Former Ron Paul Monetary Staffer on new Fed Bill: its defects are severe
Paul-Martin Foss, Campaign for Liberty Chairman Ron Paul’s aide for Monetary Policy from 2007-2012, is now the founder and President of the Carl Menger Center for the study of Money and Banking. The Menger Center’s mission is “…to preserve and expand upon Ron Paul’s legacy in the field of monetary policy. The Center exists to further the education of the American people and American policymakers on topics of money and banking. Fiat money is, always has been, and always will be a destructive force that tears apart the fibers of society.”
Paul-Martin has analyzed HR 5018, The Federal Reserve Accountability and Transparency Act. While he, like Campaign for Liberty, supports those sections of the bill bringing increased transparency to the Fed’s regulatory policy, he shares our objections to the bill’s phony audit provisions:
Finally and most importantly, the audit provisions of H.R. 5018 are only triggered in certain circumstances, are not necessarily as far-ranging as Audit the Fed legislation, and do not provide for thorough, ongoing future audits. Furthermore, by tying a Federal Reserve audit to changes in monetary policy and using those audits as a punitive measure, H.R. 5018 gives ammunition to those critics of Audit the Fed who assert that proponents of Federal Reserve audits support Congress setting monetary policy rather than the Fed.
Audit the Fed permanently removes the exclusions on auditing open market operations, discussions with foreign central banks, etc., that have hamstrung previous attempts to audit the Fed, and it is intended to shed light on what the Federal Reserve is doing and who on Wall Street has been benefiting from Fed action. Regardless of the type of monetary policy being undertaken and whether or not Congress agrees with it, the Fed should be audited. Proponents of Audit the Fed do not want Congress setting monetary policy any more than they want the Fed setting monetary policy, but if someone is setting monetary policy then their actions should be audited.
While Campaign for Liberty is not, at this point, taking an official position on the sections of the bill requiring the Fed to adopt a “rule-based” policy, Campaign for Liberty members may be interested in Paul-Martin’s analysis of that part of the legislation:
Now for the bill’s defects, and they are severe. The bill requires the FOMC to adopt a monetary policy rule. While not explicitly requiring the well-known “Taylor Rule,” the bill requires that the FOMC must adopt a monetary policy rule, requires that the Fed include numerous mathematical functions and coefficients and, in the event that the monetary policy rule adopted deviates from the Taylor Rule, must explain in detail and justify why that monetary policy rule deviates from the Taylor Rule.
The problem with the Fed’s monetary policy is not that it engages in discretionary monetary policy vs. rules-based monetary policy, but the fact that it engages in monetary policy at all. Interest rates are prices, and the Fed by setting or targeting various interest rates is engaging in price-fixing. Price-fixing of any sort is economically destructive, particularly when the price of credit is being fixed. Drive the price too low and you artificially stimulate demand for credit; drive it too high and you artificially reduce demand for credit. That wreaks havoc in the economy. But whether that price-fixing comes about through a discretionary process or through a rules-based method based on some sort of mathematical formula is irrelevant – both processes will result in economic dislocation. That is what the authors of H.R. 5018, and indeed many conservatives in Washington, fail to realize.
The emphasis on mathematical precision also assumes that the economy is some sort of machine that responds to certain inputs in a precise manner that can be calculated or predicted. This is an error that has been critiqued and corrected over decades by many Austrian School economists. The fact that such ideas maintain any currency in policy circles is largely due to the influence of Milton Friedman and monetarism within conservative policy circles. Until policymakers realize that the economy is made up of millions of people who purposefully act to better their lives and achieve their hopes and dreams, and who cannot be reduced to a mere mathematical model, such misguided thinking will continue to permeate policy discussions.
Campaign for Liberty will continue to work to pass HR 24, the Audit the Fed bill.