patrick.net

What do I think of the Fed? One of my faaavorite subjects.
Here's what I think:

So… Mr. Bernanke, what would you say ya do here?

So… Mr. Bernanke, what would you say ya do here?

Making TPS (Treasury Printing Strategy) reports?

To those who say “useless” or “harmful” or worse, I have one question for you:

What, specifically, is your alternative?

The U.S. Treasury already handles many of the truly necessary functions of a central bank, such as creating and regulating our currency. I don't see why its scope cannot be expanded to other regulatory duties that have long been ignored and/or neglected by the current Fed. For example: setting and enforcing responsible lending standards (gee, what are those?), reserve requirements for banks/S&Ls (vs. today's "keep lending until you run out of cash" business model).

Short of a return to the inflation-inducing gold-standard imperial-mercantile era of musket-diplomacy trade and overt slavery, how do you recommend we operate an international financial system without independent central banks?

Firstly...

The Fed is technically a collection of for-profit private banks, so is not really operating "independently" nor necessarily in the best interests of average American citizens --rather it primarily operates in the interests of its member banks and major shareholders, and to a somewhat lesser extent, the politicians that appont and confirm Fed officers. If it did typically operate in the best interests of average American citizens, we wouldn't be having this conversation.

Secondly...

Are those really my only two options (gold-standard, imperial-mercantile musket-diplomacy & overt slavery vs. current Fed?), or are there better central bank models for us to follow? I don't have an answer to this one, just posing the question.

The Fed has a lot of flaws, and can stand a good round of improvements. But “unnecessary” or “harmful”? Hardly.

How can you simultaneously: (a) believe in the credit/housing bubble, and (b) NOT consider the Fed to be harmful? "Unnecessary" is debatable, I'll give you that much.

As promised, seeds for spring planting. Click on my name for more info.

The Fed is the worst banking system, except for all other banking systems. Most of the current version's flaws lay with bad political decisions.

Assertion: Let interest rates ‘naturally’ float with the free market
Response: We live in the real world, where many countries don’t follow free market rules. In fact, none do purely. By surrendering control over nominal rates a country just lets other countries exploit them. But maybe we’ll all hold hands, think positive thoughts, and this won’t happen.

The bond markets mostly set long rates right now. Why can't they set short rates too?

Assertion: A gold standard will keep governments from misbehaving.
Response: It didn’t before, why would it now?

I can't argue with this one.

Assertion: Put the Fed back under direct Congressional control.

I would not advocate putting any "central bank" under direct Congressional control for the very same reasons you gave. But the current Fed is far from being truly "independent" or free from bankster corruption and poitical influence. It's rate-setting power is unnecessary at best, harmful at worst, and best left to the bond markets. The few (mostly unused) regulatory/enforcement powers it possesses could be transferred to the Treasury Department, who might occasionally make use of them.

Assertion: Make the Fed a computer program.

Let the bond markets set rates, give the Treasury power to set/enforce banking reserves and minimum lending standards, and no program is needed.

Assertion: FDR and/or the Fed worsened/caused/prolonged the Great Depression.
Response: Dangerous historical revisionism resultant from either ignorance or cynicism.

FDR took power well into the Depression (and mainly because of the Depression), so he can hardly be blamed for it. He did a number of positive things to repair the damage and institute badly needed regulatory reforms (like founding the SEC, limiting buying on margin, founding the FDIC, etc.). The early Fed OTH, may well have contributed to the severity of the 1920s stock market bubble as well as the aftermath.

"The median home in fremont is $610,000 - so she makes $87k?"

Her combined income with her BF is under $87k.

HARM

I don't disagree with most of your points, except the "efficient bond market" theory part of it.

We should agree that "harmful" is a subjective term, and determining if the Fed is harmful or not is kind of pointless. I think that all inefficiencies are "harmful", because they rob people of prosperity. This is why I eschew about 99 out of 100 taxes.

I also consider the bond market very close to an efficient market, by current standards. It is very good at setting long rates. Though, those rates are still heavily manipulated by foreign central banks (towards their own ends) and less often by big hedge funds.

Short rates are even more exposed to such manipulation, and are more critical for the day-to-day operation of the regular banking system and corporate financing of working capital and other short-dated needs.

Imagine the Fed turns into a big computer program that mechanically defers to floating bond market rates. What prevents coordinated attacks from a couple medium foreign central banks (or less likely a deliberate move by the BoJ or ECB) to purposeful invert/uninvert the yield curve, and arbitrage a whole host of possibilities?

China have lots of capital to sterilize? No problem, just change the shape of the US yield curve for a while while forcing your inflation into the US. Now want to spur GDP growth a bit, no problem, just reinvert the curve. After all, you're China and you don't really need to play by "free market rules" inside your own country, you can charge whatever nominal rates you want to, and make Americans eat the inflation and pay for the growth with their jobs and real incomes (even worse than they already do).

The problem really is that your idea is *exactly* what I'd want if the US represented a world government. It is exactly what I don't want in today's real world. In my mind it's like the neo-market-fundamentalism is to the geopolitical neo-cons. Great ideas. Theoretically sound. Probably mostly inevitable over time. But totally impractical right now.

Guns don't kill people, people do.

Knives don't kill people, people do.

Loans don't bankrupt people, people do.

Greenspan started the ball rolling.
Realtors, mortgage brokers, appraisers, etc.

They all do share the blame in one way or another, but the bottom line is that the FB's didn't do their research and made bad financial decisions. If it wasn't for them abusing the loans to overpay for a property, none of this could have ever happened.

Let the markets correct themselves; screw all those FB's!

allah,

It's no good unless society as a whole is willing to let stupidity suffer its own consequences and starve the idiots out of the gene pool.

And I don't see that happening. Humanity will probably die off due to its own stupidity soon enough.

What kind of drugs is this professor doing?

You can buy a decent car today for 1 pound of gold. You can buy a gallon of gas for that car, with a shinny silver 1964 25cent quarter, the same as it cost in 1964. Gold and silver are insurance against inflation, and a deprecating dollar.

Leech: If there were no HUD, I wouldn't be browsing way underpriced FHA defaults.

Exactly how little does one have to make before qualifying for an FHA loan?

What's not to like? No downpayment, longer term loans, higher loan amounts, less stringent lending standards. Who says private industry should corner the subprime market?

USA! USA! USA! Woo hoo!

The bond markets mostly set long rates right now. Why can’t they set short rates too?

The bond market has been setting mortgage rates. What makes you think the bond market won't f*ck this up, too?

The main objective is to inflate asset prices at the maximum rate possible that does not at the same time create a level of inflation that creates pressure on wages.

I would modify that to say: The main objective is to foster economic growth at the maximum rate possible that does not at the same time create a level of inflation that creates pressure on wages.

Economic growth actually benefits the "have nots" by creating jobs (in theory). Equity prices also tend to rise with growth, since businesses are increasing revenues as a result.

The overall goal is not really to increase the rich-poor gap internal to the country. The goal is to increase our economic standing among the nations, which in turn improves overall standard of living in the U.S.

Inflation is the enemy because it erodes buying power without contributing to the standard of living.

I just found the information below on the internet so it must be true:

“To this day, Rothschild descendents make the decision of the price of gold in London as well as what the Federal Reserve fraud will do with all the money it steals from American citizens. These people worship Satan, even setting him a place at their table. They also worship MONEY, always seeking more: Yes, the satanic Rothschild dynasty is all-powerful. They control all our lives through their complete banking domination. They’ve already been successful at turning America into a police state in their New World Order efforts.”

It looks like Greenspan, Bernanke, and the Fed are just a front for a group of “all-powerful Satan worshipers”…

Step one: Hide the keys to the printing press.

Step two: Cut a hole in the printing press...

justme Says:

> I think I have finally figured out what the real objective
> of the Fed is: “The main objective is to inflate asset prices
> at the maximum rate possible that does not at the same
> time create a level of inflation that creates pressure on
> wages.

That is a fairly good summary of what the Fed does.

I like to say that the Fed: “Helps its member banks make as much money as possible while trying to keep as many voters as possible happy so they won’t vote incumbent politicians out of office”…

Just in case low interest rates don’t keep the voters happy enough politicians (from both sides of the aisle) keep giving away more and more.

I wrote a while back that budget Bush has proposed for the next fiscal year is about 1/3 higher than Clinton’s last budget 6 years ago.

In only 3 years Schwarzenegger is already spending 30% more than Davis and according to the Sacramento Bee the guy who “was elected governor on the promise to "cut up the credit cards,"” has doubled California's debt burden since he was elected…

Should there be Fed ? What should it do ? Why should it do that ? These are all theoretical questions. Look at the practical side. It is there. It will be there. So let's evaluate it from did it do its job ?

Here is what Wikipedia says ...

According to the Board of Governors, the main tasks of the Federal Reserve System are:

1. conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
2. supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
3. maintaining the stability of the economy and containing systemic risk that may arise in financial markets
4. providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

The first one is blah blah blah and the last one seems like pure procedural duty. The real test of skill is in 2nd and 3rd.

Does anyone have any illusions about how they "had only good intentions in mind" about those ? No one is perfect, but to my untrained eye, it seems that they completely ignored those responsibilities.

Their solution to the problem has been the "Greenspan put". I argue it is not a solution but a bigger problem.

justme Says:

> Going back to the original topics, what is “Economic
> Growth”, exactly, and if I am Joe Sixpack, should I care?

This sounds something my Dad would say…

He grew up in a home with a Dad that told him about all the bad things the Republicans were doing including paying off politicians…

My Grandfather and his Union buddies fought back by paying off Democrat politicians and voter fraud (voting for non voters, dead people etc.)…

My Dad does his research to vote for the person he “hates the least” in every election but other than that he does not care what happens in “Politics” or the “Economy”…

He gets mad at me when I complain about politicians and tells me to forget about them and just make as much as I can and give the politicians as little as possible…

How about new topic...

Google/Yahoo Advertising Dollar and Subprime bust (soon RE Bust too...)

We still see lots of mortgage advertising on Yahoo and Google...
Given the fast death of subprime lenders perhaps spreading to prime ... advertising dollar must be
tanking as we speak... As I recall Yahoo warned how problems in Detroit
was spilling into deline of advertising revenue in Dec and Jan. The court order to halt no doc loans would also impact advertising dollars.

Comments???

Just me.
I go to the same area for lunch as I did back in the 80s and can say I see fewer people today than back then. Nearly half as much... It used to be a very busy area with long lines... man I even get a seat to eat now days.
Traffic has not been a problem either ... your milage may vary... but I cover nearly 10 miles in near 15 minutes. Its also clear that we have far more vacant commercial buildings today than ever before. I worked near San Thomas and Central and Mt View old Sun HQ ...

Just me too

Anyone worth his salt had to have at least TWO lunch appointments. One to schmooze the investors, and one more to try and line up som p*ssy for the weekend.

I don't remember that. All I remember how absurd the male/female ratio was everywhere you went. That's definitely gotten a bit better.

In only 3 years Schwarzenegger is already spending 30% more than Davis and according to the Sacramento Bee the guy who “was elected governor on the promise to “cut up the credit cards,”” has doubled California’s debt burden since he was elected…

But more importantly, Arnold cut the car tax!

In the end, that's the only thing (well, maybe rolling black outs too) that got Davis kicked out of office.

What, specifically, is your alternative? Short of a return to the inflation-inducing gold-standard imperial-mercantile era of musket-diplomacy trade and overt slavery

hmm, sounds good... South Seas bubble, anyone?

If I had to pick a single argument regarding the FED, it would be in its lack of accountability. Same with the Treasury.

The FED earlier this year invited comments regarding lending practices with the intent of making recommendations sometime after September. How nice they choose to proceed at such leisure.

I think both are taking their responsibilities rather casually, and why not? What is there to prevent them? Their personal, individual legacy?

Here is a pathetic attempt from a buyers agent to drum up business. Read the last comment (by Dave Barnes), it's the only intelligent one there is.

Gold and silver are elemental and can not be created out of nothing or mixing certain ingredients. Gold and silver are the Feds enemy. All booms and busts are caused by the Fed creating money out of nothing. i.e.

This statement is categorically false. There are numerous examples of booms under asset-backed currency regimes. One of which is quoted above by DS. In fact, as a percentage of GDP, asset-backed bubbles were much larger than any in the current modern era.

No, prior to fractional reserve banking (implying a money multiplier function) there were enormous bubbles.

http://en.wikipedia.org/wiki/South_sea_bubble

c.1720, during a period of "pure" gold/asset backed currency trade.

This bubble saw stocks in London grow to exceed not just the total value of precious metals in reserve, but actually exceeded the total economic output of the entire empire for a short time.

My favorite quote, emphasis added:

The price of the stock went up over the course of a single year from one hundred pounds a share to over one thousand pounds per share. Its success caused a country-wide frenzy as citizens of all stripes – from peasants to lords – developed a feverish interest in investing; in South Seas primarily, but in stocks generally. Among the many companies, more or less legitimate, to go public in 1720 is – famously – one that advertised itself as "a company for carrying out an undertaking of great advantage, but nobody to know what it is".

Current failures have much less to do with an evil cabal of bankers, the theoretical flaws of fiat, or the virtuosity of gold than they do with the simple nature of humans to be greedy, fallible creatures.

But more importantly, Arnold cut the car tax!

In the end, that’s the only thing (well, maybe rolling black outs too) that got Davis kicked out of office.

Actually, I can think of one other big reason why former Gov. Davis got his ass handed to him in 2003. Then of course, there were the rolling blackouts, mainly due to the botched utility deregulation scheme.

“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

Actually, Thomas Jefferson didn't make this statement.

And there were bubbles in the New World at the same time (c1720)

http://en.wikipedia.org/wiki/Mississippi_Company

Compagnie des Indes share price

A 7.5 billion market cap on 80 million in revenue is pretty astonishing if it is anywhere near the truth. Such a market cap implies a price/sales ratio of 94 .

Current failures have much less to do with an evil cabal of bankers, the theoretical flaws of fiat, or the virtuosity of gold than they do with the simple nature of humans to be greedy, fallible creatures.

Broadly true, but the enormous magnitude of recent bubbles also had a lot to do with the tendency of so-called "regulators" to encourage and pump asset bubbles vs. their traditional role of taking away the punchbowl ("ensure the safety and soundness of the nation’s banking and financial system" & "containing systemic risk that may arise in financial markets" per SIBA's description above).

We can never regulate away human greed and stupidity, but is it really too much to ask regulators to, well... regulate once in a while?

There are plenty of legitimate reasons to harshly criticize the Fed. I would have them operate more transparently with regard to their goals. Specifically, I would like to see an inflation-target regime which would remove a lot of the "Fedspeak" phenomenon. If metrics were more transparent, and inflation goals were credibly expected to be executed against, then less people would be mystified by the "secrecy" (which is necessary) of the FOMC.

I do get frustrated by Fed-Dollar fiat-Central bank-Monetary discussions because the very legitimate debates folks like HARM initiate are often drowned out by the tinfoil hat, gold Carleton crowd.

Actually, I can think of one other big reason why former Gov. Davis got his ass handed to him in 2003. Then of course, there were the rolling blackouts, mainly due to the botched utility deregulation scheme.

I strongly disagree - at the end of the day, the "giving drivers licenses to illegal immigrants" thing was opposed by only those who were noisy. The average joe six pack doesn't give a crap about that.

But take $200 extra from their pockets per car - that's $1000 extra a year (since the law requires every person to own 1.25 cars, such that a family of 4 will have 5 cars).

I bet if you could remain governor if you managed to pass a bill giving special amnesty to all illegal immigrants in California, at the same time passing a bill that does a reverse car tax where you pay everyone for owning a car.

Like they say.... money talks.

HARM

I can't disagree with any of that. I have long thought the Fed should make more use of their dusty "reserve requirement" lever. For example, during the 90s stock bubble many people were scratching their heads at why the Fed didn't use their power to reign in margin requirements. The Fed has enormous powers over member Banks far and beyond the overnight lending rate.

Increasing reserve requirements just a tiny amount effectively deflates the money supply very efficiently and credibly (because it decreases the multiplier). Since velocity is only increasing day-by-day, it hardly seems a reach that we unmultiply the money supply a bit. In a theoretically perfect world we could have infinite velocity with zero transactional friction and 100% reserve requirements with no money multiplier at all. We'll never get their for obvious reasons, but that should be the direction we head.

@eburbed,

Actually, for most of the people I saw daily and worked with (not a statistically representative sample, I know), the car tax was a minor issue. The license for illegals issue was by far the biggest anger-inducing/hot button issue for them, followed by the car tax, and then the deregulation debacle.

Allah…the quote still has validity.

Yes. It does have validity, but the quote still wasn't made by Jefferson.

From an article on bullnotbull.com:

Thought Exercise: Now Pretend You're the Bank
Take a look at this quote, which can be found all over the internet:

This quote is attributed to Thomas Jefferson, though it is most certainly apocryphal. However I use it because it is instructive in many ways. First, don't believe anything just because you read it, even if you've read it many times. You can find this quote on a hundred web pages attributed to Jefferson. Second, even though Jefferson didn't say it, there is still wisdom in whoever did: "First by inflation, and then by deflation..."

@Randy H,

I think we are mostly in agreement. IMO, the biggest failing of the Fed in recent years (aside from dropping rates to 1% and holding it there) was Greedspan's refusal to use any of his other regulatory powers to contain/defalte asset bubbles, esp. the reserve requirements lever you mentioned. Instead of taking away the punchbowl when needed, he turned the Fed into a serial bubble-blowing machine.