Will Mnuchin stop Trump from auditing the Federal Reserve?

Auditing the Federal Reserve was once part of the Trump administration’s first 100 days’ action plan to “Make America Great Again,” but it appears that Wall Street banker and Treasury Secretary nominee Steve Mnuchin is now trying to undermine President Trump and the momentum of this important campaign promise.

Over the years, Sen. Rand Paul (R-Ky.) and Rep. Thomas Massie’s (R-Ky.) Federal Reserve Transparency Act has received growing bipartisan support, even from polar opposite ideologues like Sens. Bernie Sanders (I-Vt.) and Mike Lee (R-Utah), who recognize the dangers of allowing Fed officials to manipulate the economy for political gain.

In 2014, the bill passed the House with a 333-92 vote. Although it failed the Senate by a mere 7 votes, many speculate that the “Trump bump” will allow it to hop over the legislative hurdle once and for all — that is, unless Mnuchin distances the president away from it.

 

Although Trump recognizes that “Auditing the Fed is so important,” so much so that he publicly called out Sen. Ted Cruz (R-Texas) for missing a vote on the bill last year, Mnuchin is quietly working to stop the legislation from advancing. When questioned last week by Sen. Bill Nelson (R-Fla.), Mnuchin said, “As you know, the Federal Reserve is organized with sufficient independence to conduct monetary policy.”

Mnuchin is merely echoing his former Wall Street cohort’s talking points, and it’s important that we debunk them now before further damage is done to this important cause.

The Fed does not operate ‘independently’

The Federal Reserve has become nothing more than another arm of the executive branch, responding to the beck-and-calls of the president.

As economics scholar Robert Weintraub detailed, Fed policies almost always change to reflect the monetary views of the president.  For example, when he was head of the Fed, William McChesney Martin complied with President Eisenhower’s request for very slow growth in the money supply. Years later, however, Martin then agreed to reverse course by cranking up money growth to 5 percent for President Lyndon Johnson, who depended on massive Fed inflation to finance his “Great Society.”

The same held true under Fed Chairman Arthur Burns. A former vice president of the Dallas Fed said that, “The diary [Burns] kept during the Nixon years confirms that Fed policy became subservient to administration goals and the president’s re-election campaign.”

Things have not improved in recent years. In fact, this past election cycle, the “apolitical” employees of the Federal Reserve doled out over four times more in campaign donations to Hillary Clinton, who was widely speculated to win the presidency, than any of the other candidates combined.

So no, the Fed does not act independently — its members only do what is politically and personally convenient. Only a thorough Congressional audit can stop this cozy relationship between the president and the central bank.

The Fed is not thoroughly audited

Critics such as Mnuchin and Sen. Bob Corker (R-Tenn.) often argue that this bill is useless because the Fed is already thoroughly audited. This claim is far from the truth.

Currently, the Government Accountability Office, the independent, apolitical government agency tasked with auditing the Fed, is not allowed to touch the central bank’s monetary policy deliberations, FOMC transactions, and agreements with foreign central banks.

In a testimony to Congress, the GAO expressed how the audit in its current form is virtually futile because it does not allow them to adequately determine where our money is going. The Office stated, “We do not see how we can satisfactorily audit the Federal Reserve System without authority to examine the largest single category of financial transactions and assets that it has.”

In 2011, Congress ordered a limited, one-time GAO audit of Fed actions during the subprime crisis, and the results were far from pretty. That audit uncovered that the Fed lent out a whopping $16 trillion to domestic and foreign banks during the financial crisis without congressional approval.

What is the Fed doing today?

What assets has the Fed bought since then and who is it doling out money to now? The answer to these questions will remain unanswered unless Congress passes Paul and Massie’s Audit the Fed bill this session.

Allowing the Fed to rapidly inflate the money supply and secretly give out loans to foreign entities without congressional oversight is stupid policy. It has destroyed 95 percent of the dollar’s purchasing power, all for the purpose of helping the president and his favored Fed officials retain political power.

Let’s hope that President Trump, who has promised to “drain the swamp,” sees through the light of Mnuchin’s talking points and prioritizes the passage of this bill. The economy can’t be made “great again” without doing so.

Source: Will Mnuchin stop Trump from auditing the Federal Reserve?

Federal Reserve Bankers Mocked Unemployed Americans Behind Closed Doors

IN 2011, UNEMPLOYMENT WAS at a near crisis level. The jobless rate was stuck around 9 percent nationally, an unusually high number due to the continuing effects of the financial crash.

House Democrats were aghast. “With almost five unemployed Americans for every job opening, too many people remain jobless because of a lack of work, not a lack of wanting to work,” said Congressman Lloyd Doggett, D-Tex. So in early November 2011, they introduced a bill to reauthorize Federal unemployment benefits, an insurance program designed to aide those looking for work.

Behind closed doors at the Federal Reserve however, the conversation struck a different tone.

The Federal Reserve’s mandate is to promote “maximum employment,” which essentially means: print enough money so that everyone who wants one has a job. Yet according to transcripts released this month after the traditional five-year waiting period, Federal Reserve officials in November 2011 were debating whether unemployment was caused by bad work ethics and drug use – rather than by the greatest financial crisis in 80 years. This debate then factored into the argument over setting monetary policy.

“I frequently hear of jobs going unfilled because a large number of applicants have difficulty passing basic requirements like drug tests or simply demonstrating the requisite work ethic,” said Dennis Lockhart, a former Citibank executive who ran the Atlanta Federal Reserve Bank. “One contact in the staffing industry told us that during their pretesting process, a majority—actually, 60 percent of applicants—failed to answer ‘0’ to the question of how many days a week it’s acceptable to miss work.”

The room of central bankers then broke into laughter.

Charles Plosser, the president of the Philadelphia Federal Reserve, cited “work ethic” as a common complaint he heard in his district, both in rural and inner city areas. A contact of his who owned 60 McDonald’s restaurants said “passing drug tests, passing literacy tests, and work ethic are the primary problems he has in hiring people.”

His wife, he noted, had attended a meeting in Philadelphia where employers cited literacy, work ethic, and drugs as impediments to hiring.

It was hardly the first time these bankers blamed unemployment on the unemployed, rather than, say, bankers. In an April meeting that year, Richmond Federal Reserve President Jeff Lacker told participants that “Several firms told us of difficulty finding adequate workers, because they preferred to collect unemployment benefits or can’t pass drug tests.” He reiterated that point in November, saying that in West Virginia he was told by an employment agency that “unquestionably the biggest problem in hiring skilled and unskilled workers was the inability to pass a drug test.”

Lacker’s Federal Reserve district includes West Virginia. In August, he again spoke of “widespread reports about hard drug use, OxyContin and methamphetamine, in Appalachia and other rural parts of our District—in particular, Appalachia.”

Apparently his colleagues responded with laughter again, because he then said “Drug abuse and the hardship involved in unemployment aren’t really laughing matters.” Usage, he noted, isn’t higher than the national norm in West Virginia. “It’s hard to pin this down quantitatively,” he continued, wondering if there was “something meaningful there as a contributor to impediments to labor market functioning.”

These debates took place within the Federal Open Market Committee (FOMC), the Federal Reserve body tasked with “influenc[ing] the availability and cost of money and credit to help promote national economic goals.” The debate revealed a split within the Federal Reserve system between “hawks” who worry more about inflation than unemployment, and “doves” who believe that too many are going without jobs. Typically, “hawks” tend to lean to the right politically, and “doves” tend to lean slightly more to the left.

Lacker is one of the most “hawkish” members of the FOMC, which means he tends to be in favor of higher interest rates and higher unemployment to ward off inflation. In 2015, Lacker ascribed increasing inequality to the lack of college education among the poor

Sarah Bloom Raskin, a dovish member of the Board of Governors, countered by saying that unemployment was a function of the financial crisis. “The economy remains mired in the worst slump since that of the 1930s,” she said.

Daniel Tarullo, another dovish Federal Reserve governor appointed by President Obama, called the focus on drug use a “red herring.” He said, “We had that problem 25 years ago, 20 years ago, 10 years ago; we have it today; and we’re going to have it 5 years from now.” He cited housing debt from the largest housing bubble in history as a core driver of unemployment.

The transcripts illustrate how the controversial method of picking Federal Reserve officials plays out in setting monetary policy: The three men who cited work ethic or drug use as a cause of unemployment instead of the financial crash were picked by regional private sector businessmen to lead the local Reserve banks.

The Dodd-Frank financial reform law passed in 2010 mandated that the Federal Reserve Board in Washington approve the choices of private businessmen, but the Board has yet to reject any suggested candidates. The board members who cited the financial crash as causing unemployment were appointed by the president and confirmed by the Senate.

The concept of having private business interests selecting public officials has been criticized by experts. As Wharton professor and author of “The Power and Independence of the Federal Reserve” Peter Conti-Brown put it, “It’s not clear at all that the opaque and obscure process by which the private sector selects the Reserve Bank presidents produces superior central bankers than the public process used to select the remaining principal officers of the United States.” This controversial selection process risks having, as he put it, “a system for enhancing the influence of certain slices of society on our central banking policy.

Lacker and Lockhart are retiring this year. Advocates and experts are putting pressure on the Richmond Federal Reserve to replace retiring Reserve Bank Presidents with someone more attuned to the reality of unemployment. Fed Up, a coalition of advocates seeking to shift the Fed from its traditionally pro-bank policies, is seeking to have the regional bank President’s picked with more attention to the needs of workers.

Jordan Haedtler, deputy campaign manager of Fed Up, lashed out at Lacker’s comments as related in the newly released transcripts. “Even nine years into the recovery, workers are still struggling to get the wages and hours they need,” Haedtler said. “Yet with unemployment above double digits in huge swaths of President Lacker’s district in 2011, he was citing anecdotes about drug use and desire to collect unemployment benefits as key reasons why employers weren’t hiring. Rather than looking for solutions and talking to people who were out of work, he was seeking excuses from employers.”

President Donald Trump has a number of vacancies on the Federal Reserve Board to fill as well. He has been highly critical of Federal Reserve Chair Janet Yellen. He argued, without citing evidence, that she pursued monetary policy goals to help support Barack Obama and elect Hillary Clinton. If Yellen and Tarullo follow custom and step down from their board slots in 2018, Trump could appoint a majority of Federal Reserve board members within two years.

Despite the importance of monetary policy, the Federal Reserve keeps the transcripts of internal deliberations of the committee that sets monetary policy out of public view for at least five years. But the people who attend those meetings take other jobs — some in the financial services industry. In 2010, incoming House Oversight Committee Chairman Darrell Issa questioned whether it was appropriate for the Fed to withhold its deliberations for so long. “If the Fed’s full transcripts can be released sooner, they should be,” he said.

The debate in the Fed and within Congress was ultimately resolved. The Federal Reserve kept interest rates low. And in 2011, a new wave of recently elected Tea Party Republicans and Democrats finally compromised on language to cut unemployment benefits.

Neither West Virginia senator, Shelley Moore Capito nor Joe Manchin, would comment on Lacker’s discussion of the West Virginia drug epidemic and its relationship to unemployment. The Appalachia region, including West Virginia, went strongly for Trump in the 2016 election.

Source: Federal Reserve Bankers Mocked Unemployed Americans Behind Closed Doors

Understanding Inflation: Changes in Purchasing Power

Purchasing Power of the Consumer Dollar 1913-2017

“Inflation is taxation without legislation.” – Milton Friedman

Why does your monthly rent today cost just as much as the down payment your grandparent’s put on their home 70 years ago? The answer is inflation. Economics Professor Robert Lawson explains how inflation is essentially the change in the purchasing power of your money (i.e. how many tacos can you buy with, say, $20 today as compared to a decade ago).

When inflation occurs, you’re able to buy fewer goods and services with the same amount of money. And when inflation really picks up, it can have catastrophic economic consequences.

Watch Professor Lawson below to learn more:

Ethanol industry buys a top seed and three key politicians

“Besides higher #food prices, however, this form of #government #bureaucrats picking winners and losers in the #energy market is having another unexpected consequence—boosting genetically modified food. #Syngenta, a Swiss-based firm, recently got the go-ahead for sales of its #geneticallymodified corn seeds…”

http://sfexaminer.com/ethanol-industry-buys-a-top-seed-and-three-key-politicians/

Income Tax Declared Unconstitutional

The U.S. Supreme Court, in 1895, ruled unconstitutional a federal law containing income taxes, with arguments concerning class warfare and the definition of a direct tax.

Posted by William L. Wunder on Aug 3, 2008

Shareholders of corporations immediately sued to halt their corporations from paying the tax. The various cases were consolidated into Pollock v. Farmers’ Loan and Trust Co. and accepted by the Supreme Court in January 1895. The plaintiffs, represented by William D. Guthrie, George F. Edmunds, and Joseph Choate, claimed that the income tax would induce class warfare that would lead to “communism, anarchy, and then, the ever following despotism.”

Direct Tax and the Uniformity Clause

As for constitutional arguments, the plaintiffs insisted that the income tax was a direct tax- the law’s tax on real property was the equivalent of a property tax, which was a direct tax. According to Article I, Section 9 of the Constitution, “No capitation or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration…” The plaintiffs claimed that the income tax wasn’t in proportion to the census and therefore it was unconstitutional.

Also, the plaintiffs used the uniformity clause of the Constitution. Article I, Section 8 states that “…all Duties, Imposts and Excises shall be uniform throughout the United States.” The plaintiffs charged that the vast majority of the affected taxpayers lived in New York, New Jersey, Connecticut, and Pennsylvania. In addition, the tax was not uniform because it was imposed on some kinds of income.

The defense, represented by Richard Olney and James C. Carter, countered with precedent. They maintained that the income tax was not a direct tax. They cited the 1796 Supreme Court decision that upheld a carriage tax, clearly determining that direct taxes referred to only property. Other taxes upheld by the Supreme Court in the past included taxes on insurance companies and the Civil War income tax.

Another argument posed by the defense took on the plaintiffs’ issue of class warfare. According to Steven Weisman, Carter asserted that the best way to preserve private property was to relieve the masses of excessive tax burdens. The poor had paid more than their fair share through consumption taxes and tariffs and the income tax would act as a balance. The income tax would be a safety valve in an era of labor unrest.

Chief Justice Melville Fuller

The Court decided the case in April, a Court that believed “property was sacrosanct,” and “economic regulation was taboo,” according to writer Burt Solomon. Chief Justice Fuller, writing for the 5-3 majority, declared that income taxes on real estate was a direct tax and therefore unconstitutional. The majority also discarded the tax on interest from municipal bonds as an infringement on the states. However, with one justice absent, other issues in the case split 4-4 and the case was retried.

In May, with a full complement of justices, the Supreme Court threw out the entire Wilson-Gorman law by a 5-4 margin. Fuller, again for the majority, wrote that the unconstitutionality of the income tax on real estate scuttled the whole law, despite the possibility of some taxes, like wages, being constitutional. Dissenting, John Harlan stated that it was a dangerous precedent in ruling income taxes unconstitutional- it could open society to social unrest.

Both sides in Pollock v. Farmers’ Loan and Trust Co. feared that unrest if they didn’t prevail. And both couldn’t agree on the definition of a direct tax as written in the Constitution. What did become apparent, according to Harlan, was that a constitutional amendment allowing income taxes would be needed. That was for the future- the Sixteenth Amendment.

Sources

Solomon, Burt, FDR v. The Constitution, Walker: New York, 2009.

Weisman, Steven R., The Great Tax Wars, Simon and Schuster: New York, 2002.


Also see:

Today in History: Income Tax Ruled Unconstitutional in Pollock v. Farmers Loan Trust Co. | Tax Foundation | April 8, 2013

Supreme Court Case Pollock v. Farmer’s Loan and Trust Co. 1895