No One Is Minding the Store

The following video is disturbing, to say the least. On the surface, it presents a straightforward picture that the Fed is careening out of control, and that the Inspector-General assigned to its oversight has not a clue as to what is going on:

That is disturbing enough. But what makes the video really disturbing is that the Congressman cannot answer his own question. The branch of government which has the primary responsibility for overseeing the Federal Reserve is not its Inspector-General's office, but Congress itself. All I see is that one Congressman has the ability to read the news and ask questions so as to embarrass a witness, who admittedly is clueless to begin with. ("Off-balance-sheet transactions? I'm afraid I haven't read the Bloomberg story to which you are referring.")

As Fed Chairman Ben Bernanke heads to Capitol Hill for two days of testimony beginning this morning, there will be no want of opportunity to question him. But without any meaningful regulatory oversight of the Fed's operations, Congress is pretty much forced to accept whatever answers he wants to give.

For example, in a foretaste of his testimony, Mr. Bernanke has published an op-ed in today's Wall Street Journal. In it, he supposedly provides an answer to the question of whether the Fed will be able to apply the brakes in time to prevent run-away inflation. I say "supposedly", because if you read it closely, you will find that the methods he proposes to stop inflation all involve more flim-flam with paper money. Either he prints more money out of thin air to pay the banks interest on the reserves he earlier loaned them (yes, you read that right --- the Fed loans the banks money, which they turn around and invest at the Fed, which pays them interest), or the Treasury sells debt obligations to the public and "invests" the proceeds at the Fed, or the Fed itself sells some of its huge inventory of largely worthless securities and keeps the proceeds in its own account. All three methods involve transferring some of the "money" held by the banks and the public to the vaults of the Fed. This takes it out of circulation, true --- but what we get in place of that paper money is just a different kind of paper money: interest or worthless securities. It's just a never-ending carousel of revolving debt paid for with "money" printed out of thin air.

There are, to be sure, calls to regulate the Fed as it once used to be regulated. (The Wall Street Journal linked above has some useful links to past articles about the history of the struggle by the Fed to win "independence".) But the debate has an unreal character about it that comes from a false dichotomy: either the Fed must be allowed to make up the rules as it goes, without any interference by the politicians, or the politicians must be allowed to curb the Fed according to popular demand. The truth, of course, lies elsewhere; the "debate" is intended only to distract your attention.

Even with 274 or so co-sponsors, Congressman Ron Paul's proposed bill to require a first-ever audit of the Fed has no chance of enactment without Nancy Pelosi's say-so. (Being a "sponsor" of a bill does not mean you will vote for a bill's enactment --- it just means you are in favor of bringing it to the floor for a vote, or want to send a signal of sorts to the Fed --- or to the Administration.) So what is truly scary about the above video is that the Congressman depicted (Rep. Alan Grayson, a Freshman Democrat from Orlando, Florida) is asking all the right questions, but of the wrong person.

And as a freshman, even a Democrat freshman, he won't be given the chance to ask the right person for years. So where is the rest of Congress on this matter? Asleep at the switch, while the train derails. Or actually, not asleep, but in fact providing the worst possible example of how not to run fiscal policy. In fact, while the Fed's off-balance-sheet transactions are skyrocketing and causing tremendous concern over its grasp of monetary policy, Congress is proposing to do even worse with the Treasury's balance sheet --- and thereby demonstrating its utter lack of ability to manage fiscal policy. Take a look at this graph (from the recent testimony of the Director of the Congressional Budget Office --- it runs from 29:30 to 35:30 on the video):

The graph depicts the outstanding debt of the Treasury held by the public (including principally the Chinese) as a percentage of the Gross Domestic Product --- the value of all the goods and services produced by Americans --- under two scenarios. The "Baseline Scenario" is with the CBO's current published projections given legislation already enacted. The "Alternative Scenario" is with the bills Congress currently has under consideration (universal health care, cap and trade, second stimulus, etc.). That the two could even be placed side by side is not the joke; it is that the one is labeled "baseline" while the other is labeled "alternative".

Notice that the percentage has never gone as high as 100% since in the aftermath of having to finance World War II, when the economy (in terms of GDP) was only one-sixth of what it is today. And notice, too, how short and steep the peak was in 1949, versus the unknown size of the mountain we are scaling today. The numbers are going off the charts on both the fiscal and the monetary scales, and we are assured that everything is under control.

Pray for your country --- no one is minding the store.