I never quite understood the “audit the Fed” trend that gained perhaps its widest acceptance as one of the final acts of Congressman Ron Paul’s career. He introduced H.R. 1207 as an amendment to Dodd-Frank, of all things, and even garnered 320 co-sponsors which aided the Congressman in getting it passed by the House. The Senate version was pared back to a one-time audit limited to certain aspects of the Fed’s actions during the financial crisis.

The audit has been reintroduced in the years since, the last being killed by the Senate just this year. Congressman Massie of Kentucky introduced H.R. 24 in January 2015 with 193 co-sponsors, but it has not, to my knowledge, been given a House vote. At the upper house, the bill could not reach cloture.

The intent of each audit seems to be about gaining access to comprehensive data on the full range of the Fed’s transactions. As it stands right now, a great deal of what the Federal Reserve actually does as far as its operational activities that should “hit the tape” don’t. The thinking seems to be that a complete audit might uncover improprieties as perhaps the first step in discrediting the institution. This is the part I don’t get.

It’s not that I disagree with the audit as an idea, I just think it is the wrong direction to take. The problem with the Fed isn’t that it is a central bank that does central bank things, rather the problem is central bankers. It would probably be somewhat helpful to uncover what transactions went to whom and when, but if we are to audit the Fed the investigation should be focused on Janet Yellen and Ben Bernanke (and Alan Greenspan), not what specific orders were given by them to the Open Market Desk by CUSIP.

It is getting lost in details unnecessarily. There is no missing money smoking gun with which to prove beyond all doubt the Fed is a fraud. There isn’t any money there at all, which is precisely the problem. The money went missing in the 1970’s and it was central bankers like Alan Greenspan who claimed that it didn’t matter even though deep down he suspected all along that it did.

The 1970’s is known as the Great Inflation but also as the age of “missing money.” The term was coined by the aptly named Princeton economist Stephen Goldfeld who wrote in words what had already been recognized in policy. Monetary evolution was proceeding even if economists preferred it didn’t. Ignoring new discoveries only had the effect of making the Great Inflation that much more “great.” Interest rate targeting was the preferred method of recognizing monetary change without having to fully appreciate or understand it.

abook-nov-2016-periodic-table-fullThe Congress, emboldened by a very different administration, needs to examine the Fed’s track record in full, not the specific steps with which it took to amass such a pitiful catalog. This is a human story on both sides of the issue: those who remained devoted to ideology that clearly wasn’t suited for the real world long after that deficiency was perfectly exposed, and the rest of humanity that suffers the consequences. Nassim Taleb has described it about as well as anyone else, giving these people the disparaging acronym IYI, which aptly registers as Intellectuals Yet Idiots.

The American people need not be detoured into the intricacies of dollar swaps to which foreign central bank on the part of what European (or Japanese) bank that couldn’t fund in “dollars.” As then Open Market Desk chief Bill Dudley said in September 2007:

First, the turmoil in money markets did impair the functioning of the foreign exchange swap market. This made it more difficult for banks in Europe that are structurally short of dollars to obtain the dollar funding needed to fund their assets.

Do we really need to know exactly what the Open Market Desk did in response? We have a good idea right now, just as we did contemporarily. Their actions taken as a result of all that were all failures, and pretty obvious ones. That is what needs to be subject of all inquiry, starting with making Ben Bernanke account for both “subprime is contained” as well as spring 2008’s “the worst is behind us” rhetoric. Panic was supposed to be impossible. It follows right into the crisis that wasn’t ever a “tail risk” and leads us logically and easily to why the Great “Recession” was both so “great” and why it clearly was never a recession, accounting fully for the QE’s.


Monetary policy has been an embarrassment of blunders with very real costs, some of which can be estimated and quantified, some, as noted yesterday, we just won’t be able to though they are what actually matter most. Despite all that, Janet Yellen as the technical and ideological heir of Greenspan and Bernanke is still afforded a level of deference and respect (intellectually) despite her and her institutional inclusion in IYI. They are easily exposed by forcing them to account for that which they simply cannot, and it has nothing to do with how they determined the exact level of the IOER; it is about why they thought IOER would be useful in the first place and more importantly, the whole emphasis for what this version of the “audit” should be, why it wasn’t.

This is the starting point for reform. Now that Donald Trump has been elected and has proved the electoral pathway for beginning to reckon with the economy we have as opposed to the economy that was supposed to be as a product of so much intellectualism, he has to make it count. The Fed cannot simply be made to shuffle personnel, the equivalent of a wrist slap (proportional to the offenses) amounting to at most the sake of appearance. What good is a Janet Yellen resignation, assuming that one would be requested, when that would mean Stanley Fischer or any of the other dozen empty suits would take her place? Every single one of them would look at the eurodollar futures curve, for example, and say, as Bill Dudley has all over again, “that can’t be right because we are.”

The faces have changed, Volcker to Greenspan to Bernanke to Yellen, and the Chairman increasingly smaller in physical stature, but nothing of importance really has since the Fed can only offer (at this moment ) interchangeable IYI’s. There is no missing money to be found via audit; the money went missing decades ago and central bankers knew it and did nothing. They are still doing nothing, and that is what needs to change.

Elections have consequences, some more substantial and truly hopeful than others.