Why I support Ron, Part 1: End the FED

The Federal Reserve

If you think that talking about the Federal Reserve and monetary policy is both boring and a little crazy, believe me, I was with you for much of my life. The thing that drove me away from Ron Paul supporters in 08 was that they talked about "Ending the Fed." This sounded like an ephemeral and strange issue that was the realm of obscure economist and the tin-foil-hat crowd. If you remember only "supply and demand" from college econ, as I did, you would likely think this is a non-issue.

But that is the strange thing about supporting Ron Paul. The more I look into the issues, the more I see that the things he talks about are things that really matter. His campaign is as much about raising awareness of these issues as it is about him being elected president. So I am going to tell you why I find this relevant, and I am going to state things as plainly as I can because I am not an economics person (In fact I don't even know what that would look like, glasses maybe?).

1) The Fed (and the President) are making us poorer.

How do you define your wealth? Is it in the amount of money you have or the laughter of your children? Well, if you are like me you don't have children...so I guess I am left with money. I kinda always assumed that money was a mostly fixed quantity, a dollar is a dollar. But have you tried to use a dollar to buy anything recently? I tried to buy a soda from a vending machine the other day, it was $1.75! Are these the same prices I had when I was a kid? Of course, you who didn't sleep through economics have already figured out why I can't buy anything (except from McDonald's) for a dollar; inflation.

I knew about inflation but I never really understood why it was important. I though it was just the natural course of economics to have some inflation. The government printed more money in response to a growing economy...blah, blah, blah. But what I didn't understand was this; Inflation wasn't a byproduct of economics, it was actually a goal of the Federal Reserve. The Fed wants to keep an 'elastic' money supply. To do this, they need to keep printing money when the economy grows, and then reduce the money supply when the economy shrinks. But they don't always keep with the market. Even more, since our money does not have theoretical limit, instead of money increasing in value with the expansion of the economy, the price of money is kept low. While low money cost might be good if you wanted widespread lending or you are trying to sell cheap goods overseas (like we demand China stop doing), the fact is that inflation makes us poorer. In times like we live in now, in which most of us have flat or no wages, cheap money makes us poorer. Our money is worth less, and our wages are not inflating to compensate.

So you would think in a depressed economy that the FED would slow down the money supply, but the FED doesn't actually care about you. Recently, President Obama realized that he could have the FED buy all kinds of things because it can print money. So the FED printed up all kinds of money and bought $600,000,000,000 of mortgage backed securities (AKA Toxic Assets) from banks. To put this in perspective, $600 billion is about 4.2% of our GDP. The banks wanted the FED to take these assets off their hands because they were likely losers. The FED, for reasons you will see in part 2, was more than happy to oblige. But to buy these assets, the FED had to print money, thereby inflating the money supply. Obama gets a big win, as he can claim that the Federal Deficit did not go up. But America gets a deflated money supply.

So that would be enough, but the FED keeps buying things. The FED is currently promoting its 'quantitative easing' or QE. What is QE? Well it's like the above, but instead of buying mortgage backed securities it buys government bonds. Congress loves this idea, because money from bond purchases go into the money Congress can spend. Even more, Congress can spend money AND reduce the deficit because the bond purchase counts as revenue. The only cost is that when Congress does this, our money is worth less. From April to June of 2011 the FED bought $600 billion worth of Treasury Securities and they keep buying more. Everyone wins...well if you are Congress, Obama, or the FED. If you are just a citizen with money that is less valuable you kinda get screwed.

Oh and we are still doing quantitative easing, we are just more quiet about it. Oh and Obama's new student loan program, guess who is going to assume that debt? Guess how we are going to pay for it? but Obama can claim that it doesn't 'add one cent to the deficit."

But I don't blame the FED for this. You see they can't help it, it is in the nature of the beast.

2) The FED made in Hell.

You may wonder why the FED is this way.

You see back in 1907 there was a big financial panic where the stock market fell 50% in one year. Renowned Industrialist (and robber baron) J.P. Morgan and other bankers had to shore up the banking system with pledges of their own money. Morgan did not like having to put his own money at risk, and thought "Wait I can put the government's money at risk instead of mine!" Shortly thereafter Morgan's close friend Nelson Aldrich (No relation) proposed a central bank that would control the nations money supply. Aldrich wanted a non-political (i.e. private) central bank, progressive democrats wanted a public central bank under the control of congress. In grand bipartisan fashion they resolved to adopt the worst of both, and the Federal Reserve was born.

The Federal Reserve is a semi-private corporation created by the U.S. Government. It is private in that a board of directors in that private banks elect part of the FED, it is 'semi-private' in that parts of the Fed are appointed by the President. The private banks of the United States appoint 6 of the 9 directors at each of the 12 Federal Reserve banks. Now the structure of the Fed is a little complicated so I will try and explain it. The President, with the advice and consent of the Senate appoints the Chairman of the Fed and the 9 member Board of Governors (BOG). Now there are 12 Federal Reserve banks across the country which each have a 9 member board of directors. Banks appoint 6 of these directors, and the BOG appoints the other 3 at each bank (108 directors in total). The 12 Federal Reserve Banks then appoint 5 of their 12 board presidents to the Federal Open Market Committee...OH SCREW IT!!! This is very complicated, just look it up on Wikipedia.

Suffice to say, the inmates are running the damn asylum. Private banks have their hands all over the Federal Reserve banks, and the President has his hands all over the BOG. This is a marriage made in the worst parts of Hell. The Fed is the worst kind of corporation. It has the imprimatur of the Federal Government on its actions, but it has all the freedom of a private bank to do whatever the hell it wants. It has none of the accountability or transparency of the Federal Government (Which is not saying much) and none of the market or tort liability that a private bank would have if it was screwing the American public. In fact we cannot 'vote with our dollars' because they HAVE ALL THE DOLLARS! The government has given the power to regulate banks and print money to an unaccountable organization. Which wouldn't be so bad if it weren't screwing us, but it is screwing us....

I know I got a little emotional there for a second. But this is why I think people go a little crazy about the FED. It is an insane system. It wholesale gives control of our money to an organization which is at the same time 1) Accountable to banks and 2) Unaccountable to voters. And we let it go on without so much as report on what they are doing with all this money and power.

But this all gets worse when you consider the incentives of the FED. The FED has an incentive to appease banks and the President. So if the the President wants to create a massive federal program, like a bank bailout, he can have the FED assume the loans. If banks need someone to shore up their finances, the FED guarantees their assets and infuses them with cheap money. It is a crazy system, and it has to end. END THE FED