakers, including 16 with Democrats and seven with Republicans, her calendar shows. She held 51 meetings with executive branch officials, including two with President Barack Obama and 25 with Treasury Secretary Jacob Lew .

Rep. Scott Garrett (R., N.J.), citing a Wall Street Journal online tool that allows readers to sort Ms. Yellen’s calendar for meetings with different officials by name and type, said her schedule was among many factors painting a picture of a Fed “guided by partisan politics.” Others included her speech on inequality in October a month before the midterm elections; her meeting with Mr. Obama the day before the elections; and her meeting with “liberal advocacy groups.”

“So having Congress oversee your agency more thoroughly will not make it more political than it already is,” Mr. Garrett said.

Rep. Bill Huizenga (R., Mich.), referring to the White House address, said, “I don’t want to see 1600 Pennsylvania Ave. policies pushed through the Fed.” He asked, “is [the Fed] being unduly influenced by the executive branch?”

Ms. Yellen said no.

http://www.wsj.com/articles/fed-chief-janet-yellen-defends-fed-independence-1424883047

This lack of independence of the Fed sounds all like rumor and innuendo, and the proposed "cure" (partisan audits and other interference into the central bank affairs) is worse than the claimed disease.

What specific actions undertaken by the federal reserve can these Republicans point to that indicate partisan bias?

By all accounts, the federal reserve has done a fair job managing the financial crisis and implementing accommodative policy that helped dig us out of the great recession.

The question is not well phrased as it presupposes that conservatives are obsessed merely because they are the most recent critics of the Fed. In fact, historically, the Fed has usually received criticism from the Left. Henry Gonzalez, a Democrat from San Antonio, was frequent critic of the Fed during his tenure as Chairman of the old House Banking and Currency Committee. He succeeded Cong. Wright Patman of Florida as Chairman, and Patman had been a major Fed critique as well and had served for a very long time.

As Ron Paul has pointed out, he'd been submitting his "audit the Fed" bill for thirty years with no success at all until the financial meltdown. Suddenly he had dozens of co-sponsors and eventually had a majority of the House behind it. This included Republicans, certainly, but it also included many Democrats. Ron Paul's co-sponsor in the Senate was Sen. Bernie Sanders of Vermont until Rand Paul was elected to the Senate and picked up the flag.

So it is the financial melt-down and the questionable role played by the Fed, a role obscured by the lack of an audit, that is the motive behind this legislation. It hasn't been a part of the mainstream conservative agenda at all.

Those accounts of the marvelous job the Fed did during the financial crisis come largely from the Fed or from Wall Street cronies. Quoting the Wall Street Journal in this context is particularly inapt. Economists across of the country have soundly criticized the Fed's actions since the financial crisis. This includes many mainstream economists. The Fed's actions during and since the crisis are entirely unprecedented and do not even represent routine Keynesian economics.

In effect, the Fed rescued several Wall Street banks. Morgan Stanley and Goldman Sachs almost surely would have gone under without Fed intervention. Others might have as well. In the process, the Fed's actions may have resulted in a more mild downturn than would otherwise have occurred. However, the price they paid was to leave the truly serious problem of insolvent banks unresolved. So the Wall Street banks are now in even worse condition than when they were rescued in 2008. As a result, the "recovery" from that downturn has been anemic, and the next downturn is almost certain to be much more severe than the last.

 

[laughing dog]

Could you give an example of a real asset that dosnt lose value?

Land, lathes, factories, houses, silver, grain, companies, brands, bridges, roads... Money only has value wrt the things it can buy. Money doesn't have real value. It is traded for real value.

Any asset only has value either in use or in exchange. Fiat money has no use value. Then again, neither does a rusted out lathe or car and they don't typically have any trade value.

 

[Underseer]

Because money is literally all conservatives care about, and the Federal Reserve controls the money supply. This is like holding a big side of beef, and being surprised that dogs won't stop staring at you.

That's not true. Conservatives don't care about money, they care about the people who have the most money. Money is just how they know which persons are worthy of their worship.

 

[laughing dog]

In effect, the Fed rescued several Wall Street banks. Morgan Stanley and Goldman Sachs almost surely would have gone under without Fed intervention. Others might have as well. In the process, the Fed's actions may have resulted in a more mild downturn than would otherwise have occurred. However, the price they paid was to leave the truly serious problem of insolvent banks unresolved. So the Wall Street banks are now in even worse condition than when they were rescued in 2008. As a result, the "recovery" from that downturn has been anemic, and the next downturn is almost certain to be much more severe than the last.

Which "Wall Street Banks" are now even in worse condition than in 2008? You persist in making this claim, but have never backed it up with any evidence.

 

[boneyard bill]

Fed actions such as QE have empowered the big banks to control our economy. By bailing them out, the Fed makes them the gatekeepers of our economy and entrenches them in activities that are harmful to our economy. The injection point for the funds the Fed creates should never be the big banks. They have chosen to operate on that money and not serve savers and pensioners and pension plans and the money of the common man. This is evidenced by the largest banks only offering 0.1% on savings. A person who worked his or her lifetime in an inflationary economy and has saved considerable funds is still cash poor if he cannot work anymore. That is likely because our physical economy is actually quite anemic. The focus of these banks is still on large returns to their share holders to such an extent they mainly seek speculative gains and they do not finance small business at all.

By issuing this money to big banks at zero or next to zero interest, the Fed becomes their stooge and slave. This also makes the banks have no interest in the saver. We should abolish the Fed entirely and establish a National Bank with strict government controls on whom they might issue money to. The Fed is unduly influenced by the same crooked too big to fail banking interests that caused the 2008 economic crisis. What's worse, these banks are steering their way back to the same policies that caused that crisis.

You use the word "Liberal" far too liberally. Obama et al. are corporatists...much like you. That is not very "liberal" if you ask me.

You don't seem to understand how QE works - it is not a bailout. It is not a loan. The federal reserve doesn't engage in bailouts. The bailout was TARP, which was conducted through an act of _congress_.

QE consisted of purchases of financial _assets_ owned by banks in exchange for cash. In other words, it's a trade. Furthermore, those who own retirement accounts would be beneficiaries of such an action as it would raise the value of their portfolio.

The purpose of this is to increase liquidity and money supply and bring down yields to help stimulate the economy.

Your proposal is exactly the type of thing that gets rid of central bank independence and ruins economies.

That certainly isn't the way I have heard the Fed actions described. That may be accurate with respect to the immediate Fed money creation following the meltdown, but that's not the way I have heard "quantitative easing" described. In its quantitative easing policy, the Fed has purchased mortgages from the Wall Street banks at book value even though these are assets are basically worthless. They are held on the Fed's books at book value thus allowing the Fed to join Wall as an insolvent bank even though it doesn't show up on the books. Indeed, the only reason the Fed including MBS's in its purchases of quantitative easing would be to take them off the banks' books. The interest rate reductions were achieved largely through the purchase of Treasury bonds. Is there any time in the history of the Fed when it has purchased mortgage backed securities from the banks? I don't think so.

The increased value of pensioners bond is offset by reduced yields. If you bought the bonds a long time ago, you may be all right, but if you're looking for yield today, you won't find it in Treasury bonds.

The more important question is why the Fed should be intervening to set interest rates in the first place? Should the government intervene to set the price of gasoline? We saw what a disaster that was in the seventies. Is there any area where the government sets prices? Aside from alleged "natural monopolies" we do not believe that it is advantageous for the government to determine prices and leave that issue or the market place. Why then should the government set interest rates? After all, the interest rate is merely the price of money. Why shouldn't that be set by the market place just like any other product or service? If setting the price of gasoline leads to misallocation of gasoline availability, why would you not also expect misallocations in the market process when the government sets the interest rate?

 

[Axulus]

Could you give an example of a real asset that dosnt lose value?

Land, lathes, factories, houses, silver, grain, companies, brands, bridges, roads... Money only has value wrt the things it can buy. Money doesn't have real value. It is traded for real value.

Those can lose value as well - a factory that has obsolete equipment or produces things that are no longer in demand, land in an area that people are moving away from, roads and bridges no longer used very much, etc.

 

[Loren Pechtel]

Real assets don't lose value. They ARE value. Money is at best virtual value. It dreams of some day BECOMMING value. deflation can't harm real assets. Debt assets GAIN value under deflation.

A real asset that produces something no longer as much in demand loses value.

Consider an interesting thing I ran into not long ago: There are big concrete arrows on the ground in many places in the US. They were useful items when they were built but they have long been abandoned other than a few that people have chosen to restore.

Is that not an example of a real asset losing value?

 

[Nexus]

Value is always subject to the whims of observers. A pig might be valuable to some and worthless to Jews or Muslims. Yet if circumstance change and they were starving the pig probably gains value. I can't think of a single thing that has a TRUE absolute value.

 

[Harry Bosch]

Land, lathes, factories, houses, silver, grain, companies, brands, bridges, roads... Money only has value wrt the things it can buy. Money doesn't have real value. It is traded for real value.

?? All those assets go up and down in value, continuously.

 

[SimpleDon]

Paul Krugman has also weighed in on this subject, here. He believes that the class interests have something to do with it, but he goes further,



This is demonstrably wrong, the rich generally don't hold money, they hold real assets which lose value under deflation. Even Krugman struggles to understand deflation. He should say that the rich mistakenly believe that they lose under inflation and win under deflation. The rich have a special name for inflation when referring to its effects on their real assets, they call it "capital gains" and it is a good thing.



Certainly this tendency to having to apply morality to to the working of the economy is constantly on display here, the need to blame the poor for poverty, for example. Poverty is a strictly economic problem, wages that are too low. Or the calls to drug test welfare recipients, because to conservatives being poor apparently means having a lot of disposable income with which to buy drugs. Or wanting to punish Greece with crushing, punitive austerity because they retire at 58 and because they bought into the idiocy of deregulating their financial markets.

Real assets don't lose value. They ARE value. Money is at best virtual value. It dreams of some day BECOMMING value. deflation can't harm real assets. Debt assets GAIN value under deflation.

Can you define real value without using money?

Yes, debt becomes more valuable under deflation because the money that will be used to pay back the debt is more valuable than the money that was loaned out.

Deflation is simple, it is when money becomes more valuable than it was. It can buy more real things than it could previously. The real things become less valuable in terms of the money, therefore.

Likewise, inflation is simple, it is when money becomes less valuable than it was. It can buy fewer real things than it use to. The real things are more valuable in terms of the money.

Under inflation debt becomes less valuable, the money that is used to pay back the loan is worth less than the money was worth that was loaned out.

You may be confusing value with utility. Real things have the same utility, think usefulness, under inflation or deflation.

But obviously, real things can lose utility too. For example, a horse drawn wagon is less useful than it was a hundred years ago. It has lost utility.

I make the same offer to anyone who says that money has no real value. Send it to me.

Money can buy things. It has real value.

Econ 101 says that money has no utility. That is no one holds on to money for the money's sake. Econ 101 is again wrong about this. People hold money as a hedge against future uncertainty. They save for a rainy day.

 

[laughing dog]

Econ 101 says that money has no utility. That is no one holds on to money for the money's sake. Econ 101 is again wrong about this.

If ECON 101 taught that it would be wrong. But ECON 101 does not teach that. ECON 101 taught by my colleagues and everyone I know teaches that money has 3 functions: as a unit of account, as a store of value and for transactions. Clearly the 2nd function is a reason to hold money.

 

[SimpleDon]

Land, lathes, factories, houses, silver, grain, companies, brands, bridges, roads... Money only has value wrt the things it can buy. Money doesn't have real value. It is traded for real value.

Any asset only has value either in use or in exchange. Fiat money has no use value. Then again, neither does a rusted out lathe or car and they don't typically have any trade value.

Like Jurhyn I am wondering if you aren't confusing value with utility. Yes, those things that you listed are useful.

Maybe this will help. Your lathe might cost say $10K. Its value is $10K. Easy to see, I hope.

But what is it worth to my metal shop? Is it worth $10K to me? This is the question of utility. Like so many of this questions it depends. We have to introduce the idea of marginal utility.

If I don't have a lathe and am cutting groves in shafts with a milling machine, trust me this is possible but takes a long time, then it is worth $10K to me.

But if I already have six lathes and only three operators, then the $10K lathe is very nearly useless to me. It has no added or marginal utility to me. It won't increase my productivity.

Even if I believe that it will increase my productivity by $5K the vendor won't sell it to me for that amount, hoping that it is worth more than $10K to someone else.

But the value of the lathe is still $10K to that someone else. Even if the marginal utility is $25K to him.

 

[SimpleDon]

http://www.wsj.com/articles/fed-chief-janet-yellen-defends-fed-independence-1424883047

This lack of independence of the Fed sounds all like rumor and innuendo, and the proposed "cure" (partisan audits and other interference into the central bank affairs) is worse than the claimed disease.

What specific actions undertaken by the federal reserve can these Republicans point to that indicate partisan bias?

By all accounts, the federal reserve has done a fair job managing the financial crisis and implementing accommodative policy that helped dig us out of the great recession.

The question is not well phrased as it presupposes that conservatives are obsessed merely because they are the most recent critics of the Fed. In fact, historically, the Fed has usually received criticism from the Left. Henry Gonzalez, a Democrat from San Antonio, was frequent critic of the Fed during his tenure as Chairman of the old House Banking and Currency Committee. He succeeded Cong. Wright Patman of Florida as Chairman, and Patman had been a major Fed critique as well and had served for a very long time.

As Ron Paul has pointed out, he'd been submitting his "audit the Fed" bill for thirty years with no success at all until the financial meltdown. Suddenly he had dozens of co-sponsors and eventually had a majority of the House behind it. This included Republicans, certainly, but it also included many Democrats. Ron Paul's co-sponsor in the Senate was Sen. Bernie Sanders of Vermont until Rand Paul was elected to the Senate and picked up the flag.

So it is the financial melt-down and the questionable role played by the Fed, a role obscured by the lack of an audit, that is the motive behind this legislation. It hasn't been a part of the mainstream conservative agenda at all.

<snip, for excessive confused content>

Which is why I added my clueless in Kentucky post.

Yes, the Democrats criticize the Fed too. But their criticisms are that the Fed pays too much attention to their legally mandated obligation to control inflation and not enough attention to their legally mandated obligation to minimize unemployment. No matter how you feel about this you have to admit that it is a reasonable criticism.

The Democrats also criticize the Fed for not using their authority to protect the banking system from bad behavior by the banks themselves to prevent the misbehavior that caused the Great Financial Crisis of 2008. The Fed didn't because they were so thoroughly saturated with the deregulation delusion/derangement that they believed that the banks would somehow magically start self-regulating. Just based on the outcome you have to admit that the criticism is reasonable.

But the criticisms from the right are based on the idea that the Fed is going to print a huge amount of money to flood the economy with massive amounts of liquidity to debase the currency and create inflation. This is unreasonable on so many counts.

Why would the Fed do this? It is against their charter and their natural tendencies as already noted.

How would they do it? If we have learned recently monetary policy is nearly useless in getting money into the consumer economy, especially at the zero bound.

Money is created in the consumer economy by the banks loaning money or by the federal government running a deficit. The Fed has only a partial control over the former by setting the interbank interest rate and none over the latter.

Once again, the Fed is one of the most transparent of the agencies. Complete recordings of their deliberations are issued five years after the fact. From the recordings issued made before the meltdown we now know that the committee was still overly concerned about inflation and that there was hardly a mention of the huge asset bubble in home values or in the misbehavior of the executives in the banks and other financial institutions that the FBI had repeatedly warned them about.

Ron Paul nor Rand Paul don't seem to have any idea of what they expect to gain in additional information from their so-called audit bill. Perhaps if they were willing to release recordings of their internal discussions we would know. As it stands there is the strong suspicion that the main purpose of the so-called audit bill is to assert more political control over the Fed, which would be undesirable in my opinion.

 

[laughing dog]

Any asset only has value either in use or in exchange. Fiat money has no use value. Then again, neither does a rusted out lathe or car and they don't typically have any trade value.

Like Jurhyn I am wondering if you aren't confusing value with utility. Yes, those things that you listed are useful.

Maybe this will help. Your lathe might cost say $10K. Its value is $10K. Easy to see, I hope.

But what is it worth to my metal shop? Is it worth $10K to me? This is the question of utility. Like so many of this questions it depends. We have to introduce the idea of marginal utility.

If I don't have a lathe and am cutting groves in shafts with a milling machine, trust me this is possible but takes a long time, then it is worth $10K to me.

But if I already have six lathes and only three operators, then the $10K lathe is very nearly useless to me. It has no added or marginal utility to me. It won't increase my productivity.

Even if I believe that it will increase my productivity by $5K the vendor won't sell it to me for that amount, hoping that it is worth more than $10K to someone else.

But the value of the lathe is still $10K to that someone else. Even if the marginal utility is $25K to him.

Do you see that the increase in the productivity is the value in use to you (which is determined by the market and perhaps the additional satisfaction/utility you get) while the vendor's minimum price is the value in exchange?

 

[SimpleDon]

You don't seem to understand how QE works - it is not a bailout. It is not a loan. The federal reserve doesn't engage in bailouts. The bailout was TARP, which was conducted through an act of _congress_.

QE consisted of purchases of financial _assets_ owned by banks in exchange for cash. In other words, it's a trade. Furthermore, those who own retirement accounts would be beneficiaries of such an action as it would raise the value of their portfolio.

The purpose of this is to increase liquidity and money supply and bring down yields to help stimulate the economy.

Your proposal is exactly the type of thing that gets rid of central bank independence and ruins economies.

That certainly isn't the way I have heard the Fed actions described. That may be accurate with respect to the immediate Fed money creation following the meltdown, but that's not the way I have heard "quantitative easing" described. In its quantitative easing policy, the Fed has purchased mortgages from the Wall Street banks at book value even though these are assets are basically worthless. They are held on the Fed's books at book value thus allowing the Fed to join Wall as an insolvent bank even though it doesn't show up on the books. Indeed, the only reason the Fed including MBS's in its purchases of quantitative easing would be to take them off the banks' books. The interest rate reductions were achieved largely through the purchase of Treasury bonds. Is there any time in the history of the Fed when it has purchased mortgage backed securities from the banks? I don't think so.

The increased value of pensioners bond is offset by reduced yields. If you bought the bonds a long time ago, you may be all right, but if you're looking for yield today, you won't find it in Treasury bonds.

I feel like we have been through all of this many times before. The Fed has only two tools available to them to influence the creation of money in the economy.

The first is that they set the overnight interest rate that the banks pay to borrow money to use for short term shortfalls in the banks reserve requirements. But this is a fairly limited influence on money creation in the consumer economy. The impact of the reserve requirement has been slowly eroded over the years in favorable changes for the banks usually by the Congress, not the Fed. The bulk of deposits, those from the corporations, can be loaned out with no reserve requirement. And as we saw after the meltdown the setting of this interest rate can go to zero with no effect if no one wants to borrow money, if no one wants to build because demand is not there.

The second tool the Fed has is open market operations, the QEs. They make money out of thin air and buy bonds on the open market or from the banks that the banks have deposited in their own reserve accounts in the Fed, the banks’ bank. The latter are obviously completely useless, the money that the banks get for their bonds is usually just deposited back in the bank’s reserve account, nothing has really changed, especially since the Fed is now paying interest on reserve accounts.

That leaves true open market operations, when the Fed buys bonds on the open market. The problem with these purchases is that the money created to buy the bonds doesn't usually reach the consumer economy. The people or companies selling the bonds usually isn't selling them to increase consumption, the bondholders were holding the bonds are usually going to use the money gained in another portfolio investment, not an investment in the real economy of building production facilities to produce more products for consumption. Especially in times of low demand, like after the meltdown. The QEs are good for the stock markets, for example, but not for the economy. The stock market is a secondary market. It has little or nothing to do with the economy as a whole. What happens to the bonds that the Fed buys? They are effectively destroyed.

The mortgage backed securities that the Fed bought weren't basically worthless and they weren't bought by the Fed but by the Treasury with money provided by Congress raised by selling T-Bills. A minor point, admittedly, but one that you insist on getting wrong in spite of us pointing it out to you. From Wikipedia.

Purpose
TARP allowed the United States Department of the Treasury to purchase or insure up to $700 billion of "troubled assets," defined as "(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress."[4]

This isn't the QEs. As noted above the QEs bought bonds mostly on the open market, most of them were US Treasury bonds and notes, long term government debt, and some T-Bills, short term government debt. Although the SOMA shows the Fed holding no T-Bills currently. SOMA is the System Open Market Account holdings, which is here on the NY Fed's web site. It lists the current bond holdings by the Fed. Did I mention that the Fed is one of the most transparent of the federal government agencies?

You can see that the Fed still holds about 1.74 trillion dollars of Agency mortgage backed securities. These aren't the TARP funds that bailed out the banks, those have all been retired and the Treasury actually made a small profit on them. The 1.74 trillion in bonds were purchased from the GSO's, Fannie Mae, Freddie Mac, and Ginnie Mae. This program is possibly the one that you are confusing with TARP, the program to bailout the private banks.

The purchase of Agency MBS's was undertaken by the Fed in order to support the mortgage markets in 2008, when no one else was buying these bonds. If anything you would say that purchase of these bonds by the Fed bailed out the mortgage re-purchasers. However, the agencies still lost money because the Fed bought these bonds at a considerable discount, because like all open market operations, they were bought at market prices. As a result the Fed is making profits on the bonds as they mature, although that wasn't the aim of the Fed when they bought them. The whole program cost the Fed 1.2 trillion dollars by the time it ended in 2010 and as I said they still have 1.74 trillion dollars of bonds.

This program was undertaken under the Fed's charter authority to conduct open market operations in support of the banking system. Like all of their OMO's it was announced publicly before it started. In fact, the major purpose of the purchases was to restore confidence in the home mortgage market. To have done these purchases in secret would have defeated the purpose of making them. It is the same for all of the Fed's operations. They done in the full light of day because it is counter productive to do them in secret.

The more important question is why the Fed should be intervening to set interest rates in the first place? Should the government intervene to set the price of gasoline? We saw what a disaster that was in the seventies. Is there any area where the government sets prices? Aside from alleged "natural monopolies" we do not believe that it is advantageous for the government to determine prices and leave that issue or the market place. Why then should the government set interest rates? After all, the interest rate is merely the price of money. Why shouldn't that be set by the market place just like any other product or service? If setting the price of gasoline leads to misallocation of gasoline availability, why would you not also expect misallocations in the market process when the government sets the interest rate?

Austrian economics babble.

Try again to make a coherent argument and I can give you a coherent answer. Austrians believe that the interest rate is the price of the money and like all prices there is a "natural" price independent of the money price that would be the price arrived at in a moneyless barter exchange and that a missallocation results when the natural price is different from the money price. There is so much wrong with this that it is almost impossible to know where to begin. If this is the argument that you are making I understand why you have so much trouble with the real world, you are living in an Austrian fantasy. Austrians are not describing the current economy, they are telling us how their fantasy economy would work. If it isn't the argument that you are making you should drop the Austrian terminology so that you have the chance to understand this.

The Fed targets an interest rate that they think will result in a moderate growth in the money supply. In general they want the money supply to grow no more than the economy grows. If the money supply grows faster than the economy does you will tend to have inflation. If the money supply doesn't grow as fast as the economy grows you will have disinflation or even deflation and the economy will stop growing.