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Guest Post: The Empire Strikes Back

By George Washington of Washington’s Blog.

Ron Paul tells Bloomberg that Congressman Watt has just more or less killed the bill to audit the fed:

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”..

Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.

Congress is also suggesting that the Fed be given more powers, making it the chief risk regulator of the entire banking system.

Specifically, as summarized by Huffington Post, a new bill introduced by Democrats in Congress “gives the Federal Reserve the power to determine which firms are actually ‘too big to fail’ and pose systemic risk to the financial system.”

Given the Fed’s history (as discussed below), that is like appointing the head of the Medellin drug cartel as drug tzar.

Admittedly, the Congressional bill allows other agencies a seat at the risk regulator table. But those are likely token seats. If the drug tzar’s office was staffed by the head of the Medellin drug cartel – who had the majority vote – and some law enforcement officers who have a history of either (a) being on the take or (b) looking the other way, what do you think would the result would be?

High-Level Fed Officials Speak Out

High-level officials of the Fed itself have criticized the Fed’s actions. For example, the head of the Federal Reserve bank of San Francisco – during a talk on how runaway bubbles can lead to depressions – admitted:

Fed monetary policy may also have contributed to the U.S. credit boom and the associated house price bubble

Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies’] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.

Kansas City Fed President and veteran Fed official Thomas Hoenig said:

Too big has failed….

The sequence of [the government’s] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…

Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….

Many of the [government’s current policy revolves around the idea of] “too big to fail” …. History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger

The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:

Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***

Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.

But Plosser said that the growth of the Fed’s balance sheet was a key metric.
“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said.***
Plosser is bringing the spotlight right back to the Fed’s balance sheet.
“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.

The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:

“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”

And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:

Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.
In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.
The current situation at the Fed seems eerily similar, he said.

“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.

But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:

Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.

“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.

Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.

Global Agencies Speak Out

BIS – the central banks’ central bank – slammed the Fed and other central banks for blowing bubbles and then “using gimmicks and palliatives” which “will only make things worse”.

The head of the World Bank also says:

Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the ‘real economy’ of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.

Economists Speak Out

Stephen Roach (former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia) is one of the most influential and respected American economists.

Roach told Charlie Rose this week that we have had terrible Federal Reserve policy for the past 12 years under Greenspan and Bernanke, that they concocted hair-brained theories (for example, that we should let the boom and bust cycle occur, but then “clean up the mess” once things fall apart), and that we really need to reform the Fed.

Specifically, here’s the must-read portion of the interview:

STEPHEN ROACH: And what’s missing in the debate that drives me nuts is going back to the very function of central banking that’s at the core of our financial system. Do we have the right model for the Fed to go forward? And, you know, I think we’ve minimized the role that the custodians, the stewards of our financial
system, the Federal Reserve, played in leading to this crisis and in making sure that we will never have this again. I think we’ve had horrible central banking in the United States for the past dozen of years. I mean, we elevate our central bankers, we probably .

CHARLIE ROSE: From Greenspan to Bernanke.

STEPHEN ROACH: Yeah.

CHARLIE ROSE: Both.

STEPHEN ROACH: We call them maestro, and, you know, we make them
sound larger than life. And, you know, and the fact is, they condoned
policies that took us from one bubble to another. They failed to live up
to their regulatory responsibility granted them by law. They concocted new
theories to explain why these things could go on forever, and they harbored
the belief, mistakenly in my view, that monetary policy is too big and
blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the
mess we’re in right now. We need a different approach here. We really do.

Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed’s entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.

Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:

“I am convinced that the misbehavior of some would have been much rarer — and far less damaging to our economy — if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities …

Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.

“Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior,” Kaufman said. “It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective.”

Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were “too big to fail” have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.

“Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities,” he said. “The Fed failed to rein in the problem.”…

“Much of the recent extreme financial behavior is rooted in faulty monetary policies,” he said. “Poor policies encourage excessive risk taking.”

Economist Marc Faber says that central bankers are money printers who create bubbles, and that the system would be much better now if the Fed hadn’t intervened. Specifically, Faber says that – if the Fed hadn’t intervened – the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced.

Economist Jane D’Arista has shown that the Fed has failed miserably at its main task: providing a “counter-cyclical” influence (that is, taking the punch bowl away before the party gets too wild).

The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:

The Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.

The Fed has performed terribly in many other tasks as well.

And the Fed is unlawfully refusing to disclose to Congress or the American people who it’s giving money to and what it is really doing.

Conclusion

Given the above, isn’t it obvious that Congress is attempting to give the Fed more powers at a time when it should be audited, and then ended?

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22 comments

  1. mmckinl

    Yet another excellent column by George Washington.

    Everything he lays out never sees the light of day in the corporate media …

    If it wasn’t clear before, it is certainly clear now, that the privately owned and operated Federal Reserve is run by and for the banks as the Federal Reserve has doled out, bought and backstopped over $14 trillion for the banks. All without Congressional approval.

    Nationalization; It’s so radical that Canada nationalized their Central Bank in 1936. Yet today Canada’s banks are some of the best-run in the world, according to the Bank of International Settlements.

    Where is the discussion on nationalization?, De-leveraging?, Glass Steagall? … We can’t even get an audit to see where tax payer money is going and what tax payers are back stopping …

  2. JohnB

    Excellent post GW. Please keep it up.

    America has jumped the shark. I’m totally over it. Suggestions for where to land?

    1. giggity

      Yup. Might as well relax until TSHTF day.

      I’m ready, I think. Or will we ever be?

      Without a large swath of these billionaire and millionaire skeptics and contrarians uniting and helping to fund some real blowback against the mega corps, Fed, and corrupt pimp politicians, we’re doomed.

      As sad as it is, there’s no way to reform the system without big money, but when you depend on that system’s money and beuracracy, you’re weakened.

      The establishment has worked this all out quite well, everyone dependent upon it.

      1776 isn’t going to happen again with the plutocratic technocracy running things.

      But I’ve still got hope. Definitely all out of Obama’s brand, though.

  3. Lavrenti Beria

    You know, I get sick of Ron Paul. If the man had had an ounce of authenticity he’d have run an independent campaign for president last year but, instead, he chose the easy and, I might add, self-serving route of re-election to a safe House seat as a Republican. Paul plunges ahead imagining himself the indispensable voice of those without a voice. Barely a week passes without Ron calling attention to himself calling attention to causes which, while meritorious enough in and of themselves, so threaten the Regime as to guarantee their suppression, the matter under consideration here a case n point. Paul’s presence in Congress simply serves to keep alive the imbecilic hope that the system is reformable and, of course, to guarantee him a lifestyle few others in this country happen to enjoy. Its time, I say, to imagine a world without Ron Paul and the illusions on which he thrives.

    1. giggity

      Harsh.

      I like Paul a lot. But sometimes the same thing goes through my head, that is he really risking anything by trying to work within the system? He’s in his 70s, not much time left, how about rocking the boat some more?

      Although, it simply amazes me that a bill with a majority of co-sponsors, bipartisan at that, can’t even make it out of committee, yet ridiculous legislation, with a tenth of sponsorship makes it to the floor and eventually the White House, with no one so much as batting an eye.

      If you’re not doing anything wrong, what do you have to hide? That goes for the Fed, and the CIA/NSA/etc.

      1. Lavrenti Beria

        “Although, it simply amazes me that a bill with a majority of co-sponsors, bipartisan at that, can’t even make it out of committee, yet ridiculous legislation, with a tenth of sponsorship makes it to the floor and eventually the White House, with no one so much as batting an eye.”

        I predicted this very result here on this and other blogs just a few week back, giggity. You’re in a dictatorship, that’s why things like this happen. Well intentioned people continue to cling to the illusion that somehow, someway we’re not going to have to make the effort of starting all over here in the United States. Its simply unimaginable to most that the scum holding political office aren’t really there to serve them. People like Ron Paul and Elizabeth Warren reinforce these infantile notions. Bill Moyer had an outstanding interview with Galbraith on Friday night. Galbraith grasps all but the most important elements of the question – that is, the hopelessness of there ever being a parliamentary solution to this dilema – yet when brought to the matter of remedies, all he can conjure up is recourse to the courts!! There will be no solutions apart from mass demonstrations and strikes. Anything less, like Paul’s Fed audit, is simply a pipedream.

    2. Vinny G.

      I agree with you, Lavrenti Beria.

      A few days ago Ron Paul and Michael Moore were on Larry King Live, and it was pathetic to see Paul agree basically with everything that Moore was saying, and still clinging on to his status as a “republican”. From the wars in Iraq and Afghanistan to health care reform, from “corporatism” to the control of this nation by the military-industrial complex, from the crooks on Wall Street to the unsustainability of the overstretched American Empire, he did nothing but echo Michael Moore. He conveyed no new information during the interview.

      At least Moore has more charm, more charisma, more passion, and certainly a better developed sense of humor, and he also comes across as more genuine. It just proves how redundant and unnecessary the Republican Party has become these days.

      I suggest we outlaw the GOP, very much the way the Nazi Party was outlawed in Germany. Both these parties brought similar types of fiascoes on their respective nations, anyhow.

      Vinny G.

  4. gruntled

    Everyone seems to realize what an incompetent, soulless bunch of pimps (see the previous post by Washingrton) we have in Congress. Yet we expect them to be able to audit the Fed and do a better job! Come on, guys! The Fed sucks and may have sucked for the last umpteen years, but putting the jokers in Congress in a position of directly influencing monetary policy would be suicidal. Don’t you really see the possible irony here?

  5. funkright

    I am reading ‘Web of Debt’ right now, that books literally scares the sh*t out of me.. We need to take the ownership of our economies and money supply back from the various Central Banks (I am not from the USA).. Usury of the masses to benefit the few is not part of the world I want to pass on to my children..

    1. Vinny G.

      Don’t worry, the dollar is well on its way to a disorderly collapse, and this nation is already finished both economically, politically, and socially. All the rest of the world has to do is just sit back and watch in amazement how this nation implodes into the banana republic that it so rightfully deserves to be.

      Vinny G.

  6. Francois T

    Who the hell is Mel Watt?
    How much has he been promised to be the Fed’s bitch? A plush job for the wife? Is this all it takes to buy the conscience of an American public servant nowadays? Like Joe Lieberman and Evan Byah for the health insurance industry?

    Is there any hope at all to see someone, anyone in the media sit down with him and grill the heck out of him, a la BBC?

    In a word, is this country irremediably doomed to political turpitude, social polarization of its middle class (THE gift that keeps giving and giving to the elites) and descent into banana republic?

    John B asked: “Suggestions for where to land?”

    Canada is not a bad place to be, if you’re looking for steady-Eddy locale. If you crave action, Brazil or China should give you that.

    1. Vinny G.

      Francois,

      I don’t know about Canada, my friend. Weather and lifestyle are worth something too. I suggest Cyprus.

      Vinny G.

  7. RueTheDay

    The criticisms of the Fed launched by Roach, Schwartz, and Kaufman are all legitimate, thoughtful, and deserving of serious consideration.

    The “end the Fed” nonsense promulgated by Ron Paul and other radical laissez-faire adherents is uninformed and downright assinine.

  8. anon

    Too big to fail is a made in America excuse.

    The largest Canadian bank is proportionately 3 times the size of Citi and B of A.

    Enough said.

    The problem lies elsewhere.

    1. chindit13

      It’s not quite so simple as that. Yes, proper regulation is as critical as size, but with regard to relative size of Canadian banks vs. US banks, one must consider the OBS derivative exposure, the size of which for the likes of BAC and JPM dwarfs the World Economy. In addition, the old argument about notional vs. risk value of derivatives has been obviated to a large extent by the newly rediscovered awareness of counterparty risk.

  9. Seal

    from the Wall Street Journal Spring 2004

    UP AND DOWN WALL STREET – By ALAN ABELSON
    Saint Alan?
    WHAT DO YOU CALL A FIRE DEPARTMENT that concentrates not on putting out the fire, but on cleaning up afterward? Different, if you’re polite. Insane, if you’re us.

    IMO Greenspan has simply been non-compus mentus for years – too old to hold a responsible office of any kind.

  10. ian

    Nothing has been nationalized. Quite the opposite. The Federal Government has been *privatized.*

    It is now a subdivision of Goldman Sachs. Congress and the president, and you and I, now work for the financial sector.

  11. winterwarlock

    fortunately, they made us non-persons long ago.

    if you depend on a utility controlled by others, they will put a gun to your head every time.

  12. EmilianoZ

    According to the prevalent theory of western democracy (Montesquieu) the government is divided into 3 separate independent powers:

    1) The executive (president)
    2) Legislative (congress)
    3) Judiciary (supreme court)

    In truth there is a 4th separate branch that is not acknowledged. The Fed acts in effect as an independent financial power.

    Now, there is in theory nothing wrong in having a 4th separate independent power as long as this power is made to serve the people. The problem is that the Fed was created by the bankers for the bankers. They will tell you their interest is the same as the nation’s interest, which of course is a total fallacy.

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