 It's a pleasure to participate in a morning that had two such interesting talks before me, which especially highlight the connection between big movements in finance and war in a very interesting way, and it made me think of Pollock's Law of War Finance, which is do not lend money to the side that's going to lose. Many thanks to the Mises Institute for inviting me here. I'd like to share some ideas on how to reform the Federal Reserve, and many thanks to Bob Tancula for sponsoring this presentation. Ladies and gentlemen, I'm going to address the Federal Reserve as a problem for the constitutional order of the American Republic. In Joe Saleno's very interesting talk yesterday, he discussed the inflationary mindset, or the inflationist mindset, which can take over governments and central banks, and so that they practice in Henry Haslett's wonderful words, swindling the people by printing a chronically depreciating paper money. Now, under an inflationist mindset, that comes to be accepted as, well, of course, that's what we do, and we do it every year and all the time and forever, swindle the people in this fashion, and this shows us that shifting ideas between theories of money and theories of central banking, that ideas that are in the minds of the central bankers are one of the most important economic factors that we deal with in economics and finance. Now, we might contrast, for example, William McChesney Martin, chairman of the Federal Reserve under Eisenhower and four other presidents, how he characterized inflation, which was as, quote, a thief in the night, unquote. That's one idea of the top central banker of his day. On the other hand, we have the Fed under Chairman Bernanke explicitly committing itself and the country and the country to perpetual inflation, to inflation forever at the rate of 2% a year. Now at 2% a year in a single lifetime, average prices will quintuple. How about 3% in one lifetime? Average prices will increase by 10 times, such as the amazing power of compound interest. How about 4%? Average prices in one lifetime will increase by 23 times. So it sounds like little percentages, but the effects over time are huge. Now is this, I ask us, the kind of money that the American people want? I don't think so. It definitely is the kind of money that inflationist statists want to finance their deficits and expand the power of the state. But the nature of money and the long run stability of its value or lack of such stability is an essential and fundamental political and social question. Now in 1896, William Jennings Bryant became famous by proclaiming, you shall not crucify mankind upon a cross of gold. But from the other point of view, how about, you shall not drown mankind in a flood of paper money? Who gets to decide this? Not the Federal Reserve by itself, oh no. And I must note also, as Jonathan Newman nicely discussed yesterday, that a flood of central bank digital currency would be even worse than the flood of paper money. Now should the Fed have been able unilaterally to commit the country to perpetual inflation and perpetual depreciation of the dollar's purchasing power? At some rate it shows, which it shows 2% a year. At that rate or any other rate? In my view the answer is absolutely not. Regulating the value of the currency is a constitutional function of the Congress. And deciding whether that money should be stable or perpetually depreciating, and if you're going to depreciate it at what rate? These are inherently and profoundly political questions. Now our media is absolutely full of comments about the Fed's 2% inflation target. What can the Fed get inflation up, we used to say, to its 2% to the Fed's 2% target? Now can we get inflation down to the Fed's 2% inflation target? But all these discussions make an assumption which is quite unwarranted, namely that it's the Fed who gets to decide this. This should not be the Fed's target, but the country's target. And when the Fed came up with this idea about how to depreciate the people's money, that idea should have been brought to the elected representatives of the people for approval or rejection. And of course it was not so brought to the Congress. Now how in the world did the Fed imagine that it had the unilateral authority to commit the whole nation to perpetual depreciation of the currency at some rate that it was going to choose? How in the world could they imagine that? Well the only explanation I can think of is pure arrogance. Of course you can understand how being the Fed might make you arrogant. The Federal Reserve creates the dominant fiat currency of the world. It produces the inflation of the supply of that currency and the depreciation of its purchasing power on average. Fed finances the government, monetizes federal deficits that allow the state to expand in power and scope. And it is often thought of as managing the economy, quote unquote, although in fact no one, including the Fed, can successfully manage an economy. But the Fed is the central bank not only for the United States but to the entire dollar using world. And we heard an interesting discussion this morning of how that world became dollar using. In short, the Fed is the most powerful financial institution there has ever been. And certainly the most powerful there is and such a role could easily lead to an excessively high opinion of its own authority. But at the same time there is an offsetting fundamental weakness and it is this. The Fed cannot possibly know what it's really doing. It's always subject to deep uncertainty. The Fed has clearly demonstrated its total inability, by the way, like everyone else's inability to predict the economic and financial future. The Fed is inherently unable to know what the results of its own actions will be or even what its own actions will be, although it tries to commit itself but doesn't work. And its amazing power, as just discussed, combined with this inescapable lack of knowledge of the future, makes it as well as the most powerful, the most dangerous financial institution in the world. And this is not a comment about the lack of talent or the lack of intelligence or the lack of good intentions of its undoubtedly brilliant, extremely well educated and well intentioned officers, however brilliant, however well intentioned, however many hundreds of PhD economists the Fed can hire, however many computers they can buy and they can buy all they want. They cannot know what they're really doing. Well, here we've arrived, haven't we, at something we knew all along the fundamental Austrian principle of the impossibility of the required knowledge that anyone would need, including a central bank, to be a successful central planner. The former governor of the Bank of England, Mervin King, put this in a very blunt way. He wrote, quote, if the future is unknowable, then we simply do not know and it's pointless to pretend otherwise, unquote, and he's so right. Now, a remarkable example of the results of this lack of knowledge is the Fed's own dismal financial performance and its growing technical insolvency. The Federal Reserve in the last 12 and a half months has made net operating losses of $109 billion. That's as of October 11th this week. The Fed's capital has become negative $66 billion under proper and normal accounting. That is to say they've run through their entire capital of $43 billion and another $66 billion on top of that. This shocking number is getting rapidly bigger. The Fed continues to lose money at the rate of $9.5 billion a month. That's $2 billion a week. That's $114 billion a year and these losses look set to continue for a long time to come and thus the Fed's negative capital is likely headed to getting worse and worse. It'll be a negative $100 billion or so by early next year, 2024. And how does the Fed finance this negative capital? Finances it by borrowing. That is to say by actually running up the debt but the debt is off the Treasury's books. It's the Fed's own debt. The Fed's liabilities are greater than its assets. It's technically insolvent as we say. And it fills up the gap by increasing the debt of the consolidated government. Where consolidated government means the Treasury plus the Fed, which have been tightly connected for the entire lifetime of the Fed. Anybody know who under the original Fed Reserve Act who was automatically the chairman of the Fed? No, the Secretary of the Treasury of the United States was automatically the chairman of the Fed from 1913 until they changed it in 1935. Anyway, now how should we think about the scale of these losses? The scale of the losses is doubtless a surprise to the Fed itself. This is apparent from the woefully inadequate forecasts of continued low interest rates for a long time, which they made while amassing literally trillions of dollars of investments in very long term, very low rate assets. For example, this one is a favorite of mine in the Fed's bond portfolio is the following bond. It's the Treasury one and a quarter percenters of 2050. 2050. So for 27 more years, the Fed is going to sit on a bond yielding one and a quarter percent and it'll be losing money on that bond for all those years. Now, the interest rate risk position that the Fed Reserve built by making that most fundamental of financial mistakes, investing long and borrowing short was bound to lose money when interest rates went back to a normal level four or five percent. We talk about these are as high rates. You're high rate. These are not high rates. These are normal, normal interest rates. We're back to normal and and the and these really remarkable losses have have come to the Fed and they are spending. They speculated with taxpayers money without approval of the legislator legislature. They are losing the taxpayers money and spending it and increasing debt without approval of the Congress. It's very fascinating and troublesome constitutional situation. And in general, it demonstrates that the combination of great power and arrogant assertion of unilateral authority is what makes the Fed such a problem. Now, what could we do to reform this? I've actually have proposed nine different things and I don't have time to talk about them all in the four minutes left me. But I do want to talk about four, four of them. First and foremost, in my opinion, the Congress should amend the Federal Reserve Act to make it clear that the Fed does not have unilateral authority to decide on the nature of U.S. money. It might have authority to carry out a decision made by the elected representatives of the people, but not to make the decision. And therefore, that setting any inflation target requires review and approval by Congress. This would make it consistent with the practice of other democratic countries, by the way. Notably New Zealand. New Zealand is the father of the inflation targeting theory. How did the New Zealand inflation target get set in the beginning? It was a deal, an agreement between the parliamentary government and the central bank, not a unilateral central bank act. That's a much better model. What was the original target? Zero to 2%. That's a much better target than 2%, although not the ideal target. So we've already asked how in the world did the Fed imagine it had authority all on its own to commit the nation to perpetual inflation at a rate of its own choosing? This new reform would straighten that out and subject the Fed as it should be to the checks and balances of a constitutional republic. Second, consistent with this reform, Congress should explicitly cancel the 2% inflation target that was unilaterally set by the Fed until such a time as Congress approves some other principle. For a better principle, I recommend price stability. There's something new, not a stable rate of inflation forever, but stable prices. In other words, a long-term inflation target of approximately zero. We can keep working on what should happen. I would suggest a range, because everything moves in economics and inflation moves too, but a range of something like minus 1% to plus 1%, averaging approximately zero over time, or maybe minus one and a half to plus one and a half, averaging approximately zero. Now that would be a modern form of sound money. Third, from 1913 to 2008, the Fed's investment in mortgages was exactly zero. Thank you, zero. Reflecting the sound principle that the central bank should never use its monopoly of printing money to subsidize specific sectors or to advantage specific sectors. Now the Fed's mortgage buying was erratical at the time, an emergency action promised that it would be shortly reversed, and we'd go back to them. There's this wonderful testimony, which I won't take time to quote from Chairman Bernanke at the time, making this commitment to Congress. Well, obviously it didn't happen. It should happen now. The Congress should instruct the Fed that its investment in mortgages has to be on a path to go back to zero, where it should be. And finally, the last I'll mention today, is the Fed should be required to use standard U.S. gap, generally accepted accounting principles. When reporting its capital, a lot of central banks are required by law to use standard accounting. Fascinatingly, the Fed isn't, well, what should be? And then it would have to report its true negative net worth. Well, it's the fact. Why should we let it deceive us about that? Of course, the Fed would also have to disclose the mark to market of its $8 trillion balance sheet. I talked here at Mises, had the honor of doing that in March of 2022, and said the Fed's mark to market loss could be as big as $800 billion. I was low. It's currently over $1 trillion. Well, that needs to be disclosed. It's one more evidence that we need reform. And through all the considerations of the Federal Reserve, as we work on these reforms, everybody, including the Congress and the Fed itself, and maybe with vast luck, even some elements of our communications media, should be realistic about the inherent inability of the Fed to reliably forecast the economic or financial future, or to so-called manage the economy, or to know what the results of its own actions will be, in the memorable and brilliant phrase of Hayek's Nobel Prize lecture, there should be no pretense of knowledge about central banking. And all in all, as it heads for its 110th birthday, the Federal Reserve, in December of this year, the Fed needs to be controlled. The Fed, with all its power and all its danger, needs to be controlled in the context of our constitutional republic.