The Case Against the Fed from a US Senator

If you read through this letter from US Senator Sherrod Brown (D-OH), who is also the chairman of the Senate Subcommittee on Economic Policy, you will get a grasp of how badly the Fed has mishandled its responsibilities over the past ten years at least.

I thought the Senator was far too kind and reserved in his criticism. Yes, the Fed did focus on inflation. Unfortunately the definition of inflation which they used was inappropriate, since it did not include the obvious asset bubbles which were created by the Fed's own monetary policies.

In addition, the Fed not only neglected its role in consumer protection, it took an activist opposition to the regulation of new financial instruments such as derivatives that has created a position that even today leaves the US in a financially precarious position.

This is particularly galling when one hears of the schemes being concocted by the bank friendly Senators, Dodd, Corker and Shelby, to move more of the weak banking reforms into the Fed, which is itself a private institution owned by these very banks that it will regulate.

This is not the appropriate level of financial reform that the American people deserve. And if you notice to whom Senator Sherrod is addressing his concerns, you will understand my lack of enthusiasm or any change or improvement in this sorry state of affairs.

March 10, 2010

The Honorable Timothy Geithner
Secretary, United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

The Honorable Lawrence Summers
Director, National Economic Council
The White House
1600 Pennsylvania Avenue, NW
Washington, D.C. 20500


Dear Secretary Geithner and Director Summers,

I write to you today to express my concern about the vacancies at the Federal Reserve, both on the Federal Open Market Committee (FOMC) and soon in the Vice Chairman's office. This is the financial equivalent of leaving open vacancies on the United States Supreme Court, and it is essential that we fill these positions.

As Chairman of the Senate Banking Committee's Subcommittee on Economic Policy, with jurisdiction over the Federal Reserve System's monetary policy functions, I am acutely aware of the importance of monetary policy at the Fed.

Both the full Banking Committee and the Economic Policy Subcommittee have examined the causes of the financial crisis and the resulting effects on lending, access to credit, and employment. The evidence presented to the Committee about the role that Fed policy decisions played in the financial crisis and the economic downturn has led me to conclude that the Fed's monetary policy has focused almost entirely on controlling inflation rather than maximizing employment and that the Fed has too often put banks' soundness ahead of its other responsibilities.

In light of this experience, there are several other important qualifications that I would urge you to consider in selecting the new Vice Chairman and new members of the FOMC:

1. Recognition of the causes of the financial crisis before it occurred.

Many economic experts, including some at the Federal Reserve, failed to anticipate the impending economic crisis. However, there were exceptional people who sounded alarms about the rapidly inflating housing bubble, the proliferation of subprime lending, and the packaging, selling, and investing in toxic financial products by Wall Street. Unfortunately, regulators, including the Fed, ignored or attempted to discredit many of these courageous individuals, rather than heeding their warnings. We need economic policy makers who possess the foresight to identify harmful economic trends, the courage to speak out about the necessity of addressing these practices before they inflict lasting damage to our economy, and the wisdom to listen even if their views are challenged.


2. Demonstrated dedication to protecting consumers and maximizing employment.

For years, the Federal Reserve's monetary policy has maintained an almost single-minded focus on inflation. This has been detrimental to the Fed's other core missions, particularly maximizing employment and protecting consumers. The results of this fixation speak for themselves. The national unemployment rate is more than double the Fed's statutorily mandated 4 percent unemployment target. The Fed also failed to act on repeated warnings about predatory mortgage lending and credit card abuses. Consumer protection experience is particularly important if the new consumer protection entity were to be housed at the Fed. Our economy will benefit from renewed attention to all of the Fed's priorities.


3. Commitment to releasing e-mails related to the Fed's involvement in the AIG bailout.

A growing number of experts - including economists, academics, and former regulators - have called upon the Federal Reserve to release all e-mails, internal accounting documents, and financial models related to AIG's collapse. The American taxpayers now hold the majority of AIG shares, and they have a right to know how their money is being spent. Providing greater detail about the AIG bailout is particularly important because that episode continues to taint the Fed's reputation. Focusing on candidates committed to full transparency related to this particular economic event would help to restore the Fed's stature and credibility in the eyes of many Americans.

The American public has lost a great deal of confidence in the Federal Reserve. Selecting a Vice Chair and FOMC members with the above qualifications will send the message that the Federal Reserve has learned from the financial crisis, and that the Fed's weaknesses are being addressed with more than just cosmetic changes.

I would be happy to discuss specific candidates with you at your convenience. Thank you for considering my views, and I look forward to working with you to address these vacancies at the Fed.

Sincerely,
Sherrod Brown
United States Senator

h/t to the Huffington Post for the letter

Investors Who Lost In Madoff and Stanford Schemes Want Government to "Make Them Whole"

These are, by and large, relatively well-to-do people who were considered 'qualified investors,' or ought to have been. They were able to place large sums of money in obviously risky investments seeking abnormally high rates of return, which they did receive for many years.

The notion that the government should retroactively cover their losses, even indirectly, by taxing the public is obviously repugnant.

What about the many who have lost, on a percentage basis, equally if not more devastating amounts of their retirement savings in the tech, housing and credit bubbles? Their only fault is that they lack the political connections and high powered lawyers to make the case for them to the Congress, and the influence to get their way from pliable Congressmen.

I feel mightily sorry for anyone who has lost money in these fraudulent markets. I spend quite a bit of my personal time trying to warn people about the snares and pitfalls that are allowed to continue in the US financial markets even today. And there are many of them. Consumer Protection is not a priority in Washington.

A better case might be made to sue the Wall Street exchanges, the private self-regulators, and the auditors and ratings agencies for gross negligence in allowing these frauds to continue for so many years. Prosecutions for fraud and corruption across a much wider circle of enablers is generally what is done. It was done in the 1930's and it was done after the Savings and Loan Scandal.

But that will not happen. The financial sector is contributing far too much to the politicians in Washington, and too many powerful politicians are beholden to them, despite what smooth words that might pass their lips in public.

To take the losses of wealthier investors from hedge funds and other high risk investments having no productive benefit or socially redeeming value, and socialize them to the many is almost unbelievable.

And the backing of Senators Richard Shelby and Bob Corker for this is just another sign of the disgraceful corruption and patronage to a select few that infests the Finance Committee in the Senate. These are the Senators on the Finance Committe, among others, who are blocking and weakening financial reform. What hypocrites!

"These capitalists generally act harmoniously and in concert to fleece the people, and now that they have got into a quarrel with themselves, we are called upon to appropriate the people's money to settle the quarrel." Abraham Lincoln, speech to Illinois legislature, Jan. 1837

BusinessWeek
Madoff Victims Join Stanford Investors to Lobby for Payback
By Robert Schmidt and Jesse Westbrook
March 10, 2010, 12:16 AM EST

March 10 (Bloomberg) -- Victims of Bernard Madoff and accused Ponzi schemer R. Allen Stanford are banding together to lobby Congress for a law that could require Wall Street firms to pay billions of dollars to cover some of the losses they suffered.

As the groups’ leaders walked the Capitol halls separately over the past several months, they learned how to find the Senate’s Dirksen Office Building and to call their proposal “revenue neutral,” meaning no cost to taxpayers.

They also gleaned another lesson: The broader the geographic base of support, the better the chance of legislative success. The result is a coalition of the Democratic-backed, East Coast, and mostly Jewish investors defrauded by Madoff, with the Republican-backed, largely Christian, Sunbelt residents victimized by Stanford. The disparate groups now find themselves bound by a common notion: They’ve been cheated, and they want the government to make them whole....

The lobbying initiative “gives new meaning to the word chutzpah,” said James Cox, a professor at Duke University School of Law. “This is just a tax increase. It’s levied on banks but customers end up paying.” Until recently, the two groups were going at it alone, and not winning much support except from lawmakers in their regions.

Shaw’s Stanford group had backing from Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, and other panel Republicans like Bob Corker of Tennessee, David Vitter of Louisiana and Kay Bailey Hutchison of Texas, said Shaw, who also works part-time as a spokeswoman at the Federal Reserve Bank of Dallas.

“These are very Christian” people, Shaw said, referring to the Stanford victims. A lot of members were marketed the Stanford securities “at church...”

And Here Come Those Treasury Auctions

The US equity markets are holding on to the rumour-inspired gains from yesterday, as commodities are hit and the longer end of the bonds slump a bit.

"There is also the matter of the 3, 10, and 30 year Treasury auctions this week. The dollar is often dressed up for the occasion. If not with the fundamentals, then by weakening the 'competition' to make it look prettier than them. If the US stock market cannot move up or hold its ground while the Treasury conducts even modestly successful Treasury auctions, then this is a cautionary indication that Wall Street and the Fed are moving capital in a circle of manipulation to attempt to maintain the illusion of growth, in the manner of a Ponzi scheme." US Dollar Charts Still Technically Strong March 8, 2010

CNN Money
Treasurys dip ahead of auction
By Annalyn Censky
March 10, 2010: 12:12 PM ET

NEW YORK (CNNMoney.com) -- Treasurys traded lower Wednesday morning ahead of a government auction of $21 billion in 10-year notes.

What prices are doing: In mid-day trading, the benchmark 10-year note fell 10/32 to 99-3/32 and its yield rose to 3.741%. Bond prices and yields move in opposite directions.

What's moving the market: After strong demand in the government's $40 billion auction of 3-year notes Tuesday, analysts expect Wednesday's auction of 10-year notes to be well received, but with slightly less demand. Longer term debt like the 10-year note and 30-year bond traditionally see slightly lower demand in auctions, because of their inherent greater risk.

The auctions include a $13 billion offering in 30-year bonds on Thursday...

Propaganda Campaign Attempts to Mask the Economic Risks and Reality

The propaganda campaign by the US government is trying to mask the fact that the economic recovery plan is failing and that America is rapidly losing confidence in Team Obama.

You cannot have a sustained recovery without changing the underlying conditions that caused the failure in the first place.

In addition to the media blitz dissected by Yves Smith in the essay excerpted below, I have never seen such a load of rubbish being put forward with regard to the markets in US financial assets and commodities, and I have seen quite a bit in the last twenty years. In particular, the campaigns against gold and silver in particular are heavy-handed, obvious, and reaching the point of hysteria.

The shorts are trapped, hopelessly trapped, and unable to deliver on their massive short positions. They are only able to manipulate the price in short term bursts, and continue to dig themselves deeper as the world demand continues to drain them.

Whoever heard of a bubble in which the major money center banks are so perilously short it? A bubble requires a broad participation and belief, and the encouragement of the market makers. And now a statement from an "SEC official" that there is a gold bubble. This, from the very people who allegedly could not see the tech, housing and credit bubbles until they fell on top of them.

And of course there are the funds and the wealthy, who mouth the same party line while lining their portfolios with huge positions and personal holdings.

Various exigencies can compel the big players to make statements swearing gold and silver are no good, no store of value against all the evidence of history. But the fact remains that the US dollar reserve currency regime is falling apart, tumbling like the humpty-dumpty construct that it is. And the status quo is shitting their collective pants about it, and the likely backlash from the public when their deceptions are exposed.

Don't expect the Ancien Régime fiancier to fall easily, quietly, or quickly. But it will change; change is the only inevitability. And we all suspect what will remain standing when the dust settles. All this noise seems more like haggling over a larger quantity for a better price, and a clearer path to the exit.

Naked Capitalism
The Empire Continues to Strike Back: Team Obama Propaganda Campaign Reaches a Fever Pitch
By Yves Smith

I’ve seldom seen so much rubbish written by people who ought to know better in a single day. Many able people have heaped the scorn and incredulity on three articles, one a piece on Rahm Emanuel slotted to run in the Sunday New York Times Magazine, another an artfully packed laudatory piece on Timothy Geithner by John Cassidy in the New Yorker and a more even handed looking one (I stress “looking”) in the Atlantic.

Ed Harrison has skillfully shredded parsed the Geithner pieces . Simon Johnson thrashed the New Yorker story. A key paragraph below:

"The main feature of the plan, of course, was – following the stress tests – to communicate effectively that there was a government guarantee behind every major bank or quasi-bank in the United States. Of course this works in the short-term – investors like such guarantees. But there’s a good reason we usually don’t guarantee all financial institutions – or act happy when other countries do the same. Unconditional bailouts lead to trouble, encouraging reckless risk-taking and undermining responsible governance. You can’t run any form of reasonable market system when some big players hold “get out of bankruptcy free” cards."

Banking expert Chris Whalen was so disturbed by the numerous distortions in the New Yorker piece that he had already fired off a long letter to the editor by the time I pinged him, with these starting paragraphs:

"Jack Cassidy tells us that “Timothy Geithner’s financial plan is working—and making him very unpopular.” Unfortunately this is completely wrong. Cassidy’s comment just illustrates why the New Yorker has fallen into such obscurity, namely because it is more Vanity Fair than its vivacious sibling and unable to perform critical journalism.

In fact, the banking system is continuing to sink under bad loans and even worse securities losses. Telling the public that the banks are “fixed” is irresponsible. Unfortunately this false perception is widespread, including among major media such as CNBC and also with a number of my clients in the hedge fund world."

...Yves here. The reason that people who can discern clearly what is afoot are so deeply disturbed is simple, and all the comments touch on it. The campaign to defend Geithner and Emanuel, both architects of the administration’s finance friendly policies has gone beyond what most people would see as spin into such an aggressive effort to manipulate popular perceptions that it is not a stretch to call it propaganda.

This strategy, of relying on propaganda to mask their true intent, has become inevitable, given the strategic corner the Obama Adminstration has painted itself in. And this campaign has become increasingly desperate as the inconsistency between the Adminsitration’s “product positioning” and observable reality become increasingly evident...

Read the rest of this thoughtful and informative piece and its many associated links and references can be read here.

Lord have mercy on us, for what we have done, and what we ought to have done but did not,
and from what we may yet deserve to reap from our misuse and debasement of your bounty.