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Stockman: Slap Handcuffs on the Fed Before It's Too Late

By    |   Wednesday, 11 February 2015 01:34 PM

David Stockman, former White House budget director in the Reagan administration, says that not only should the current Federal Reserve be audited — it should be shackled to stop it from destroying the national economy.

Writing in his Contra Corner blog, Stockman lamented that the central bank has been making public policy for years despite the fact its officials are not elected. He is not a fan of the tidal wave of ultra-easy money emanating from the Fed, which it is finally expected to edge away from with a modest rate increase by mid-year.

"Indeed, given the very earliest expected date for 'lift-off' in June, the Fed will have pinned the money market rate at zero for 80 months running. This unprecedented tsunami of 'easy money', of course, happened with nary a Congressman or Senator darkening the door at the Eccles Building," Stockman noted, referring to the building that houses the Fed.

"Rather than protecting the Fed from meddling politicians, it is the American public that desperately needs protection from the depredations of an unelected monetary politburo that runs the entire financial system."

By slashing 300 basis points off the historic after-tax and after-inflation return on consumer savings, the Fed "annually pilfers $250 billion from the nation's . . . depositors and savers," in Stockman's view.

That money extracted from Americans' accounts ends up in the income statements of the U.S. banking system, where is counted as earnings to help banks recover from their profligate ways, he explained.

Stockman noted the Fed has either cut rates or left them unchanged 100 times during the past nine years, but not once has it raised them. Higher rates tend to translate into higher returns on consumer savings and deposit instruments.

The insular bankers at the Fed are fretting that Sen. Rand Paul, R-Ky., and other advocates of an audit of central bank policies will be successful, and worry about the potential findings, he said.

"Namely, that ZIRP [zero interest rate policy] has crushed savers and rewarded Wall Street gamblers with free money to harvest the stupendous riches obtained from their carry trades; and that QE [quantitative easing] has been a bonanza for the fast money traders who front run the Fed but has done virtually nothing for the main street economy."

The Fed should be restored to its original function of providing liquidity to the banking system, not setting fiscal policy and trying to manage GDP and the job market, according to Stockman.

"In short, what the nation really needs is not an 'independent' Fed, but one that is shackled to a narrow and market-driven liquidity function," he wrote, adding that the Fed leadership of recent years has turned the nation's financial markets into "dangerous, unstable casinos, and the nation's savers into indentured servants of a bloated and wasteful banking system."

A policy audit of the Fed cannot come soon enough for him. "An honest one would show that its so-called 'independence' has been monumentally abused in a manner which is deeply threatening to both political democracy and capitalist prosperity."

In a pushback to audit advocates, Fed Governor Jerome Powell claimed in a speech at Catholic University that such a move by Congress would "reverse decades of deliberate effort by the Congress to insulate the Fed from political pressure in carrying out its day-to-day duties," according to MarketWatch.

Richard Fisher, president of the Dallas Fed, is calling for reforms at the central bank, however, The Wall Street Journal reported.

Fisher is advocating broad changes that would take away power from the New York Fed, which some observers believe is overly influenced by Wall Street banks, and transfer it toward the central bank's other regional operations.

"We at the Fed must fully and frontally address the concern of many who feel that too much power is concentrated in the New York Fed," Fisher said.

He explained that such reform would help the democratic nature of the institution and give the rest of the country a greater voice in policy decisions, according to The Journal.

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David Stockman, former White House budget director in the Reagan administration, says that not only should the current Federal Reserve be audited — it should be shackled to stop it from destroying the national economy.
Stockman, Fed, audit, independent
Wednesday, 11 February 2015 01:34 PM
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