James Pethokoukis

Politics and policy from inside Washington

What Ben Bernanke is telling Congress about Ron Paul’s Fed audit plan

Aug 3, 2009 18:12 UTC

This bit from the WSJ‘s interview with John McCain caught my eye:

“You have no idea the pressure I was under,” he says. “I remember being on the phone with President Bush, Vice President Cheney, the Treasury secretary and [Fed Chairman Ben] Bernanke. They assure me the world financial system is going to collapse if I don’t vote for the bill. So I do the impetuous and rash thing by saying, look, I have got to go back to Washington and see how I can help. And by the way, so did Obama—but it was McCain that was the impetuous one. Obama came back to Washington.” Mr. McCain grumbles, “He was at the White House with me. But he wasn’t impetuous.”

Me: I can tell you that Ben Bernanke is pitching a line to key congressional members in private about Ron Paul’s Fed audit bill that is not too dissimilar to what he told Congress back in the fall of 2008.  Except back then he was saying failure to pass TARP would kill the economy. Today, it is the passage of a bill that would kill the economy, the Fed chairman says.


We’re asking for a simple audit and Bernanke thinks the economy is going to collapse.. again. It’ll surely collapse if he has anything to hide.


Cash for clunkers is Obamanomics in microcosm

Aug 3, 2009 17:58 UTC

Think of “cash for clunkers” as a sort of bizarro twin of that “bucks for banks” program from last autumn. You know, the one where Congress authorized $700 billion to keep financial clunkers on Wall Street up and running.

Thank goodness the automobile version won’t be nearly as expensive for taxpayers, consisting of a mere $1 billion in incentives for individuals to trade in their old gas guzzlers for new, (at least slightly) more fuel-efficient vehicles.

And giving away free money turned out to be so wildly and unexpectedly popular that the House quickly passed a bill giving away another $2 billion before heading out on August holiday. Now it’s up to the Senate to pass a similar extension before it takes the rest of the month off.

It shouldn’t. Although there’s no doubt the program encouraged a mad rush into automobile dealer showrooms, what will be the net effect of the deluge once it subsides? Probably not much.

An analysis by Macroeconomic Advisers forecasts that the program will affect only the timing of car sales, not total sales: “In particular, we expect that roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway. Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.”

In other words, the program gets much of its juice via stealing car sales from the near future rather than generating additional demand. In practice, it works much like tax policies and subsidies to encourage women to have more children. Studies have found that women may have children earlier than they would otherwise, but they don’t necessarily have more kids.

The rebate program is also emblematic of the administration’s unwise approaches to economic policymaking. It borrows money to generate economic activity, which in effect borrows growth from the future, since eventually that loan will have to be paid back through higher taxes.

It picks and promotes a particular industry in a sort of small-scale industrial policy. It also places an emphasis on consumer spending as a route to renewed prosperity over greater investment — and isn’t that how the American economy got in trouble in the first place?

And for those reasons, cash for clunkers isn’t just a whimsically named government program that helps automakers clear out some inventory and generate a bit of quick cash flow, while also making average Americans feel they’re finally getting their bailout.

If that’s all it was, cash for clunkers wouldn’t be such a big deal. Rather, it is evidence that no one in Washington is learning any economic lessons. And that is a very big deal.


I did some research and made a list of Pros and Cons to the Cash for Clunkers program. So far, it’s 6-Pro, 12-Con.http://www.CashForClunkersInstruc tions.com(And I added a video – Jon Stewart on Cash for Clunkers, for kicks)

Higher growth vs. rising unemployment

Aug 3, 2009 17:54 UTC

Two fun factoids:

1) During the past two recessions, the unemployment rate kept rising for 15 months (1990-91 downturn) and 19 months (2001 downturn) after the recession officially ended, according to the National Bureau of Economcic Research.  If that happens now, we are looking at rising joblessness right smack into Election Day 2010.

2) During the first quarter of the last 10 economic recoveries, real GDP rose 5.8 percent on average, with a high of 17.2 percent during the first quarter of 1950 and a low of 1.4 percent during Q4-2001. That from Ed Yardeni. Here are the first two quarters of growth from each of the past three recessions: 1981-82 (0.3, 5.1), 1990-91 (2.7, 1.7), 2001 1.4, 3.5).

Bottom line: There is going to be a quarter coming up that Obama can crow about — but won’t because of rising unemployment.

6 economists on why Ron Paul’s Fed audit idea is wrong

Aug 3, 2009 17:01 UTC

I asked a half dozen economists who are very concerned about Federal Reserve independence what they thought about Rep. Ron Paul’s bill to audit the Fed. This was my specific question: “Given that Congress can already grill the Fed chairman during Humphrey-Hawkins (and occasional other congressional appearances), how would a GAO audit really threaten Fed independence in practical terms?”

Here is what they told me:

Robert Schiller, Yale University:

The GAO audit proposal is from Ron Paul, who has advocated abolishing the Fed and returning to the gold standard. Maybe people think that this is his foot in the door, a first step in the plan. When King Louis 16 called for a meeting of the Estates General in France, it led to a chain of events that resulted in his beheading!

Lee Ohanian, UCLA

My view is that there is a major difference between general economic questions from Congress to a Fed that isn’t open to a GAO audit and that doesn’t get its budget from Congress, versus a detailed audit by the GAO, which would create an explicit Congressional assessment of Fed operating procedures. An important reason why so many economists argue for independence is because there is substantial cross-country evidence that Central Banks which are more closely tied to the legislature have much higher inflation rates than in highly independent Central Banks. I do think Congress should be able to ask questions of the Fed during regular testimony, and Chairman Bernanke has certainly done more than his predecessors to explain what the Fed is doing and why.

James Hamilton, UC-San Diego

My own concern is not about a specific step such as a proposed audit but rather is a response to what I see as a changing political climate in which I fear it will be more difficult for the Fed to withstand pressure to monetize the deficit.

You ask, why should we be concerned about an audit if we’re not concerned about Congress grilling representatives of the Fed?  My answer is, I am concerned about the manner in which Congress has been grilling representatives of the Fed.

Anil Kashyap, University of Chicago

An audit suggests that they can force them to supply all the background information in real time that goes into a decision and presumably compel all members of the FOMC to share their thinking on any issue in real time.  This information is disclosed after 5 years, with good reason.

The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy.  That would be a disaster.  (Akin not just to having Supreme Court arguments on TV but also the process of them writing the decisions being televised.)

You want people to be able to change their mind and to be able to vigorously debate all sides of an issue.  If you put all this in public and subject to immediate second guessing it will shut down the give and take that is critical to reaching good decisions.

Michael Woodford, Columbia University

The level of intrusiveness of the GAO would surely be significantly greater — indeed, there would be no point to this proposal, given Humphrey-Hawkins, if it were not the intention of the bill’s proponents to exert Congressional control of monetary policy decisions in a way that the Humphrey-Hawkins testimony alone does not allow them to.

It is important to remember that the GAO already has the authority to audit the Fed, and does, except that the bill giving the GAO this authority in 1978 specifically excluded certain aspects of the Fed’s activities from GAO audits — essentially, decisions about monetary policy. The only purpose of the new bill is therefore to decrease the Fed’s independence with regard to monetary policy decisions.
Considerable historical experience suggests that political interference with monetary policy decisions can lead to regrettable outcomes — which is why Congress itself decided to forswear such interference. The dangers are especially great at a moment like the present one, when the prospect of large government deficits for years to come could easily make short-sighted decisions to use monetary policy to facilitate the financing of those deficits all too tempting. It is ironic that many of the proponents of reining in the Fed claim that their concern is preventing the Fed from further weakening the value of the currency, when the opposite would almost certainly be the consequence of their bill if passed.

Michael Feroli, JPMorgan

That’s a fair question. At H-H the Chairman is accountable for the Fed’s decisions. But I do think there is a distinction between asking questions and having all the conversations audited. For one, that could stifle the openness of the debate: to take an example, the Chairman always has to dance around the issue of NAIRU because it can be misperceived by economically illiterate members of Congress as meaning the Fed wants to engineer a certain amount of unemployment.

With audited conversations, the debate could become stilted. I think a GAO audit would also risk appearing as an official verdict on Fed decisions, as opposed to twenty different Congressmen questioning the Fed, which is much more clearly the opinions of some politicians. Finally, even if the step isn’t a major one, it’s a move in the wrong direction: if the markets and foreign investors perceive it that way, it could immediately push up borrowing costs even if theaudit are only a symbolic increasing of Congressional oversight of monetary policy.


Ugh. Post rational, logical and fact-based arguments that clearly explain why Uncle Ron’s fan are psychotic fringers and they come out of the wood work. If you all truly want high inflation rates and larger lending fees then by all means, take full access of the Fed. I find it the height of hypocrisy that those who complain about the govt being too big and having too much power can simultaneously advocate for giving Congress control over monetary policy decisions.

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Libertarian economist disagrees with Ron Paul’s plan to audit Fed

Aug 3, 2009 16:39 UTC

I just got this email from an economist with strong libertarian leanings who also thinks that Ron Paul’s plan to audit the Fed is a bad, bad idea:

Congress delegating its monetary authority to the Fed is the only feasible approach. Opening the door to giving 535 politicians the authority to influence policy is a recipe for disaster. Sure a price rule would be great, and so would peace everlasting. It ain’t gonna happen. The most you can realistically ask for is to have policy conducted by people who get it right more than wrong. It’s an imperfect resolution, but we live in an imperfect world.

Me: Again, if don’t like monetary policy under Bernanke, would you like it any better under Pelosi and Reid? If you want monetary policy linked to market indicators, fine. But make that case directly. The Fed audit would only spook the markets, and with good reason.  Unless, of course, you expect a Fed audit to reveal a worldwide conspiracy like this one from the film I Married an Axe Murderer:

Stuart Mackenzie: Well, it’s a well known fact, Sonny Jim, that there’s a secret society of the five wealthiest people in the world, known as The Pentavirate, who run everything in the world, including the newspapers, and meet tri-annually at a secret country mansion in Colorado, known as The Meadows.
Tony Giardino: So who’s in this Pentavirate?
Stuart Mackenzie: The Queen, The Vatican, The Gettys, The Rothschilds, *and* Colonel Sanders before he went t-ts up. Oh, I hated the Colonel with is wee *beady* eyes, and that smug look on his face. “Oh, you’re gonna buy my chicken! Ohhhhh!”
Charlie Mackenzie: Dad, how can you hate “The Colonel”?
Stuart Mackenzie: Because he puts an addictive chemical in his chicken that makes ya crave it fortnightly, smart-ss!


http://www.youtube.com/watch?v=e3zo7zjYk 2E

I strongly believe we need a federal reserve audit. The recent stock market action suggests to me the federal reserve is intervening in a free and open market. I believe the biggest beneficiary of this TRILLION DOLLAR stock market move in a couple of weeks was Goldman Sachs. Goldman Sachs sells derivatives in our equity markets its apparent that Goldman Sachs Has Total Control Over our stock market using the unlimited capital available from the federal reserve. I believe Goldman Sachs doesn’t have the best interest of our markets. They are misusing the federal reserve to manipulate the stock market and making huge 100 BILLION DOLLAR profits THIS IS ILLEGAL people expect our government to obey the laws just like citizen. Also this manipulation without regards for cost continues to put our government and the people more and more in debt




Imagine controlling the Federal Reserve portfolio of commodities and equities. TO DO WITH AS YOU PLEASE!!!!!!!

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Why Team Obama thinks your taxes are going up

Aug 3, 2009 16:28 UTC

The White House can try and walk back from the comments yesterday by Geithner and Summers, but don’t buy it. Pretty much — like 99.9 percent — of center-left economists think Americans don’t pay enough in taxes to support the modestly-large welfare state/military superpower that they seem to prefer. And by not enough, I mean $500 billion to $1 trillion a year too little.

There is no reason to believe Summers, Orszag, Goolsbee, Bernstein and even Obama don’t also believe that. The only question is what will be the taxing mechanism. All the wonks love a value-added tax. It is efficient and somewhat below the radar. That second thing is important since Team Obama is certainly smart enough not to buy into the theory that Americans are ready to pay vastly higher taxes. There is nothing in recent polls or election results to imply that. Just ask the folks in California ….

Will GDP pop in the third quarter? If so, will Obama smile?

Aug 3, 2009 13:55 UTC

That is the case being made by the always-great Ed Yardeni (bold is mine):

If nothing changes during Q3, real GDP will be up 4.6% during the quarter. This isn’t our forecast. It is arithmetic. If there is no change in final sales to consumers, business, governments, and foreigners, and if nonfarm inventories are unchanged, that’s how much real GDP will increase. This is because nonfarm inventory investment was minus $144.4bn (saar) during Q2. If it is zero during the current quarter, real GDP will surge. The inventory investments component of real GDP has been negative for five consecutive quarters, the longest stretch since Q1-2001 through Q1-2002. … By the way, during the first quarter of the last 10 economic recoveries, real GDP rose 5.8% on average, with a high of 17.2% during Q1-1950 and a low of 1.4% during Q4-2001.

Me: Will the White House then be ready to declare the end of the recession? My guess is that rising joblessness will impel them to keep any smiles on hold. Also, as long as they can say we are in a “recession,” they can keep talking about how they inherited it from Bush. But they will own the recovery for good or ill.