hypothetical hearing on QE

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hypothetical hearing on QE

Opening Statement of Rick (Richard Allen) Hohensee to the House
Committee on the Judiciary, Subcommittee on the Constitution

Hypothetical Hearing
Concerning the Unconstitutionality of Quantitative Easing

Chairman Franks,

I suspect it's not often that someone is more grateful than I am to be a
witness at a Congressional hearing. Thank you, Sir, and thank you for
your consistant cordiality in our encounters on the Hill. Although we
disagree on some issues as deeply as imaginable, opinions will vary, and
your constituents should know you always read my signs, and that that is
unusual for persons in your position.

My thanks also to ranking member Nadler, and if a momentary tangent
would please the Chairman I repeat my prior congratulations to Rep.
Nadler for his admirable vote against PL 107-243.

If it please the Chairman, I'd also like to misallocate a moment of the
subcommittee's precious time to thank Rep. Conyers for the various
displays of unmistakeably genuine friendship he has shown me, which have
all been acts of preternatural grace and generosity, and probably also
contributed to my presence before the Subcommittee on the Constitution.

Chairman Franks, Congratulations to you also for the Daniel Webster
quote placed prominently on your House website, "There is nothing so
powerful as the truth." May that hold true here today. I don't presume
that that has anything to do with your habit of reading my signs, but I
believe we are faced today with a very simple and ugly truth, which, as
you know, has been alluded to on my signs I carry on Capitol Hill
frequently, especially over the last two years: quantitative easing as
now practiced in the USA is nothing more than a loophole, and is also
plainly unconstitutional. Also a simple fact, but one which I will not
develop in this statement, being somewhat beneath the Constitutional
question, is that the evil effects of Fed QE show the wisdom of our
Founders in making it illegal at the hardest-to-change level, and as in
so many things recently, we need to refurbish our respect for that

Mr. Chairman, It's seems manifest to me that if an entity wanted to do
something as important as coin money, and that entity was not the
Congress, and given that the Constitution clearly empowers the Congress
to coin money, stating that "The Congress shall have power:... to coin
money;", and empowers no one else to do so, explicitly excluding even
individual "sovereign" States from doing so, then clearly the Congress
should have by explicit Act conveyed that power to whoever it is that is
coining US money lately. I have read several of the major banking Acts,
and have rummaged around quite a bit in Title 12 of the US Code, and I
have no recollection of any law ever authorizing privately owned Federal
Reserve Banks to create money for themselves out of thin air by simply
arbitrarily increasing their bottom lines. A witness from the Fed might
know of such a law. I do not. If such a law exists, it is
unconstitutional anyway, and I would be appealing to the Supreme Court
in addition to this body, but more on that in a moment.

If there was such a law allowing current Fed practice, I suspect it
would be in Title 12, subsection 355, which empowers Federal Reserve
Banks to purchase securities on the open market, in the regulatory
context of a Federal Open Market Committee. It doesn't say anything
about creating the money to do so out of thin air. Oddly, Federal
Reserve Board members incessantly refer to quantitative easing as
"purchasing securities", almost always leaving out the detail of simply
issuing the legal tender to do so arbitrarily. One has to wonder what
the relationship is between this incessant deceptive language by the Fed
and the fact that they do mention the legal part.

This loophole arose when we abandoned metallic backing for our currency.
If a dollar has a certain amout of gold or silver backing it, the
backing rate is only changed by Congress. With fiat money Congress has
relinquished that means of controlling the overall quantity of money in
circulation, and the banks have acted accordingly, enriching themselves
arbitrarily, and recently to a shocking level. Quantitative easing is an
increase in the bottom line, with no cost. The common term for that is
"pure profit". Federal Reserve Banks have therefor profited some $2.3T
since President Obama took office. The entire US oil industry had an
annual profit of some $200B in a very good recent year. This is the
exact mechanism by which numerous great empires throughout history have
died, often horrifically.

Coming off the gold standard does not mean the old rules no longer
apply. Coining money hasn't changed, as it has always had a significant
arbitrary component. It is still the act of creating legal tender. The
ancients did that when they stamped a face value, and a face, typically,
on a lump of metal. The value then became somewhat independant of the
metal. The difference between face value and market metallic value was
called seignorage. Thus money has always had a fiat component. Various
sovereigns have generally played that to their own advantage, or their
own percieved short-term advantage, rather. In 1776 Adam Smith noted
that a "pound sterling" was then worth about a third of a pound of
silver, and even at that, was by far the least debased major coin in
Europe. In the case of Fed QE, it is the sovereign citizens, and their
Congressional representation, who are getting played. The US dollar has
become too cheap to make copper pennies. Pennies are zinc now.

Throughout history, seignorage was arranged to benefit the sovereign. If
coin issued directly from metal possessed by the sovereign, the premium
placed on the metal by an inflated denomination, that is, by seignorage,
was enrichment of the sovereign. Historically, I believe, if you bring
metal to a mint, you are typically given a receipt for the value of the
metal, and are paid that amount in coin, and the sovereign has just in
effect charged you the difference, and it's usually significant.

Thus, and more fundamentally, who creates money has always been the
initial owner of the money, much as the initial creator of everything
else I can think of is the original owner. That's why, it seems to me,
Congress is supposed to coin money, whether it is solid gold or digital
bits of information. The sovereign people of this nation, as embodied in
the Congress, are supposed to own all new money, and all new legal
tender created. So if there actually is a law allowing quantitative
easing benefitting privately owned banks, it is unconstitutional.
Creating money is, well, making money. Profit. It is a service of the
sovereign, not banks, and should profit the sovereign, which in the USA
is supposed to be you and me, not the Fed. And whether the Founders were
thinking about this in these terms or not, the power to print money
clearly implies being the original owner of that money, and thus the
beneficiary of its creation.

Thus, even though QE is unconstitutional, some statutory clarification
is in order. Since it's just closing a loophole, even a lay would-be
legislator like myself might be able to fashion suitable language, such
as the proposal at http://presidentbyamendment.com/issues/money.html ,
which is two short paragraphs that make all newly created US legal
tender the property of the American people, as embodied in the US
Treasury, not private banks.

This creates the huge moral hazard that the Congress would then have the
power to inflate it's way out of debt. The status quo, being
unconstitutional, is so bad, that there is a widespread misconception
that the Congress can print itself out of debt now. They can't. All QE
does now is enrich private banks and, if anything, increase the national
debt. Bernanke says the Fed does not monetize debt. He is correct about
that. They monetize pure profit for privately owned banks and use those
unearned profits to either sell debt to the American people at a further
profit, or distort markets such as the housing market. What the Fed does
do is worse than monetizing debt, and you can tell it's worse because it
is unconstitutional.

Thank you Mr. Chairman, and I always value and enjoy opportunities to
speak with you on any topic, as I do all your colleagues.


Rick Hohensee


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