“Get down on your knees and thank the LORD for Bernanke” ~Warren Buffet
Bernanke’s Free Ride Is Over by Gary North
Ben Bernanke took over as Chairman of the Board of
Governors of the Federal Reserve System on February 1,
2006. On February 9, 2011, his free ride ended. On that
day, Paul Ryan’s House Budget Committee grilled him.
Bernanke has yet to appear before Ron Paul’s
Subcommittee on Monetary Policy. Whether Bernanke will ever
agree to testify before that subcommittee remains an open
question. If the House does not compel him to show up, he
may be able to escape stiff cross-examining. If the House
refuses to compel him to testify, then the House once again
has capitulated on a bipartisan basis. We shall see.
Bernanke is not used to tough questions. Some of the
questioning wound up on YouTube within hours.
You may not perceive the extraordinary nature of all
this. You can be sure that he perceives it. For almost a
century, representatives of the Federal Reserve have been
dealt with deferentially by Congress. In theory, the
Federal Reserve answers to Congress. In fact, Congress asks
The sign of the FED’s operational autonomy is the
absence of any independent audit by any agency of the
United States government. This includes any audit of the
gold that the FED legally has stored for the government
since 1933. The last audit of the gold in Fort Knox was in
1953. There has never been an independent audit of the gold
inside the vault of the New York Federal Reserve Bank
(privately owned) at 33 Liberty Street, New York City.
Between 1953 and 1974, no one got inside the vault at
Ft. Knox, where (supposedly) 147 million ounces of gold are
stored. In 1974, Congressman Phil Crane (R-Ill) strongly
suggested to the Secretary of the Treasury that a group of
citizens and a few congressmen be allowed to tour the
facility. Secretary Simon got this approved. This was the
first tour of the Ft. Knox vault since Roosevelt toured it
during World War II. That had been the only other tour. An
account of the 1974 tour is here.
Ron Paul has introduced a bill to audit all of the
nation’s gold. His 2009 bill to audit the FED was held up
by Barney Frank. Although a majority of the House co-
sponsored the bill, Frank never allowed it to get to the
floor of the House for a vote. A gutted version was allowed
into the bank reform law of 2010.
Any full-scale audit of the FED by the General
Accounting Office or other government agency should
determine three things: (1) how much U.S. gold is in all
depositories; (2) the fineness of the gold (coin melt is
only 90% gold and is not suitable for delivery to the
metals markets); (3) which nations and central banks have
title to the gold in the vaults.
The FED has of course strenuously resisted any audit.
An audit is officially rejected by the FED for this reason:
it would be an infringement on the autonomy of the FED.
Bernanke told Congress what the situation was in 2009. The
FED, not Congress, was in charge. He said that the FED
should not be subject to an audit by Congress.
We will continue to work with the Congress to
provide the information it needs to oversee our
activities effectively, yet in a way that does
not compromise monetary policy independence.
“Wait a minute,” you may be thinking. “The Federal
Reserve is legally an agency of the U.S. government. The
government should audit every agency.” That sounds nice,
but the government does not audit agencies with real
autonomy and serious power, such as the CIA and the
National Security Agency (NSA). The FED is different.
Unlike those agencies, 12 of its administrative agencies,
the regional FED banks, are privately owned organizations.
This is why their Web addresses end in .org, not .gov.
Whenever we find a government agency that is not
subject to an audit by the government, we can be sure we
are dealing with an agency that possesses real power. The
FED possesses such power.
UNTOUCHABLE NO LONGER
The chairmen of two Congressional committees are
openly critical of the FED. This has not happened before.
The only chairman as hostile to the FED as Ron Paul is, was
Wright Patman of east Texas. He was a left-wing Populist.
He was a greenbacker. He favored a pure fiat currency,
unbacked by even the pretense of gold. From 1929 to 1976,
he was a thorn in the side of the FED. During World War II,
he teamed up with Jerry Vorhis, a California Congressman
who shared his greenback views. Together, they got a law
signed that forced the FED to repay to the Treasury all
interest income from Treasury bonds that was not used for
operating expenses. That has put a significant lid on FED
income over the last six decades. In 2010, it paid back
$78.4 billion, up from $47 billion in 2009.
Patman was removed as chairman of the Banking
Committee in a coup engineered by Democrats. He died in
March of 1976, a month before Ron Paul was elected to
Congress in a special election to fill a recently vacated
position. Paul is as hostile to the FED as Patman was, but
on a different basis: a free market monetary standard in
which the U.S. government is not involved. He thinks gold
would become the monetary unit of preference.
Patman never had another House chairman share his
views of the Federal Reserve. Ron Paul knows that, within the
Tea Party, there is significant hostility to the FED. For the
first time in post-World War I history, there is a
significant minority of voters who know that the FED is an
autonomous agency in control of monetary policy. They do
not think the FED should be trusted by Congress or anyone
Bernanke now faces a situation never faced by a FED
Chairman before. What he says is not simply reported in the
financial press. It winds up on YouTube within a few
minutes. This is not what he meant by “transparency.”
YouTube existed for only a year before Greenspan left
office. Bernanke is subject to criticism on the Web in a
way that Greenspan avoided, because Greenspan was always
ready to inflate to overcome recession. Today, the FED
inflates, but unemployment remains persistently high —
higher than it did in any post-World War II recession. His
statement to the Budget Committee was subdued.
While indicators of spending and production have
been encouraging on balance, the job market has
improved only slowly. Following the loss of about
8-3/4 million jobs from 2008 through 2009,
private-sector employment expanded by a little
more than 1 million in 2010. However, this gain
was barely sufficient to accommodate the inflow
of recent graduates and other new entrants to the
labor force and, therefore, not enough to
significantly erode the wide margin of slack that
remains in our labor market. Notable declines in
the unemployment rate in December and January,
together with improvement in indicators of job
openings and firms’ hiring plans, do provide some
grounds for optimism on the employment front.
Even so, with output growth likely to be moderate
for a while and with employers reportedly still
reluctant to add to their payrolls, it will be
several years before the unemployment rate has
returned to a more normal level. Until we see a
sustained period of stronger job creation, we
cannot consider the recovery to be truly
There was not much lipstick for this pig. The job
market is locked in recessionary mode, and nothing that the
FED or the government has done has put people back to work.
Bill Clinton’s promise to end welfare as we have known it
looked good for a decade, but it has been replaced by a
politically permanent dole.
The public remains concerned about the stubborn
resistance to recovery in the job market. People know that
an economy that cannot provide jobs is a sub-par economy.
Yet the total number of Americans employed today is the
same as in 1999, yet the population has moved from 279
million to 313 million.
The job market is paralyzed. This is why Bernanke
cannot hide. The voters are pressuring Congress to do
something. The Democrats lost the House in 2010 because of
the lack of jobs. If unemployment had been at 6%, the
Democrats would probably have won. It was not the Federal
deficit that did them in. It was the deficit plus no jobs.
The situation is so bad today that something in the
range of 17 million college graduates are working in jobs
that require only high school graduate’s skills. These
people serve as the reserve army of the underemployed.
There is little likelihood that new college graduates
will find an improved job market in the next two years. For
high school graduates, it will be even worse. They are in
competition for jobs that are being filled by college
graduates — low pay, low responsibility, entry-level jobs.
Bernanke cannot talk his way out of this corner. He is
not an inspiring speaker anyway. Greenspan was lively, even
though he spoke in gibberish. Paul Volcker was something of
a spellbinder, if only because of his 6’7″ frame and his
Red Auerbach cigar. Nobody remembers G. William Miller, who
served for 18 months under Carter. Arthur Burns smoked a
pipe and had the air of a kindly banker explaining things
to a small businessman looking for a loan. That takes us
back to 1970. So, Bernanke’s dishwater dull testimony puts
him at a disadvantage in the era of YouTube. He makes his
case the way a professor makes his case to a group of
freshmen at a community college. He drones on and on about
how things are getting better, but not much better.
The public wants things to get much better. The public
is going to remain disappointed.
PUSHING ON A STRING
This phrase has been applied to Federal Reserve policy
since at least 1935. The FED expands the monetary base, but
commercial banks may not lend as much as they are legally
entitled to lend, given the increase in the FED’s holdings
of paper, meaning the FED’s balance sheet, meaning the
monetary base. Until 2008, there was no post-War case of
pushing on a string. It was discussed by analysts who
predicted price deflation in the early 1970s, but that
turned out to be the most inflationary peacetime decade in
American history. The deflationists looked silly — even
more silly than Keynesians who said that price inflation
would end recessions. It didn’t.
Today, the Keynesians are in high cotton. They are
seen by the financial media as the only economists with a
plan of action. Bernanke is their most highly placed
representative. But, in the area of job creation, the old
magic is no longer working. The monetary base is rising,
but there is not much consumer price inflation, but there
is also no consumer price deflation. Why? The answer
appears to be the theory of pushing on a string.
You can lead a horse to water, but you can’t make him
drink. You can lead a banker to a business in need of
financing, but you can’t make him lend. The fact that an
opportunity exists is not the same as a booming economy.
Losses lie ahead for local banks. Businesses are
sitting on near-cash assets because the economy is fragile,
and managers want liquidity in any future crisis. They
cannot trust the banks to lend in a recession. The banks
are not lending today. The solution is near-cash reserves.
So, the fact that businesses are sitting on liquid reserves
is no guarantee that they will put these reserves to work by
starting new projects, buying new equipment, and hiring
This recession is like no other. The level of
skepticism has persisted. This is why Bernanke’s words ring
More recently, however, we have seen increased
evidence that a self-sustaining recovery in
consumer and business spending may be taking
hold. Notably, real consumer spending rose at an
annual rate of more than 4 percent in the fourth
quarter. Although strong sales of motor vehicles
accounted for a significant portion of this
pickup, the recent gains in consumer spending
appear reasonably broad based.
Cuba Gooding’s line in “Jerry McGuire” seems
appropriate: “Show me the money!” Clara Peller’s line in
the 1984 Wendy’s ads ring even truer: “Where’s the beef?”
The deficit is now out of control. Bernanke keeps
hammering on this, because it is true. He told the Budget
Committee that the projections of the Congressional Budget
Office regarding the budget deficits are grim. Then he
tossed this hand grenade. Its projections are low-ball.
The CBO’s long-term budget projections, by
design, do not account for the likely adverse
economic effects of such high debt and deficits.
But if government debt and deficits were actually
to grow at the pace envisioned, the economic and
financial effects would be severe. Sustained high
rates of government borrowing would both drain
funds away from private investment and increase
our debt to foreigners, with adverse long-run
effects on U.S. output, incomes, and standards of
living. Moreover, diminishing investor confidence
that deficits will be brought under control would
ultimately lead to sharply rising interest rates
on government debt and, potentially, to broader
financial turmoil. In a vicious circle, high and
rising interest rates would cause debt-service
payments on the federal debt to grow even faster,
resulting in further increases in the debt-to-GDP
ratio and making fiscal adjustment all the more
Don’t bother to look for the silver lining. He did not
offer any. He ended with this: “Our nation cannot
reasonably expect to grow its way out of our fiscal
imbalances, but a more productive economy will ease the
tradeoffs that we face.”
Read it again. He has broken with the dominant
Keynesian-monetarist-supply side mantra. He has said that,
if Congress does not cut spending, there is no way to grow
our way out of a fiscal crisis.
Congress is not going to cut spending. He knows that.
We all know that. The reality of this can be seen in this
clever video on the deficit as a row of shot glasses.
So, we find ourselves on the highway to fiscal hell.
The Congress is unrepentant. The President has proposed a
$53 billion, six-year expenditure on high-speed trains. As
to who will ride on these trains, we are not told. At what
price per ticket? We are not told. To get from where to
where? Why? It is all a little vague, but the fact that it
will cost $53 billion to build, let alone operate, is not a
Bernanke will give lots more testimonies. He will not
find an audience of subservient listeners. The members of
the committees are aware that the economy back home is in
bad shape. Bernanke is trying to pass on the Old Maid of
unemployment to them. “It’s Congress’s fault. Blame
Congress.” They are not going to cut spending. Then how
will they shift blame away from themselves? The target is
obvious: the FED.
Bernanke’s free ride is over. So is the Federal Reserve’s.