Senator Paul does an excellent job of providing "facts" in his op-ed entitled Audit the Fed. However, a more appropriate title may have been How to Lie With Statistics and Scare Uninformed People to Do What I Want (perhaps an editor could come up with a more succinct title, but the point remains the same). Below are some of such facts that Rand Paul attempts to use in his justification for auditing the Fed, along with "fact check" of sorts from the article Unfriend the Fed: Rand Paul's Attack Re-examined by Pedro Nicolaci Da Costa of the Wall Street Journal.
Paul begins his article with a comparison of the Fed to the failed investment bank Lehman Brothers. He notes:
If the Federal Reserve was a real bank, without extraordinary powers, it would be insolvent. The Fed has $4.5 trillion in liabilities and only 57 billion dollars in equity. It is leveraged at 80:1, nearly three times greater than Lehman Brothers when it failed.Clearly an opening to create shock and awe for readers, it makes one wonder how it is possible for the Fed to survive under such leveraged conditions. First, it comes down to the key praise "without extraordinary powers", or, if the Fed was a regular bank. However, to say that the Fed is just a regular bank completely disregards the definition of the Federal Reserve system. The Fed was created by Congress and holds the full faith and support of the United States government; to say that the Fed is insolvent would be parallel to saying that the government was insolvent. Second, as pointed out in the article by Nicolaci Da Costa, the structure of the Fed does not allow it to build up further equity. He points out that the Fed has been earning "record profits", but the law requires those profits to be handed over to the U.S. Treasury. Again, this key feature of the Fed not being a regular bank comes into play; when the Fed grows its liabilities and it, by law, cannot grow equity, its leverage will increase.
Rand Paul explicitly tries to call for greater oversight through an audit of the Fed. He says:
What we really needed was more oversight of the Fed, not small community banks. If the Fed has purchased more than $2 trillion dollars of "distressed" assets, don't tax payers deserve to know what they bought? Did they buy the assets of friends and acquaintances? Did they buy any liabilities from companies they used to work for?In terms of his last question, the Federal Reserve is not allowed to buy liabilities from companies, so if there is any speculation that they have done so, perhaps an audit would be justified. However, it is more likely that his use of the word "liability" might more closely mean the "distressed" assets that he mentioned before. Nicolaci Da Costa provides an explanation for these assets:
The Fed did acquire distressed assets in its bailouts of AIG and Bear Stearns and as part of other 2008 emergency rescue programs. But these loans have been fully repaid. The Fed also bought mortgages backed by housing agencies such as Fannie Mae and Freddie Mac...The Fed's balance sheet currently totals $4.5 trillion, more than five times pre-crisis size. Of that total, $2.5 trillion of the assets are Treasuries and $1.7 trillion are mortgage-backed securities.As pointed out, the distressed assets that were on the Fed Balance Sheet have already been repaid and taken off the Fed's books. Any further distressed assets that may have been purchased would have had to be so well hidden that they would not have been revealed in one of the several layers of auditing the Fed currently undergoes. These supposed $2 trillion of distressed assets are just one more fact that Senator Paul needs to get straight before pushing further for "Audit the Fed".
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