Tag Archives: congress

If it Isn’t Broken, Don’t Try to Fix It

Last month, Republican senator Rand Paul introduced a bill that would expand Congressional oversight over the Federal Reserve and used it to spearhead a self-proclaimed “Audit the Fed” movement.  In an op-ed on Breitbart written by the senator himself, Rand cites the Fed’s massive balance sheet leverage being composed of faulty loans, long-term dollar dilution, and expanded powers from the Dodd-Frank Act as being the driving forces behind the movement.  Many journalists seem to be missing the underlying implications of the proposed bill.  Neil Irwin of the New York Times delves into a description of how the Fed is actually quite transparent and argues that its financial statements are indeed already audited yearly, then goes on to claim that experts say the bill is really about “unveiling the secrets of the temple, exposing the perfidy that these secretive central bankers are surely engaged in”.  He counters that issue by going into detail about the Fed’s communication with the public, but what his analysis is missing is the fact that Congress having even the slightest input on the Fed’s decisions is a terrible idea.  A writer for the Wall Street Journal glanced over that notion as well, providing an explanation of the Fed’s balance sheet and Paul’s claims, adding a mere sentence about how Fed officials think the bill would limit their independence with no elaboration beyond that.  Journalists are missing the real story here.  While some are acknowledging the fact that the Fed is adamantly against the issue, as this WSJ article does, they are simply quoting statements from Fed officials and leaving the meaty story on the table, opting instead for the side-salad.

Nobody should be surprised that the Fed is against expanding Congressional oversight – it goes against everything they stand for as independent, “private” bankers.  The issue at hand here is not about a lousy financial audit, nor is it about tapping into the minds of the Fed’s Board of Governors.  It is about Congress, a radically political being, wanting to interrupt a monetary system that has a solid track record.  It is about lawmakers diverting their efforts towards a matter of policy where there is little room for improvement.  Since the peak of the global recession, the United States has had the best recovery out of the five countries with the biggest central banks, as demonstrated by this data from the World Bank.

 

gdpgrowthperformance

 

This was largely due to the Fed’s quick response of buying up toxic assets, a response which may have taken years (and which would have been far too late) if it involved some sort of Congressional vote or approval.  Critics of the Fed claim that purchasing these assets was a mistake, reasoning that there is risk inherent to increasing the size of the Fed’s liabilities.  In reality, the asset purchase program was well-implemented, likely saved Americans years of economic stagnation, and carried less risk than what was perceived.  It is only natural that it will take a while for the Fed’s balance sheet to shrink, just as Fed officials claim, since it must space out the asset sales at a reasonable rate (and its asset sales have been accelerating, as noted in CNBC).  The Fed has been wise in its handling of these assets, opting to hold on mortgage-backed securities that it had previously intended to sell in 2013, waiting for the right time so as to avoid losses, as described by this Bloomberg article.  Those who claim that the Fed has not been transparent enough seem to be overlooking the fact that Ben Bernanke provided plenty of guidance to the market with respect to the Fed’s goals.  The Fed as we know it is working perfectly fine as it is: a board of apolitical experts who are free to make decisions without worrying about public or political input that is often misguided, as Rand Paul’s is.  To insert any sort of Congressional control would jeopardize a system that has worked perfectly fine as is.

 

Congress Needs to Rethink the Puerto Rican Economy

Last year, Standard and Poor’s became the first of the three major ratings agencies to downgrade Puerto Rico’s debt from investment grade to junk status, increasing pressure on the commonwealth’s government to find a solution to growing liquidity risks.  The US territory found itself facing a cash flow shortage, namely as a result of its habit for issuing debt to cover old debt, a practice that various administrations have been utilizing since 1976, according to Puerto Rican newspaper El Nuevo Día.  This combined with nine consecutive years of recession have left the island with some $70 billion of debt that it does not have sufficient revenue to service.

Friday, a US federal court ruled that Puerto Rico’s Recovery Act, a bill passed last June that would allow the commonwealth’s public corporations to restructure their debt, was unconstitutional, per Reuters. This ruling has left the Puerto Rican government in limbo as it has practically no way to organize its debt in the face of an inevitable bankruptcy.  Perhaps in anticipation of this situation, Puerto Rico’s sole representative in Congress, Pedro Pierluisi, proposed a bill that would allow Puerto Rico to be eligible Chapter 9 bankruptcy just a month after passing the Recovery Act.  This is certainly the most logical solution – US bankruptcy code defines municipality as “political subdivision or public agency or instrumentality of a State” (Wiki), and Puerto Rico’s state companies are definitely public agencies subject to US law.  However, US lawmakers have little incentive to act on a bill that would directly lead to the largest municipal bankruptcy in the nation’s history, so the bill died in committee (Congressional Bill Tracker).  This brings us back to Puerto Rico’s limbo.  As a US territory, it has no options available to it for restructuring its debt.

It is neither wise nor fair for US lawmakers to sit by and watch as the Puerto Rican economy, composed of US citizens, starves.  The Chapter 9 Uniformity Act, which may not even become reality in the foreseeable future, should have been a no-brainer and the first step towards a fundamental re-evaluation of the Puerto Rican economy.  While Puerto Rican’s administrations are by no means blameless, the root of many of the island’s economic troubles lie with US legislation.

The Puerto Rican government’s over-reliance on debt issuance is partially fueled by the fact that its debt is triple tax exempt, i.e. exempt from federal, state, and local income taxes.  This has made the commonwealth’s debt very appealing to wealthy Americans, and has ensured that Puerto Rico has never had much difficulty issuing debt despite underlying financial problems.  The Jones Act of 1920 prevents foreign ships from shipping cargo between two US ports, which prevents major cargo ships from stopping in Puerto Rico to unload goods and load Puerto Rican goods, as they opt for the mainland.  “Puerto Rican consumers ultimately bear the expense of transporting goods again across the Atlantic and Caribbean Sea on US-flagged ships subject to the extremely high operating costs imposed by the Jones Act” (Wiki).  There was also section 936 of the IRS code, which allowed corporations based in Puerto Rico to avoid income taxes.  The island’s economy grew based on corporations attracted by this exemption, and when the exemption expired the companies left, sparking the current nine year recession.

The US is obligated to reconsider its ties to Puerto Rico’s economy.  It should remove antiquated laws like the Jones Act.  It should work with the Puerto Rican government to work on running a tighter budget by improving the efficiency of public companies as well as tax collection rates.  I would even propose that the US backs all Puerto Rican debt, which I see to be a logical responsibility of a parent nation.