End the Fed or Audit it?

Rand Paul and Ron Paul
U.S. Sen. Rand Paul (R-KY) (L) talks to his father Rep. Ron Paul (R-TX) (R) during a news conference June 22, 2011 on Capitol Hill in Washington, DC.. Photo by Alex Wong/Getty Images

In February 2013, Senator Rand Paul (R-Ky.) introduced an "Audit the Fed" bill to give Congress oversight of the central bank's credit facilities, including its purchases of Treasury bonds and mortgage-backed securities otherwise known as quantitative easing

In 2010, the Dodd-Frank Wall Street Reform Act mandated that the Fed undergo a one-time audit of loans it made to companies like AIG during the 2008 Financial Crisis.

The Act also allowed the additional audits of any future emergency loans the Fed might make. Federal Reserve Chairman Ben Bernankecomplied, but wasn't happy about the audit. Bernanke said audits made it seem like the Fed was no longer independent. Worse than that, he added, it hampered the Fed's ability to quickly and creatively spur an economy that is still teetered on recession.

Many of the Fed's other activities are audited on a regular basis.

  • The Government Accountability Office (GAO) reviews various Fed bank activities. For details, see GAO Audits.
  • the Office of Inspector General (OIG) oversees an annual audit of the Fed's financial statements. The Fed's balance sheet is published online weekly. For details, see Fed's Balance Sheet.
  • All Reserve banks are audited by the GAO and the OIG.
  • Last but not least, the Fed's financial statements, including the combined financial statements for all Reserve Banks, are published in the Annual Report. (Source: Federal Reserve, Does the Fed Get Audited?)

    End the Fed

    Rand Paul agrees with his father, former Texas Representative Ron Paul, that the Fed is a dangerous quasi-governmental authority. He argues that it is not accountable to the American people because its governors are not elected. Ron Paul said that the Fed is responsible for the financial crisis and has written a book entitled End the Fed.

     

    Dr. Paul says the Federal Reserve should be eliminated, or at least audited, because it prints money, thereby devaluing the dollar. As Chair of the Fed Oversight Committee, he urged it to become more transparent. Fortunately, he didn't eliminate the Fed. 

    Congressman Paul makes a compelling argument for abolishing the Federal Reserve. Paul's knowledge of economics, especially economic history, is impressive. Unfortunately, he ignores the impact of fiscal policy and the deregulated financial industry. Ending the Fed will not achieve what Paul says it will: the end of business cycles, inflation and recessions. Insted, it cripple the economy. Monetary policy is needed to adjust liquidity and control inflation. Without this guidance, investors would lose trust in financial markets, increasing volatility. Expectations of inflation would cause it to spiral out of control. Ending the Fed would isolate the U.S. from global trade, since central bankers coordinate economic policy between countries.

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    Pros

    • Easy to read and understand. Clearly written without a lot of intimidating terms.
    • Explains why war is never good for the economy.
    • Provides a good history lesson of the founding of the Fed and early American economy.
    • Explains the destructive effect of inflation.

    Cons

    • Ending the Fed would not eliminate inflation caused by excessive demand or too-little supply.
    • Ignores the role of derivatives in creating current recession.
    • Doesn't address AIG and bankers' misuse of depositors' funds.
    • Deficit spending also causes a declining dollar and inflation.
    • Allowing banking system to fail would cause untold losses to most U.S. citizens.

    Description

    • Chapter One. Why You Should Care.
    • Chapter Three. My Intellectual Influences.
    • Chapter Five. The Gold Commission.
    • Chapter Seven. Conversations With Bernanke.
    • Chapter Nine. The Current Mess.
    • Chapter Eleven. The Philosophical Case.
    • Chapter Thirteen. The Economic Case.
    • Chapter Fifteen. The Way Out.

    Guide Review - End the Fed

    Ron Paul is a good writer and effective communicator. His book, End the Fed is clear, easy to understand and engaging. Many of his points are absolutely correct. Inflation and the declining dollar hurt the economy. War is an artificial and temporary way to pump up the economy, but causes more harm than good in the long run. Monetary policy was too expansive for too long, which did contribute to the real estate bubble and current recession.

    However, ending the Federal Reserve would not end these problems. Congressman Paul does not address how fiscal policy also contributes to inflation and a declining dollar by running budget deficits year after year. The current economic crisis was caused by a great number of complicated factors.

    • The Fed, alone, did not create it.
    • The Fed did not cause the $13 trillion debt.
    • The Fed did not cause AIG to use insurance deposits to create credit default swaps.
    • The Fed had nothing to do with the lack of regulation on derivatives and hedge funds.

    All of these factors contributed to the Great Recession.

    Therefore, if the Fed were abolished, these things would continue. Business cycles, inflation, and recession would still exist, perhaps more severe than today. That's because there would be one less balance and check on the economy.

    As Congressman Paul says, "Everyone should have an intense interest in what money is and how it's manipulated by the few at the expense of the many." The income inequality in this country proves that is true. But ending the Fed would not stop that. The resultant economic turmoil might even make things worse.

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