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The Fed’s Surrealistic “Melting Clocks” Monetary Policy Is the American Dream Killer

Salvador Dali with Babou, the ocelot and cane. 1965. (via Wikimedia Commons)

“Houston, we’ve had a problem here.” With those low-key words, command module pilot Jack Swigert of Apollo 13 revealed that, in the later recollection of mission commander James A. Lovell, its “oxygen tank No. 2 blew up, causing No. 1 tank also to fail. We came to the slow conclusion that our normal supply of electricity, light, and water was lost, and we were about 200,000 miles from Earth.” NASA’s heroic and successful effort to return the crew safely home is part of national lore and history.

“Washington, we’ve had a problem here,” we, the voters, are saying, far more emphatically. The most recent government measure shows that America’s economic growth rate slowed, in the last quarter, to a rate of only 1.1 percent, about one-third of normal American economic growth rates.

This may not sound like a big deal. But it is. It means that job creation, including our ability to get better jobs, raises, bonuses and promotions, has vanished.

It means the death of the American Dream. Poor growth compounded over time is the prime cause of the collapse in people looking for work, the ballooning of the federal deficit, and the weakness in our social insurance programs, Social Security and Medicare.

Breaking News! There’s a solution, and the Wall Street Journal editorial board finally, for the first time, has weighed in to advocate that solution (or at least the process from which a solution can be derived):

One place for Congress to start would be to pass Rep. 

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Cruz Questions Yellen on Fed Policy

Sen. Ted Cruz (R-TX) (photo credit: Gage Skidmore)

Ralph, you noted this first, but this New York Sun editorial is worth a closer look. In a glowing column Friday, the Sun praised Ted Cruz for his astute questioning of Federal Reserve Chair Janet Yellen in last week’s Joint Economic Committee hearing, and in particular for focusing on the effectiveness of having a monetary rule verses current Fed policy:

The key question Mr. Cruz asked is whether Mrs. Yellen agrees with her predecessor Paul Volcker that the absence of a cooperatively managed rules-based monetary system has not been a great success. Mr. Volcker offered that assessment in a speech to the Bretton Woods Committee in May 2014; it was first reported in a Wall Street Journal op-ed piece by the editor of the Sun and, given Mr. Volcker’s stature, was an important moment in the debate over monetary reform.

Mr. Cruz sketched the economic turmoil since we abandoned the Bretton Woods system for fiat money. He also pressed Mrs. Yellen about a view — of Nobel laureate Robert Mundell, among others — that the central bank’s tightening early in 2008 precipitated the crisis that became the Great Recession. Mrs. Yellen seemed startled, even confused, by the question, at least according to some, and in any event dodged Mr. Cruz’s query with classic Fed-speak.

The editorial also praised the effort in Congress to address U.S. monetary policy shortcomings, particularly the FORM Act and its accompanying Centennial Monetary Commission:

That is the bill that was passed last month by the House and is now before the Senate.

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Ted Cruz Grills Janet Yellen Over Good Money

Sen. Ted Cruz (R-TX) (photo credit: Gage Skidmore)

Last week at a hearing before the Congressional Joint Economic Committee, JEC member Sen. Ted Cruz, who has — to great notice and some predictable attacks from the left — proposed restoring the gold standard, asked several very sophisticated questions of Fed Chair Janet Yellen.

Cruz’s questioning was effusively praised by Scott Sumner, David Beckworth, and Norbert Michel, among others, as reported in the Washington Examiner‘s “Cruz steps outside GOP orthodoxy with free-market criticism of Fed.”

The Examiner:

For a Republican, Ted Cruz has a unique criticism of the Federal Reserve.

The conservative Texas senator and contender for the GOP presidential nomination argues that the central bank is responsible for causing the financial crisis and recession because it kept money too tight in 2008.

Cruz’s criticism of the Fed is nearly the opposite of the one typically voiced by Republicans, who generally fault Chairwoman Janet Yellen and her predecessor Ben Bernanke for their efforts to ease money. …

Yet Cruz’s criticism of the Fed, while unheard of on the national political stage, is a sophisticated one, shared by some prominent and credible economists, including supply-siders, libertarians and even members of the Federal Reserve system.

[…]

Yellen, although used to obscure or hostile questions from members of Congress, seemed taken off-guard.

The second exchange between Sen. Cruz and Chair Yellen, drew effusive praise of Cruz in The New York Sun, which wrote, in “Ted Cruz Takes The Lead”:

Congratulations are in order for Senator Ted Cruz for his questioning of the Federal Reserve’s chairman, Janet Yellen, at this week’s hearing of the Joint Economic Committee.

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Game Changer: House Confronts Fed Chair Janet Yellen

Federal Reserve Chair Janet Yellen (photo credit: Day Donaldson via Flickr, CC BY 2.0)

On Thursday, Nov. 19, the Paul Ryan House took its most impressive step yet in advancing Speaker Ryan’s (R-Wis.) promised transformation of our political culture.  Ryan, in accepting the gavel, declared,

“Here’s the problem. They’re working hard. They’re paying a lot. They are trying to do right by their families. And they are going nowhere fast. They never get a raise. They never get a break. But the bills keep piling up—and the taxes and the debt. They are working harder than ever to get ahead. Yet they are falling further behind. And they feel robbed—cheated of their birthright. They are not asking for any favors. They just want a fair chance. And they are losing faith that they will ever get it. …

“What a relief to them it would be if we finally got our act together—what a weight off their shoulders. How reassuring it would be if we actually … grew our economy, … lifted people out of poverty, and paid down the debt. At this point, nothing could be more inspiring than a job well done. Nothing could stir the heart more than real, concrete results.”

Ryan is losing no time in taking bold steps. With the instrumental support of Leader Kevin McCarthy (R-Calif.), leadership brought up for a floor vote — and passed — possibly the most crucial piece of economic growth legislation in many years: Huizenga-Garrett’s FORM, the Federal Reserve Oversight and Modernization Act of 2015.

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Fed Reform Battle Heats Up in Congress

The Federal Reserve headquarters in Washington, DC (photo credit: Dan Smith, CC BY-SA 2.5)

A new bill seeking to increase oversight on the Federal Reserve and force it to endorse a rule will likely come up in the House this week, kicking the debate over U.S. monetary policy into high gear:

The bill, called the Fed Oversight Reform and Modernization Act — FORM Act for short — deals with a lot of issues relating to the Fed’s management of U.S. monetary policy, but one element of the bill will receive most of the attention and commentary by monetary policy specialists. This is the bill’s requirement that the Fed publish a rule that would, in theory, explain what the Fed would do to achieve the twin goals of low inflation and economic growth. The Fed doesn’t have to follow the rule, but it must explain why it varies from the rule when it is does so.

Unsurprisingly, Federal Reserve Chair Janet Yellen is not happy about the idea.  She wasted no time writing a letter to Speaker Paul Ryan asking him to reject the bill, calling the sections pertaining to monetary policy “particularly troubling”:

“This provision would politicize monetary policy and bring short-term political pressures into the deliberations of the FOMC by putting into place real-time second guessing of policy decisions,” Yellen wrote in the letter. “Such action would undermine the independence of the Federal Reserve and likely lead to an increase in inflation fears and market interest rates, a diminished status of the dollar in global financial markets, and reduced economic and financial stability.”

The FORM Act’s sponsor, Bill Huizenga, disagrees:

“The Fed’s recent high degree of discretion and its lack of transparency in how it conducts monetary policy demonstrate that not only are reforms needed, but more importantly that reforms are necessary. 

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Rubio Gives Yellen a Vote of No Confidence

Sen. Marco Rubio (R-FL) (photo credit: Gage Skidmore)

Reuters reports that Sen. Marco Rubio discussed the Federal Reserve while at a Wall Street Journal conference yesterday, saying that he would not renominate current Fed Chair Janet Yellen were he elected president.

Rubio also teed off on recent Fed policies, arguing that Washington has become “Fed-obsessed”:

“The Fed is no substitute for tax policies, regulatory policies, fiscal economic policies that create an environment that’s conducive to economic growth,” Rubio, a U.S. senator from Florida, said at a conference in Washington.

“In fact the Fed oftentimes, by trying to compensate for bad fiscal policy, ends up making policies that dramatically alter the economy in very negative ways,” he said.

Paul Dupont is the managing editor for ThePulse2016.com. Continue Reading

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Cruz Joins Rand in Support of ‘Audit the Fed’ Bill

Sen. Ted Cruz (R-TX) (photo credit: Gage Skidmore)

A bill subjecting the Federal Reserve to a more thorough audit process has finally hit the Senate floor—and Rand Paul and Ted Cruz have jumped all over it.

The Federal Reserve Transparency Act of 2015, reintroduced to the Senate a week ago, would allow the Government Accountability Office (GAO) to audit the agency, therefore creating oversight over the Federal Reserve.

“The Federal Reserve needs to fully open its books so Congress and the American people can see what has been going on.  This is a crucial first step to getting back to a more stable dollar and a healthy economy for the long term,” Cruz said in a written statement.

“Right now, the Fed is adjusting monetary policy according to whims, getting it wrong over and over again, and causing booms and busts.  If you look at the crash of 2008,” he added, “the Fed’s policy destabilizing our money contributed powerfully both to the bubble and the collapse.

Opposition comes from those such as the Federal Reserve Chairwoman Janet Yellen, who believes that “Audit the Fed is a bill that would politicize monetary policy and it would bring short-term political pressures to bear on the Fed.”

Cruz, Rand, and the 20 other senators who have co-sponsored the act, however, are of the mind that “by auditing the Fed, the American people can fully understand the scope and consequences of the agency’s extraordinary monetary policy since 2008—and then know what reforms are needed to improve the Fed’s operations and accountability.”

Anna Pfaff works for the American Principles Project. Continue Reading

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Trump Is Right, Sorta; This Issue Could Be “Yuge”!

Donald Trump (photo credit: Gage Skidmore)

During the past two weeks, Donald Trump has made claims that Janet Yellen is keeping interest levels low to help Obama and the Democrats:

“This is a political thing, keeping these interest rates at this level,” Trump, the billionaire Republican presidential candidate, said in a Wednesday interview with Bloomberg Television’s Stephanie Ruhle.

“Janet Yellen for political reasons is keeping interest rates so low that the next guy or person who takes over as president could have a real problem.”

That problem spurred by raising rates, Trump argued, could be “a recession or worse.”

You’ve got to give credit where it’s due — Donald Trump is the first presidential candidate to tackle this problem with the Federal Reserve at this level. And it’s great. And I mean really, really great. It’s “yuge” to have the front runner go after arguably the biggest problem facing the American economy — the Fed.

However, there is a major problem with how he’s going about this — attacking the political motivations of the Federal Reserve and its chairman obscures the very real, harmful effects of the Fed.

While Janet Yellen could be keeping interest rates low to help Obama and hurt Republicans, there’s nothing new to having a politically motivated Fed. Does anyone remember Reagan appointee Alan Greenspan sitting next to Hillary Clinton at the State of the Union and later endorsing Clinton’s tax hike? Trump’s on good footing to suggest that actions of the Fed have a profound impact on the presidency — as Matt O’Brien pointed out at WaPo:

The arc of the political universe is long, but it bends towards monetary policy.

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Trump Attacks Janet Yellen and Federal Reserve, Again

Donald Trump doubled down on his criticism of U.S. monetary policy Friday, accusing Federal Reserve Chair Janet Yellen of artificially keeping interest rates low as a favor to President Obama.  Trump said the zero interest rate policy is meant to artificially prop up Wall Street and push a coming recession into the next administration, and that as soon as interest rates are raised “someone’s going to suffer”:

TRUMP: Janet Yellen, for political reasons, is keeping the interest rate so low that the next guy…who takes over as President could have a real problem.  Keeping these interest rates at this level, Stephanie, this is a political thing.  When they get raised, perhaps with the next President, we’ll see some bad things happen.

STEPHANIE: Do you think Janet Yellen is failing?

TRUMP: I don’t know if she’s failing, but she’s a very political person because everybody’s been saying that she should raise the interest rates.  Now she’s always been known as a dove on interest rates, but I think what she’s doing, and I’m sure that’s with the blessing of the President because he doesn’t want to have a recession or worse in his administration, so she’s keeping interest rates low.  Get him out of here, let him go to my golf courses, because I’m sure he’ll be playing because I have the best golf courses around, but he’s gonna go play golf, and someone’s going to suffer.

STEPHANIE: Quantitative Easing really seems great for people in the financial industry.

TRUMP: Excuse me, I’m a developer. 

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WSJ Confesses Fed Has No Clue How to Restore Economy

The Marriner S. Eccles Federal Reserve Board Building (photo via Wikimedia Commons, CC BY-SA 3.0)

The cyberworld is buzzing from Janet Yellen’s announcement she’s not yet going to permit interest rates to find their market level.  Gradually, slowly but inexorably, even central bankers are beginning to acknowledge the Fed doesn’t have a clue how to make the economy grow.

“Central bankers have injected roughly $8 trillion into the global economy since the financial crisis. In return, the world has remained in a low-growth rut,” is the lead paragraph of a front page story in Friday’s Wall Street Journal.

Their central theory that manipulating money and interest rates artificially can spur growth is being disproven.  Their tools don’t work.

Raghuram Rajan, head of India’s Reserve Bank, is one of the few to point out the increasingly obvious fact that the monetary emperors at the Fed have no clothes: “Finance, especially as motivated by central banks. . . can’t be the underlying driver of economic growth,” he acknowledged.

One of the core misconceptions of the reigning monetary theories, which George Gilder dispels in his APP monograph, “The 21st Century Gold,” is that the only bad economic consequence of manipulating money is inflation. No inflation, no bad economic consequences, the regnant theory suggests.

Aside from Gilder, David Malpass is one of the few to connect the dots here: Artificially zero interest rates are killing the middle economy while boosting the incomes of the 1 percent by creating an artificial bubble in stocks and Manhattan penthouses:

The Fed’s new economic forecasts highlights its insecurity over markets, policy tools and its own effectiveness.

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