An open letter to Congressman Ron Paul of Texas Antal E. Fekete April 6, 2011 Dear Dr. Paul: There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it. Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars âout of the thin airâ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation â but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law. Contrary to a statement of Dr. Bernanke, made before he became the Chairman of the Board of Governors of the Fed, he could not drop freshly printed dollars from a helicopter, no matter how many reasons for such an action he may be able to cite. Another thing the Fed is not allowed to do legally is to purchase Treasury paper from the U.S. Treasury directly. It must be purchased indirectly through open market operations. If you donât put the Treasury paper through the test of the open market before the Fed is allowed to buy it, the presumption is that the market would reject it as worthless, or would take it only at a deep discount. The law does not allow the F.R. banks to purchase Treasury paper directly from the Treasury because that would make money creation through the F.R. banks a charade, reserve requirements a farce, and the dollar a sham. If that were the only problem with Quantitative Easing, it would be bad enough. But there is something else that is even more ominous. The fact is that the Federal Reserve banks can purchase Treasury paper only if they pay with F.R. credit that has been legally created. F.R. credit (F.R. notes and F.R. deposits) is legally created if it has been issued in accordance with the law. The law says that F.R. credit must be backed by collateral security at the time of issuance, usually in the form of an equivalent amount of U.S. Treasury paper. The procedure is as follows. The F.R. bank seeking to expand credit takes its Treasury paper, owned outright and free from encumbrances, and posts it as collateral with the Federal Reserve agent who will then authorize the issuing of credit. In other words, if the F.R. banks do not have the unencumbered Treasury paper in their possession, then they cannot create additional credit legally. There is some evidence that the F.R. banks do not have F.R. credit available to make the kind of purchases Dr. Bernanke is talking about as part of his Quantitative Easing. Nor do they have unencumbered Treasury paper in sufficient quantity that they could post with the F.R. agent for authorizing the issue of additional F.R. credit. The point is that the process of posting collateral first, and augmenting F.R. credit afterwards must under no circumstances be reversed. What the F.R. banks cannot legally do is to buy the Treasury paper first with unauthorized F.R. credit, post the paper as collateral, and justify the illegal issuance of credit retroactively. Nor can they borrow the bond from the Treasury, post it as collateral, and pay for the bond retroactively. This is an important limitation separating the regime of market-based irredeemable currency from the regime of fiat money involving outright monetization of government debt â the graveyard where the Continental dollar, the assignat, the mandat, the Reichsmark, and the Zimbabwe dollar (among countless others) rest. At any rate, retroactive authorization of F.R. credit, if thatâs what the Fed is up to, would be a violation of both the letter and spirit of the F.R. Act. It would mean converting the dollar into outright fiat money through the back door, bypassing Congress. It would show absolute bad faith on the part of the Chairman of the Federal Reserve Board of Governors, Dr. Ben Bernanke, who certainly knows what the law is. Such a blatant violation of the law would make him totally unfit for the powerful office he occupies. It would call for his immediate and dishonorable discharge by the President, pending Congressional investigation of the matter. The various violations of the law of which the Fed is accused point to a concerted effort to remove the shackles the law has put on the money spigots lest crooks help themselves to the public purse. These violations are not isolated incidents. They are aiming at the corruption of the monetary order of the nation and the world. Moreover, they would ultimately figure prominently among the causes of the financial instability the world has been suffering from since 1971 and, more recently, since 2008. Without understanding this fundamental truth, all talk about stabilizing the monetary system and reining in the runaway budget deficit is an exercise in futility. Yours very sincerely, Antal E. Fekete Professor (retired) Memorial University of Newfoundland Tel./Fax: +36-1-325-7996 http://www.zerohedge.com/article/antal-feketes-open-letter-ron-paul-impeach-bernanke Impeach Bernanke! Why? He has flown the helicopter so well that Egypt, Tunesia and Lybia are getting rid of their dictators...Who would have though that Bernanke and not Mrs Clinton is leading US foreign policy!!!!!!
Whatever the argument he's making, he cites no actual letter of the law that the Fed is supposedly breaking. There is nothing in the Federal Reserve Act that lends any credibility to his claim.
He needs to go. The time has come for a more hawkish Chairman and eradicate the Bernanke/Greenspan model, regardless of the consequences. When your chief Central Banker shows no financial discipline, how can the country be expected to? All the high living the US has enjoyed the past 20 years will come to an end, but in the long run it is best for the country in order to rebuild. Many of the current baby-boom leadership are "gutless wonders" only worried about their own skin and some of their corrupt cronies.
How is there no credibilty to his claim if you don't know what argument he is making? He's obviously gotta be wrong....
Well, I know the Federal Reserve Act, which is the law that the Fed is purportedly violating. And no, he doesn't have to be wrong and I have read his letter carefully. The problem is that his claims aren't based on any specific legal references.
It's a topic for much debate, and I don't have the time or inclination to debate it much. I don't expect to change anyone's mind; at least those that are here on Elite Trader. It seems like everyone reads the same blogs that want to oversimplify and come across like they are smarter than the Fed Chairman. Most of them have something to sell. Yes, QE and QE2 are a risk to inflation, but too many clowns jump on the price of gas and food and say 'SEE, SEE! What did I tell you?! That's Bernanke's fault!' Give me a break. I'm a fair man. Maybe QE2 will create a bubble or two, and it might fuel more inflation than we want, but it was done for a reason. And those reasons are sound. At least, I think they are sound. I don't blame the Fed for wanting to do something about the weak economy and high unemployment. Problem is, the critics can't even acknowledge that there was any justification for it. So they are either stupid or just insincere. I tend to think they are insincere. They just want to sound like they know something so they can sell their service, their newsletter, etc. Here's a guy with a fair take I think. Read it and get a little different perspective : "Forget $3.50 Gasoline, Ben Bernanke Is Still Right On Inflation Joe Weisenthal | Feb. 28, 2011, 11:56 AM | With gasoline at $3.50, it's easy to be surprised by Ben Bernanke's seeming nonchalance regarding inflation, as is our Henry Blodget. But sneering at Bernanke's seeming inflation-blindness -- which is something we hear every single day on CNBC and from other markets -- isn't going to do much good. There's no indication that the rise in energy and food prices are associated with monetary policy. Food prices in many instances are closely connected to weather and other events, including the Russian wheat fires, the drought in China, and the floods in Australia and Brazil. What's more, food inflation in the US isn't very dramatic. Yes, the global commodity hike is not ideal for food vendors, but very little is trickling through to the end user. See more here on that. As for gas prices, the first thing to note is that global oil prices are pretty obviously tied to the strength of the global market. Here's a look at oil prices vs. US economic leading indicators. It seems pretty clear what's driving oil. It's not monetary policy. (check the link for the chart) Here's the thing: The Fed HAS acknowledged the rise in commodity prices, and the threat that poses to the economy. The last Fed minutes they were acknowledged. But what the Fed should be looking at is measures that are under the influence of monetary policy. Tightening money isn't going to do anything about food prices -- in fact, it could make the problem worse if access to farm loans become more expensive, and the same goes for energy exploration. Areas that might be affected by the Fed -- housing, wages, etc. -- clearly remain pretty subdued. Read more: http://www.businessinsider.com/forg...still-right-on-inflation-2011-2#ixzz1Ir6VDOnu
Bernanke's critics can't even acknowledge that the guy is in a very tough spot. They just want to sit on the sidelines and criticize. Let's get real: you guys think Bernanke really doesn't understand the risks of inflation? the risks of creating new bubbles? of course he understands. But he's between a rock and a hard place. He has more information and a better grasp of the information than Joe Bob blogger. I know a lot of you want to paint Greenspan and Bernanke as equal villians. For me, I think Greenspan is the villian, but Bernanke is doing a fine job under the circumstances. He stepped into quite a mess, but I understand his justification for his policies. Right or wrong, I think it's defensible.