One Thing Worse
Mike Shedlock has a few comments on the Fed and the latest brilliant idea from the Treasury:
The GlobeInvestor is reporting Even on Wall Street, capitalism takes a hit.
Socialist-style Fed or financial saviour?
The cover of the latest issue of BusinessWeek shows Ben Bernanke in profile against a bright red and orange backdrop, pensively stroking his grey beard and looking remarkably like Vladimir Ilyich Lenin.
The imagery is intentional and pointed.
“Comrade Ben is determined that there will be no financial meltdown and no depression while he is in command,” economist Ed Yardeni wrote to clients. “Given the initial reaction [on Wall Street], I suppose this means we are all financial socialists now.”
Guaranteeing Bear Stearns’ portfolio of troubled investments sets a bad precedent by transferring potential losses from the market to taxpayers, complained Allan Meltzer, a professor of political economy at Pittsburgh’s Carnegie Mellon University.
“I do not believe the current system can remain if the bankers make the profits and the taxpayers share the losses.”
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Who is to blame for the mess we are in?
And who is to blame? The Fed course, with help of Congress, and the SEC.
Congress passed legislation to create GSEs to foster affordable housing. Now the definition of “affordable” is over $700,000, and calls to reduce the role of the Fannie Mae are now calls to increase the role of Fannie Mae in the wake of the housing crisis. There were 300 some programs to create affordable housing and every program made the situation worse. All those programs really amounted to was handouts to the building industry and banks.
And if Congress would stop wasting money on needless programs the dollar would stop sinking. Of course the government is wasting trillions of dollars trying to be the world’s policeman, a role we can no longer afford.
The SEC in its infinitely poor wisdom, decided to give government sponsorship to Moody’s, Fitch, and the S&P and this led to extremely risky garbage being rated AAA. I talked about this problem in Time To Break Up The Credit Rating Cartel.
But the Fed deserves the brunt of the blame for micro-managing interest rates like some central planners from the Soviet Union. The Fed does not know how to set the correct price for money (interest rates) any more than it knows how to set the correct price for orange juice. Only free market forces can properly set prices so that economic distortions do not occur.
Unfortunately, every problem Greenspan faced was an excuse to cut interest rates. Even non-problems like the silly Y2K (year 2000) scare was an excuse to cut rates.
When the dotcom bubble collapsed, the Fed slashed interest rates to 1% to get the economy moving again. The housing bubble was the result. Greenspan added more fuel to the fire along the way by openly praising ARMs and derivatives.
Greenspan May 5th 2005: “Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth.“
I compared Greenspan to Buffett in Who’s Holding The Bag?
Buffett in stark contrast to Greenspan called the explosive use of derivatives an “investment time bomb”.
It’s perfectly clear now who was right. For those who have not pieced the story together properly, it was fear of a dominoes style chain reaction collapse of Credit Default Swaps starting with Bear Stearns that caused Bernanke to force a shotgun wedding between Bear Stearns and JP Morgan.
So what does the Treasury Department propose? The Orwellian answer of course is to give the Fed still more power to wreak havoc.
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The biggest, most reckless credit experiment in history has started to implode. It’s far too late to stop a complete systemic collapse now. Granting new powers to the agency most responsible for the mess simply does not make any sense.
In the long run, the only solution is to abolish the Fed, end government sponsorship of the ratings agencies, and return to sound monetary policies in Congress with a currency backed by hard assets instead of promises.
Instead, the proposal is to give Fed increased authority to watch over additional henhouses. And if there’s one thing worse than the fox watching the henhouse, it’s the Fed watching the henhouse. A quick look at history should be enough to convince anyone of that.
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“The biggest, most reckless credit experiment in history has started to implode. It’s far too late to stop a complete systemic collapse now. Granting new powers to the agency most responsible for the mess simply does not make any sense.
In the long run, the only solution is to abolish the Fed, end government sponsorship of the ratings agencies, and return to sound monetary policies in Congress with a currency backed by hard assets instead of promises.”
Wow. It’s actually surprising to see this kind of sentiment being expressed so widely in recent weeks. This is actually kind of amazing to me, to hear more people really taking the Greenspan and Bernanke Fed to task and calling for the end of the Federal Reserve system.
Over the past few years I heard some very smart people say this kind of anti-Fed sentiment would really build up in the future, but this is just one of those times when I’m really amazed to see the whole process unfold.
Comment by David — 3/30/2008 @ 9:30 pm
I doubt that we’ll see the Fed abolished anytime soon. But it certainly doesn’t hurt to have the discussion out in public. I don’t know how ’serious’ - or honest - the discussion will be. And too many people don’t really understand it - or care.
Comment by BMB — 3/30/2008 @ 9:47 pm
What rankles me is that from my obstructed perspective these problems could largely have been avoided if the federal agencies presently responsible for regulation and enforcement had actually engaged in regulating and enforcing the rules. I’m all for streamlining the regulatory red-tape, but Paulson is fooling nobody here by rearranging the deck chairs, at least not me. The problem that got us into this mess was lack of enforcement of regulations. How is giving the Federal Reserve more authority going to help when they’ve already showed that they are not interested in exerting the authority they have had?
It is good to hear the anti-Fed sentiment pick up steam. I think that may be the biggest legacy of Ron Paul’s semi-quixotic run for President. He did more than just about anyone in the recent past to open the eyes of the public to the unchecked power of the Federal Reserve. The problem with Congress is that Ron Paul is a lone voice in the wilderness. We still have the likes of Schumer exerting undue influence on the process.
Comment by Momo Fader — 3/31/2008 @ 7:44 am
Sounds like your thinking cap is pointed in the right direction to me Momo.
Comment by BMB — 3/31/2008 @ 8:08 am
I just called (my) Congressman Lloyd Doggett’s office in Washington DC and pretty much voiced the opinion I shared above. I asked if he had taken a position on the Treasury Department proposal, and if he would be participating in the Joint Economic hearing this week with Bernanke. The intern on the telephone did not know anything about his position or his schedule. I know it’s pissing in the wind, but if his telephone ledger shows more than a few calls about the Treasury and the Federal Reserve this week, perhaps he’ll take a more active interest. That’s the only way we can force any change in this representative democracy.
Comment by Momo Fader — 3/31/2008 @ 9:37 am
I guess you gotta do what you can - after all, they don’t have elections once a month…
Comment by BMB — 3/31/2008 @ 10:13 am
I totally agree with Momo on the importance of Ron Paul’s campaign in furthering this whole Fed debate. It was another point I wanted to make, but I don’t think I could have said it any better.
Comment by David — 3/31/2008 @ 1:19 pm
It’s just so typical that government suddenly finds the ‘need’ to act AFTER the crisis has already occurred. It makes you wonder, as an example, just how bad the whole Social Security / Medicare funding issue will get over the years before they finally do something about it.
Comment by BMB — 3/31/2008 @ 1:31 pm
Yes, and in that vain, I’d like to invite you guys to comment on our recent post about the Fed’s growing regulatory powers.
http://financetrends.blogspot.com/2008/03/fed-leviathan-grows.html
Be great to get your feedback when you all have a moment to read it.
Comment by David — 3/31/2008 @ 1:56 pm