Auditing the Fed Nears

If you've been to any tea party, then you've probably seen someone that supports H.R. 1207. That's a bill sponsored by Ron Paul that would mandate a full and complete audit. Now, if you're unfamiliar with the matter, you might be shocked. You'd probably assume that the finances and balance sheets of our own Central Bank would already be a matter of public record. Not so. The public doesn't know exactly what the central bank owes and owns. That appears to be coming to an end. H.R. 1207 is favored overwhelmingly. More than that, it gets support from a cross section of the population. It has bi partisan co sponsorship including the likes of ultra liberals like Brian Baird and minority leader John Boehner. Even the Green Party is in favor of this plan. Libertarians are overwhelmingly in favor of it. It simply makes sense. Now, it's gained a very important supporter.

Rep. Barney Frank, the chairman of the House Financial Services Committee, has endorsed a bill calling for an audit of the Federal Reserve.

The support from the powerful Massachusetts Democrat comes after the measure, introduced in late February by Rep. Ron Paul, has won hundreds of co-sponsors on both sides of the aisle.

Frank's office had previously declined to comment on the bill, which had been idling in his committee for months, but the congressman publicly backed it when pressed on the issue at a recent town hall meeting held during Congress' month-long summer recess.

The reason that Barney Frank's support is important has everything to do with the dynamics of our legislative bodies. Power is held in large part in the hands of committee chairs. They decide which bill get voted on and which never see the light of day.

H.R. 1207 had overwhelming support, but until Barney Frank, head of the finance committee, gave it his vote of confidence it wasn't going to get voted on. Now, it will see the light of day and a very important hurdle is crossed.

With this latest news, I have an excuse to play my favorite Fed related video.


Now, the larger point is what will we find inside the books of the Fed. Some say that we'll find the Fed is near insolvency.

Yet, has the Fed really “run out of ammunition”? First of all: what is the Fed shooting at? It is trying to artificially stimulate the economy with its monetary policy, thereby it is also unwittingly shooting at the value of the currency. Through its monetary policy, the Fed is trying to bail out an insolvent and illiquid banking system to maintain an unsustainable structure of production. As long as the currency is not totally destroyed, the Fed will never run out of ammunition. In order to assess the ammunition left, one should have a look at the balance sheet of the Federal Reserve — especially at the assets the Fed can still obtain. The Fed’s balance sheet also gives insights on the condition or quality of the dollar.

Since the crisis broke out, the Fed has continuously weakened the quality of the dollar by weakening its balance sheet. In fact, the assets the Federal Reserve holds have deteriorated tremendously. These assets back the liability side of the balance sheet, which mainly represents the monetary base of the dollar. The assets of the Fed, thereby, hold up the value of the dollar. At the end of the day, it is these assets that the Fed can use to defend the dollar’s value externally and internally. Thus, for example, it could sell its foreign exchange reserves to buy back dollars, reducing the amount of dollars outstanding. From the point of view of the buyer of the foreign exchange reserves, this transaction is a de facto redemption.

We'll see. What I have no doubt about is that a full and complete audit of the Federal Reserve will be the single most important economic event in this country since the Sherman Anti Trust Bill. Once the public understands exactly what this shadowy and all too powerful organization does, nothing in domestic policy and economics will ever be the same.