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Yellen tackling U.S. administration’s attacks on central bank: Don Pittis

Suspicion of central banking has a long history the United States.

When the Federal Reserve was founded in 1913, more than 200 years after its British equivalent the Bank of England, strident voices said it was a bad idea.

After the Second World War, the Fed established its reputation as the world`s most powerful central bank with the globe`s most tradeable currency. Voices of opposition were relegated to the fringe.

Now under U.S. President Donald Trump, the conspiracy theorists are back with a vengeance. Part of Fed chair Janet Yellen`s testimony Tuesday to the Senate banking committee was clearly intended to discourage that anti-central bank sentiment.

Trump’s friends can’t borrow

It’s unclear if her words will be effective.

More than once Yellen was asked about Trump’s recent statement connecting banking regulation with reduced lending.

He said he had personal experience.

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‘Frankly, I have so many people, friends of mine, that have nice businesses and they can’t borrow money,’ said U.S. President Donald Trump. But Yellen says bank lending exceeds the 2008 peak. (Kevin Lamarque/Reuters)

“Frankly, I have so many people, friends of mine, that have nice businesses and they can’t borrow money,” said Trump on Friday.

But yesterday Yellen testified that was not what the evidence showed. In fact, it showed there is no shortage of lending.

“Commercial and industrial lending at this point has grown … and exceeds its 2008 peak,” she testified. “The same thing is true for total loans held by commercial banks.”

In the last 12 months, large commercial loans were up seven per cent and small business loans were up four per cent, she said. 

Forced to hoard?

Of course, Trump is far from the sole voice in his administration finding fault with the central bank and its policy.

Yellen was asked by Senator Elizabeth Warren to reflect on a statement by Trump’s chief economic adviser, Gary Cohn, about lending reserve requirements enforced by the Fed.

“Banks are forced to hoard capital, and they can’t take any risk,” Cohn declared. “We need to get banks back into the lending business.”

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Gary Cohn, Trump’s chief economic adviser, has said the central bank is forcing lenders to hoard money instead of lending it. Yellen refuted that statement. (Andrew Kelly/Reuters)

As Yellen patiently explained, Cohn’s statement reveals a fundamental misunderstanding of the banking system.

“It’s not a requirement that they take that money and stick it in a safe where it can’t  be used,” Yellen responded. “It’s a requirement that they finance the lending that they want to do with a certain amount of capital and not only with debt.”

Rather than being weak and struggling due to the effects of the Dodd-Frank financial reform legislation of 2010, as Cohn recently declared, there is evidence that U.S. banks are strong and are “capturing market share from European banks,” Yellen said.

In fact, evidence shows that banks of all sizes are more profitable than ever.

Books no longer needed

It used to be that the wackiest views on the Fed were limited to a small cluster of book-reading fanatics.

The Federal Reserve Conspiracy by Antony Sutton and The Secrets of the Federal Reserve by the anti-Semitic Eustace Mullins describe a complex financial world manipulated by elites, usually Jews, for their own advantage.

But you no longer have to read a book to encounter such views. Many similar sentiments circulate on the web and on Twitter, often from people who seem to support Trump.

Tirades against “fiat currency” — money not backed by a physical object such as a precious metal — and in favour of “sound money” seem to imply a dream of returning to the gold standard, which Trump addressed with approval during the campaign as something that would be “hard” but “wonderful.”

In nervous times, scare stories about the dangers of a weak and malicious Federal Reserve may be used by some promoting investments in gold or silver.

There is nothing wrong with criticizing the Fed’s practices, but understanding the modern system of money is not easy. 

Superficially, it may appear that our banking system creates money from nothing. 

But as Yellen tried to explain yesterday, and as she has insisted in the past, a strong central bank with strict rules may be the only thing preventing the kinds of monetary crisis that the conspiracy theorists fear.

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Democratic Senator Elizabeth Warren accused the Trump administration Tuesday of risking another financial crisis by relying on ‘alternative facts.’ (Joshua Roberts/Reuters)

If, as Cohn seems to want, banks were permitted to go on handing out money beyond the strict rules of fractional reserve lending, they would make enormous short-term profits as they create and lend money without limit. But that is exactly the behaviour that could make the U.S. dollar crash.

If the Fed continues to hold interest rates down to allow the economy to roar in the short term, that will cause inflation to soar.

Patient discipline is required

Without the patient discipline of someone like Yellen to stand in the way of the people willing to weaken the central bank, the worst fears of those who warn of fiat money will come true.

“On any issue, but especially on something as important as the rules in place to stop another financial crisis, we need to start with the facts, real facts, not those alternative facts the administration has become known for,” said Warren after Yellen had responded to one of her questions.

Such statements from Democrat Warren, an outspoken Trump critic, are unlikely to quell the revival of anti-Fed sentiment circulating in the Trump camp. They would be more useful coming from Republicans.

Follow Don on Twitter @don_pittis

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Article source: http://www.cbc.ca/news/business/federal-reserve-conspiracy-1.3982195?cmp=rss