Joe Manchin’s Strategic Pause

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

If Senator Joe Manchin gets the “strategic pause” he wants, what are the Republicans going to do with it? The Mountain State mensch, a Democrat, used an op-ed piece in Friday’s Wall Street Journal to call for delaying the use of a budget reconciliation to pass President Biden’s $3.5 trillion spending binge. He disagrees with the “strange belief” that there is “an infinite supply of money to deal with any current or future crisis.”

Good for Mr. Manchin. Particularly because, if the GOP sticks together, the West Virginian could be in a position to force the issue. How, though, might Republicans use the breathing room? The best bet, by our lights, would be to use the pause to start on reforming the system that has allowed the government to create from computer pixels money to lend to itself to spend, without cutting lower-priority spending or taxing the voters.

Mr. Manchin’s op-ed piece isn’t a per se proposal for monetary reform. He does warn that an “overheating economy has imposed a costly ‘inflation tax’” on middle- and working-class Americans. With the nation’s debt at a record, Mr. Manchin blames “Democratic congressional leaders” for proposing “the largest single spending bill in history” with “no regard to rising inflation, crippling debt or the inevitability of future crises.”

It’s hard to read Mr. Manchin’s language without thinking of the dollar itself. It is true that, say, Mr. Manchin voted against confirmation of Judy Shelton as a governor of the Fed. Democrats feared that once she gained such a platform, her commitment to honest money could find a reception with the public. Yet monetary reform, more than any other issue, would put the “strategic” in the “pause” Mr. Manchin is now seeking.

Plus, too, it’s nice to see inflation and debt being raised by, for a change, a leading Democrat. For back in the 63rd Congress, it was the Democrats who introduced the strategic reform — known as the Federal Reserve Act — that created the central bank at the center of our problems today. The Democrats did so, back then, on the express condition that the Federal Reserve would not threaten the gold convertibility of the dollar.

No need to reprise that history here. We’ve been banging this drum for decades, as have many others, particularly this season when America is remembering the 50th anniversary of the collapse of the monetary system that powered the fabulous post-World War II economy. The 11 pieces so far in the Sun’s series, by such luminaries as Steve Forbes, Edwin Vieira, Jr., and Ron Paul, are available here — and with more to come.

Rarely has this issue loomed with such urgency as now. This is marked in the latest Grant’s Interest Rate Observer, with a piece on the “State of Money in America.” It looks at the dollar crisis from a prism through which Americans all too rarely look — the solvency, or lack thereof, of the Federal Reserve itself. Grant’s focuses on the Federal Reserve Bank of New York, which, in Grants-speak, is the U.S. Treasury’s “top milch cow.”

The numbers he cites are staggering. “Systemwide,” Mr. Grant writes, “the Fed shows assets of $8.33 trillion versus capital of $39.8 billion, for a leverage ratio of 209:1. If the average conscientious Federal Reserve bank examiner encountered such a balance sheet as this one, he or she might dial 911. However, the New York Fed, with assets of $4.156 trillion and capital of $13.3 billion, exhibits a leverage ratio of 311.6:1.”

For perspective, Mr. Grant cites JPMorgan Chase, which on June 30 reported an assets to stockholders’ equity ratio of 12.9:1. “What makes the New York Fed so confident that it can manage a balance sheet almost nine times more distended than the one that almost took down Morgan Stanley in 2008?” Mr. Grant asks. He discovers in a Fed footnote that the central bank will just treat future losses as a “negative journal entry to the treasury.”

Surely, one might think, the Treasury would protest. It turns out, though, that the Treasury is being run by the Fed’s former chairman, Janet Yellen. What Mr. Grant proposes to deal with this scandal — our word — is to require the New York Fed to comply with the rules of the Third Basel Accord, under which, after the 2008 financial crisis, global banking rules on capitalization and other matters were tightened.

Mr. Grant’s proposal isn’t the reincarnation of the classical gold standard of which he and the Sun are admirers. We cite it as a warning of the scale of the problem that Congress could begin to address were it to get the strategic pause for which Mr. Manchin is asking. The Sun favors the early establishment of a Monetary Commission to look at this problem. No need for the GOP not to join Mr. Manchin’s lead. We’ve always liked Ronald Reagan’s rule about how there’s nothing one can’t accomplish if one doesn’t mind who gets the credit.

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Drawing by Elliott Banfield, courtesy of the artist.


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