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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