United Liberty
Why make a deal on the debt ceiling when you could just listen to Ron Paul?
Tue, 07/05/2011 - 10:05am | posted by Jason Pye
As House Republicans prepare to make a deal on the debt ceiling with the White House, Rep. Ron Paul (R-TX) is offering a solution that is receiving some praise from The New Republic, a publication ordinarily hostile to libertarianism:
Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget.
The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.
Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet.
[…]
To be sure, there would be consequences to the Fed destroying these bonds. The Fed had planned to sell off the bonds to absorb reserves that it had pumped into the banking system when it originally purchased the bonds. These reserves can be created by the Fed when it has need to do so, as was the case with the quantitative easing policy. Creating reserves is in effect a way of “printing money.” During a period of high unemployment, this can boost the economy with little fear of inflation, since there are many unemployed workers and excess capacity to keep downward pressure on wages and prices. However, at some point the economy will presumably recover and inflation will be a risk. This is why the Fed intends to sell off its bonds in future years. Doing so would reduce the reserves of the banking system, thereby limiting lending and preventing inflation. If the Fed doesn’t have the bonds, however, then it can’t sell them off to soak up reserves.But as it turns out, there are other mechanisms for restricting lending, most obviously raising the reserve requirements for banks. If banks are forced to keep a larger share of their deposits on reserve (rather than lend them out), it has the same effect as reducing the amount of reserves. To take a simple arithmetic example, if the reserve requirement is 10 percent and banks have $1 trillion in reserves, the system will support the same amount of lending as when the reserve requirement is 20 percent and the banks have $2 trillion in reserves. In principle, the Fed can reach any target for lending limits by raising reserve requirements rather than reducing reserves.
As a practical matter, the Fed has rarely used changes in the reserve requirement as an instrument for adjusting the amount of lending in the system. Its main tool has been changing the amount of reserves in the system. However, these are not ordinary times. The Fed does not typically buy mortgage backed securities or long-term government bonds either. It has been doing both over the last two years precisely because this downturn is so extraordinary. And in extraordinary times, it is appropriate to take extraordinary measures—like the Fed destroying its $1.6 trillion in government bonds and using increases in reserve requirements to limit lending and prevent inflation.
In short, Representative Paul has produced a very creative plan that has two enormously helpful outcomes. The first one is that the destruction of the Fed’s $1.6 trillion in bond holdings immediately gives us plenty of borrowing capacity under the current debt ceiling. The second benefit is that it will substantially reduce the government’s interest burden over the coming decades. This is a proposal that deserves serious consideration, even from people who may not like its source.
It sounds reasonable enough, which is probably why no one in Washington will consider it as a means to solve the debt ceiling fight.
Actually, Ron just spoke to abolishing the interest we pay on the money printed out of thin air, not the principle on the bonds. It was in the WHO radio interview about a week ago.
Audit the fed, support HR 459 Paul
Support S 781 Feinstein
Mr. Paul has a strong ground game, early successful fund raisers, high profile legislative endorsements, GOP fellow candidates who literally are echoing Mr. Ron Paul’s stead fast platform, supporters not only from 1 “party” but supporters who are democratic, libertarian, republican, and all others. Most importantly, all those people who feel kind of “snowed over” by all the failed campaign promises of Mr. Obama, realize now that ideology and rhetoric never supersedes substance and track record. Walk the walk and talk the talk. Mr. Ron Paul does just that.
I’m going to have to assume that the commenters saying Ron Paul was taken out of context/only said waive interest on the debt of the feds bonds are most likely correct. The reason is thus:
“destroying” these bonds is the exact equivalent of turning on a printing press and printing an extra trillion dollars. The federal government can do that tomorrow, and not bust the debt ceiling.
Ron Paul is cheif among those who wants to “audit the fed”. How is an audit going to look if $1 Trillion in assets are removed from a balance sheet, but no liabilities? Not good.
The reason the fed goes through the arcane procedure of buying and selling bonds is that it does at least comply with things like a debt ceiling, as well as the procedure to sell the bonds to soak the money supply back up at some point in the future.
Ignoring this step and just destroying these bonds would send the same signal to world financial markets as printing $1 trillion. The dollar would lose world reserve currency status even faster, and the hyper-inflation Ron Paul and his supporters often speak of would happen even sooner.
Sounds good on the surface, not so much in practice.
Paul said it and he is right. There is no other reasonable way to get out of debt. We can’t tax enough, we can generate enough revenue through a strong economy. We must “go bankrupt”
One little thing you missed in your argument. Ron Paul’s
position is much stronger and more logical than you think.
The Fed created the money out of thin air to buy the notes
in the first place. The Fed is NOT a Government agency. It is
a privately held concern that our Government has given the authority
to create fiat money, which is not only unconstitutional. but we don’t
even have the right to audit them!
In essence, the Fed creates money out of thin air to buy notes from
the Government, collects interest on the notes, and then prints more
money to bail out our bankrupt Government even further. We are borrowing money to pay the interest on the money we have already borrowed, all of which, as far as the Fed is concerned, never existed until they punched a few keys and created it.
How would you like to create money and then loan it out at interest?
Ron Paul is trying, as he has for years to end the shell game and end the Fed.
Wiping out the debt we owe the Fed is nothing more than destroying
notes to pay back money that never existed, with interest! And yet, some still say that Ron Paul is a radical thinker! What a joke. He is one of the few politicians that understand the system in the first place, much less have the balls to say out loud how to stop the greatest scam ever created on planet Earth.
Y’all wake up, do a little research, then get Ron Paul nominated and then elected in 2012.
If you do a little homework, you will realize that he is the only chance we have to save this Country!
Well, GOP, I hope you’re ready to lose again in 2012. It is obvious that you have learned nothing from the last election. The GOP is shot. Spent. Caput. Your party is not growing with the youth, and your die hard fiscal conservatives have made a tea party. The Bachman fans and Pawlenty lovers may tow the party line in the general election, but will leave you shy of victory in the end just like happened in ‘08. The only chance you have of victory is to appease the libertarians and nominate the god father of the tea party, and I don’t mean federal reserve banker Herman Cain. I mean of course Ron Paul.
And frankly you owe them, because as f*cked up as it makes you all look (and you deserve it for rabidly running this country into debt), they are the only ones over the past 4 years to give your party any credibility at all.
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