RonPaulFanInGA
09-08-2009, 08:24 AM
h ttp://www.newmajority.com/ron-paul%E2%80%99s-fatuous-anti-fed-book
Ron Paul’s new book End the Fed exemplifies H.L. Mencken’s dictum: “Explanations exist; they have existed for all time; there is always a well-known solution to every human problem — neat, plausible, and wrong.”
Paul’s explanation for many U.S. economic and political ills — not just the recent crisis but the business cycle overall, and even welfare dependence and foreign wars — is that the Federal Reserve caused or enabled them. His solution is to abolish the Fed, with preliminary steps including (as his current legislation calls for) expanding the Government Accountability Office’s power to audit Fed transactions. He calls for a return to the gold standard, and for private currencies to compete with the federal dollar.
His explanation mixes some legitimate concerns into a stew of exaggeration, misdirection and conspiracy-mongering. His solution combines the counterproductive with the untried, and is offered with an ideologue’s certitude that no adverse consequences or difficult tradeoffs need be considered.
Paul is right to be concerned about the Fed’s capacity to expand the money supply and generate inflation. (Incidentally, he defines inflation not as a general rise in prices but as any expansion of the money supply, a neologism that produces nothing but confusion.) But his audit bill, by making the Fed more susceptible to political manipulation, will only increase such inflationary proclivities. The record is clear that central banks with some insulation from political pressure are better at curtailing inflation.
The financial crisis that blew up in 2008 evidently had many causes, with actions by government as well as by the private sector contributing in various ways. Paul sticks with a mono-causal explanation, blaming it all on the Fed (for keeping interest rates too low and enabling government bailouts; not, of course, for being lax in regulatory oversight). That provides a convenient scapegoat but a simplistic view of a complex situation. Market dynamics (e.g., banks gorging on mortgage-backed securities) and a lack of government activism (e.g., Treasury’s decision not to bail out Lehman Bros.) played a role in the crisis, and it is far from clear what would have happened if the Fed had not pumped up liquidity in response.
Financial crises occurred in America long before the Fed was created in 1913. The 19th century was rife with severe crises, most of which occurred long after the Fed’s precursors, the First and Second Banks of the United States, had been driven out of existence by the anti-financial populists of their day. Paul shrugs off this significant counterevidence to his argument, and seems to have ruled out on a priori grounds the possibility that financial crises can occur without government causing them in some way.
Similarly, he downplays the Panic of 1907, when the financial system came close to collapse and was held together, barely, by J.P. Morgan, Sr., who acted as a de facto central banker in organizing a consortium of banks and deciding where to direct funds to stem the tide of withdrawals and collapses. Paul, who repeatedly complains that the Fed serves the interests of the Wall Street elite, seems unaware that the central bank was created in significant part to avoid leaving systemic responsibility in the hands of a small number of private-sector bankers.
On page 150 of End the Fed, Paul describes the Fed itself as a “private bank,” a false description that is a staple of conspiracy literature. In reality, the Fed’s Board of Governors, which has the final word on policy, is a clear-cut government agency, with members appointed by the President of the United States, and the Fed’s regional banks — though shares in them are held by banks in their districts — are de facto government agencies (the shares cannot be bought or sold, and all profits are remitted to the Treasury).
Extolling the gold standard, Paul argues that it would bolster the dollar’s credibility while restraining government spending on social programs and “unnecessary wars.” Placing the U.S. dollar on a commodity standard (possibly linking it to a basket of commodities, rather than just gold) is not an absurd idea; it would help staunch inflation and depreciation. But any such move will have downsides as well. For one thing, a commodity standard may require high interest rates to maintain, damaging economic growth. It may also be subject to instabilities as the commodity supply fluctuates.
If the commodity standard credibly limits government spending, there may be a crisis involving the ability to pay for outstanding obligations (including wars that may not be so unnecessary). More likely, policymakers will simply dump the standard at times of crisis and war, as most of the combatant nations did with their gold standards in the Napoleonic Wars and World War I. In that case, the standard will have little credibility, which will lead to more financial turmoil. As for Paul’s further hope for a world in which private currencies compete against and possibly supplant government currencies, let’s just say we’re quite a ways off from that, and have very little historical basis for assessing its viability.
Current reform efforts should focus on strengthening, not weakening, the Fed’s ability to constrain inflation. That could mean giving the institution clearer statutory guidance to focus on inflation (it currently is required to focus on employment as well) or mandating a specific range of inflation rates to target. In the longer run, more radical steps, including commodity standards and private currencies, may prove useful. But all that will require an interest in serious reform, not in whipping up paranoid hysteria. Nothing good will come of Ron Paul’s book and his campaign of demonizing the Fed.
Ron Paul’s new book End the Fed exemplifies H.L. Mencken’s dictum: “Explanations exist; they have existed for all time; there is always a well-known solution to every human problem — neat, plausible, and wrong.”
Paul’s explanation for many U.S. economic and political ills — not just the recent crisis but the business cycle overall, and even welfare dependence and foreign wars — is that the Federal Reserve caused or enabled them. His solution is to abolish the Fed, with preliminary steps including (as his current legislation calls for) expanding the Government Accountability Office’s power to audit Fed transactions. He calls for a return to the gold standard, and for private currencies to compete with the federal dollar.
His explanation mixes some legitimate concerns into a stew of exaggeration, misdirection and conspiracy-mongering. His solution combines the counterproductive with the untried, and is offered with an ideologue’s certitude that no adverse consequences or difficult tradeoffs need be considered.
Paul is right to be concerned about the Fed’s capacity to expand the money supply and generate inflation. (Incidentally, he defines inflation not as a general rise in prices but as any expansion of the money supply, a neologism that produces nothing but confusion.) But his audit bill, by making the Fed more susceptible to political manipulation, will only increase such inflationary proclivities. The record is clear that central banks with some insulation from political pressure are better at curtailing inflation.
The financial crisis that blew up in 2008 evidently had many causes, with actions by government as well as by the private sector contributing in various ways. Paul sticks with a mono-causal explanation, blaming it all on the Fed (for keeping interest rates too low and enabling government bailouts; not, of course, for being lax in regulatory oversight). That provides a convenient scapegoat but a simplistic view of a complex situation. Market dynamics (e.g., banks gorging on mortgage-backed securities) and a lack of government activism (e.g., Treasury’s decision not to bail out Lehman Bros.) played a role in the crisis, and it is far from clear what would have happened if the Fed had not pumped up liquidity in response.
Financial crises occurred in America long before the Fed was created in 1913. The 19th century was rife with severe crises, most of which occurred long after the Fed’s precursors, the First and Second Banks of the United States, had been driven out of existence by the anti-financial populists of their day. Paul shrugs off this significant counterevidence to his argument, and seems to have ruled out on a priori grounds the possibility that financial crises can occur without government causing them in some way.
Similarly, he downplays the Panic of 1907, when the financial system came close to collapse and was held together, barely, by J.P. Morgan, Sr., who acted as a de facto central banker in organizing a consortium of banks and deciding where to direct funds to stem the tide of withdrawals and collapses. Paul, who repeatedly complains that the Fed serves the interests of the Wall Street elite, seems unaware that the central bank was created in significant part to avoid leaving systemic responsibility in the hands of a small number of private-sector bankers.
On page 150 of End the Fed, Paul describes the Fed itself as a “private bank,” a false description that is a staple of conspiracy literature. In reality, the Fed’s Board of Governors, which has the final word on policy, is a clear-cut government agency, with members appointed by the President of the United States, and the Fed’s regional banks — though shares in them are held by banks in their districts — are de facto government agencies (the shares cannot be bought or sold, and all profits are remitted to the Treasury).
Extolling the gold standard, Paul argues that it would bolster the dollar’s credibility while restraining government spending on social programs and “unnecessary wars.” Placing the U.S. dollar on a commodity standard (possibly linking it to a basket of commodities, rather than just gold) is not an absurd idea; it would help staunch inflation and depreciation. But any such move will have downsides as well. For one thing, a commodity standard may require high interest rates to maintain, damaging economic growth. It may also be subject to instabilities as the commodity supply fluctuates.
If the commodity standard credibly limits government spending, there may be a crisis involving the ability to pay for outstanding obligations (including wars that may not be so unnecessary). More likely, policymakers will simply dump the standard at times of crisis and war, as most of the combatant nations did with their gold standards in the Napoleonic Wars and World War I. In that case, the standard will have little credibility, which will lead to more financial turmoil. As for Paul’s further hope for a world in which private currencies compete against and possibly supplant government currencies, let’s just say we’re quite a ways off from that, and have very little historical basis for assessing its viability.
Current reform efforts should focus on strengthening, not weakening, the Fed’s ability to constrain inflation. That could mean giving the institution clearer statutory guidance to focus on inflation (it currently is required to focus on employment as well) or mandating a specific range of inflation rates to target. In the longer run, more radical steps, including commodity standards and private currencies, may prove useful. But all that will require an interest in serious reform, not in whipping up paranoid hysteria. Nothing good will come of Ron Paul’s book and his campaign of demonizing the Fed.