On December 16, the Bernanke Fed took the most unusual step of lowering the overnight inter-bank lending rate (the federal funds rate) to an unprecedented zero percent with an upside limit of 0.25 percent. The Fed further announced that it will buy “large quantities” of mortgage-backed securities, and is considering doing the same thing with longer-term Treasury bonds. This means the Fed is ready to debase the U.S. dollar to artificially low levels in order to re-inflate the U.S. economy. The Fed wants to trigger monetary inflation and change deflation expectations so they can float excess debts away in a sea of newly created money. Normal functioning of private credit and capital markets is therefore suspended, and so the Fed will micro-manage failing markets for the foreseeable future, or at least as long as U.S. deflationary pressures persist.
The Fed is also taking big chunks of ownership in large private U.S. banks in order to recapitalize them and to let them deleverage themselves in an ‘orderly’ way. Today the White House leaked plans to similarly allow U.S. car manufacturers to enjoy an ‘orderly’ bankruptcy.
The Fed is also taking big chunks of ownership in large private U.S. banks in order to recapitalize them and to let them deleverage themselves in an ‘orderly’ way. Today the White House leaked plans to similarly allow U.S. car manufacturers to enjoy an ‘orderly’ bankruptcy.
Why is our government taking the tack of apparent socialist extremism, and what will be the financial and economic intended and unintended consequences?
First of all, let’s keep in mind that the Fed is the only central bank in the world that is both public- and private-owned. Bankers sitting on the Fed board can make decisions to lend new money to themselves at whatever rate they choose. The entire American financial and fiscal system is run by bankers, either at the Fed or at the Treasury. Indeed, beginning on January 20 (2009), the Obama administration’s Treasury Secretary will be the current president of the New York Fed, Mr. Timothy Geithner, who will be replacing Secretary Henry Paulson, himself a former CEO of the Wall Street investment bank Goldman Sachs. Although the U.S. President initiates and Congress approves the nominations of the seven members (currently only five in exercise) of the Federal Reserve Board of Governors (for a 14-year term), the de facto managing of the Fed is left to bankers. This is done through the Federal Open Market Committee (FOMC) which implements monetary policy through open market operations and other discounting policies and discount loans. It is comprised of the seven members of the Board of Governors and five presidents of the twelve Federal Reserve District Banks. The Chairman of the Fed Board is also the Chairman of the FOMC. The President of the New York Fed is always on the FOMC and acts as its Vice Chairman. The remaining 4 fed member slots are shared and rotated among the remaining 11 District Banks. In fact, the presidents of all twelve Federal Reserve District Banks are present at the FOMC meetings, but only five are enabled to vote at any given time. But, since members of the Fed board often originate from the regional Fed banks or from private banks, bankers are often in the majority in deciding American monetary policy.
Secondly, by taking over private financial markets, the Fed is, in effect, covering its own mistakes (and those of the SEC and of the U.S. Treasury) for having allowed the building up of a shaky pyramid of asset-backed securities (ABS), not the least being the toxic mortgage-backed securities, and the sweaty gambler-like credit default swaps (CDS), amounting to the big giant knee in our collective groin that is causing our continued economic crumpling to the ground.
It is my feeling that the Fed, by creating a bond bubble, is only (surprise!) postponing the day of reckoning and is buying time. When the bond bubble bursts (and believe me, it will burst as all bubbles must), the U.S. economy will be pushed much farther downhill. Many capitalized pension funds will fail, for example, buying many retirees a one-way ticket toward sudden Madoffian-style poverty. Inevitable spikes in interest rates will hurt investments and damage the economy even more.
Meanwhile, a bout of competing currency devaluations has been launched, since other governments and other central banks will have to try to debase their own currencies if they want to avoid importing the worst of the U.S. economic downturn. This will be reminiscent of what happened during the 1930s economic depression. In the mildest of terms, this is not a pretty perspective for the future of fiat currencies.
It seems that the Fed has an uncanny talent for creating financial and economic bubbles. In the late 1990s, after the Asian financial crisis and after the near failure of the hedge fund Long-Term Capital Management (LTCM), in September 1998, the Greenspan Fed flooded the U.S. economy with liquidity and created the 2000 tech bubble. The same Greenspan Fed aggressively lowered the Federal Funds rate from 6.5 percent to 1 percent in 2004, thus paving the way to the worst housing bubble in American history. Now, the Bernanke Fed is at it again, and, by lowering the federal funds rate to close to zero and by announcing that it stands ready to monetize U.S. Treasury debt, it is actively blowing into what has the appearance of one of the worst bond bubbles ever.
The Fed has bestowed so much money on banks in exchange for their bad debts while the banks themselves remain unwilling to lend, that bank excess reserves at the Fed have exploded to more than half a trillion (November 2008), which is ten times what is required. Clearly the economy is in a liquidity trap. There is a lot of money in the system, but it is not circulating. When the Fed creates more liquidity, it is like pushing on a string. By lowering short-term interest rates to close to zero, therefore, the Fed is helping itself before helping others, since it will be paying less interest on Banks’ excess reserves, most of which came from the Fed anyhow.
We the electorate have, through a complete lack of resistance, anger and outrage, permitted the Fed, Congress, the Treasury, and the Executive Branch to wield a massive, blundering hammer on the framework of a delicate and very troubled economy. Our government and Fed, in step with other governments and central banks, are repeating mistakes we should have learned from previous downturns and turning what should have been a bad recession into a full-blown global depression. By allowing the pillaging, we must now prepare ourselves and face the consequences. God have mercy on us for squandering the freedoms so many died to provide and protect, only to watch from beyond the battlefield as we summarily piss away freedoms because we were too busy taking them for granted.
Secondly, by taking over private financial markets, the Fed is, in effect, covering its own mistakes (and those of the SEC and of the U.S. Treasury) for having allowed the building up of a shaky pyramid of asset-backed securities (ABS), not the least being the toxic mortgage-backed securities, and the sweaty gambler-like credit default swaps (CDS), amounting to the big giant knee in our collective groin that is causing our continued economic crumpling to the ground.
It is my feeling that the Fed, by creating a bond bubble, is only (surprise!) postponing the day of reckoning and is buying time. When the bond bubble bursts (and believe me, it will burst as all bubbles must), the U.S. economy will be pushed much farther downhill. Many capitalized pension funds will fail, for example, buying many retirees a one-way ticket toward sudden Madoffian-style poverty. Inevitable spikes in interest rates will hurt investments and damage the economy even more.
Meanwhile, a bout of competing currency devaluations has been launched, since other governments and other central banks will have to try to debase their own currencies if they want to avoid importing the worst of the U.S. economic downturn. This will be reminiscent of what happened during the 1930s economic depression. In the mildest of terms, this is not a pretty perspective for the future of fiat currencies.
It seems that the Fed has an uncanny talent for creating financial and economic bubbles. In the late 1990s, after the Asian financial crisis and after the near failure of the hedge fund Long-Term Capital Management (LTCM), in September 1998, the Greenspan Fed flooded the U.S. economy with liquidity and created the 2000 tech bubble. The same Greenspan Fed aggressively lowered the Federal Funds rate from 6.5 percent to 1 percent in 2004, thus paving the way to the worst housing bubble in American history. Now, the Bernanke Fed is at it again, and, by lowering the federal funds rate to close to zero and by announcing that it stands ready to monetize U.S. Treasury debt, it is actively blowing into what has the appearance of one of the worst bond bubbles ever.
The Fed has bestowed so much money on banks in exchange for their bad debts while the banks themselves remain unwilling to lend, that bank excess reserves at the Fed have exploded to more than half a trillion (November 2008), which is ten times what is required. Clearly the economy is in a liquidity trap. There is a lot of money in the system, but it is not circulating. When the Fed creates more liquidity, it is like pushing on a string. By lowering short-term interest rates to close to zero, therefore, the Fed is helping itself before helping others, since it will be paying less interest on Banks’ excess reserves, most of which came from the Fed anyhow.
We the electorate have, through a complete lack of resistance, anger and outrage, permitted the Fed, Congress, the Treasury, and the Executive Branch to wield a massive, blundering hammer on the framework of a delicate and very troubled economy. Our government and Fed, in step with other governments and central banks, are repeating mistakes we should have learned from previous downturns and turning what should have been a bad recession into a full-blown global depression. By allowing the pillaging, we must now prepare ourselves and face the consequences. God have mercy on us for squandering the freedoms so many died to provide and protect, only to watch from beyond the battlefield as we summarily piss away freedoms because we were too busy taking them for granted.
Posts
No comments:
Post a Comment