By Bill Wilson – Texas Governor Rick Perry shook the political and financial establishment to the core on Aug. 16 with his comments criticizing the potential politicization of the Federal Reserve and the nation’s monetary policy. He said, “Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion.”
Here, at Americans for Limited Government, we responded by praising Perry for opposing the use of monetary policy to achieve political ends. The statement read, “Continuing to print money to pay the debt is nothing more than a political dodge from the hard choices that our elected officials are hired to make. Governor Perry is to be commended for recognizing this pernicious scheme for what it is.”
For that rather innocuous statement, a senior editor of a major, national financial publication who shall remain unnamed, sharply replied via email that, “OK, that’s it. You guys have destroyed your credibility.” Ouch.
No, it is not we who have lost credibility. It is the mouthpieces of the established order who lose credibility every day pretending that the vast expansion of the Fed’s balance sheet — from $896 billion in Aug. 2007 when the financial crisis began, to over $2.9 trillion today, a 223 percent increase — is somehow a public good.
CNBC host Larry Kudlow found Perry’s remarks to be “undoubtedly way too strong,” but he qualified his analysis by stating, “the rest of Perry’s statement suggests that his analysis of Fed policy is right on target.”
Kudlow credited Perry for noting the Fed’s deliberate devaluation of the dollar, noting the sharp rises in consumer prices and the resulting slowdown in consumer spending brought on by QE2. To wit, he wrote, “it turns out that Governor Perry — even with his overly strong language — is a pretty sharp economic and monetary analyst.”
Has Kudlow too destroyed his credibility for embracing Perry’s central message?
But the harsh response from the editor was hardly surprising. After all, Perry’s main offense was to question what was, until recently in political parlance, unquestionable and sacrosanct.
Go back to 2008, when Rep. Ron Paul’s top issue was abolishing the Federal Reserve. He was barely allowed into Republican presidential debates, so radioactive was the issue. Most Americans still believed in the alchemy of the Fed. Alan Greenspan, and then Ben Bernanke, were treated like oracles by D.C. politicians and Wall Street bigwigs seeking divine guidance, whose tinkering could bring forth prosperity with a few ink cartridges.
But as the financial crisis heightened, it was not long before the Fed was bailing out Bear Stearns’ creditors and then AIG with billions of dollars of printed money, leading to the Mother of All Bailouts — $1.25 trillion of purchases of toxic securities to bail out major financial institutions that had bet poorly on housing in the U.S.
Since then, it has become increasingly necessary to take on the central bank in the political arena. In 2009, every single House Republican signed on as a cosponsor of Rep. Paul’s “Audit the Fed” legislation. In 2010, a weakened version of the legislation was adopted on a bipartisan basis in Congress, and signed into law, to find out just what the Fed had been up to in 2008.
The partial audit revealed what many had long suspected. Based on the data released by the Federal Reserve, of the $1.25 trillion of mortgage-backed securities bought by the Fed, $442.7 billion were purchased from foreign entities at the height of the program. According to the Federal Reserve, the securities were purchased at “Current face value of the securities, which is the remaining principal balance of the underlying mortgages.” These were not loans, but outright purchases at one-hundred cents on the dollar.
According to the New York Fed’s website, the purpose of the program was to “foster improved conditions in financial markets”. Now, we know by that the Fed meant to prop up financial institutions all over the world. The bailout included $127.5 billion given to MBS Credit Suisse (Switzerland) for the junky securities, $117.8 billion to Deutsche Bank (Germany), $63.1 billion to Barclays Capital (UK), $55.5 billion to UBS Securities (Switzerland), $27 billion to BNP Paribas (France), $24.4 billion to the Royal Bank of Scotland (UK), and $22.2 billion to Nomura Securities (Japan). Another $4.2 billion was given to the Royal Bank of Canada, and $917 million to Mizuho Securities (Japan).
This bailout of foreign banks was a gross misuse of power, revealing the Fed to be the bad bank of last resort — for the entire world. Are we indentured to these international financial institutions?
This outrage has only been compounded by the Fed’s regrettable decision then to print money to service the national debt and to subsidize the Obama Administration’s unbridled spending spree. Since the financial crisis began, the Fed has increased its share of U.S. treasuries to $1.64 trillion, making it the nation’s largest creditor, more than China. This is the “pretended payment” of debt that classical economist Adam Smith warned against.
Adding insult to injury, most recently, the Fed engaged in the unprecedented decision to put a political timeline on keeping interest rates near-zero — until well after the 2012 elections. This seemingly corresponded with Congress’ move to push any voted-upon increases of the debt ceiling until after the elections in the recent debt deal. Were these not political decisions?
Perry’s charge that monetary policy would be used for political purposes is not a new one, as documented by Loyola College economics professor Thomas J. DiLorenzo in an article entitled, “The Myth of the Independent Fed”. In fact, the Federal Reserve has never operated completely independent of Washington’s politics, although many pretend that it has. Perhaps that’s why Perry’s comment alarmed the establishment so.
After all, the central bank, whose chair is appointed by the president, has almost always accommodated presidential prerogatives. For example, Fed Chair Arthur Burns fired up the printing press to fuel inflation and help Richard Nixon get reelected, and his successors failingly attempted to do the same thing to help Jimmy Carter. When presidents want inflation, they get it.
In the 1990’s and 2000’s, the Fed was used as a conduit to blow up the housing bubble by keeping interest rates too low for too long. Housing prices soared, the boom that led directly to the great market crash of 2008.
It assisted the formation of the social policy, directed by politicians, to extend credit to low-income Americans that turned out could not be repaid. As revealed by columnist Jeff Jacoby, a manual issued by the Federal Reserve Bank of Boston to mortgage lenders pushed for the degradation of credit standards: “Lack of credit history should not be seen as a negative factor.” It even directed that unemployment benefits and welfare could be accepted as “valid income sources”.
Moreover, the Fed continues to, as a matter of policy, foster the devaluation of the dollar, which every American pays for with higher food and energy prices, higher prices on imports, and the specter of hyperinflation in the future should the dollar lose its status as the world’s reserve currency.
So, the practice that Perry deplored — the use of Fed policy to influence elections or to achieve political policy goals — is certainly nothing new. His innovation was to label it as a crime against the American people, leading to the destruction of our currency. As for Perry himself, his greatest offense was telling the truth.
And to my friend, the unnamed editor of the major national financial publication, it is not we who lose credibility for calling attention to this crime, it is those who sweep it under the rug in the hopes that no one will notice. Just like the fable of the boy who pointed out that the emperor had no clothes, the fools of this story are those who continue to pretend otherwise.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.
