Bernanke Unleashes the Power of the Monetary Force

The Fed will lead us out of deflation, but how many years will we spend in the wilderness?

Federal Reserve Open Market Committee
Release Date: December 16, 2008
For immediate release

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. (That's it, we're effectively at ZERO - Jesse)

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity. (TASLF for homes and businesses. Will that be a two-page form like TARP? Can I fill it out online? - Jesse)

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. (Did Ben threaten them with martial law? Or just scare the hell out of them? - Jesse)

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

Madoff Enablers: Everyone Was Getting Paid

As we said the other day in Rogue Nation, schemes like this continue on because everyone is getting paid, directly or indirectly, not to look closely.

Go along to get along with plausible deniability. The 'dumb CEO' and 'overworked civil servant' chasing kittens and alley cats while the lions are on the prowl.


Financial Times
Madoff feeder funds levied high fees
By Henny Sender
December 16 2008

The “feeder” funds that channelled money to Bernard Madoff charged their investors high fees that in some cases exceeded the norms of the hedge fund industry, people familiar with the matter say.

Mr Madoff received much of his funding from feeder funds run by so-called funds of hedge funds. These funds of funds are paid by investors to perform due diligence on hedge funds and allocate money among approved managers.

Typically, funds of hedge funds charge a 1 per cent management fee and take 0-10 per cent of the profits. This would be in addition to the fees charged by the underlying hedge funds – which usually take a 2 per cent management fee plus 20 per cent of the profits, above a certain level, known as the hurdle rate.

Fairfield Greenwich, a feeder fund that invested $7.5bn with Mr Madoff, charged a 1 per cent management fee and took 20 per cent of the profits, according to a person familiar with the matter.

Suzanne Murphy, managing director of Tri-Artisan, a hedge fund consultancy, said she believes other Madoff feeder funds charged fees similar to those at Fairfield Greenwich. At such levels, she claimed, “These organisations were more partners of Mr Madoff than clients.”

In general, generous arrangements such as large performance fees “raise questions about conflicts of interest and caveat emptor,” according to the general counsel of the alternative investment division of one bank. The head of the hedge fund practice at one law firm, added: “At a certain point, if you get outsize compensation, you can argue that you lose the incentive to do due diligence.”

In many cases, the feeder funds that worked with Mr Madoff also did so with few conditions, such as ones requiring that minimum returns be reached before fees would be paid, according to people familiar with the matter.

In some cases, the private wealth arms of banks that channelled money to such feeder funds also received payments from these funds.

Mr Madoff did not charge his investors fees but was paid through commissions on his trades, all of which went through the broker-dealer he controlled. Because he did not charge typical fund performance fees, he earned a reputation among some investors for being a lower-cost manager. (But severely back end loaded. Jesse)

Did the New Deal Fail?

Most people informed by our modern educational system would respond that the New Deal was ineffective, and that only World War II resolved the Great Depression with its massively non-productive consumption. This is sometimes called "military Keynesianism."

As evidence of this they will point to the renewed slump in US GDP and the equity markets that occurred in 1937.

Here is some perspective on what caused that slump from Paul Kasriel.

In 1937, CPI inflation was running in excess of 4%. So, in 1937, the Fed doubled reserve requirements to soak up excess reserves and prevent even higher inflation. It worked. The economy entered the second leg of the Great Depression in 1937 and deflation re-appeared.

The New Deal was so "ineffective" that the Fed panicked and doubled reserve requirements in a draconian pre-emptive response because they feared inflation! And this was with the unremitting opposition to the reforms of the New Deal by the Republican minority, the Business interests, and their appointees on the Supreme Court.



In a fiat regime inflation and deflation are primarily a policy decision, or perhaps more clearly, the end result of a series of policy, fiscal, and political decisions. Japan is a good example of that combination. There is a lag between the implementation of policy decisions and the desired result. There are also secular events such as a oil embargo or an asset crash that may significantly impact prices and measures of the money supply, although somewhat unevenly.

They are not perfectly controllable, and there is difficulty stimulating aggregate demand and the velocity of money. It cannot be done by monetary policy alone but an accumulation of decisions by the entire national leadership.

But where there is no exogenous constraints such as a monetary standard inflation and deflation are a choice among priorities, essentially a policy decision.