How to Unite the Party: Fight the Fed!

The following is adapted from APP Chairman Sean Fieler’s remarks at the American Principles Project’s Practical Federalism Forum in Hooksett, N.H., on Oct. 3.

Photo credit: Kurtis Garbutt via Flickr (CC BY 2.0)
Photo credit: Kurtis Garbutt via Flickr (CC BY 2.0)

We Americans are in an anti-establishment mood.  We’ve been lied to. We know it and we are determined to put an end to it.  We want elected officials who will tell us the truth.

Now, Democrats interested in the truth.  And there are some, God bless their souls, that have a solution to the lie.

That solution is Bernie Sanders and his message of hope. The socialist dream is just 18 trillion dollars of spending, and we can tax the rich to pay for it.  Well, you’ve got to give them credit for honesty, but that’s not the solution I’m looking for.

We Republicans also want someone who will tell us the truth, but not to tell us about the state of big government and their plan to pay for it.  We want a candidate that is going to be honest about their plan to shrink the size and scope of government and revive the American experiment in limited government and the America dream of prosperity and liberty.

Our Republican primary process, reflects exactly that: a search for a new kind leader that is going to actually change things.

This makes a world of sense.  Just think, for a minute, about the journey that we Republicans have been for over three decades.  We’ve won elections.  We had Reagan, we had Newt, we had the Presidency and the Congress under George W. Bush, and the government continued to grow.

So, we started the Tea Party.  Now, we have a movement, and, God willing, we’re going to elect a President that is going give us our country back, give us our system government back, and give us our prosperity back.

Now the good news is that we already have growing numbers in Congress that understand what needs to be done.  Speaker Boehner’s resignation is a sign that business as usual, at the very least, has become uncomfortable.

The bad news is that we’ve made little progress in actually reducing the size of the federal government, and, consequently, we are not yet on the road to prosperity.   If smaller government is part of your vision — it is certainly central to my vision — you’re not going to like that ever upward trending federal spending that we continue to see in the budget we keep passing.

The worse news is that, in the process of fighting for limited government, we’ve divided Republican Party.  Our party is at war with itself.  Establishment Republicans and grass roots Republicans are at each other’s throats.

Some hope that the nomination process will smooth over these division and unite the party.

I certainly hope so, but given the depth of the divisions, simply selecting a nominee will automatically unite the party.

What will unite the party is a nominee with a clear vision of a smaller federal government and a mandate to get there.

Only once we are on the path to smaller government, only once we are confident that we are going to get there, will we truly unite the party, will the internal fights be settled in compromise rather than animosity.

And we can then convincingly reaffirm Reagan’s 11th commandment: “Thou shall not speak ill of a fellow Republican.”

So, where’s the vision, where’s the credible path to smaller government?  I’ll tell you what it’s not.

It’s not a plan of tax cuts that doesn’t address spending.

It’s not a program by program description. We can’t get there program by program.

It’s not a law that says we are on the path.  We know that won’t work.

It’s not an effort to purify the party.  We cannot get there by only electing true believers.

And, it is not force of will.  Force of will is not enough.

We can only get there by putting in place different incentives.  When we, the American people, keep saying the system is broken, we mean the incentives are wrong.

Let me tell you about the current incentives system so you understand what we’re up against.  Imagine a system in which you can borrow all the money they want at 1 percent.  You never have to pay it back.  And, if you ever have trouble paying it back, you just print more.

Well how much would you spend?  Most of the time, it turns out that you’d spend a lot.  Think trillions!  Congressmen are people just like you and me.  I don’t know about you, but I wouldn’t trust myself with that system.

Republicans in Congress aren’t dumb.  They get the role the Fed plays in facilitating government spending.  They understand the incentives, and they are sincere.  They want to cut; we know that.  They are willing to shut it down to shrink.  So, why aren’t they willing to reign in the Fed?

It’s not like the Fed is delivering prosperity.  Republicans all see what is going on in the real economy.  They are on the campaign trail.  They see that people are struggling.  That this has been a jobless recovery.  That we have distortions, that we have financial engineering.  They understand that all is not well.

It’s not that they love Janet Yellen.  Quite the contrary.  Republicans voted against her in record numbers.  Just watch her semi-annual testimony to Congress.  There is no great Republican love for Yellen.

So, why?  One word: fear.

We’re not afraid of what happens to our the government if we reign in the Fed.  We know it will get smaller.  We’re afraid of what will happen to our economy if we rein in Federal Reserve.  What happens if the Federal Reserve cannot act to bail us out?

Let’s be honest.  On the one hand, this idea of government intervention to save the over-leveraged banks is anathema to the Republicans embrace the free market.  We don’t like the bail outs.

On the other hand, what would happen to the banking system if the Fed couldn’t bail them out?  Who’s going to lend $100 billion to Morgan Stanley to save the system?  Who’s going to make sure that the big banks perform on their hundreds of trillions of dollars of derivatives?  And, who’s going to step in if they don’t?

This is why we’re afraid to touch the Fed: not because of what it will do to the federal government, but because of what it will do to the private economy.

Now, unfortunately, this fear is not misplaced.  The perverse part of all the bailouts is that they’ve made our financial system more fragile than ever.  The solution to too much debt is always more debt, which makes the next crisis more likely and more severe, and makes us more dependent upon the Fed to save us again and again.

So, what will our nominees say about the monetary system in their economic plans?  This needs to be a focal point.  They can’t ignore this issue:

  • If we ignore the monetary system, we are not going to get the federal government on the right trajectory.
  • If we ignore the monetary system, the economy is going to continue to preference Wall Street over Main Street.
  • And if we ignore the monetary system, the Fed’s overreach is going to get worse.

Let’s focus on that last point.

We are six years into an economy recovery, seven years into negative rates, and after three bouts and three trillion dollars of quantitative easing, everyone is wondering if we can handle a rate increase.  That’s a bad situation.

And, it could very well get worse.  One of the Federal Open Market Committee participants proposed a negative Fed funds rate.  It is in the dot plot released by the Fed.

Theoretically, this is nothing new.  Inflation, money printing, and artificially low rates are all a tax on working Americans.  But these taxes are subtle.

Negative rates are, well, not so subtle.  So, you’d earn money and you’d save money, and if you save it in your own currency, the Federal Reserve would take some of the money you saved away every year.  We’d see negative Federal Funds rates, negative treasury yields, and negative rates in treasury money market account.

The idea is to punish you for holding cash so that you spend the cash and stimulate the economy.  That is the central planning of the Federal Reserve’s absolute monopoly as purveyor of our money.

But for people who have been shortchanged by the economy and have lost control of the government, the idea of paying the U.S. government for the privilege of holding money is a bridge too far.

But we need a nominee who is not going to pass a law banning negative rates without changing the underlying problem.

That simply won’t do.  That’s what we did with too big to fail.  Read the introduction to Dodd-Frank.  It says it right there, “to end bailouts.’  But it doesn’t do it.  You can pass a law statutorily hemming in the Fed.  You have to change their incentives.

This is just moving the power from the Fed to the Congress.  The power is still at the federal government.  It can’t be enforced.

Congressional oversight is not the central founding principle of a free people.  Federalism is.

We need to make the Fed accountable to the American people, not to Congress.  We need to subject the Federal Reserve to competition so they have to think about losing their monopoly before they propose something so brazen as negative rates.

The Constitution guarantees the American people to use gold and silver as money under Article 1, section 10.  It’s a constitutional right.  A constitutional right that is particularly relevant given the ongoing revolution in payment technology.

Affirming this constitutional right asserts a fundamental principle.  If the money is good, why do you need to force us to use it.  If the money is good, we’ll use it.  But don’t force us to use it.  And don’t charge us a negative rate for holding it.

Americans should be free to choose money that holds it value.  Over time, this market discipline would not just rein in the Federal Reserve, but also the federal government.

Over time, it returns control of the money supply to the American people.

Finally, it can be done without legislation, because the IRS’s interpretation that gold is not money is unconstitutional.  You set in motion the solution.  You subject the Fed to competition and stop protecting their unconstitutional monopoly.  Put the money back in the hands of the people.  It’s credible.  It addresses incentives.  It sets us on the path to limited government.  It uses the incentives of federalism.

Sean Fieler is the Chairman of the Board of the American Principles Project.