What a bunch of busy work! Youtube for Ron Paul Fed and what I see is the mind of a civil war era Representative pandering directly to his gold bug militia nut base.

What will an audit of the Fed accomplish? We know that’s where the money is printed. Get over it.

The question Ron Paul should have asked Bernanke is this one:

OK. So, you are setting money supply according to measurements of the economy right? What happens if your model calls for a negative interest rate? And if negative means throwing money from helicopters how can the Fed equitably implement a negative interest rate?

The crux of the problem is where the center of the needle meter reading is supposed to be. If the metering instrument has a dial that goes no lower than zero there is a problem with this model of money supply control. Any sensible person would see if you want to keep something steady you need a reading on both sides of the nominal reading. Thus, the Fed rate should actually be set nominally at 10 or 15 percent so you have some leeway on both sides. Or, you could just leave it at 5% and let the market itself make the adjustments.

The grandstanding “audit” bill completely misses the problem here. The Fed didn’t cause the current crisis. Even with a constant interest rate, lax regulation of who else can “print” money would still cause a problem. By “printing” I mean this. It should be illegal to trade any financial contract that is shielded from price discovery. Such contracts amount to printing money. We hear little of Milken these days. He was the money printer of his time:

http://en.wikipedia.org/wiki/Michael_Milken

Key point here. The Fed prints the money but who else, through whatever loophole, can also effectively print money and is not accountable to the Fed or Congress?

The Fed didn’t cause the current crisis – Blue Horseshoe

I 100% disagree with this. The Fed is at the heart of the problems we face today. It was their manipulation of interest rates trying to stop the dotcom bust that led us to where we are today.

Ken/Michael. Yes. How the money supply is set certainly can create a distortion. I agree with that. Dotcom and housing are the same in terms of bubble price appreciation. Interest rates created additional stimulus in both cases. But Dotcom popped gracefully. The government wasn’t left holding the bag. The fools who didn’t sell payed for it. There were no bailouts.

But, what does either thing have to do with the Fed operating policy? Ruling out actual malfeasance, all Fed can do is try to preserve the purchasing power of dollar relative to some consumer staples – food, rent, etc. On the other hand, if the Fed was stepping into the equity markets directly, then it would be illegal according to the Fed mandate at least if it was secret. Central banks are typically bound by law to disclose interventions within a certain time after the fact – 6 months typically. I hope I’m not defending the Fed too much here but I really think there is less going on in there than people think.

Congress can also sternly admonish the Fed to “watch for bubbles”, but how can the Fed actually implement stable money once and for all? If land is put into the consumer price index then some other asset will bubble up as throngs of idiots get swept up in a new frenzy.

[An aside. The consumer price index could be retooled perhaps. You could look at what people are spending their money on today and set interest rates according to price inflation in the top N consumer expenditures for example. But an audit of the Fed won't suggest anything like that. An audit usually slaps some wrists and then it's business as usual.]

So, without opening markets and merely targetting what blew up last time, banks or other firms could still see easy money again by lending to said idiots who are eager to bet the farm on the new Tulip Bulb Fad. I say banks, but it can be any firm which can print contracts and keep real prices of those instruments from being discovered for a time. This time (housing) banks did it by putting the contracts in the vault under the accounting loophole of hold to maturity and everybody had a private party for awhile – from investment banks to insurance companies.

The real problem this time (housing) was an utter lack of price discovery and the consequences of price discovery which has nothing to do with the Fed. Even at zero percent interest, price disovery would have dampened the housing market very quickly. There would have been a robust set of investors, taking the other side of the mortgage paper and insurance contracts instead of the delusional insiders high on their own marketing fumes. Even at zero percent interest any breather in the value of that paper would have attracted contrarian positions for one thing, and true hedging for another. Zero percent was unlikely to last forever as well. But, nobody at the banks and insurance companies wanted to make their trades on the CME Housing Futures. It isn’t required to consult the exchange traded markets for a price. It is much more profitable to make up your own price – the banks “knew better” and they knew for sure it would have put a very wet blanket on the fire if prices were subject to scrutiny even way back in 2006 after the steepest run-up. In fact it could have even ended in 2006 with a V shaped “pop” just like DotCom before it.

“But Dotcom popped gracefully. The government wasn’t left holding the bag. The fools who didn’t sell payed for it. There were no bailouts.”

Gracefully??

Of course there was a bailout…it was called dropping rates to 1% after the initial March 2000 melt down (which bottomed out fall 02).

The FED seemingly had one goal at the time with that interest rate policy — prop up the Dow. It worked…until fall 08.

They have started the whole process over again now.

Without getting too much into the details, here are some general lessons I have learned over the years.

I agree with some of the general assertions of the above statements.

The Fed does not “pump” liquidity into the system, it merely makes it available. The market decides what to do with that liquidity.

In the long run, the Fed’s Policies are irrelevant(they don’t accomplish what they’re design to do) in that the Fed is just another player in the market place, it is part of a crowd. Much like others in the crowd, it plays its role within the market and responds in similar ways as the crowd to forces impinging upon it. The Fed does not freely make its decisions; it is constrained by the existence of markets which are much bigger than itself.

The Fed does not raise and lower rates in a random fashion; it raises rates for a while, then lowers rates for a while. Over long periods, the Feds behavior trends along with the markets it’s trying to control.

The Feds policies help “make” the trends(and problems) that it usually blames on others. It’s completely oblivious to the fact that its own policies are an integral part of the problem and so it goes on trying to solve a problem it helped create by passing more of the same policies.

In a world without a Central Bank a case can be made that markets may function more efficiently and freely and that business cycles maybe benign. The existence of the Fed and it’s unlimited access to liquidity has exacerbated the magnitude, frequency and duration of boom/bust cycles.

Them are my sentiments.

Here is the origin of the word “Manipulation”: Sense of “skillful handling of objects” is first recorded 1826; extended 1828 to “handling of persons” as well as objects.
http://dictionary.reference.com/browse/manipulation

Does anyone really think the Fed “manipulates”, “props up”, or “controls” anything?

Over long time periods, the Fed’s actions often have massive “unintended consequences”. The Fed does not “do” anything. Doing implies intentionality.

The Fed is like a child with a gun. That is a big part of the problem.

Ultimately, the real power lies with the Crowd. And when the Crowd wakes up to a stupid idea, watch out!(as things may be about to change)

Although some still attempt it, over the last century many central banks have learned that it doesn’t pay to fade or lag too far behind the markets.

The Fed may bring liquidity to the horse’s mouth but it can’t make it drink, so to speak. Although the Fed follows the market with a punch bowl the Public(and the Fed) may feel it’s actually in “control” and “pushing on a string”.

I don’t know if this thread is still active, but I’ll throw some ideas out for any of you that are as bored as I am.

Blue Horseshoe-

I’m glad you realize that the real problem is fractional reserve banking. However, just because goldsmiths invented it, or the fact that its been around forever, does not mean we should just accept it as a fact of monetary life. (Theft has also been around forever, but we don’t throw in the towel on that matter.) The simple truth is that you cannot simultaneously have money and lend it out at the same time. Think about it…it just makes no logical sense. There is no other business in the world that tries to operate this way. If you were to deposit your car in a garage, with the expectation of being able to get it back on demand, would it make any sense for the garage to lend out your car while you were away?

Secondly, I don’t understand how you can argue against a gold standard by saying that new supplies of gold would serve as a serious disruption to the system. Essentially, you’re saying that new gold supplies, which only amount to ~ 1% or so of the total supply each year, would prevent the system from functioning smoothly. Now let’s contrast that scenario with our current paradigm. The fed doubled (100%!!!) its balance sheet in the space of two or three months!!! It is a complete contradiction to worry about a supply increase of a percent or two a year, but then completely ignore the money supply growth that can (and does) take place with a virtually limitless printing press and an extremely inflationary fraction-reserve environment.

Also, while you seem to be worried about how large the gold mining sector would grow, you make no mention of how large the banking and finance sectors have grown in the present day. Half of all ivy league graduates go directly to wall street or to law school (so they can become corporate lawyers and get in on the action.) This doesn’t trouble you? Our financial sector has grown disproportionately large, and its growth explosion can be traced to our abandonment of the gold standard- severing any link to monetary discipline.

Trender-

You seem to be in the camp that we’d be better off without a fed than with one, but I cannot accept your general sentiment that the fed is largely harmless and irrelevant. The fed wrote a check to citigroup for $300 billion and took junk mortgages as collateral. It also wrote a check for $500 billion to various central banks with god knows what for collateral. Every time it prints and then hands out money it steals from everyone else. The dollar has lost 95% of its value under the fed’s watch. That’s simple theft. What’s more, the fact that the fed exists gives incentive for banks to take larger risks than they would otherwise. I see what you’re saying about the fed being reactionary, but their “reaction” is always to steal.

cy, p.s.s. keep in mind the Fed follows the market.