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Fed Independence and the Constitution

Posted by Larry Doyle on June 24, 2009 10:25 AM |

Are President Barack Obama, Ben Bernanke, Tim Geithner, and Congress about to overrun the Constitution of the United States?

President Obama is proposing to make the Federal Reserve the ‘regulator of last resort’ in order to handle issues of systemic risk. Will that move compromise the Fed’s independence and in turn violate the Constitution? I addressed this topic the other day in writing, “Don’t Call the Fed Independent.”

Adrian Van Eck of Van Eck-Tillman Advisories provides a chilling, historical perspective on this issue. I strongly recommend your saving and reviewing Van Eck’s commentary. The foundation of our country–that is, the United States Constitution– is in the crosshairs. Perhaps Barack and team may want to rethink the implications of this leg of their financial regulatory reform. What may be even scarier is if, in fact, they already have.

I thank my friend for sharing this patriotic post with me and I recommend you share it as well.


Yesterday the President of the United States made a move to gain total power over the Federal Reserve.  This is very, very serious.  It worries me that Fed Chairman Ben Bernanke did not protest.  It may mean that he has done for the Fed and for America what he was born to do.  He blocked a second Great Depression from happening!  But it may also mean that it is time for him to go back to teaching college economics come January, because he is now showing few signs of being a natural leader and great executive at a time when that is what the Fed truly needs.  I’ll give you the details in a moment.  But first a bit of history.

Franklin Delano Roosevelt tried to gain power over the Fed in the Depression 1930’s.  He proposed adding the Treasury Secretary on the Federal Reserve Board and making him automatically vice chairman, instead of the New York Fed president.  Bear in mind that in those days the Fed chairman in Washington was seen as little more than a figurehead.  The real power in the Fed was then and had been since its founding the president of the New York Fed.  (That is the job that current Treasury boss Timothy Geithner held before moving to the Treasury.)  The idea of blending the Fed and the Treasury together was shot down at once by Congress… and FDR backed away.  In that time before television, members of Congress were then invariably highly qualified and well informed, rather than sometimes just being possessed of a nice-looking face and able to read speeches on a teleprompter written by staffers.  They knew that the Constitution gave full power over money to Congress and they denied the Administration, any Administration, any control whatsoever over the money supply.

The Constitution was written that way because the men who wrote it were intimately familiar with history, back through England to Rome and beyond.  They made the House of Representatives closer to the people by giving it two-year terms instead of four for the president and six for the Senate, whose members originally were chosen by state legislatures.  Congress had delegated some but not all of its power over money to the Fed when it created the so-called independent central bank.  Congress in 1913 made it plain that the Fed was fully under the control of Congress and would have to report to Congress on a regular basis.  When Paul Volcker was chairman of the Fed he used to taunt the members of Congress by telling them that if they did not like the way he was running their bank, they could fire him.  But then, he would say, of course you will not have me to blame any more and you will have to take the blame yourself when anything goes wrong.  They would turn away from him then and say no more.

Congress in 1913 had wanted to decentralize the so-called central bank, so it divided it into a dozen regional banks.  All of them were privately owned by banks in their district, and their boards of directors were set up in three classes to represent businesses and banks in each district.  The intention was that oil drillers would have a say in one district, cattlemen and meat packers in another, mining firms in a third, manufacturers in a fourth and so forth across America .  Their regional bank buildings were privately owned by these private banks and paid local real estate taxes.  The board members in Washington served 12-year terms, which were staggered.  They had to be from different districts.

The Fed was allowed to create money to buy Government bonds.  They kept enough interest to pay for their staff salaries etc. and paid much of the rest back to the Treasury voluntarily.  Today that payment from the Fed comes to billions of dollars a year.  This is why when the Fed largely financed World War II, FDR said we owed the money to ourselves.  Personally I think it is a better deal than we get from the Chinese communist government, which prints its own money to buy a trillion dollars worth of our Federal debt and gets big interest checks weekly.  It uses that money to undermine America in Asia, Latin America, Africa and Europe .

The money that the Fed loaned to banks and others during the recent emergency was the Federal Reserve’s own money, from its now-large reserves.  It did not come from taxpayers.  Each time a Congressmen makes a speech raving about the taxpayers paying for these loans I wince.  Their ignorance is disturbing, even frightening.  Yesterday when they hauled the Treasury Secretary before the Senate’s panel of financial “experts” (everything is relative and they are better than most of the rest when it comes to understanding money and banking) to discuss the president’s 88-page proposal of new laws concerning the Fed and the Treasury, I saw just how deep the ignorance now runs.  Most of the Senators asked questions about specific provisions of the proposed bill, mostly about a proposed vast increase in regulatory powers that should not even be in the Fed’s domain.

I watched coverage of this hearing on CNBC.  Larry Kudlow, an experienced senior member of their broadcasting staff whose Washington government experience prepared him to notice what I have been talking about here, commented on this central fact hidden away in the bill even before one lone Senator later nailed it to the wall.  That made a total of three of us who would instantly realize that this whole bill was filled with a lot of silly provisions designed to elicit comments from those in the media, from bankers and businessmen, from Senators and Congressmen… all to keep their eyes and their mind off the one lonely passage that in the FDR Administration shook the halls of Congress with anger and rage, until it was then dropped and forgotten.  One interesting note:  There was a break in coverage on the General Electric-owned TV network (CNBC), while a commercial was played.  When they came back, Kudlow was missing from the screen and had been replaced by a younger man, who was not interested in pushing Larry’s bull’s-eye-hitting criticism of the president’s bill.

Only one Senator brushed aside talk of the many new regulations the president was asking for.  He cut right to the central core of the matter.  He had only 5 minutes to speak and in that 5 minutes he called attention to what he said was clearly the heart and soul of this bill.  (And I agree with him!)  He correctly said that by forcing the Fed to get written approval from the Treasury Secretary when it loans money to a major bank, insurance company or other firm the bill in effect silently and secretly reduces the Fed from being a separate, non-Federal, largely private and de-centralized institution with a history running back to 1913 and turned it into a 100% controlled-by-the-president subordinate department of the U.S. Treasury, just another Federal agency.

Ninety-six years of history would be wiped from the slate if this bill passes as is.  Yet during hours of questions and answers before the Senate yesterday morning only the one Senator recognized what you just read here and as I mentioned he protested vigorously.  No other Senator followed up to protest or even comment.  That is probably because their questions are written down in advance for them by staffers and they are not equipped to seize a fresh idea and expand on it.  What’s more, from what I heard there are no Congressmen upset about this revolutionary passage in an 88 page bill.  And believe me this is revolutionary!  They are led by Barney Frank, who helped to cause the crash in banking and is now trying to cover his own failures up by shifting all blame to the Ben Bernanke and Fed.

But now I am going to tell you what really upset me yesterday.  Apparently the one man who has the intense historical knowledge of the Fed, of the FDR Administration, of the Great Depression and of the long history of imperial, royal, dictatorial and presidential misuses of government monies when they got their fingers wrapped around its control – and I mean of course the chairman of the Federal Reserve – did not so much as open his mouth and offer a whimper in protest at this provision.  Indeed we were told that when he loaned billions of dollars to AIG he had approached the Treasury boss and asked him to write his approval down on paper and sign it, before he sent money to AIG.  I can understand why Ben Bernanke would do that in the highly politicized environment of Washington .  But there is a gap as wide as the Mississippi River between the chairman doing that on his own privately and the proposed new law requiring him to do it.  And he should be shouting that fact to anyone who will listen, especially to Congress.

Now the president has said since the Fed chairman asked for that signed paper one time, lets make it official and require him to get such approval in writing from the Treasury boss every time he or any Fed chairman (and the man who hungers for the job is hovering at the president’s elbow each day) wants to make such a loan.  I have no doubt that Larry Summers has told the president he will defer to him in each instance, in effect putting the president in charge of the Fed when it really counts.  (For what it’s worth, there are more than a dozen women of both Parties in the Senate, and I cannot imagine them voting to confirm Summers as Fed Chairman, after he was fired as president of Harvard University for suggesting that women professors are really not smart enough to be professors.  Of course, he regards himself as the smartest man in America and he probably does not think that men are smart enough to be professors either, so that would mean he also looks down on Ben Bernanke.)

This would put the president himself where the Founding Fathers and several generations of Congressmen made sure no president, not even Franklin Delano Roosevelt, would be allowed to go.  If the current Fed chairman does not see the importance of saying no to this, then he should forget about another term at the helm of the Federal Reserve and go back to teaching at an Ivy League college.  He has done a great service to his country until now, and if this bill is passed as written and put into effect with a passive, mild leader sitting at the desk of the chairman of the Fed, America will be turned away from its heritage and inched down a road toward dictatorship where all of history says the Congress itself will be reduced to a shadow of its former self.  If you doubt me, take a good look at what the socialist dictator of Venezuela has already accomplished and what he intends to do in the next year.

Adrian Van Eck

Van Eck-Tillman Advisories

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