Economy Watch Q&A with Hon. Joseph J. DioGuardi
Is the current US monetary system Constitutional? Is it corrupt? What can be done to make it more honest or effective?
Constitutional or not, from a technical legal point of view, the question should be, “Is it working?” Let me begin by saying that I do not believe that the Federal Reserve is corrupt, but I do believe that it can be made more effective. I am neither a lawyer nor an expert on our Constitution, but I do have a perspective on this. One of the most important aspects of our democratic system of governance is the separation of powers and the “checks and balances” that go with it. For those who feel strongly that the Federal Reserve should not be an independent part of government, where would they suggest that the important function of monetary policy dealing with interest rates, inflation, and the money supply be placed? As part of the Executive branch?
I think that from a practical and common-sense point of view, the answer is obvious. The public’s perception right now is that government is not working for the public benefit. Our budget policy, which deals with taxing, spending, and borrowing, is a mess due to political gridlock and partisan bickering, primarily motivated by reelection. As an independent “agency,” the Fed is not subject to our electoral system, answering directly to the public through Congressional hearings and its own public pronouncements. What needs to be done is to make the Fed more transparent through independent audits and annually published financial statements so that the public knows the size of its balance sheet, which is approaching $3 trillion dollars as of this writing. Other important aspects of its operations and policy making activities can be disclosed through public press conferences from time to time.
How could Congress be held more accountable? Who would regulate and what would stop a regulatory body from becoming corrupt?
Congressional accountability begins with transparency and better information, when it comes to public policy and government finances. Thomas Jefferson once said that, “Information is the currency of democracy.” So good information—the truth—that is easily accessed by the public is the best way to strengthen our system of representative government today. One of the ways to make Congress more accountable is to reform the budget process so that the highest professional standards of accounting are used to calculate (and publicize) our real annual deficits and the national debt (for which numbers ranging from almost $15 trillion to over $60 trillion have been calculated and made public by the Treasury Department and various public interest groups).
As for who would regulate our federal departments and agencies, the Executive branch already does this through its law enforcement agencies such as the International Revenue Service, the Securities and Exchange Commission, a cadre of Inspectors General, and the Immigration and Naturalization Service, to name just a few. The Legislative branch enhances the regulatory process by exercising Congressional oversight through House and Senate hearings, audits by the Government Accountability Office, and budget forecasts by the Congressional Budget Office.
The only way to effectively stop members of the Executive and Legislative branches from becoming corrupt is by making sure that we have a transparent and fair process of elections and appointments to attract the most honest and competent public servants to begin with. This will require more independent electoral redistricting panels every ten years and a system of campaign financing that levels the playing field between incumbents and challengers. After that, we need an independent ethics committee over each branch of government to investigate individuals and recommend for prosecution those who abuse the public trust for their own benefit. I introduced legislation to implement such a process with a prominent member of the Democratic Party in the House of Representatives in August 1988, but to no avail.
What is the worst that could happen to the US dollar and global markets if the federal government continues to exhaust the ability to borrow?
The US dollar today is a worldwide reserve currency because of the traditional strength of the US economy and the triple-A rating that US Treasury-issued debt obligations enjoy. But, today we face at least three major emerging challenges that could reduce the global primacy of the US dollar in years to come if effective action is not taken now. For one, the US economy has been in the doldrums since the current financial crisis began in September 2008 and has not created the job growth necessary to maintain necessary levels of tax revenues and spending (without borrowing) to sustain its globally sound economic footing over the long run.
Secondly, the political establishment in Washington and in the States has not shown the ability to live within their means. They have continued to spend money they do not have, adding huge amounts to already massive federal and state debt obligations and by not funding entitlements and other retirement obligations that must be paid in the future.
Lastly, countries like China and Saudi Arabia do not share American, democratic values, and yet we find ourselves hostage to their money and oil as we consume more and more than we produce. China estimates annual economic growth of more than 8 percent, while the United States had reduced its estimate for 2011 to under 3 percent. China has an annual trade surplus with the United States of approximately half a trillion dollars, sucking more manufacturing jobs away from us every year. And China is owed well over $1 trillion, which we have borrowed to fund our annual operating deficits and the wars in Afghanistan and Iraq—not to rebuild our infrastructure.
The interest alone on Chinese debt could surpass $100 billion in the not too distant future as interest rates rise over the next ten years to compensate for the higher levels of inflation that many economists are already predicting because of the massive expansion of the money supply by the Fed to keep interest rates artificially low in an attempt to spur growth. This dangerous combination of challenges could easily result in the downfall of the US dollar as the world’s reserve currency if action is not taken now to balance our annual expenditures with our revenues, without further borrowing.
What is the biggest concern facing America today?
We are spending money that we do not have, borrowing from countries, like China, that we do not really trust, and in the process putting the American dream of economic and social opportunity, self development and prosperity, and our national security and individual liberty in jeopardy for the first time since we declared independence from England. Have we survived a civil war, a Great Depression, and two world wars, only to succumb to fiscal profligacy, political inertia, a lack of leadership, and economic incompetence? I think not—but bold action and leadership are needed now before it is too late.
This Article was Originally Published in Economy Watch