The Myth of Deflation

Wendy Macy put together a good video of Rand Paul and Peter Schiff discussing the myth of our current “deflationary crisis.” As the myth goes, prices for consumer goods and commodities have been falling during this last year of the recession, therefore we have a deflationary crisis.

However, nothing could be further from the truth. While prices have indeed decreased, the expansion of the money supply has increased exponentially. The more money the Federal Reserve prints, the more the value of the dollar decreases, thus goods and commodities increase in price. However, in our current situation, we have a couple of factors playing into why prices have decreased.

First, the increase in money supply has been soaked up by banks. The idea was for banks to use the money to  rid themselves of toxic assets and open up credit to businesses and individuals again. However, the banks have not used the money yet, as the toxic assets are still on their books and credit is still tight. Therefore, the increased amount of money has not fully made into into the market yet.

Another reason for decreased prices is liquidation. Businesses are liquidizing their assets in order to stay in business. As evident by the increasing unemployment numbers, businesses are still finding it hard to stay in business. One way to decrease their costs is to let their employees go. Another way is to reduce the prices of their products to drive up demand.

Eventually, however, the banks will let go of the newly printed money, unleashing a fury of inflation on Americans; 1970′s style. How long the banks continue to hoard the money and keep credit tight is unknown, however, what we do know is that with our government spending and deficit increases in the next couple of years, inflation will strike regardless. The Federal Reserve/Treasury will have to print the differences, thus increasing the money supply to the market immediately.

Ron Paul Appearance on The Daily Show w/ Jon Stewart

Congressman Ron Paul appeared on The Daily Show w/ Jon Stewart last night (September 29th, 2009) to discuss his new book, End the Fed. In all, I thought it was a pretty fair interview with Stewart genuinely asking questions about Ron Paul’s solutions. It gave Dr. Paul a chance to explain how the Fed promotes bigger government by financing social and corporate welfare programs and never-ending wars.

This video probably won’t be up long since it’s on YouTube, but here you go. Enjoy!

UPDATE: This video has been taken down. But you can still watch it on Comedy Central’s website.

Rep. Grayson Grills Fed Attorney!

During yesterday’s hearing on HR 1207, Rep. Alan Grayson (D-FL) grilled Scott Alvarez, General Counsel of the Federal Reserve, over market manipulation by the central bank. Notice his devilish grin as he tears into Alvarez.

UPDATE: Ron Paul Gets Hearing on Fed Audit 9:00 AM TODAY

Hearing to audit the fed tomorrow

UPDATE: September 25, 2009 7:30am CT.

To watch the action live, click here. I really do hope this passes without being added appended to some overall financial regulations bill.

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On Friday, September 25th the House Financial Services Committee has scheduled a full committee hearing on Ron Paul’s HR.1207 to audit the Federal Reserve. The hearing is slated to begin at 9am eastern time. For details and a link to the (eventual) live streaming video of the hearing check out the committee website.

As with many of these committee hearings the schedule is tentative and right now there are no witnesses listed.

By now we know what the opponents of the bill will argue, but it doesn’t change the fact that the bill has over 290 bipartisan cosponsors and 75% of the American people want a Fed audit.

The conditions are ripe for passing some form of Federal Reserve audit. Rahm Emanuel has been criticized for not wanting to allow our economic “crisis to go to waste”. In turn, Obama has largely been capitalizing on his honeymoon in popularity coupled with the economic crisis to push his agenda through Congress. The health care debate has stifled that strategy for now.

Without the economic crisis I doubt Ron Paul’s Fed audit bill would have more than 290 cosponsors. So, in a way, Ron Paul is not letting this crisis go to waste either. It is a perfect bill for the America we live in today.

It is Ron Paul’s job to convince others that his bill would not allow Congress to interfere with monetary policy. This is the lone argument against his bill and it’s quite a weak argument.

Friday’s hearings mark a major battle in the long term effort to “End the Fed“.

Source: Liberty Maven

WSJ: Palin, Sounding Like Ron Paul, Takes on the Fed

Sarah Palin addresses Asian investors. (Associated Press)

Former Alaska Gov. Sarah Palin fired a shot at the Federal Reserve in her coming-out speech in Hong Kong today, blaming the central bank for the current crisis and disagreeing with the idea that the Fed should have a greater role in preventing the next crisis. It was an echo of fellow Republican and Texas congressman Ron Paul, who has led the charge in Congress to perform an audit of the Federal Reserve with an eye to eventually eliminating it.

“How can we discuss reform without addressing the government policies at the root of the problems? The root of the collapse? And how can we think that setting up the Fed as the monitor of systemic risk in the financial sector will result in meaningful reform?” she said. “The words ‘fox’ and ‘henhouse’ come to mind. The Fed’s decisions helped create the bubble. Look at the root cause of most asset bubbles, and you’ll see the Fed somewhere in the background.”

More generally, Mrs. Palin took the tack that the financial crisis occurred because government got in the way of free enterprise.

“Lack of government wasn’t the problem, government policies were the problem. The marketplace didn’t fail. It became exactly as common sense would expect it to,” she said. “The government ordered the loosening of lending standards. The Federal Reserve kept interest rates low. The government forced lending institutions to give loans to people who as I say, couldn’t afford them. Speculators spotted new investment vehicles, jumped on board and rating agencies underestimated risks. So many to be blamed on so many different levels, but the fact remains that these people were responding to a market solution created by government policies that ran contrary to common sense,” she said.

Read the entire Wall Street Journal article.

Federal Reserve to Obama and Geithner: Go Away!

The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.

The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”

Audit the Fed and make Bernanke cry

The Federal Reserve Board rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance.

The Obama administration wanted a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”

Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and “propose any changes to the Fed’s governance and structure.”

Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey, and a former Atlanta Fed research director had this to say:

It is not obvious at all why that is a Treasury responsibility or even appropriate why the Treasury would undertake that kind of study. The Fed was created by Congress and it is not part of the executive branch.

This is just more fuel to the fire for auditing the Fed. H.R. 1207, a bill to audit the Federal Reserve, currently has 290 cosponsors, a 2/3 majority in the House and is scheduled to have a hearing on September 25th.

Source: Bloomberg

Federal Reserve Plans to Control Banking Salaries

Under a new proposal set to be released soon, the Federal Reserve will give itself the authority to reject compensation on CEOs, traders, and loan officers that it feels takes on too much risk. More than 5,000 bank holding companies will be affected by this proposal, including hundreds of small, state-charted institutions. About 25 of the U.S.’s largest banks would receive even closer scrutiny.

As the Wall Street Journal describes it,

The Fed’s latest move marks another striking exertion of power by the nation’s central bank since the financial crisis struck with ferocity two years ago. It has bailed out firms such as American International Group Inc. and has flooded the financial system with money.

Ironically, this move comes at a time when an overwhelming majority want to audit and restrict the powers of the Federal Reserve.

The Federal Reserve board will consider this proposal within the coming weeks. They claim that if it is approved, they will open it up for “public comment”, however, I think what they mean is the Fed will make a comment about it in public.

Sources: The Wall Street Journal

Alan Grayson Announces Hearings on HR 1207 Bill to Audit the Fed

This announcement comes on the heels of H.R. 1207 has receiving its 290th cosponsor, a 2/3 majority. As Rep. Grayson points out in his speech, this would be the first audit of the Federal Reserve in its 96 year history.

Rep. Grayson was the first Democratic to sign on to H.R. 1207, Ron Paul’s bill to audit the Federal Reserve. He has played a significant roll in convincing fellow Democratics that H.R. 1207 was not a partisan issue, but rather that the health of our countries economic health rest on the transparency of the Federal Reserve.

This announcement comes on the day before Ron Paul’s seminal book, End the Fed is set to be released across the country. As the title would suggest, Dr. Paul sees H.R. 1207 as the first step towards abolishing the Federal Reserve system.

How The Federal Reserve Bought The Economics Profession

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after “flipping” had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal ReserveChairman Alan Greenspan said that “a national severe price distortion [is] most unlikely.” A year later, current Chairman Ben Bernanke said that the boom “largely reflect strong economic fundamentals.”

The Fed also failed to sufficiently regulate major financial institutions, with Greenspan — and the dominant economists — believing that the banks would regulate themselves in their own self-interest.

Despite all this, Bernanke has been nominated for a second term by President Obama.

In the field of economics, the chairman remains a much-heralded figure, lauded for reaction to a crisis generated, in the first place, by the Fed itself. Congress is even considering legislation to greatly expand the powers of the Fed to systemically regulate the financial industry.

Read the full article.