5 Myths & 5 Ugly Truths About the Fed

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Myth #2: The Fed isn’t accountable to anyone and has never been audited

piggy bank break 5 Myths & 5 Ugly Truths About the FedMany conspiracy theories about the Federal Reserve include a thought along the lines of “Whenever a Congressman has introduced legislation to audit the Fed, that bill is always defeated.” While many efforts targeting the Fed have died on the floor, in fact independent financial audits of the Federal Reserve banks are conducted by accounting firms each year – as well as inquiries requested by the Board of Governors. Consider a 1992 GAO audit that drew attention to the Fed’s sluggish compliance with regulatory reforms mandated by the Foreign Bank Supervision Act of 1991. A previous audit also criticized payment system activities under the Monetary Control Act of 1980 for unfairly competing with some private banks. These are just two examples, proving that the Fed is not a black box but subject to information requests and audits like a host of other governmental agencies.

But here’s an ugly truth about Fed audits …

Those selfsame audits that shed light on Fed shortfalls have also been one of the biggest motivators for reform, via frustration by the auditors themselves. In fact soon after the 1992 study mentioned above, GAO comptroller Charles Bowsher went before the Committee on Banking, Finance and Urban Affairs to lament that his office could have done better work if they had been given broader access. Specifically, Bower defended the GAO’s right to audit daily government securities auctions and foreign currency interventions – and supported a bill that would allow greater access to Fed activities. One that, surprise surprise, eventually died on the House floor. Ron Paul supporters will notice Bowsher’s comments sound curiously like the Texas conservative’s own complaints in his plain-titled 2009 book, “End of the Fed.” The only difference is that the concerns were voiced nearly two decades ago. The duality of the public-private Fed has long been a complicated matter for auditors, since the central bank retains some governmental privileges but also some private sector protections from 100% transparency with the American people, and there is much about the Fed that even regular audits cannot shed light on.

Myth #3: The Fed has ruined the economy by devaluing the dollar and causing inflation

inflation ahead sign 150x150 5 Myths & 5 Ugly Truths About the FedHere we get to a very sticky subject – the concepts of a weaker dollar or moderate inflation sometimes being “good” things. If you recall events in the financial markets in late 2008 and early 2009, one of the biggest concerns on the minds of most economists was the threat of deflationary death spiral akin to the mess that created Japan’s “Lost Decade” of stagnant economic growth. But according to the International Monetary Fund, much-maligned “quantitative easing policies” undertaken by central banks worldwide helped sidestep deflation. It’s also worth noting that a weak dollar makes American goods and services less expensive in the global marketplace, and thus makes us more competitive. Think of it as kind of a way to put a “discount” on American goods abroad to encourage business. Those who advocate zero inflation and a strong dollar have to consider the very real consequences of such actions.

But here’s an ugly truth about inflation and the dollar  …

 

For all the weakening of the dollar, there hasn’t been a material change in the import-export disparity for the U.S. According to foreign trade data released April 11, the trade deficit remains a remarkable $45.8 billion. And most economists predict that number will tick up against as the U.S. trade balance is affected by oil prices. In short, the idea that a weak dollar boosts imports is a gross oversimplification and ignores other factors at play in the global economy. Furthermore, while a reasonable level of inflation helps support demand there comes a tipping point when hyperinflation – such as skyrocketing gasoline and food prices we are seeing now – outpaces wages at an alarming rate and wreaks havoc on household budgets. If wages can’t keep pace with inflation, as is clearly the case over the last 6 months, then the net result is that people see their money buying less and less with each passing day. So if a weak dollar isn’t juicing the economy as some claim it should and inflation is now doing more harm than good, who’s side is the Fed on?

NEXT: Myths about the Fed as a “government” enterprise…

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