Jawbone of an Ass

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So it turns out that the great scandal of the London Interbank Offered Rate has spilled over to the Federal Reserve. It seems, according to a dispatch of Reuters, that the Federal Reserve Bank of New York “may have known as early as August 2007 that the setting of global benchmark interest rates was flawed.” It was consulted when the problems first arose at Britain, and it sent some suggestions for reform. But these are now looking inadequate. “As one of the world’s most powerful regulators, the New York Fed has the power to ‘jawbone’ banks to force them to make tough decisions,” Reuters reported, attributing the point to a former associate general counsel at the Federal Reserve in Washington, Oliver Ireland.

This is something to consider. If Samson could use the jawbone of an ass to slay a thousand men, how come the Federal Reserve can’t jawbone a few banks into fixing their interest rate the right way? After all, the Fed has a lot of experience in the jawboning line. That’s what it does for a living. Its governors set their own rate for federal funds by talking about it without so much as a howdy-do to gold or anything else of value. In theory, they’re supposed to keep prices stable, but the value of the dollar has plunged dramatically in recent years to less than a 1,500th of an ounce of gold. It has lost nearly half its entire value during President Obama’s first three years in office and something on the order of four fifths of its value since President George W. Bush was sworn in.

They’re also supposed to set their rates with an eye to maintaining full employment. But they’ve been lathering trillions of dollars over to the federal government and to banks. Yet it seems the more they do it, the more contented the unemployment rate seems to be resting above 8%. That doesn’t even count hidden unemployment and underemployment and persons dropping out of the look for work. It’s gotten so bad that members of Congress are starting to think about whether they want to end the employment mandate. A key committee unanimously called for a tough, unprecedented audit of the Fed, and the chairman of the Fed, Ben Bernanke, is so concerned that he’s broken precedent and started holding quarterly press conferences.

So, while we don’t want our biblical references to be construed as rude in tone, it’s time to ask the question: Who is the jawbone here, and who is the ass? Or to put it another way, what is the difference between, on the one hand, the kind of rate setting done by Barclays and the others involved in the London Interbank Offer Rate, and, on the other hand, the kind of rate setting that is done by the Federal Reserve? In the one case, the chairman of Barclays, Robert Diamond, is given the heave-ho as unceremoniously as Samson dealt with the Philistines, and the thing is being written up as a scandal. In the other, the chairman of the Fed, Ben Bernanke, is given deference as a genius of rate-setting and the thing is being written up as a proper monetary system.

Our own prediction is that out of this debacle will come greater impetus to monetary reform and the introduction into the conduct of monetary policy of a reference to gold. This may be done through the kind of legislation being advanced by Congressman Ron Paul in the Free Competition in Currencies Act, which would end legal tender laws altogether in the United States and open the monetary sphere to the introduction of privately coined and printed money. It might involve the establishment of the kind of classical gold standard being advanced by, among others, the American Principles Project and Lewis Lerhman. Or it may come from, say, another country or an international organization. But it’s hard to look at the LIBOR scandal and not conclude that jawboning has its limits, as poor Samson found out the hard way.

The New York Sun

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