Ron Paul's Big Idea

I remember the first time I heard Rep. Ron Paul (R-Texas) speak when I was in college. I thought to myself, this guy is brave. He's bold. He doesn't give a damn what anyone else thinks. I like that. But he's also living in his own wacky bubble of reality. Just look at his latest big idea.       

The government is buried in debt (or have you heard that already?) and quickly approaching default if it can't or won't raise the national debt ceiling over the next few weeks.

Paul's solution is simple: The Federal Reserve has purchased $1.6 trillion worth of government bonds since the financial crisis began in 2008. These bonds, while owned by a government agency (the Fed), are liabilities included in the government's $14 trillion-plus total debt load. If the Fed simply ripped them up (part of Paul's broader plan of eliminating the Fed), voila …total debt would shrink by $1.6 trillion. "They're nobody," said Paul last week. "Why do we have to pay them off?"

The idea has its merits. Canceling debt owned by the Fed doesn't directly burden anyone. Interest payments the Fed receives on these bonds are remitted back to the Treasury -- this really is money the government owes itself. So why not just forget about it?  

Well, there are a few big reasons.

Most seriously, if Congress instructs the Fed to destroy its bonds, that would almost certainly qualify as selective default. Rating agencies -- Moody's (NYSE: MCO  ) and friends -- would in all likelihood slash the government's credit rating sharply and immediately.

Over time, a credit downgrade could cost the government more than it saves from the Fed's repudiation, thanks to higher interest rates on existing debt. Current projections see the government spending $562 billion on interest payments in 2016. You can safely double that figure if default sends interest rates lurching.

Even if rating agencies don't consider the move a default (they're known to do funny things), private Treasury investors would find little solace in the government merely defaulting on itself. They'd see it as outright default, and respond accordingly. As Carmen Reinhart and Ken Rogoff painstakingly outline in their book This Time is Different, history is packed with examples of governments repudiating debt on a select group of investors (typically foreign investors, since they don't vote). Stiffing one group invariably spooks all others, sparking a who's next? guessing game, and sapping all hope that the government can make hard choices about tax hikes and spending cuts.                                                             

Second, the Fed is a bank with assets, liabilities, and equity. If it tore up all its assets, it would be insolvent. This isn't a hard problem to fix, since it can print money and purchase assets -- typically Treasuries -- at will. But that creates a circular problem: Ripping up Treasuries would make the Fed insolvent, and regaining stability might require … purchasing Treasuries.

Third, there's good reason for the Fed to own Treasuries. Quantitative easing expanded the monetary base by trillions over the past two years. This hasn't yet ignited inflation, because almost all the money is sitting in excess reserves at the Fed. Someday, though, the cash will enter the economy, sending inflation pressures rising. This needn't be scary, since the Fed can sop up excess liquidity by selling the Treasury bonds it now holds on its balance sheet, eliminating cash printed during the financial crisis.

But that option gets really sticky if the Fed rips its Treasuries up. A decade ago, when budget surpluses promised to eliminate all government debt in due time -- ah, those were the days -- policymakers worried that the Fed wouldn't have enough Treasuries to do one vital part of its job. "Without Treasuries," wrote James Glassman in 2001, "the Fed will have a tough time conducting its 'open-market' operations, the practice of buying and selling bonds that keeps interest rates where the central bank wants them."

Shredding the Fed's Treasuries today would create the same problem. Some, including economist Dean Baker, say we can avoid this by using reserve requirements to regulate monetary policy, making banks like Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and JPMorgan Chase (NYSE: JPM  ) hold more or less reserves at the Fed to keep money supply under control. He's right, but that opens up a whole new direction here. Do we really want to rewrite traditional monetary policy, all in the name of circumventing the inane rule of the debt ceiling?

Here's a Paul-esque bold idea to work around the debt ceiling problem: Get rid of it. The ceiling has been raised 87 times since 1945, which has successfully prevented us from running up exactly zero dollars of debt. Its sole purpose, it seems, is to create something to argue about.

If spending needs to be cut, cut it. If taxes need to be raised, raise them. Putting up a self-imposed roadblock that's nearly always quickly pushed aside, and talking about repudiating national debt and overhauling monetary policy when it can't be pushed aside, accomplishes nothing and harms everything.  

Fool contributor Morgan Houselowns B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 07, 2011, at 3:24 PM, CluckChicken wrote:

    "The idea has its merits. Canceling debt owned by the Fed doesn't directly burden anyone."

    Per Amendment 14 part 4 the idea is unconstitutional. The US cannot just cancel legal debt once issued, no matter who holds the debt.

    Considering this mans take on how the government needs to follow the US Constitution more, he should actually READ it some time.

  • Report this Comment On July 07, 2011, at 3:54 PM, roughneck9er1 wrote:

    @ cluckchicken. The US congress can't just cancel debt. But, the Fed itself could absolutely make this happen. It would be entirely constitutional (assuming that the Fed is constitutionally legitimate). Thank you.

  • Report this Comment On July 07, 2011, at 3:57 PM, mike860 wrote:

    Actually it can and has canceled debt int he past. Amendment 14 part 4 only states that we must pay back debts owed on pensions and pay owed to soldiers who have defended the country on our own soil. Perhaps you should both do your homework.

  • Report this Comment On July 07, 2011, at 4:01 PM, SigmaChi1855 wrote:

    The FED is not FEDERAL because it is not a government agency! They are independent of the legislative branch, otherwise why have they never been able to be audited by Congress? Answer that one Motley Fool! Ron Paul is the only honest politician left in Washington. Where was the Tea Party when Ron Paul was being consistent with his Constitutional values for the past 30 years?

  • Report this Comment On July 07, 2011, at 4:18 PM, CluckChicken wrote:

    "Actually it can and has canceled debt int he past. Amendment 14 part 4 only states that we must pay back debts owed on pensions and pay owed to soldiers who have defended the country on our own soil. Perhaps you should both do your homework."

    A14P4 - The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

    Notice that reads "including" not "limited too" which means all debt authorized by law. The reason they named those specifically was because the next sentence basically says those same debts issued by the Confederates are not legal.

    Anyway it would not matter if the Fed would "simply ripped them up" because they are listed as a debt holder for X amount and they will be sent the money to repay those funds, with said interest, even if they said they do not want to be paid back. It is not the Fed that gets to decided if they get paid back.

  • Report this Comment On July 07, 2011, at 4:31 PM, BillGillingham wrote:

    I would suspect that Paul is up to something more than just dealing with the debt ceiling.

    First - this shines some light on the Fed... People have to be scratching their heads 'We borrowed money from ourselves??' That will get people to think more about what is going on.

    Second - if we cancelled this debt owed to the Fed... would the Fed buy more government bonds?

    In some ways, cancelling the debt goes contrary to Paul's views - because that money would permanently be in the money supply... that is why I think there is more to this than meats the eye. (But what do I know?? haha)

  • Report this Comment On July 07, 2011, at 4:34 PM, whereaminow wrote:
  • Report this Comment On July 07, 2011, at 4:47 PM, questro wrote:

    "These bonds, while owned by a government agency (the Fed), are liabilities included in the government's $14 trillion-plus total debt load. "

    The Fed is NOT a government agency. It is a private bank. We can rip them off as easily as we have been ripping off tax payers for the last 86 years.

  • Report this Comment On July 07, 2011, at 4:52 PM, TMFHousel wrote:

    ^ An agency where directors are appointed by the president and confirmed by congress is a government body by any reasonable definition.

  • Report this Comment On July 07, 2011, at 5:26 PM, Tlauby wrote:

    You are wrong TMFHousel & CluckChicken

    Lewis v. United States, 680 F.2d 1239 (1982)

    proved that the Federal Reserve is a private institution not a government entity. The buck stops with the Supreme Court.

    http://www.globalresearch.ca/index.php?context=va&aid=85...

    I suggest you yank your head out of your rear and stop making up history.

  • Report this Comment On July 07, 2011, at 5:47 PM, Deefburger wrote:

    You fail to note that the Federal Reserve Bank has a monopoly on the creation of the currency that they used to purchase the debt created by the Treasury.

    There is no loss except the loss of our future production as the citizens responsible for the good faith and credit of the United States that the Federal reserve will not own any more.

    They are a monopoly bank with monopoly money and monopoly power, instituted by legislation, not a constitutional power or branch of government. They are NOT a government entity, they are a banking cartel with special privilege granted unconstitutionally by congress in 1913.

    They do not adhere to the letter of title 12 themselves, and so are in effect acting illegally any way. See Title 12,3,12,411 Issuance and Redemption.

  • Report this Comment On July 07, 2011, at 6:18 PM, Sonya42 wrote:

    I think you may want to look into who owns the Federal Reserve. Just like Federal Express, I'm pretty sure it's not a government agency. Want more info, go here: http://www.dailypaul.com/77899/the-primary-owners-of-the-fed...

  • Report this Comment On July 07, 2011, at 6:39 PM, srun wrote:

    I understand your reasoning behind eliminating the debt ceiling altogether to reduce anxiety on the markets and interest rates. But, this is a MUCH bigger picture problem. We can't just keep pummeling through debt ceilings and printing money when we need it. It's immoral, and sooner or later we'll have to pay. It's not just debt to ourselves, it's to other countries, too. A fact that is often forgotten... It's simple business ethics, don't spend more money than you make.

  • Report this Comment On July 07, 2011, at 6:59 PM, CluckChicken wrote:

    @Tlauby

    I am not sure what part of that ruling has anything to do with what I have stated. In terms of the US government it would not matter who owns the debt and if they feel they need to collect on that debt because the government is going to pay the debt.

  • Report this Comment On July 07, 2011, at 7:05 PM, TheDumbMoney wrote:

    I agree with pretty much everything Morgan said.

    Hey, you know who else was bold and didn't care what others thought? -- Pol Pot. (I'm going with Pol Pot because the Hitler and even Stalin references are SOOoo cliche.) Why anyone takes Ron Paul seriously is beyond my comprehension.

    Also, the Federal Reserve System is not a government body/agency. Yet, neither is it a "private institution," Tlauby. The best way to describe it is as "independent within the government." It is quasi-governmental. It has a .gov web-address.

    However, the Board of Governers of the Federal Reserve System IS a federal agency. How is that for convoluted.

    See here:

    http://www.federalreserve.gov/pf/pdf/pf_1.pdf

    As this link notes, the Swedes and British have had a central bank since the 1700's. Here is hoping we don't abolish ours again, or do anything similarly stupid.

  • Report this Comment On July 07, 2011, at 7:29 PM, ScrambleLight wrote:

    The Treasuries are not owned by the Federal Reserve, they are assets of the United States Government held at the Reserve. The problem is you are all looking at it from only one side of the transaction. It isn't that the government will decide not to pay its debt obligation, but that it will decide to forgive a debt obligation owed to it... there is no default.

  • Report this Comment On July 07, 2011, at 7:36 PM, VoiceintheCrowd wrote:

    It's a sad commentary that Morgan may be right that the Fed might need to sell its Treasury bonds to the public in order to take QE money out of circulation once inflation begins to pick up. A far more salutary way of taking that excess fiat money out of circulation would be to balance the federal budget, and then pay those Treasury bonds at the Fed off in the ordinary course of business.

    Couldn't the Fed and Treasury conceivably be competing with one another to sell Treasury bonds (the Treasury selling new issues, the Fed reselling the ones it is buying now to inject money into the economy), if inflation begins to pick up before we get the deficit under control? That does *not* sound like a healthy form of competition.

  • Report this Comment On July 07, 2011, at 9:09 PM, whereaminow wrote:

    dumber,

    Did you just seriously compare a man that dedicated his life to individual liberty and freedom to Pol Pot?

    The purpose of Ron Paul's idea was to alleviate the tax burden caused by repayment of interest on those securities. It also helps to expose the violation of liberty inherent in running a mountain of debt. One of the ways it can be paid back is by increasing taxes, which by its very nature is a decrease in liberty.

    So while you complain that people take Ron Paul seriously, perhaps you should look in the mirror and wonder how anyone can take you seriously, when your knee jerk reaction is to compare the greatest defender of liberty in American political history to Pol Pot.

    David in Qatar

  • Report this Comment On July 07, 2011, at 9:51 PM, lnardozi wrote:

    And now, just as they're doing on literally thousands of message boards all across the country and the world, people are discussing the purpose and legitimacy of the Federal Reserve. I think Dr. Paul's accomplishing his immediate objective - getting everyone to think about the fact that the 1913 dollar is worth less than 3 cents today. everyone know it's not possible these days to invest and make as much as the real rate of inflation. Think about this for a minute - what will you live on when you retire?

  • Report this Comment On July 07, 2011, at 10:04 PM, PEStudent wrote:

    Ron Paul likes to say things the uneducated folks who somehow think they know-it-all will find good to hear like "Gold Standard," (which was limiting the dollar flow and holding back the economy in the 1890's, let alone now), "do away with the secretive Federal Reserve" even though ALL the Fed's actions are transparent and ALL profits are remitted to the U.S. Treasury, etc.

  • Report this Comment On July 07, 2011, at 10:11 PM, TheDumbMoney wrote:

    David, not that I spend a ton of my time thinking about you, but you have to understand that, particularly where Ron Paul is concerned, sometimes when I'm on this site I wonder how I can phrase something in just such a way that it will really cheese you off. Whether you're blogging or not, I know you're out there, perusing. Oh and by the way, libertarianism is a simplistic way of looking at the world. And I love city-run police forces. See? It's so easy. Have a nice evening, bud! :-)

    lnardozi, if the 1913 dollar is indeed worth less than 3 cents today, who cares? Are you going to spend today's dollar back in 1913, or are you going to spend it within the next year or so? What is our relative net worth (i.e., net of debt) today, versus then? There is a reason the last century is called the American Century.

  • Report this Comment On July 07, 2011, at 11:58 PM, Clint35 wrote:

    Ok, 14 tril minus 1.6 tril. I'm not good at math but that still sounds like a lot left to pay off even if they did decide to use the shredder. I totally agree with Morgan about doing away with the stupid debt ceiling. Having a so-called ceiling doesn't do a bit of good if they're just going to keep raising it. What the Gov. really needs to do is quit spending so damn much! They act like teenagers with credit cards!

  • Report this Comment On July 08, 2011, at 12:31 AM, skibrendan wrote:

    The Fed isn't a federal agency; It's a weird quasi-governmental organization owned by the nation's banks. Basically, the government forced the bank's to coordinate with each other in the form of the Fed in exchange for giving them the power to create money and getting to appoint the Fed president. The banks wouldn't be happy if we cancelled the debt owned to them in the form of the Fed. This would also be equivalent to Weimar Germany minting their way out of WWI debt. Usually Paul rails against Weimar, but he doesn't

    realize he's proposing the exact same thing.

    Unfortunately we have to deal with congressmen and financial journalists who don't understand the complexity of the issue.

  • Report this Comment On July 08, 2011, at 12:34 AM, whereaminow wrote:

    "This would also be equivalent to Weimar Germany minting their way out of WWI debt"

    Um, no. It's the opposite.

    David in Qatar

  • Report this Comment On July 08, 2011, at 11:02 AM, pickerCJ wrote:

    The Fed is NOT a government agency, it is a banking cartel. President Jackson destroyed the Central Bank in his day, and it was the only time in US history when we were close to being debt free.

  • Report this Comment On July 08, 2011, at 12:03 PM, joe1201 wrote:

    End the Fed!

    What can I say more?

    Those Rothchilds, Rockefellers, etc. are nothing more than con men and scam artists dressed up in $10,000 suits.

    These are criminals of the lowest level, and have destroyed our currency. They need to be in jail.

    Auditing the Fed is the obvious first step.

    Besides son, Rand, if there is another honest man in the corrupt cesspool of DC, I'd like to know who.

  • Report this Comment On July 08, 2011, at 3:16 PM, TMFMMTInvestor wrote:

    Ron Paul's idea is perfectly sound, morally and constitutionally.

    But there are better solutions, such as fazing out the issuance of public debt (Treasury securities) altogether and simultaneously replacing it with the payment of IERBs (interest on overnight electronic reserve balances) by the Fed. There is no good reason why the US government should pay more than the effective rate of short-term T-bills. From a conventional viewpoint, it would save the taxpayer a lot of money. This should be done after consolidating the Fed and the Treasury department into one institution because, for all practical purposes, yes, they are both consolidated GOVERNMENT agencies. Congress has the authority to do so now, I believe. If not, a constitutional amendment would be fine by me.

    With all due respect, who cares about what the ratings agencies think? They are irrelevant idiots. There is zero default risk for US "debt" and always will be so long as Congress chooses to pay. Even under current outdated arrangements, the Fed could guarantee a rate on any and every part of the yield curve if there was the political will for it to do so. US government debt is a public institution, and said government is as much in control as it wants to be. That the market actually or necessarily controls rates is a fiction. So there is no real risk of interest costs not being contained. Besides, these "costs" take the form of interest income payments to the private sector. OMG, that's a horrible thing right now.

    Bond issuance by the US government is an anachronistic holdover from the gold standard era which only serves to confuse the public and provide steady corporate welfare to fat Wall Street primary dealers who make a market in trading such securities. So, yes Morgan, we really should re-write "traditional" monetary policy, including scrapping the unconstitutional debt ceiling and Treasury issuance altogether, and abolishing the Fed as currently structured as a questionably governmental agency outside the Treasury department.

    By the way, Rogoff/Reinhart's "This Time Is Different" is one of the worst books on financial history presently available. It's not instructive for our current situation and their research is shoddy in important ways. But that's for another discussion.

  • Report this Comment On July 08, 2011, at 4:03 PM, Brandon78 wrote:

    dumberthanafool obviously posed a question. "lnardozi, if the 1913 dollar is indeed worth less than 3 cents today, who cares? Are you going to spend today's dollar back in 1913, or are you going to spend it within the next year or so?"

    We'll time travel is impossible Good SIr, but you forget, that money from 1913 still exists modernly? What happens when you spend a dollar from 1913 today? What happens when you spend 10$ from 1913 today? This is the inverse of the question you posed.

    I save coins.

    I don’t know how or why I started doing this, or even when. The influence may have come from my grandmother, who collected coins in little cardboard books. She had Pennies that were decades old, Silver dimes, Silver Ounces, and few Gold Eagles

    I don’t collect coins like she did, though. She gave me 10 US silver morgans 1 ounce coins.

    What many of you commenters are missing, is I was able to exchange those coins for paper dollars. For 10$ of Silver Ounces, minted by the US goverment pre-1924, I was able to purchase a month of groceries, and pay rent off for two months.

    That might not sound like such a big deal. However, considering I was unemployed It was sure nice have 64 days rent free, with a months of groceries for only 10$ US from pre-1954.

    I was unemployed, and was able to keep myself fed and sheltered for 10$ from 1954. 32 days of food. 64 days of shelter

    I now have a job, I work for wages in 2011 US . I get 15 hours / 6 days for 9 an hour. For 10$ US dollars from 2011, I cannot have 32 days of food, nor 64 days of shelter.

    Ron Paul 2012. Ron Paul 2012. Ron Paul 2012

    My grandfather who made less then minimum wage nominally had no debt, two houses, an automobile; 7 kids, and wife on solely one income.

    I challenge any modern american to work less then minimum wage today!!!

    Why could my grandfather purchase all those assets, raise, clothe,educate, and feed 7 children 1 wife on one income on a hourly income less then 5 dollars an hour is beyond most americans.

    However this was also when a snowcone in a carnival was 5 cents, popcorn 10 cents, or gallon of gas was 18 cents.

    Today a US Silver Dime pre-1954 minted under JFK is worth 3.30 cents, last I was at the pump, it was 3. 45 cents.

  • Report this Comment On July 08, 2011, at 4:11 PM, NunyaBizness wrote:

    Brandon I bet he still doesn't get it.

  • Report this Comment On July 08, 2011, at 5:58 PM, TheDumbMoney wrote:

    Brandon, your post is largely incoherent, with all due respect. But you do manage to pose this question:

    "What happens when you spend 10$ from 1913 today?"

    Nobody does that. Period. That is because outside of hypothetical-world, people are not that stupid.

    In the real world -- i.e., the one in which we live, people either: 1) spent the 1913 cash pretty quickly; or 2) they invested it and lost money because they were bad investors; or 3) they invested it and grew it faster than the inflation rate you are so upset about. And that goes for companies, too. That is why KO is so valuable, for example: it consistently reinvested its profits and grew future profits fast enough not only to negate the harm of inflation, but to vastly outstrip it.

    In short, does mild inflation incentivize you not to simply hold your dollar bill under a mattress for 100 years? Yes. And that's a good thing. Mild to moderate inflation incentivizes you either to spend your money, thus boosting the economy, or to invest it in a productive enterprise, thus boosting the economy.

    This is not rocket science. You are looking at a single statistic, in isolation, and failing to view it in its proper context. Congratulations, the vast majority of financial errors are made in precisely this way.

  • Report this Comment On July 08, 2011, at 9:50 PM, packoo wrote:

    The Federal Reserve is no more Federal then Federal Express and has no reserves...

    Motley Fool should pay everyone the monies collected from their subscribers.. They dont know how the Fractional Reserve system works, so how can they report on the casino known as the stock market... Pitiful actually... I quit long ago but saw this article and decided to see what they would say...

    The Federal Reserve gets paid 6% of all money issued and credit created every year... It is impossible to ever get free of debt to the private corporation known as the Federal Reserve.

    The 1913 Federal Reserve Act changed the Constituion... It is illegal to change the Constitution with anything other than an Amendment... So a congressional act cannot change Article 1 section 8 and Article 1 section 10 of the Constitution...

    Inflation is what Lennon deemed the best way to steal wealth from its serfs...

    I suggest MC read up on the system we are being forced to use by guns of the crooks in Washington and the Fed and then read, novel idea, on what Sound Money our founding fathers set up for us...

    Next lesson... the IRS is an offshore corporation stealing money from US citizens by use of force and courts with judges who have no clue or worse, know they are violating the oath they swore to uphold...

    I urge anyone with MC to contact me or better yet, RON PAUL. Grow up and stop the sheep think / group think...

    Learn something and then write articles that are accurate...

    Thanks,

    John

    aka pacu44

  • Report this Comment On July 08, 2011, at 10:18 PM, packoo wrote:

    Questions to MC or Morgan Housel

    1 Who is the Federal Reserve, what branch of goverment are they with and where do they get their money?

    2 Who picks the list that the President chooses from?

    3 Where in the Constitution do they get their authority?

    4 IS a central bank concept not straight out of the Communist Manifesto? Where in Adam Smiths works does he talk about a Central Bank or central planning?

    5 What is a Federal Reserve Note? Explain the concept of paper money, where it came from and how does the Feds application apply here?

    6 What Presidential candidate is talking about the root cause of our financial crisis?

    7 I am calling MC out, where is any of the material about our financial system is on your site and the pro's and con's of such system we use?

    8 Do you disagree with Sound Money that the Constitution and our founders idea behind it? Why are you ridiculing the only man pointing out the criminal acts committed?

    9 Who is Ludwig V Mises?

    10 Why cant I just save money, why do I have to gamble on stocks just to keep pace with stated, and unstated inflation...

    Bonus - True or False

    Inflation- the increase in money supply and credit...

  • Report this Comment On July 08, 2011, at 10:32 PM, zadoc wrote:

    POLL: Given the currnet field, who will win the 2011 GOP nomination?

    Vote: http://www.wepolls.com/r/1114529

    Can Ron Paul really win?

  • Report this Comment On July 08, 2011, at 11:22 PM, CluckChicken wrote:

    "The 1913 Federal Reserve Act changed the Constituion... It is illegal to change the Constitution with anything other than an Amendment... So a congressional act cannot change Article 1 section 8 and Article 1 section 10 of the Constitution..."

    I believe you are referring to:

    A1S8 "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures".

    Coining of money is the making of coins and printing of money (the physical stuff), which is done by the US Mints. See Coinage Act 1792.

    The Fed does not "regulate the Value thereof, and of foreign Coin", it never has done this. Since the creation of the Fed Congress passed 3 Gold Reserve Acts which changed the value from 20.67 to 35 (1934) then to 38 (1972) finally to 42.22 (1973). Since Congress approved of the removal of the Gold Standard nobody regulates the value of the US Dollar or its value against foreign coin. So I guess you could claim that the removal of the gold standard was unconstitutional but no ground to claim the Fed is.

    Nothing in A1S10 relates to anything the Fed does, it only relates to things the States can not do: "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

    One thing that should make you wonder is if members of Congress believe that the Fed is Unconstitutional then they can easily bring that up during any active section of congress.

    "Ron Paul's idea is perfectly sound, morally and constitutionally."

    Sound? Maybe if many things are ignored.

    Morally? What does this have to do with anything and whos morals are we using?

    Constitutionally? Since only Congress could have the power to cancel debt that they issued (though this would most likely require an Amendment) the Fed has no say on if they will collect the debt or not. The only Constitutional question in this whole thing is if a debt ceiling is actually constitutional.

  • Report this Comment On July 08, 2011, at 11:47 PM, TMFAleph1 wrote:

    <<everyone know it's not possible these days to invest and make as much as the real rate of inflation. Think about this for a minute - what will you live on when you retire?>>

    SOME people might think they know that, but they're wrong.

  • Report this Comment On July 09, 2011, at 11:30 AM, AptlyNamedPoster wrote:

    dumberthanafool:

    Comparing Ron Paul to Pol Pot is a tad bit sensationalist, don't you think? It's a logical fallacy to say that anyone with "a big idea" is equal to everyone else with "a big idea". Using that logic we could compare Ghandi to Hitler, Martin Luther King Jr to Charles Manson, Mother Theresa to Stalin, and John Lennon to Attila the Hun. Come now. All ideas that shape the world are big ideas. It's the content of those ideas that counts.

    Thankfully our judicial system hasn't come to the same conclusion as you, or there would be mass incarceration of college professors, intellectuals, scientists, researchers, authors, historians, philosophers, people with an IQ over 12, to be thrown in the hoose gow for "conspiracy to commit Big Ideas".

    The Board of Governors are the only thing governmental about the Fed (hence why the site for the BOG has a .gov address but the actual Federal Reserve banks have .org addresses) Here's a question for you: Who appoints the shareholders? Who ARE the shareholders? There ARE shareholders, after all. Who really runs the Fed: Ceremonial governors, or their effective bosses, the shareholders? We wouldn't know any of that because the Fed is aboslutely secret on everything they do even from the President and Congress. The mere threat of a *shudder* audit sends the Fed and it's apologists into a blind panic/controlled rage.

    So, we've got a semi-private bank that holds the power to manipulate our currency without any accountablitiy, no transparancy, no elected representatives. That sounds something like a monetary dictatorship, if you ask me. Sure, we haven't quite gotten to a political dictatorship yet (they're working on that one), but we've had a monetary one since 1913. I suppose you're going to argue that unelected, unaccountable, dictators are a good thing, and as American as apple pie.

    This isn't Britain. I think we sorted that out in 1776. If you love the British system so much, I'm not aware of any immigration restrictions that would bar you from expatriating. There are a lot of nice people in Britian and you wouldn't have to learn a new language. The British have always had some form of monopoly by decree in one form or another. It was that very system of mercantilism that largely led to the American Revolution. Taxation and the King's shenanigans were just the straw that broke the camel's back.

    Comparing us to the British is a bit silly. I mean: They still have royalty. You're wanting to emulate a country that allows unelected rich snobs rule over the country for no good reason while living off the taxpayer dime? As bad as some of our leadership is, at least we have ourselves to blame for electing sociopaths and criminal masterminds to office. No matter how many MPs they vote for, or how many PMs come and go, they'll never get rid of the Queen and her family. Then again, your fondness for unelected people exacting power over others with no way to throw them out might cause you to embrace such a system.

    It's funny that you try to compare a libertarian with an authoritarian dictator, whist embracing an authoritian monetary dictatorship in the same post. Classic. If Ron Paul is wrong (he isn't), just say why he's wrong. The mad comparisons just make you seem intellectually dishonest.

  • Report this Comment On July 09, 2011, at 12:34 PM, TheDumbMoney wrote:

    "So, we've got a semi-private bank that holds the power to manipulate our currency without any accountablitiy, no transparancy...."

    Most of the rest of your post is nonsense, misrepresentation, and straw-man-slapping, but above you actually managed to make a statement that is simply factually untrue! Congratulations! The Fed is very accountable, in that the Chairman and the Board of Governors are confirmed by Congress, and can and do get booted out and replaced. The Fed is also quite transparent, it's just that most Fed-bashers don't take the time actually to look at all of the information and explanations posted by the Fed. Finally, the entire Federal Reserve System was created by Congress in 1913 and signed into law I believe by President Wilson. It could be ended by a bill of Congress very easily. If that is not accountability, I don't know what is. Fortunately, just about every Republican other than Ron Paul is not stupid enough to actually contemplate such a thing.

  • Report this Comment On July 09, 2011, at 3:38 PM, whereaminow wrote:

    dumberthanafool,

    It would help if you knew the proper Fed Apologist Playbook:

    1. First you claim that the Fed is audited.

    2. Then, after you learn that there are exceptions to the audit, and that this is the purpose of Ron Paul's audit bill, you are supposed to claim that those exceptions are necessary to protect the markets.

    So here are the exceptions to being audited under the current system. After you get this digested, get your second fallback position ready. Remember, the Fed overlords protect the market and that's why they need this secrecy. Don't forget, ok?

    http://en.wikipedia.org/wiki/Federal_Reserve_Transparency_Ac...

    the Federal Reserve Transparency Act of 2009 (H.R. 1207 ) amends Title 31 of the United States Code "to reform the manner in which the Board of Governors of the Federal Reserve System is audited by the Comptroller General of the United States and the manner in which such audits are reported". It strikes exceptions to the audit protocol in 31 U.S.C. § 714 for the Federal Reserve System, the central bank of the United States, and replaces an indefinite deadline with a deadline of December 2010.[1] It also ensures the audit results are available to Congress.[2] The audit would include the Fed's "discount window", its funding facilities, its open market operations, and its agreements with foreign bankers.[3]

    And here's the current Fed audit rules:

    http://us-code.vlex.com/vid/audit-examination-comptroller-cu...

    The important part:

    This section would be removed:

    "but may carry out an onsite examination of an open insured bank or bank holding company only if the appropriate agency has consented in writing.

    Audits of the Federal Reserve Board and Federal reserve banks may not include -

    1) transactions for or with a foreign central bank, government

    of a foreign country, or nonprivate international financing organization;

    (2) deliberations, decisions, or actions on monetary policy

    matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;

    (3) transactions made under the direction of the Federal Open Market Committee; or

    (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to clauses (1)-(3) of the subsection.

    So 1-4 would be removed. Following?

    --------------------------------------------------

    --Subsection (e) would be added --

    “(e) Audit and report of the Federal Reserve System.—

    “(1) In general.—The audit of the Board of Governors of the Federal Reserve System and the Federal reserve banks under subsection (b) shall be completed before the end of 2010.

    “(2) Report.—

    “(A) Required.—A report on the audit referred to in paragraph (1) shall be submitted by the Comptroller General to the Congress before the end of the 90-day period beginning on the date on which such audit is completed and made available to the Speaker of the House, the majority and minority leaders of the House of Representatives, the majority and minority leaders of the Senate, the Chairman and Ranking Member of the committee and each subcommittee of jurisdiction in the House of Representatives and the Senate, and any other Member of Congress who requests it.

    “(B) Contents.—The report under subparagraph (A) shall include a detailed description of the findings and conclusion of the Comptroller General with respect to the audit that is the subject of the report, together with such recommendations for legislative or administrative action as the Comptroller General may determine to be appropriate.”.

    -----------------------------------------------------

    Ok, so now that my little copy and paste job has cleared up the confusion, this is the part where you agree that those things are necessary to protect the market.

    Proceed.......

    David in Qatar

  • Report this Comment On July 11, 2011, at 4:48 AM, szpaniolo wrote:

    If the 14th is a problem, here are a few possible solutions:

    1. Require the fed to pay it as a Fed-Fee or Fed-Tax. How much tax has the institution paid over they years, after all? It's about time to pay back as part of the responsibility going along with the special privilege.

    2. The Federal Government does not need to pay back those in insurrection. Define insurrection legally such that it applies to the treasonous acts of the Fed that have towards the insolvency of our country.

    3. Repeal the 14th amendment while you dissolve the Fed and clear the debt.

  • Report this Comment On July 11, 2011, at 4:48 AM, szpaniolo wrote:

    Has anyone asked Ron Paul what he would do about these issues?

  • Report this Comment On July 11, 2011, at 6:07 PM, connemara0711 wrote:

    I find it interest that you hardly hear of the federal program of leverging,or underemployed or real any concern about the massive shipping of over 20 MILLION UNION PAY LIKE JOBS overseas and giving massive tax breaks for Co's to get it done for cheaper labor cost here and to developled Slave like wages "Right To Work" states since REAGAN.There also no talk of until recently of sealing s.s./medicare funds and most of civil services retirement funds along with reagan admintration basically cutting most of the COL by indexing every increases products so low they never go up.in the latter legislation plus reagan 11 taxes increases to the middle classes over time the middle classes wages then benefits destoryed their wealth base and where did all this wealth go?In the later to the upper-12% who in 1980 had total wealth of 8 TRILLION and as end of 2010 is now over 38 TRILLION-Nice wealth building if you can get it-but you can't because the avg. middle classes is no more!

  • Report this Comment On July 11, 2011, at 8:05 PM, TMFCop wrote:

    Well this discussion is exactly why I LOVE Ron Paul and he's just about the only candidate for president Id consider voting for.

    I had not only the pleasure of meeting Dr. Paul a number of years ago, but have him stay at my house too. He's a very unassuming, humble man and a distinct pleasure to talk with.

    While some might disagree with some of his solutions, and can't quite wrap their head about the ideas he offers -- and to be honest, I'm not completely sure about the idea of just ripping up the debt of the Fed -- I'm more than willing to give his programs a try considering what we've been dealing with for the past 50 years or so, let alone the last 2-1/2.

    Rich

  • Report this Comment On July 12, 2011, at 9:11 AM, TopAustrianFool wrote:

    "Most seriously, if Congress instructs the Fed to destroy its bonds, that would almost certainly qualify as selective default. Rating agencies -- Moody's (NYSE: MCO ) and friends -- would in all likelihood slash the government's credit rating sharply and immediately."

    Well, not exactly. If this is how MCO rates credit worthyness then MCO doesn't know what its doing. Most of the credit worthyness of the US govt comes from assets it owns, yes assets like logging rights, federal land and you guess it... Gold. That's right, gold in Fort Knox can be sold in order to pay debt. Of course this will make it harder to incur any more debt but it will not affect interest rates for current debt since the debt would comensurably go down.

    Talk of govt default is nonsense and most opinion out there is unimformed.

  • Report this Comment On July 12, 2011, at 9:20 AM, TopAustrianFool wrote:

    "Second, the Fed is a bank with assets, liabilities, and equity. If it tore up all its assets, it would be insolvent."

    Wrong, wrong and wrong. The assets, liabilities and equity of the Fed are all imaginary. That's right. These are unlimited. You obviously need to read more on how the Fed-Treasury System works. The Fed has an unlimited wallet of cash and/or virtual money. Cash and/or virtual money it creates by adding number on a spreadsheet assigned to banks with the deposits at the Fed, which in turns allows those banks to lend 1000% more, thereby creating virtual and concrete inflation, since the Treasury has to print whatever is needed for cash transactions and whatever is not needed in cash still is reflected digitally in asset prices.

  • Report this Comment On July 12, 2011, at 9:40 AM, TopAustrianFool wrote:

    I am going to stop here, but you need to re-write your whole column. Looks up some references on Central Banking and Treasury Systems.

  • Report this Comment On July 12, 2011, at 9:46 AM, TMFHousel wrote:

    taf,

    What does the sentence after the one you quote (Second, the Fed ...) say?

  • Report this Comment On July 12, 2011, at 9:59 AM, TopAustrianFool wrote:

    dumberthanfool writes:

    "The Fed is very accountable, in that the Chairman and the Board of Governors are confirmed by Congress, and can and do get booted out and replaced."

    When was the last time you heard a Fed Chairman was ousted. The Fed is the most powerful man in the land. He can make the life of any politician quite uncofortable by manipulating specific interests on loans politicians have taken. He is untouchable. If he is ousted and the economy tanks, that politican is done, and will have a debt he will not be able to pay.

    Ron Paul's problem is that abolishing the Fed will create chaos initially, which is not worth it. So the best thing that can be done is to peg the dollar to gold and limit the capability of the Fed to inflate. Abolishing the Fed is impractical. Andrew jackson did it and there was not net improvements after the disruptions, plus we ended up with a Fed again.

  • Report this Comment On July 12, 2011, at 10:03 AM, TopAustrianFool wrote:

    "If it tore up all its assets, it would be insolvent."

    But it cannot be insolvent. The Fed can create any amount of money.

    What Paul is missing is that the Fed takes the interest and principal paid on this part of the debt owed to it and after it pays its bills and enriches its chairmen, it returns the difference to the Treasury. (I know it sounds crazy, but this is what it does.) So, basically cancelling this $1.6 Trill will do nothing.

  • Report this Comment On July 12, 2011, at 10:05 AM, TopAustrianFool wrote:

    "This isn't a hard problem to fix, since it can print money and purchase assets -- typically Treasuries -- at will. But that creates a circular problem: Ripping up Treasuries would make the Fed insolvent, and regaining stability might require … purchasing Treasuries."

    I see what you are asking now. You are actually going back an forth so its hard to know what the position is.

  • Report this Comment On July 12, 2011, at 10:08 AM, TMFHousel wrote:

    sorry, I meant the sentence after that:

    "This isn't a hard problem to fix, since it can print money and purchase assets -- typically Treasuries -- at will."

    I'm not oblivious of the Fed's ability to print.

  • Report this Comment On July 12, 2011, at 10:16 AM, TopAustrianFool wrote:

    Ok... since we agree on that then here is my main ponit about Paul's idea.

    What Paul is missing is that the Fed takes the interest and principal paid on this part of the debt owed to it and after it pays its bills and enriches its chairmen, it returns the difference to the Treasury. (I know it sounds crazy, but this is what it does.) So, basically cancelling this $1.6 Trill will do nothing.

    Paul would serve the public better if he took a pragmatic position and just concentrate on limitng the Fed's ability to inflate. Abolishing the Fed will create chaos initially, which is not worth it. So the best thing that can be done is to peg the dollar to gold which will limit the capability of the Fed to inflate. Andrew jackson abolished the Fed and there was not net improvements after the disruptions, plus we ended up with a Fed again. You can argue that the Suffolk System worked, but eventually it did what banks do, it went back to fractional banking. So there was not net difference. You still had the Panics and economic dislocations. A limited Fed is the best of both worlds.

  • Report this Comment On July 12, 2011, at 10:39 AM, TopAustrianFool wrote:

    " Get rid of it. The ceiling has been raised 87 times since 1945, which has successfully prevented us from running up exactly zero dollars of debt. Its sole purpose, it seems, is to create something to argue about."

    The debt ceiling is currently the only limit on the Fed inflationary policies. It also limits government running of a deficit. It has been raised many times, but it takes time to do it. The waste of time delays what would be a catastrophic inflation. Countries without debt ceiling go the way of Greece and Germany during the Weimar Republic. Trust me you want the ceiling and the bickering too.

  • Report this Comment On July 12, 2011, at 6:33 PM, PETPOE wrote:

    Great article Housel! as so often!

    as for your suggestion to scrap the ceiling: makes perfect sense!

    TAFs points were very enlightening and valid. However, I disagree with TAF on the necessity for a debt ceiling:

    I understand that the Fed has an inflation target of around 2% and uses its tools for that (including printing and burning money). So its the responsibilty of the government and law makers to limit spending. the politicians are holding the economy (aka well-being of the people) hostage by bickering. Its an ineffective way to reach a good (budget) compromise if a bunch of economically illiterate congress men and women can use the debt ceiling to force their ignorancy on the rest of the nation.

  • Report this Comment On July 12, 2011, at 7:31 PM, TopAustrianFool wrote:

    "I understand that the Fed has an inflation target of around 2%"

    Well, then the Fed has failed miserably, since inflation has been about 10%/yr since the Panic of 2008. Excluding food, and fuel is no way to measure inflation. Just look at Wall St. earnings increasing but unemployment remaining flat. That is called cost, liabilities and risks are increasing therefore no money for growth, expansion or hiring. That is inflation whether the Fed wants to calculate it or not. Look at the futures, gold, oil, or housing inventory, whatever you want. Houses for sale everywhere, even whole streets for sale, for over a year, and the prices won’t drop. In just about everything prices are up monumentally and no growth. That is inflation my fellow Fools.

  • Report this Comment On July 13, 2011, at 1:22 PM, TopAustrianFool wrote:

    "I understand that the Fed has an inflation target of around 2%"

    What does an inflation target of 2% accomplishes? I know the Fed claims this, but has anyone ever asked, what is the point of a 2%/yr infaltion.

    The only reason Central Banks inflate is to cover deficits. There is no other reason. Its a tax on savings.

  • Report this Comment On July 14, 2011, at 5:55 PM, PETPOE wrote:

    @ TAF

    good points. i agree that inflation is much higher recently. Any basket will be controversial by some measure. So maybe more important 'lets have some, but not too much' inflation. According to Greg Ip, 5% may be considered an upper, dangerous, limit (different for different countries and times).

    Maybe more important is that most economist fear deflation more than inflation. The Fed can influence it (hence a target of 2%) but with variable delay and effect size. Even though inflation can be correctly considered a 'tax on savings' , but could also be an insurance against sliding into deflation.

    Another point worth mentioning is the notion that inflation is (among others) driven by money supply. Printing money to buy government debt, does not necessarily increasy supply. Hence, the debt ceiling is less of a threat to inflation. Privat or corporate debt plays a more immediate role.

    Therefore lets get the debt ceiling raised (or abolished) to be able to focus on resolving a budget compromise. The 2year election cycles and the severity of the 2008 crisis make it even harder to reform taxes, spending, entitlement etc to put this country on a more sustainable budget course. The debt ceiling is a welcome vehicle to sappotage any compromise and hoping for the next election. Much easier (foolish) than working towards a compromise that includes a longer perspective.

  • Report this Comment On July 14, 2011, at 7:06 PM, morningstara wrote:

    This is quite long, so set aside some time to in the least watch the first 20 minutes, it's totally worth it!

    The Money Masters - How International Bankers Gained Control of America

    http://video.google.com/videoplay?docid=-515319560256183936

  • Report this Comment On July 20, 2011, at 10:01 AM, TopAustrianFool wrote:

    "Printing money to buy government debt, does not necessarily increasy supply."

    Sure, it does. When the Fed increases BAC's deposits with the Fed by say $10M that allows BAC to fractionally lend $100M. That will show up in asset prices and when suppliers start increasing supply to meet the apparent increase in demand, futures will go up in price. On and on and on... There is a lag, but it certainly increases the money supply. And prices too. Not to mention waste of resources and malinvestments on ventures that will not be sustained, thereby causing dislocations in time-preference that will lead to Boom and Bust cycle. You have to study the Boom to know what to do in the Bust.

    "Maybe more important is that most economist fear deflation more than inflation."

    Well, the fear of deflation is based on decreasing prices causing people to wait and wait and wait to make purchases, which in turns causes a spiral in prices, blah, blah, blah blah. This is unfounded since, if true then; why would anyone buy a computer or an iPhone today when it will be cheaper in six months? People don't make decisions in a vacuum. Decisions are made because although prices will drop the returns on investment will make up for the drop and more.

    Actually deflation would be beneficial, because it would allow for a smoother transition for the unemployed. It would also allow for decreases in salaries commensurate with reduced profits, which would curtail lay-offs and reduce unemployment.

    As you can see Keynesian economincs is folly.

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