There is a lot of hot air coming out of Washington and the press about who saved the financial system over the past few months. The White House claims they saved the system, the press agrees, and others say Ben Bernanke saved the system, even though he caused or helped cause the problems. Others in Congress believe that they helped save the system, who knows how they think that. Out of all of these credit seeking entities it does raise the question of who really saved the system, for now.
As far as the White House is concerned, I cannot think of one legislative item they produced in the past year that directly did anything for the banking system, but they demand credit for the save. The fact of the matter is that TARP, for all of its flaws, did save the system and that was a Bush era solution. Obama and Geithner simply imposed a ‘stress’ test for the banking system, just an FYI on the stress test, we surpassed the ‘rigid demands of that test’ as far as unemployment and other economic hardships. It is safe to assume that the stress tests were a joke and meaningless other than a confidence booster. Outside of that particular item the administration simply spent trillions on pet projects through the stimulus bill, which is clearly a failure, and that is it. Obama had nothing to do with saving the system outside of his vote for TARP, period.
To think Obama or any Congress person did anything else to save the system is pure partisan politics. I am fine with people giving the credit to Obama, because it proves my point that people do not follow what is really going on and have the attention span of a nat. However, this is a double edge sward because nothing has changed within the system itself so are they going to take credit when this thing falls apart? I doubt it, but it will be interesting to watch them weasel their way out of it. It is also clear that the latest proposal to separate prop trading from banks proves that the current administration does not and never did understand what caused the problems to begin with. In short, they are empty on intellectual knowledge and packed full of the people who helped create the problem so they are all simply doing a major CYA right now.
Congress has done nothing for the system, sure we got show trials, but they just threw a bond broker in jail for selling AAA rated securities, talk about misplaced blame! The reality is one person saved the system, in my opinion, Ben Bernanke. Now, just because I am giving him credit for the save it does not mean I like him or his policies. Yes, he cleaned up, or started to, his own mess, but make no mistake about it, he caused or helped create the current mess. Ben denies that he had any responsibility in making the mess, but he did as he endorsed, feverishly, low interest rates for a prolonged period of time during the early 2000’s. He actively endorsed QE by other countries and, now, the US and did not realize that housing prices increasing at 10-20% a year were a bad thing, huh?
Ben did save the system, but he also is responsible for its demise at the same time, so how much credit can you really give him? I do not think Ben should be reappointed as he clearly has no forward looking vision as far as potential trouble in the economy. That is one reason why I find it funny that Ben ‘sees no bubbles’ in the US markets or economy now. Yes, I believe equities are in a bubble, I have always believed that, since there was no real fundamental reason for the markets to go from the March lows to 1,150 on the S&P and 10,600 on the Dow. The markets were due for a bounce as stocks were pricing in a financial system collapse, but not all the way back up to current levels. As it turns out we might be at the precipice of the much anticipated correction now, a weak currency and massive pumping up of the monetary system is not a good thing over the long-term and is why we saw such a rally.
Regardless, Ben believes the market’s reaction is normal which can be interpreted many different ways, the conspiracy minded will say that confirms the Fed is buying S&P futures, but I read it as Bernanke is just oblivious to reality as the market grinded its way higher, with no volume or flows from retail investors, away from the economic reality of the times. Green shoots are everywhere according to Ben, but consumer credit is contracting, housing is being propped up, unemployment is grinding higher, the national debt is increasing a scary rate, Greece, Ireland, and other European countries are on the verge of default, Dubai did default, banks will not lend and hiring is minuscule at best. Sure we saw some GDP growth, government induced, and some areas, technology, look promising, but other than that there is no fundamental good economic data to support the current market levels.
It is clear that the pricing in of all the good news has already happened, Intel released good earnings and it sold off, the same with IBM and a host of other firms. Just because the market goes up does not mean everything is fine or that the market is forward looking, it is not. If the market was a good forward indicator we would not have sharp corrections because the market would always know in advance. If the market was forward looking we would not have seen the Dow hit 14,000 in the fall of 2007 when all the warning signs were clear as a bell, the Fed was dumping hundreds of billions of dollars into the overnight markets. What I am saying is I am happy if you are long and made money, but just because you made money and the market is trading at irrational levels it does not mean it is correct. The market is also not a forward looking instrument, so stop saying it is.
At the end of the day it was only Ben who saved the system pushing rates to zero, putting together those funding programs, TALF and such, but he did this at a price. By moving rates to zero he forced savers out of secure investments into higher risk assets so firms can refinance their garbage and give it to safety seeking investors because they have nowhere to turn for yield. Ben has expanded the balance sheet to new weekly records for the past year and it will continue to grow indefinitely, at this rate. Ben has started QE and it looks like he cannot stop those programs without a huge amount of pain to everyone, so it will continue forever. Ben has risked the entire future of the USA by putting the central bank in a position to permanently devalue the dollar, part of the ultimate goal I might add, and by taking excessive credit risk.
Ben just might have put the country at greater risk than the banks did in the previous 10 years. While I know deflation is in the works for the foreseeable future it is only a matter of time before inflation does hit or we are forced to openly devalue the dollar. All because Ben saved the system for a few bankers who we could have lived without as smaller institutions would have stepped up to the plate. To re-nominate this guy is the single worst idea I have ever heard. To give credit to Obama for saving the system is laughable at best, just because we want to have a beer with the guy does not change the fact that his policies are horrible and he has done nothing in his first year in office. We have to stop being influenced by what we want to believe and look at the facts on the ground. Those facts tell us Washington and the Fed have failed, end of story.
Ben Bernanke may in fact seem like the unassuming soft spoken professor who is well spoken and polite, and he is, but at the same time he is perhaps suffering from the greatest of the deadliest of sins, pride. I am translating pride into arrogance with Ben because it is essentially the same thing and the sin is identical. There is also no question that Ben suffers from the delusion that he s right and everyone else is wrong, which is how we can tell that he suffers from this disease of arrogance wich will be his ultimate downfall.
I am referring to an article I read this weekend from Reuters, which was reprinted on Bloomberg and various other news sources, where Ben announced that it was not the Federal Reserve’s wall of liquidity during the early 2000’s that caused the housing boom, and subsequent bust, but rather lack of regulation. First of all, he is wrong, because without the liquidity easy credit or the showdown securitization mortgage market simply would not have existed, that is obvious. What is not so obvious is the fact that his regulation argument is also an attack on himself. While Congress did encourage the GSE’s and banks to loosen credit standards, so did the Federal Reserve Bank and the Fed had some significant regulatory authority over these mortgages.
Am I the only one that finds it ironic that Ben, Man of the Year, Savior of the Economy, or whatever else we are calling him now, is the same guy saying that his wall of liquidity is not to blame and more regulation’s was the answer, when part of his job was to regulate the banks? Granted, the Fed’s job in regulating the banks is somewhat small, but are we forgetting Greenspan’s famous speech were he encouraged banks to get more inventive when it came to mortgage origination? This does not sound like getting tough with banks, in fact it sounds like it was a green light to do whatever you want to get homeowners into a house.
Essentially, the Fed gave its blessing to do whatever it took to get people to sign the dotted line on the mortgage application. Not only that, the Fed also provided the liquidity to encourage the lax lending standards. Having just one of those two things is bad, but both combined is disastrous, which we found out. However, our Savior still does not realize that it was the Fed at fault for this mess and I think I know why he is saying this now. He simply wants to be left alone. He figures with his reappointment a done deal, his Man of the Year award, and the magical 25% S&P 500 returns in the market people will get off his back as he built up some credibility, especially the audit the Fed people.
I honestly believe he thinks that his sins of the past can be forgiven because of his recent ‘accomplishments’ which were not really accomplishments. If anything Ben was merely picking up after himself, but with our money. To put everything into perspective on how Ben feels here is how the article ended, and what he thinks caused, I guess, the credit crisis:
“Bernanke pointed to adjustable-rate mortgages and overconfidence that house prices would continue to rise as the main culprits behind the catastrophic housing bubble.”
That is that I guess. He was partially right, but it was not just ARM’s that were the problem, not at all, it was a whole slew of mortgages that were problems. There were jumbo’s that trigger higher rates if the LTV slides below a certain value, there were sub-prime, there was the fact that the asset bubble from the Fed was not just in housing, but in commercial real estate and, well, everywhere. The question is why were people betting so heavily on housing prices to rise? Perhaps because the liquidity spigot was going full force for way too long and then when you went to turn it off the effort was meager at best. Regardless, the biggest problem now is with all types of mortgages, not just ARM’s and sub-prime.
The sheer arrogance of this man is just unbelievable though. The one thing about the deadly sins is that they are deadly and catch up to you, pride is always the one that kills the worst to. At first it was nice to see Ben apologize for the Fed’s role in the Great Depression, but how could we go from a guy who knows that his organization caused the Depression to him denying the Fed caused this problem. What happened over the last 4 years to Ben where he could state the obvious before only to deny it know? It makes no sense other than he suffers from the affliction of arrogance or pride. What I do know is what Ben is doing, long-term, will not work, because Ben has a terrible track record, and the Fed’s powers are on the verge of finally being reduced, which is a great thing as the system failed us greatly and it’s time for it to go.
No matter what Ben and Greenspan are to blame for a large portion of what happened. I am not saying that Congress is innocent, you know me better than that, and I am not saying that those who lied or bought houses they couldn’t afford are innocent either. However, legitimate fraud too place, even to reasonably intelligent people, the Fed let things happen that they should not have and Congress, well, Congress is just incompetent, what do you expect.
I have been a vocal critic of the Federal Reserve over the past decade as they have created this current mess and now demand credit for cleaning it up. I liken their current demand for praise to the following: Ben spilled a glass of cherry Kool-Aid on his white carpet then quickly ran over to my house finding my most expensive white cashmere sweater, taking back to his house and cleaning up his carpet. Those of us understanding the staining reaction of Kool-Aid know that his carpet is destroyed and my very expensive sweater is also destroyed, but this guy wants praise for fixing the problem even though the issues are still right there in front of us.
Ben deserves absolutely no credit for fixing anything and deserves to be fired along with having history branding him, and Greenspan, branding them as the two who destroyed the financial system. Of course there are a whole slew of Congresspersons and economists who deserve to go down with them, they are too numerous to name, but I am sure you can guess the top 10 or 20 off the top of your head as they are still wildly popular and in office today. None of this changes the fact that I know exactly what Ben is trying to do and, this will be a shocker to most of you, I do support what he needs to do, but I have so little faith in the man that I know he will fail. My knowing he will fail is why I criticize him so.
We can all agree that the efforts of the government over the previous 12 months have benefits one group of Americans, bankers. Thinking that any of the actions have benefited anyone else is ridiculous to say the least. Your credit card rates have increased, your banking fees went up, people lost their jobs, credit is contracting, income for workers is down, taxes are heading up and banks are making record profits and bonuses that is a rather lopsided list. Ben is not oblivious to this fact, but what he was and is trying to do is create inflation. However, the Fed can create money at the stroke of a few keys on the computer keyboard, but what the government cannot do, ever, is create credit.
Without credit or credit demand, which there is very little of, there cannot be inflation. Another term for this is money velocity and, again, we can all agree that there is no money velocity happening as bank balance sheets are swelling at the Fed right now. This is why I firm believed that the government will open term lending facilities directly to the public or small business in the near future, which will be a huge mistake, in my opinion, because we will go from massive deflation to massive inflation overnight, but that is for another article and let’s focus on what Ben is trying to do.
We know that Ben knows what he and Congress have done is wildly unfair to the public and his inflation creation is his gift to you. What he is trying to do, through devaluing our currency, is raise your pay by weakening the currency through the printing press. By doing this your pay will increase, but your debts will remain the same and as long as he leaves interest rates at 0-.25% your debt servicing costs will also not spiral out of control. This was also taken care of for unsecured debt with the credit card reform act passed earlier this year, is this all making sense yet?
Now, this is not all for you, don’t be silly, this is also for Uncle Sam as well. We have $12T in total US debt, $7T in US treasuries with $2.8T maturing next year. We will also have to spend between $1-1.6T in deficit spending next year as well which means we, the US, will have to raise some $3.8-$4.4T in treasury sales next year, that has never been done before. The US has also restructured most of our debt to mature in <10 years on a rolling basis, I have no idea why other than creditors demand shorter maturities, which is scary. Regardless, the US cannot raise interest rates to a meaningful level ever again. Let me repeat that, the US cannot ever raise interest rates to a meaningful level ever again.
I can hear you saying that I am nuts or do not know what I am talking about. Maybe, but guess again. At the current rate of spending, not including health care, within 10 years at the current interest rate levels the debt servicing costs will be so great that we will not be able to spend money on anything else. It is not me saying this, it is mathematics based on demographics, projected unemployment rate and a bunch of other major issues. What I am getting to is the only way out for the US is to inflate our money supply, exactly what Ben is trying to do now. Who cares that we are the reserve currency, it doesn’t matter as everyone has accepted that this is our only solution or accept a US default on our debt. That is the truth and there is no strong dollar policy, that exists in media sound bites to make people like me happy, that is it.
Back to Ben and you. If Ben is successful, which is doubtful, then he will inflate our way out of this mess. You will earn more money and your debt will remain flat which means you will be able to pay it off in no time at all. However, new debt will be hard to obtain and terms will be very unfriendly as the administration has made rate increases for lenders difficult. Here is the real catch, while the Fed will not be able to raise interest rates, the market will demand much higher rates on government debt so kiss that 30 year bull market in treasuries goodbye. This will translate into higher rates on other debt across the spectrum. Basically, credit will continue to contract at a continued record pace for consumers and, in my opinion, high yield debt defaults will be through the roof.
With all of that said, you want Ben to succeed, as strange as that sounds. You want him to implement this plan and then pull it in on a timely basis because that means banks will be made whole and the consumer, yes, something for the consumer, will also be made whole. Not only that, but it will allow the government to continue down its reckless path of spending and funding its idiotic projects without directly taxing you to death. Notice I said directly taxing you to death? Because you have to remember if Ben pulls this off your energy bill, on top of and cap and trade BS, will go through the roof, your food bill will go through the roof and any other commodity based purchases will be sky high which is a hidden tax. All of those purchases have a hidden tax that you are unaware of, they are always buried in the small print, but nevertheless they are there and fund the government especially on the state and local levels. In this case, the higher the prices, the higher the tax revenue which will fund the local, state and federal governments without taxing you directly. Don’t blame me, you all voted for these people.
Never fear though, this plan by Ben is failing and will fail. As I said earlier, the Fed can print all the money it wants, but it cannot create credit no matter what it does. That is our issue right now, not only do banks not want to extend credit, but no one wants credit. Without extending credit we do not get the important inflationary impact of money velocity which makes Ben’s plan useless. Never fear though, President Obama and Tiny Tim is here to mess everything up as I bet they will announce a public lending facility very soon to “initiate job creation” with leftover TARP funds. This will not only create some perverted unforeseen form of inflation that no one has ever seen before, but it will skew all sorts of numbers as well. I cannot wait to see how the employment report looks after these new programs are announced!
Even if I am wrong about Obama and Tim the Fed will fail at what it is trying to do, I am sure f it. The organization has failed at everything it has tried to do previously and no one should have faith that it can succeed in doing what it is trying to do. Ben tried to talk the Japanese into monetizing their debt in 2003, that made sense. Ben applauded Greenspan’s cheap money policy in 2003 and said he should keep it longer, what? He did not see the asset bubble building when you could get a $500K no document, nothing down mortgage, are you kidding me? I am sorry, but if you did not see this coming with that type of garbage out there you are an idiot, but this guy is running the Fed and says no one can see bubbles coming. The irony is the market is the next big bubble to pop because of his cheap money policy, for the love of God, it trades with the USD/EURO pair, that is the sign of a bubble!
If we look at the Fed’s balance sheet it is impossible for them to drain the liquidity in an orderly fashion. Banks are basically refusing to reverse repo out the liquidity, why would they want to? I wouldn’t when I am making riskless money by borrowing at .13% and loaning it to the government at 1% for a year. Not to mention that the banking system itself, because they will have to bring their SIV’s on balance sheets, are very insolvent in reality so the Fed cannot bring in the liquidity for only God knows how long. Frankly, with the current US debt load and projected debt load, combined with the Fed’s balance sheet we are not getting the inflationary impact Ben wants. We are getting the worst part of it, a falling dollar (Just a note here, the dollar was much worse under Bush before the crisis than under Obama, so cut the guy some slack there) without wage inflation. That means you pay more for gas and food while earning less, not a good thing.
In my opinion, Ben has failed as Fed Chairman and should go back to teaching and that is even questionable. There is no way his plan will work because there is simply no demand for credit out there. Americans are in the middle of a secular shift to frugality and not willing to expand their balance sheets. This is especially true with unemployment ballooning up to where it is and sure to get worse, unless you believe the last employment report (if you did believe the report than please contact me for some excellent investment opportunities in Pakistan and Afghanistan). I hope his plan does work because the consumer could use the wage inflation to pay down their debt, but given the last reports about consumer credit, fat chance. Companies desperately need credit, but they are closing shop so fast that banks do not want the risk. Basically, if you are IBM, you got credit, but if you are Ma and Pa Kettle, sorry, too risky.
The worst part of it all is that while Ben is trying to devalue the dollar to create inflation, which is dumb without any money velocity, he will lose control of the process. When FDR did this in the past, which is what Obama likens himself to, he had one very important thing going in his favor, the gold standard which allowed him to set the devaluation amount. Obama and Ben do not have that luxury. This time there are 100,000 trades around the world that will pile onto a short sale of the USD driving the value down to nothing. This is the primary issue that has me concerned, they ultimately have zero control over the devaluation process. What can they do to stop the devaluation process, print more money? That makes the problem worse, not better. Luckily, for now, we have deflation in the US with an international problem of devaluation so we simply exported our problem, thanks China.
Deflation is here to stay, get used to it. High unemployment is here to stay, get used to it. The federal government will continually interfere and make things worse, get used to it. We will see some funky things happen from some very self important, politically motivated individuals that will create problems we have never seen before, so be prepared. The Fed will fail in its attempt to fix what is created, but you knew that. Wait for gold to come down in price a little more and buy a ton of it because while we will not get inflation like Ben wants, we will get massive dollar devaluation that will eventually come home to roost and it will not be pretty when it comes home.
Uncle Ben is fighting like no tomorrow to kill the Fed bill in the court of public opinion using the same tactics that the banks used last fall. Basically he is saying if you audit us you risk the entire financial health of the US economy. This is the equivalent of putting a gun to your own head and saying; “if you don’t let me go I fill pull the trigger!” You know what Ben, go for it because what you have done is far worse than the financial system imploding on itself all at once. Instead you opted to destroy our currency system so pull the trigger, you will not be missed.
It is beyond me how an audit 180 days AFTER an FOMC meeting would jeopardize the independence of the Fed in any way. I fail to see how the US taxpayer, the money the Fed is playing with, would be hurt by knowing what Ben is taking in as collateral at the discount window. I fail to see how asking for the Treasury Secretaries signature before issuing $500B in currency swaps would be a “bad thing.” However, Uncle Ben says otherwise and the end of his world is at hand, so I hope.
Even though the likes of Mishkin, Steve Liesman and a host of other idiotic economic commentator’s say the Fed will lose its independence and it will be politicized, I am sorry, but $1T in QE in MBS, and how much in treasury QE again, later and you are already politicized. In fact the mere appointment by the President of the United States makes pretty much makes the Chairmanship of the Fed a political position, kind of. The bottom line is that the Fed is a political machine, it has lobbyists for crying out loud!
What Uncle Ben does not want you to know is what he and his cronies have been doing for the past year and you know what? I am not sure even I want to know. What I do know is that since the secret creation of the Fed in 1913, read The Creatures of Jekyll Island, and the late night passage of the Federal Reserve Act with some 3 affirmative votes on it the US has had more crisis than at any point in our history and our dollar has lost 96% of its buying power. Those are facts the Fed denies, but they are true. What the Fed likes to point out are banking panics prior to its creation, but if we made the Treasury the lender of last resort problem solved.
However, did we ever have a Great Depression before the Fed was created? Did we ever have these massive asset booms so close together, see junk bonds in the 1980’s, internet stocks 1990’s, mortgage crisis 2000’s, before the Fed? Did we ever have stagflation, see the 1970’s, before the Fed? Did we have our currency basically become worthless, except in times of war, see Revolutionary War Continental Notes, the Civil War Greenbacks, before the Fed? The answer to all those questions are NO.
I am not saying the Fed does not have a purpose, it is perfect for printing pieces of paper and wasting trillions of dollars per year, but I thought that was Congress’s job. The Federal Reserve system is old, antiquated and needs to be replaced now, not later. It operates in complete secrecy and is accountable to no one, think about that for a minute. It is more powerful and secretive than the CIA, but the CIA has oversight committees, but the Fed really does not. Yes, the Fed has superficial GAO audits now, but it is an operational audit, yes your operations work, that is the extent of the audit. Wow, I wish the IRS would be that lenient on me if I was audited, yeah, we see you made money and filed the proper paperwork, thanks! However, in real life that is not how things work and the Fed needs to be accountable for its actions.
After all, I have yet to hear Greenspan or Bernanke officially take responsibility for blowing up the economy yet. In fact, I still hear those wonderful words, “the sub-prime crisis is contained” and everything is fine. Either Bernanke is a complete moron or he just relies on old economic models that clearly do not work, either way the Fed deserves oversight. Considering this administration has taken it upon itself to declare itself the “transparent administration” and has also taken it upon itself to make most of the decisions for the American people , or risk imprisonment, why should the Fed not be held to the same standards as the rest of us?
Clearly they are no smarter than the rest of us as they missed the greatest asset bubble in the history of man hit them head on. Not only that, but their response was to expand the same policy that created that enormous asset bubble for “an extended period of time” or forever. In other words, they missed one huge bubble only to create an even larger bubble via the USD carry trade or dollar devaluation, take you pick, and they deserve no oversight? To make matters worse, if you read the Lehman bankruptcy documents you begin to see an ugly picture of the Fed, they were taking stocks as collateral at the discount window, stocks! That is against their charter and it is also no wonder why the market goes straight up if the Fed is taking stocks as collateral at the discount window.
This leads to a bigger question, what other junk is the Fed taking at the window? CDO’s, derivatives, options, junk bonds or what? We don’t know. Considering we, the US citizen, is backstopping their reckless behavior so JP Morgan and Goldman can receive billions in bonuses, we deserve to know what is going on. After all, the American people are the ones suffering, not Wall Street or Uncle Ben who are all gainfully employed and living off of our generosity via our annual tax bill. We are the ones who end up bearing the responsibility for all the executive decisions made in secret, or in public by our wonderful elected officials, so we deserve to know what is going on. You, Uncle Ben, have done your damage to us, so while we may not like what we see and while you may end up embarrassed at what we find, so what. You should have thought about that before you secretly bailed out all those insolvent banks and began destroying our dollar for fun.
The markets and economists are thrilled with the reappointment of Ben, but is this just another case of irrational exuberance? I think so. His policies are too similar to Greenspan and he made some very horrible mistakes which will eventually cost us. However, I will concede he did do some things right and because of this I think you can make a case of or against Ben being our Fed Chariman. However, the one thing that bothered me about Obama’s speech today was his consistent reference to an independent Fed, more on that later.
What Ben did wrong
Starting in 2003 Ben had been a strong supporter of cheap money and endorsed Greenspan’s policies, which earned Ben the nickname Helicopter Ben. There is no way anyone, who takes a rational look at the policies of the Federal Reserve in the early 2000’s, can say no one could have foreseen the problems we have today. Time and again lose money policy has created bubbles, this is no surprise, and this last bubble was the bubble of all bubbles which the Fed is completely responsible for.
The Fed has also become more of a market appeaser than the organization that is supposed to manage our money supply. What I mean is that the Fed adjusts interest rates based on what the market wants, versus what it should actually do. The economy and the markets are totally different and have to be managed differently. Going back to the 1990’s the Fed has been increasing liquidity and doing everything it could to increase credit to everyone, whether they deserved it or not. The Fed cannot create credit, but it can make money so cheap that banks can afford credit losses and that is exactly what happened until cheap credit made its way to mortgages.
A perfect example of how the Fed is more accommodating to the markets than the real economy is when the Fed started raising interest rates in the 2003 area companies like Ford came out crying. The Ford CEO said interest rates need to be lower so they can sell more cars at zero interest rates. What happened, rates leveled out for a time when they should have been much higher. In fact, one can argue that the Fed raises and lowers rates at the wrong time frequently. There are countless other examples, but clearly the Fed is more interested in keeping securitized loans going instead of the old fashioned types of loans that actually stay on the books of banks.
In 2007 Ben said that sub-prime is contained and that there is no problem with the mortgage market, Cramer said the same thing in July of 2007, just practicing full disclosure. However, in August of 2007 the Fed knew there was a problem and started putting hundreds of billions into the overnight market. Either he lied to us or he just felt as though adding liquidity at that level was just a good thing. Regardless, August of 07 Ben should have been adding special liquidity features then, but he waited. In fact, he continued to lie to the American public about the real problems we faced. They knew then the problems that we had, I knew then, but Ben either ignored them or thought he knew better. Perhaps it was a political move to show how good the Federal Reserve is for the economy when they fixed the very problem they caused.
Now we have a $2 trillion dollar Fed balance sheet, expected to grow to $4 trillion, and the Fed is now playing all sorts of games. For example, they moved many of the troubled securities from private banks to, essentially, the government’s balance sheet. We also see some more strange events, like a nice ‘other contract’ section to their balance sheet which, presumably, is some sort of derivative product they have taken on. The question is, if these are derivatives what happens to our country if they blow up?
Finally, we have the monetization of debt that the Fed had started with its quantitative easing program. Monetization of debt is the worst thing a country can do and is a signal that they do not believe others will buy their debt so they buy it themselves. This will eventually create inflation, but in the meantime it destroys the country’s currency, look at the DXY for an example of this. The Fed has also started playing games here as well with having primary dealers sell them new issue treasuries from the last few auctions we had. This artificially boosts demand and keeps the market happy, but, again, is terrible for the currency and a sign that other countries are considering cutting us off.
A case for Ben
He came in and created several innovative programs to fix the mess that they caused. There is no doubt that TALF and other programs have helped improve the economy. I cannot take that away from Ben, but would we have even needed to be saved if the Fed had acted responsibly over the last 20 years? I think you know the answer to that question. However, the Fed did step up with these innovative programs and zero interest rates, but this is likely to create more problems in the future.
Frankly, other than the innovative programs he started there really is no case for him to have a job. There is one exception to that statement, with Ben we know what we are getting and he might be able to know when to stop the programs he started. If we got a Larry Summers, thank God we didn’t, we would have no idea what his policies would be. The unknown is a major problem which is why, in my opinion, Obama is keeping Ben. Since Obama is already moving drastically away from traditional policies if he threw another unknown into the mix he could have a major issue if things blew up. Ben was a safe option for Obama. The reappointment comes on the heels that the Obama administration still has no clue how bad things were, or are, in the economy and that they cannot do math correctly with the projected deficit error that they made earlier in the year.
What I think
I think Ben should have been fired and the Fed needs to be rolled into the treasury department, it is really that simple. Keep all of the governors the Fed has, but if they are a government organization then they would actually be held accountable for their actions. That, of course, would never happen, but I like to think that it could. The Fed has outlived its usefulness and has caused all of the booms and busts we have ever had, why do you think we had the Great Depression in the 1930’s and not in 1907?
Frankly, we will never really know what the Federal Reserve is up to because they do not show anyone their books. The ‘other contract’ column for example, what is it and what risk does the Fed hold on its balance sheet? We don’t know because they do not and will not open their books. When asked who received TARP funds the Fed refused to divulge who got what because it would ‘jeopardize the firs reputation’ or some nonsense like that, that is about to change as the Fed lost the FOIA lawsuit Bloomberg filed.
The point is we know very little about this very privately owned organization that controls our money. Rolling up the Fed under the Treasury Department makes perfect sense because we will know everything that is being done and banks will have the lender of last resort. This is the 21st century and we are still under the 20th century monetary policies which is absurd.
As a nation we can no longer continue creating credit bubbles and have a monetary policy that has caused the dollar to lose 95% of its value since 1971. I am not saying a gold standard or anything like that, but how about a monetary policy that does not cost us any interest to print any money. The problems with the Fed will continue and, perhaps, get worse if Obama gets his way and grants this private organization more control over the financial system. Why would you give a failed organization more power? I guess this is what we get when we elect lawyers to represent us.
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