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  • Emergency Unemployment Compensation Extension Act—Motion to Proceed—Continued

    by Senator Rand Paul

    Posted on 2014-01-06

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    Read More about Emergency Unemployment Compensation Extension Act--Motion to Proceed-- Continued

    PAUL. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

    The PRESIDING OFFICER. Without objection, it is so ordered.

    Yellen Nomination Mr. PAUL. Mr. President, I rise today in opposition to secrecy, in opposition to the veil of secrecy that cloaks the money changing hands that takes place in the temple of the Federal Reserve. While the money changes hands, the monied class gets richer and the middle class gets shortchanged.

    It is more than time to part the curtain that hides the trillions of dollars that changes hands. There is a revolving door from Wall Street to the Treasury to the Fed and back again. We have former Secretaries of the Treasury who go from government to Wall Street pocketing hundreds of millions of dollars.

    I have called repeatedly for transparency at the Federal Reserve so Americans can see what is being done with their money supply. Every time I call for transparency, people from both sides have said transparency would undermine Fed independence. The problem is that Congress created the Fed and Congress was intended to have oversight over the Fed, and as time has gone on we have lost that oversight, so independence has really led to abuse.

    Some say: Well, the Fed is audited each year.

    The investigator general who is responsible for auditing the Fed came to Congress in 2009, and here is what she had to say during a question- and-answer session in a House committee. A Congressman asked: What have you done to investigate the off-balance sheet transactions conducted by the Federal Reserve which, according to Bloomberg, now total $9 trillion in 8 months? She fumbled, she repeated herself, she looked silly, and then she said: You know, I think it may be important at this point to-- Yadda, yadda, yadda, and then several yaddas later, this bombshell from the auditor: We do not have jurisdiction to directly go out and audit Reserve Bank activities specifically. So, really, there is no audit of the Federal Reserve, so don't let anybody say that we have an audit. No meaningful audit [[Page S16]] exists, and when the primary auditor and overseer of the Fed was asked about $9 trillion, the inspector general had no clue what had been purchased with the money.

    Is there a chance the Fed only has our best interests at heart? Sure. But when trillions of dollars change hands, wouldn't one want to know who got the money and whether anyone enriched themselves in the process? We know $9 trillion is over half of our entire national debt. This is money that ultimately becomes debt for all of us. It is being doled out, in secret, by our central bank. This is, in a sense, laundering money from the American people to bail out big banks and Wall Street.

    This month we learned that the Fed's official balance sheet has reached an astounding $4 trillion. To put that in perspective, the balance sheet of the Fed is now larger than the fourth largest economy in the world--Germany.

    Transparency at the Fed would not hurt the Fed, but a complete lack of transparency continues to hurt and cheat the rest of us. At the very least the American middle class deserves to know what goes on behind the curtain, what decisions are made, and how they benefit Wall Street and the monied class.

    Being secret and reckless with trillions of dollars is only the tip of the iceberg when it comes to the problems associated with the Fed. The history of the Federal Reserve has also been the history of the devaluation of the dollar. There was a time when the dollar was as good as gold. When the people grew restless or concerned that the government was debasing the currency, the people would simply express their displeasure by exchanging their paper for gold. Convertibility was a check and balance against Kings and Queens and any form of government that chose to spend money it did not have. When the government ``borrowed'' from the currency by diluting its value, the people had recourse to protect themselves. Now, the great American dollar that was once backed by gold is backed by promises.

    For many decades the dollar was said to be backed by the full faith and credit of the Federal Government. Trust lingered from the historical evolution, from barter to a medium that people valued such as gold or silver. The trust that still exists today lingers from the thousand-year history when currency had inherent value and that if paper substitutes were used, they could always be exchanged for something of real value.

    After World War II we instituted a partial gold standard that allowed foreign countries to exchange their paper for gold--and exchange they did. During the 1960s, as the United States inflated and borrowed to pay for the war on poverty and the war in Vietnam, foreign countries became skittish and turned in their dollars by the millions. Nearly half of the gold reserves were removed by foreign countries in the space of a few years. President Nixon closed the gold window in 1971, and that was that. The last link to gold was severed. But make no mistake--the trust that remained in the dollar was derived from the historic trust engendered by convertibility of paper to gold.

    For decades the full faith and credit promise allowed the Fed to continue to inflate, and still the people remained relatively passive in their acceptance of an unbacked, completely discretionary paper currency--but not without hiccups. Inflation nearly got the better of us in the 1970s, and now debt threatens to do the same.

    Something profound, though, occurred in the past few years beginning with the panic of 2008. The Fed began to back the dollar with not just promises but perhaps really bad promises.

    Since early 2008 the Fed has added nearly $3 trillion to its asset sheet, and included among these ``assets'' is stuff that nobody else seems to want, such as bad car loans and nonperforming mortgages. According to Mauldin and Tepper's book ``Code Red,'' at $4 trillion, and roughly $55 billion in equity, the Fed is leveraged at about 77 to 1. Think about that. That is an insane amount of leverage for any bank. The Fed is more leveraged than the balance sheets of Lehman Brothers, Bear Stearns, Freddie or Fannie, before those institutions essentially failed.

    Jim Rickards, author of ``Currency Wars,'' notes: The Fed is insolvent on a mark-to-market basis. . . . The Fed has wiped out its capital on a mark-to-market basis. Of course, the Fed carries those notes on its balance sheet ``at cost'' and does not mark them down to market, but if they did, they would be broke. The insolvency of the Fed will become a major issue in the years ahead and may necessitate a financial bailout of the Fed by the taxpayers.

    So the once-proud dollar that was once backed by gold, then backed by the full faith and credit of the world's greatest economy, is now backed by used car loans and underwater mortgages.

    But those who trust in paper say: Look. For 50 years now we have had no convertibility, and amazing improvements in productivity and wealth have occurred.

    Perhaps. But one might also argue that we are living on the borrowed plumage of the past, that our current acceptance of a paper currency rests on the glory of our industrial and monetary past. No one can tell for sure what the future holds, but I for one am concerned that the panic of 2008 may not have been an anomaly but a harbinger of something far worse. I am concerned we have papered over our problems in a sea of new currency. That quantitative easing has created an illusion of safety and security, but beneath the surface lurks a bigger and more malevolent future.

    Don't take my word for it. Listen to some of the economists who predicted the financial crisis of 2008.

    Economist Jim Grant recently said: From the United States to Europe and Asia, the world's central banks are flooding markets with liquidity and pushing deeper into unknown monetary policy territory and I feel this journey will not end well.

    Nassim Taleb, author of the ``Black Swan,'' writes: Someone made a mistake lending and someone made a mistake borrowing . . . and it is a mistake to transform private problems into public debt. We are facing an environment with a huge amount of debt. The next mistake is going to be to overprint, which is going to be the way out for them, which is why I fear hyperinflation.

    Yale University housing expert and recent Nobel Prize winner Robert Schiller: This financial crisis that we've been going through in the last 5 years has been one that seems to reveal the failure to understand price movement . . .

    Not shying away from his concerns that the Fed is simply inflating the housing bubble in America's largest cities, he argues: [Housing prices] are up 12 percent in the last year. That is a very rapid rise in prices, and I believe it is accelerated somewhat by Fed policies . . . the housing market, it has its own momentum right now as people see it coming back. We're sort of in the beginnings of another housing bubble.

    Since we abandoned the sequester budgetary caps, any pretense of fiscal discipline is gone. Politicians can attempt to obfuscate the truth with promises of spending restraint in the outyears, but everybody knows that the promise to cut in the outyears is a pipe dream and that all that really counts is the first 2 years of the Ryan-Murray plan that will add over $60 billion in new spending.

    What really causes China concern is not the new spending we are incurring but that the total new debt added over 10 years will be $7 trillion. China's response to our fiscal lack of discipline was to downgrade our debt. Our $17 trillion debt is manageable only with the Fed buying it and only with low interest rates.

    China's Dagong Global Credit Rating said in their statement on the downgrade: The deal means only an escape from a debt default for the time being, but hasn't changed the fact that the growth of government borrowing has largely outpaced overall economic growth and fiscal revenues.

    These are facts, and both sides--Republicans and Democrats--are ignoring the facts. China, when they downgraded us, said it, and we cannot escape this fact: The growth of government borrowing has largely outpaced economic growth and fiscal revenues. It is sad when the Chinese Government can see major economic problems for us that Washington continues to ignore.

    At current rates, we pay about $237 billion in interest payments. If interest rates rise by 1 percent, interest spending will increase by $1.2 trillion. If interest rates return to the norms of the [[Page S17]] 1980s, the taxpayer will be on the hook for an additional $6.17 trillion. If interest rates go to 10 percent, ``Katy, bar the door.'' The panic will be upon us.

    Most conservatives would be aghast if we talked about price controls. Conservatives realize, as most economists now do, that price controls lead to a glut if the price is too high and to bare shelves if the price is too low. The Soviet Union was brought low for that very reason. No one, no matter how wise, can determine the correct price of bread without a marketplace.

    Anytime a government tries to set prices, the consequence is disastrous. But many leaders who are quite aware of the destructive nature of price controls nevertheless advocate for allowing the Fed to set the price of money, for that is what interest rates are--simply the price of money. Like any other price, though, setting interest rates lower than the market rate of interest encourages more use of the money and more economic activity. But if the rates are kept below the market rate, we interrupt the feedback loop that informs producers that they are overproducing, and the bubble expands until overproduction has reached such a point that the correction is a catastrophe. That is what happened with the housing bubble. We kept interest rates too low for too long and the bubble grew and grew and grew and we are still suffering from that. And what are we doing now? Exactly the same thing.

    Jim Rickards explains this phenomenon: Market participants and policymakers rely on market prices to make decisions about economic policy. What happens when the price signals upon which policymakers rely are themselves distorted by prior policy manipulation? First you distort the price signal by market manipulation, but then you rely on the ``price'' to guide your policy going forward. This is the blind leading the blind.

    Politicians have been complacent in letting the Fed manipulate interest rates for many reasons. Many politicians are reticent to get involved in monetary policy. They are worried of being blamed if the economy sours with monetary reforms. Many politicians believe the economy is better off with the Fed than with the panics that occurred before the Fed. But perhaps the variations in the economy of late indicate just as much instability with the Fed as before the Fed.

    There is some truth to the fact that big debt and deficit financing in all likelihood require a central bank to pay the debt with inflated dollars, and there is some truth to this.

    John Mauldin and Jonathan Tepper's new book, ``Code Red,'' highlights this very point: In 2011, the Federal Reserve financed about three-quarters of the U.S. deficit; in 2012, it financed over half of it; and in 2013, it will finance most of it.

    We are on course to finance the entire U.S. debt in 2014.

    Now, for anyone imagining a day without a Fed, they would have to propose a government that would balance its budgets annually. Without fiscal restraint you cannot ever have monetary restraint. The opposite is where we are now. With fiscal irresponsibility, borrowing over $1 million a minute, you need a compliant monetary policy, and that is exactly what we have.

    But there are consequences to massive debts and corresponding massive purchases by the Fed. The consequences can be gradual or abrupt. The gradual bankrupting of America is proceeding apace. We pay for it with new money created by the Fed.

    The result is a gradual loss of purchasing power. Over the past 100 years, the dollar has lost 96 percent of its value. A nation can survive this gradual loss we have, but some would argue that the people hurt most are those who are least able to absorb rising prices--the poor and the elderly on fixed incomes.

    The other possible outcome is an abrupt loss of confidence in the currency. The panic of 2008 approached mass fear that the system was unsound. Reports that the emperor had no clothes were taken seriously, as even the soundness of money market funds was questioned.

    Our system of paper currency now backed by the promises of politicians, a $17 trillion debt, and used car loans and bad home mortgages is always one panic away from dissolution. When that day comes is uncertain. Can the Fed continue the legerdemain; can the Fed continue the illusion of wealth that comes with freshly inked money? Time will tell. But I, for one, want to know what the Fed is doing. Are individuals enriching themselves at the expense of the public? Does Fed policy enrich one group of individuals at the expense of another? What assets does the Fed hold? What informs their decision-making process? I, for one, want answers. I, for one, want transparency.

    President Obama's choice of Janet Yellen as the new head of the Federal Reserve is concerning due to the policies Ms. Yellen has promoted in her history at the Fed.

    The Federal Reserve's answer to economic crisis has long been simply to print more money, or what they call ``quantitative easing.'' It does not take a rocket scientist to figure out that printing money out of thin air is not sound long-term economic policy. But Ms. Yellen has been a major cheerleader for it. The Washington Post's Neil Irwin wrote that ``Yellen has been not merely an engineer of the Fed's policies of `quantitative easing' and `forward guidance,' but a consistent voice within the central bank to go further.'' Quantitative easing is not enough. She wants more.

    Will she go further? Will the same policies continue unabated? Those of us who think quantitative easing has gotten out of hand are now being asked to confirm a nominee who thinks the Fed has not done enough along these lines.

    The vote was overwhelming to confirm Janet Yellen, but I think we will rue the day that we endorsed quantitative easing.

    I believe the Federal Reserve is structurally flawed. I believe we need to be able to prevent or restrict any Chairman today or in the future from aiding and abetting the allies of banks and big government. As monetary historian Peter Bernholz wrote in his famous book ``Monetary Regimes and Inflation'': `` . . . we draw the conclusion that the creation of money to finance a public budget deficit has been the reason for hyperinflations.'' I see nothing in Yellen's past performance at the Fed that would indicate that her policies will be any different than what we see today. In fact, I see evidence that things may well get worse.

    I have introduced a bipartisan bill called Federal Reserve Transparency Act, known also as Audit the Fed. The purpose of my bill is to eliminate the current restrictions on GAO audits of the Fed, along with mandating that the Federal Reserve's credit facilities, securities purchases, and quantitative easing activities become subject to congressional oversight.

    Looking into what the Federal Reserve does with our money has significant support from both parties, many Members of which have heard the same concerns back home in their States and districts.

    Audit the Fed passed overwhelmingly in the House with 350 votes. Every Republican and 100 Democrats voted for it.

    The Federal Reserve is one of the most secretive institutions in our history. For decades, the people in charge at the Fed, politicians, and various ``experts'' have insisted that such secrecy was integral to its independence and effectiveness.

    But the results of complete secrecy have been Fed policies that are questionable at the least. This idea that the Federal Reserve is at the root of some of our economic problems is brandnew to many Americans precisely because we are not allowed to know what this powerful institution does behind closed doors--despite the fact that it has a direct impact on our lives.

    I can see no reason why the American public should not be allowed to see behind the veil of secrecy at the Fed. I will continue to do what I can to part that veil. I will continue to fight for a full and persistent audit of the Fed. Audit the Fed passed the House overwhelmingly, but we have been unable to get a vote in the Senate. I will continue to fight for that vote.

    Although I was delayed by the weather, I am here today to oppose Janet Yellen's nomination for two reasons. I believe she will continue the gradual destruction of the dollar's value and because I believe the time is now for a full audit of the Fed.

    Thank you, Mr. President.

    I suggest the absence of a quorum.

    The PRESIDING OFFICER. The clerk will call the roll.

    [[Page S18]] The legislative clerk proceeded to call the roll.

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