Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Thursday, February 25, 2010

Ron Paul Accuses Fed of Torture!

Ha ha...just kidding. Well, for now at least. I am sure that the Congressman from Texas (and presidential hopeful...God save us all) will drum up the charge at some point.

Here we see Paul accusing the Fed of "facilitating a 5.5 billion dollar loan to Saddam Hussein" in the 1980s (around the 2min mark):

Holy cow, Batman! But wait, there's more. He goes on cite reports that "the cash used in the Watergate scandal came through the Fed."

What next, I wonder? I can hardly wait to read his memoirs; of the trips he took with little green Martians to faraway galaxies, of the conversations he's had with the deceased, and so on. This man is an embarrassment to all libertarians.


  1. I was going through your post and wanted to say exactly what you do in the last sentence.

    Supposedly he also has a Ph.D. But then again, a lot of people with Ph.D.s are an embarassment.

  2. Wow.

    Is Ron Paul accustomed to making these kinds of accusations? He could have arrived with a short briefing document outlining his case, but didn't.

    Anyhow, you can't see me because I'm hiding in the closet.

  3. So... Am I supposed to conclude from this ad hominem attack the Fed does not loan or grant dollars to foreign governments without appropriation from Congress?

  4. The source of his claims could be a 2008 book by Professor Auerbach at the University of Texas, former economist on the Financial Services committee for 11 years with responsibilities that included assisting with "oversight functions of the nation's central bank led by Alan Greenspan." The 5 billion to Saddam is in the list.

    Fed gave 12 billion to Iraq post invasion.

    Fed gave Congress the run-around wrt Watergate,2777644

    Not sure why you're laughing, I don't find any of this the least bit funny.

  5. Blogspot messed up the last link, this one should be better:

  6. Pointbite:

    I lifted this from Auerbach's home page. I presume it contains the most serious charges against the Fed.

    In Deception and Abuse at the Fed, Robert Auerbach, a former banking committee investigator, reveals major instances of Fed mismanagement and abuse of power that were exposed by Rep. Gonzalez, including:

    [1] Blocking Congress and the public from holding powerful Fed officials accountable by falsely declaring-for 17 years-it had no transcripts of its meetings;

    [2] Manipulating the stock and bond markets in 1994 under cover of a preemptive strike against inflation;

    [3] Allowing $5.5 billion to be sent to Saddam Hussein from a small Atlanta branch of a foreign bank-the result of faulty bank examination practices by the Fed;

    [4] Stonewalling Congressional investigations and misleading the Washington Post about the $6,300 found on the Watergate burglars.

    I cannot speak to [1]. Charge [2] is ridiculous. And even if we were to believe [3], note that the charge is one of incompetency. As for [4], good grief.

    What people do not generally understand is that the Fed is ultimately subservient to Congress. The Fed was created by an act of Congress. The Fed must make regular reports to Congress (there is Congressional oversight). And, ultimately, Congress can dissolve the Fed.

    If there have been shenanigans going on in the past, it has almost surely always involved members of Congress applying pressure to the monetary authority.

    So, instead of Ron Paul's "End the Fed" crusade, perhaps we should embark on an "End the Congress" crusade?

  7. [1] All the more reason for regular audits, don't you agree? We should all be able to speak to this. And shouldn't we see the text of agreements, not just the transcripts of meetings?

    [2] Why is this ridiculous? There have been accusations of Fed interference/manipulation of the markets ("The plunge protection team") for many years and from many people, not just Ron Paul and not just this specific case.

    [3] I haven't read this book, but you are choosing to believe it was genuine incompetence, there is such a thing as plausible deniability.

    [4] What? Are you balking at the small number of dollars involved?

    The point I'm trying to make is not that each one of these accusations is true, but given how easy it is to fire up Google to find sources and the fact I find your answers evasive and unconvincing I feel as though mocking Ron Paul isn't particularly helpful. He is not alone.

    Also, regarding your attempt to shift blame to Congress, perhaps it's justified, but if you concede that Federal Reserve independence has always been an illusion anyway why all the resistance to an audit? That only further strengthens the case for reform and transparency of the kind Ron Paul suggests. If there were shenanigans in the past there is no reason to assume they have stopped, especially given what we just experienced. There are reasonable alternatives to the current Federal Reserve model, but there are no reasonable alternatives to an elected representative democracy. If you're asking me to choose between "End the Fed" and "End the Congress" I think the answer is obvious.

  8. pointbite: Are we really having this conversation while--with the popular support of the American people--the USA finds itself in not one but two wealth-draining, hegemony-degrading military occupations of relatively, disorganized countries?

    When does the finger-pointing stop? When do Americans take responsibility for their democratically chosen screw ups of the past few years?

    The legislative branches of the US government do not have to wait for monetary policy shifts in order to fix the fiscal situation, fix the strategic mistakes or remove the perverse incentives in the housing market.

  9. Pointbite:

    I claim that Elvis is dead. Your claim is that you can fire up Google and find evidence that suggests the opposite. I claim that Elvis is dead. You find my answer "evasive." Fine, we can stop talking then.

    Ron Paul is an idiot. Skip to the 3.00 minute mark of the video clip.

    Paul: But would you grant that after 10 or 15 years, the American people deserve to seems that if the Fed was not involved in [these shenanigans] at all, it would be to your advantage to say that no, we don't do stuff like that! But why can't we open up the books 10 years back and find out the truth of these matters?

    Bernanke: [what the ? are you talking about?]. As far as the 10 years, after 5 years we produce complete transcripts of every word said in the FOMC meetings.

    Paul: But, but, but...can we get the results of every agreement, every loan made, every single thing to foreign governments.

    Bernanke: Yes.

    Paul: Well, let me tell you that I have heard stories that long ago this was not the case and that it's easy to cover things up and [blah, blah, blah].

    How is it that Ron Paul does not know that the Fed makes its transcripts publicly available (albeit with a lag)? Would you trust a person like this, with his "End the Fed" campaign, when he does not even know this most basic information?

    The problem with the End the Fed program is not one of principle (I have a soft spot for free banking principles myself). It is one of practicality and reality.

    The reality is that Congress will make appropriations with or without a Fed and whether or not there is a gold standard.

    Paul complains about inflation and the inflation tax, but inflation is still low and stable. And in any case, the inflation tax is probably good for Americans as most of the currency is by now held by foreigners.

    Implicit in Paul's world view is that a legislated gold standard will prevent the inflation tax and force Congress to pay for things with direct taxation. In fact, seigniorage revenue in the US is small potatoes. And when inflation does get out of control, the people know and protest what is happening.

    The Fed's recent history is clear. The Fed has not lost a single penny (so far) in any of its emergency loan facilities or discount window loans. In fact, it has made money for the taxpayer.

    The recent rise in the Fed's balance sheet was not an inflationary "helicopter drop." The Fed printed (zero interest) money and used it to purchase Treasury-insured MBS currently yielding 5%. This is like Microsoft issuing shares to make an accretive aquisition; it is not a dilutive act.

  10. westslope:

    The reason America was founded as a Constitutional Republic with limited and separate powers and NOT as a democracy is precisely because the founders knew they couldn't trust Congress or anyone else to be responsible. Let's not act surprised when the federal government abuses powers they should never have claimed from the people.


    First of all, let's quickly return to the original topic and acknowledge there are unanswered questions and raising them in Congressional hearings does not an idiot make, regardless of other positions. None of the charges were answered in Bernanke's testimony or either of your responses.

    Secondly, I think your analogy is backwards, Ron Paul is not trying to disprove _your_ claim, he is seeking evidence to support _his_ claim. Ron Paul wants to know how Elvis died and you are hiding the autopsy because a newspaper obituary is sufficient. Ron Paul is asking for the text of agreements and Bernanke responds with the text of transcripts. These are not the same and Bernanke claiming otherwise is absurd (perhaps even "ha ha", "idiot", "martians", etc. absurd). Watch the video again. Here is another example.

    Skip to 1:20 if you are impatient. Is Sanders also an idiot? Is he trying to bring back the gold standard too? If you want to make the case secrecy is required to preserve the financial system (like Bernanke) make that case and leave out the insults.

    And for the record, the inflation question is not simply a matter of price level, if that's your only metric you will never understand these people. Ron Paul is not advocating a return to the gold standard, he's in favor of Hayek's competing currencies.

  11. Pointbite:

    I have viewed your video clip and yes, Sanders is an idiot too.

    He has no idea what he is talking about in terms of the $2.2 billion lent (much of this is in the form of MBS purchases).

    The senator is asking why the identity of those institutions making use of the emergency lending facilities is kept confidential. That is a good question. But it is also a question that has a good answer.

    The whole point of making these facilities available during a crisis is so that intermediaries who are solvent by facing liquidity issues can access the window. If their identities were made public, the stigma associated with accessing these facilities would dissuade participation, exacerbating the liquidity crunch.

    As Bernanke replied: The Fed never lost a single penny operating these emergency facilities. These were not "bailouts."

    As for a theoretical rationale supporting the notion that nondisclosure of some information may be socially desirable, I refer you to my own working paper: "On the Social Cost of Transparency in Monetary Economies."

    And even if Paul is advocating Hayek's competing currencies, he is still missing the point. Congress will make its appropriations regardless of who is responsible for creating the money. How hard is it to get this through what appears to be a collective thick head?

  12. "solvent [but] facing liquidity issues".

    And we all hope that's the case, it's too bad I'm not a particularly trusting person. I don't take Bernanke at his word, nothing personal. I happen to think we have too many financial institutions of all shapes and sizes and we would be better off if many failed, especially the large investment banks. I happen to doubt his ability to revive the economy without creating excessive inflation or permanently damaging the dollar's reputation. But I don't work for the Fed, so maybe I'm an idiot too. That's the beauty of a free market and sound money, you don't have to care what I think. It's too bad such a thing has never existed with a barely-accountable central bank over an extended period of time.

    "The Fed never lost a single penny operating these emergency facilities. "

    Yet. ( The Fed also never bought a single mortgage backed security until the day it did. This is not a meaningful point to me, there is a first for everything. Besides, I'm sure they could keep the price of discarded apple cores rising for years if they created enough demand with printed money, that doesn't mean it's a good thing.

    "These were not bailouts."

    I'm very skeptical that only solvent institutions are being helped, especially at the larger end of the scale.

    Regarding your paper, have you seen this?

    "Congress will make its appropriations regardless of who is responsible for creating the money."

    It doesn't matter if people have the option to choose a different currency. Let the government of Zimbabwe print as many sheets of toilet paper as it likes, it makes no difference to people trading with gold.

  13. David,

    There is some discussion that the issue isn't liquidity, so much as it is counter-party risk. I have found only one paper so far (and of course I can't find it now, but I will post it when I do) that discusses this point. If it is counter-party risk, then anonymous borrowing through buying MBS would actually exacerbate the problem, no?

  14. Prof J: I'm not sure, but I look forward to seeing the paper.


    [1] I'm not saying that you should trust Bernanke. You asked for, and I gave you the economic logic for some limited nondisclosure practices. Bernanke has repeated this over and over again. Paul and Sanders, rather than debate the issue with integrity, care more about their political brownie points. And the Fed is an easy target.

    [2] You may be skeptical about only solvent institutions being helped at the discount window. But given that the Fed has not lost any money, should it not be given the benefit of the doubt? (And MBS is just a form of private paper. The Fed's discount window was *designed* in 1913 to discount private paper. Are you sure you even know what you're talking about?)

    [3] Yes, I have seen what Steve Keen has said about my paper. (He has apologized in private to me for much of what he said). So what is your point? Can you not read a paper and come to your own conclusion? Or do you rely exclusively on what others have to say?

    [5] Yes, let the government print paper in Zimbabwe. Now imagine that they could not print paper. Then Mugabe and his thugs would steal all the gold. How does this not make a difference to people trading gold is beyond me. But I'm sure you have a good explanation.

  15. David,

    The first link is where I first learned of the paper. It appears to be part of John Taylor's ongoing argument with Bernanke.

    The next link is for the paper referenced in section 2.1:

  16. Also, I just read that Shedlock piece that is apparently about your paper.

    I only read your paper once so can't speak to the math. I did notice that Shedlock says that anyone with an ounce of common sense saw the real estate bubble.

    Really? Then how come it happened? And burst? And so many people lost their homes and wealth? Why did they have so much of their household wealth tied up in their homes? A posteriori yapping about what was known a priori is the real gibberish here.