Fed Hit by Subpoena – Fasten Your Seatbelt
The Federal Reserve was served a subpoena from a Congressional committee Tuesday, as lawmakers demanded documents related to Bank of America’s acquisition of Merrill Lynch. In our view, this is a precursor of more trouble to come for the Fed.
We have argued for some time that Fed Chairman Bernanke completely underestimates the political dimensions of the policies he pursues. The various "credit easing" programs have little to do with monetary policy, the domain of the Fed. Monetary policy ought to be concerned with money supply or the level of interest rates, thereby allowing the markets to decide where the money flows.
Instead, the Fed has been targeting specific sectors of the economy, such as helping the housing market or enabling car loans. The motivation is understandable, as the Fed is well aware that it may not be powerful enough to support the housing market otherwise, and sees it as crucial in its plan to prop up the economy.
However, allocating money to specific sectors of the economy is fiscal policy and, as such, should be authorized and supervised by Congress. This facet is perilous for the Fed to ignore, as it invites political backlash. Last week, Bernanke was grilled by the House Budget Committee, giving him a taste of more to come; the subpoena is a further step.
The ‘unconventional’ policies jeopardize the credibility and independence of the Fed. This takes its toll on the effectiveness of monetary policy, making any policy more expensive. Remember: the cheapest monetary policy is one where a Fed official simply utters a few words and the market reacts. Ever since the fall of 2007, monetary policy has become increasingly more expensive as the Fed’s effectiveness has been eroding. When Fed talk was no longer sufficient, the Fed had to enact an emergency rate cut in early 2008; since then, the Fed had to escalate its policies further, printing trillions of dollars.
Unfortunately, this trend may accelerate rather than reverse. Fasten your seatbelts.
Axel
Axel Merk
Author of Sustainable Wealth
President and Chief Investment Officer, Merk Investments
Comments
14 Responses to “Fed Hit by Subpoena – Fasten Your Seatbelt”Speak Your Mind
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Another important consequence of this development is the erosion in market confidence and heightened level of uncertainty it may create. We have argued that the Administration’s opaque policies have served to undermine market confidence through greater uncertainty; this subpoena may only serve to compound the problem.
For the House Oversight and Government Reform Committee to subpoena internal documents from the Federal Reserve sends a very clear message: congress has no confidence in the integrity of either the Fed or Treasury’s handling of the Merrill Lynch acquisition. Hold on. Elected officials have no confidence in other elected officials? Nothing new, a cynic (such as myself) might point out. However, Fed and Treasury officials have been charged with the task of economic stabilization – an important responsibility in light of present market conditions. Yet, such a very public and prominent challenge to their integrity only erodes our trust in them.
Trust and clarity is sorely needed given our present economic situation. Remember: greater trust and clarity leads to greater market confidence and lowers uncertainty. All of which fosters economic investment.
Sure, if something illegal happened, those responsible should be held accountable. No doubt about it. Problem is, this is such a murky situation, with many conflicting views and responsibilities that it may come to nothing. Maybe Ken Lewis or the BofA board will lose out. We’ll see.
One thing seems clear though: this episode highlights that the Fed’s independence is being increasingly compromised as they continue to intervene in unconventional ways.
Kieran
This is like a camel putting his head under the tent. The more he looks , the more he doesn’t like. The entire system is starting to be scrutinized as it should be. Congress is now starting to question the authority of the Fed starting with an audit. Maybe we will finally find out if the Gold is still there??
Banks got greedy, Wall Street got greedy, and the oversight regulators were not there (our elected officials) didn’t do THEIR job.
We the people are THROWING massive amounts of OUR money to the very people who caused the problem we are still in. Now who has gone to jail for this facisco? No one!
A one way trip to become a second rate country!
Sad but true!
A 73 year old taxpayer, veteran of Korea (4+4 years), grand father and 3 grandsons, a local poltician for 7 years and worker on walls street for 35 + years (not to proud of that!). What have they left them?
see Calif. – 50 days to fiscal wreck, 6 10 / 9
HR 1207 (Audit the Fed Act) is up to 208 co-sponsors…
http://www.nolanchart.com/article6522.html
http://www.govtrack.us/congress/bill.xpd?bill=h111-1207
So the Fed has hired Enron’s lobbyist…
http://www.thenewamerican.com/economy/commentary-mainmenu-43/1202
Of course, as Jim Grant says, if the Fed were audited, it would show the bank to be in much worse shape than even CitiCorp….
http://www.cnbc.com/id/31204170/
The FED is a private company and will never work in the public interest. However ending the FED does not solve the problem. The crisis can only be solved if the root causes are recognised. These are usury (interest on money) and credit (the creation of money out of nothing).
If someone brought a 1/10 oz gold coin to the bank in the year 1 AD, and the money remained there until the year 2000 AD, collecting a yearly interest of 4%, the amount of gold in the account would have been 3.6 * 10^31 kilograms of gold. This is 1.9 * 10^27 cubic metres of gold weighing 317 times the complete mass of the Earth. This example demonstrates that interest on money is unsustainable and leads to crisis.
Credit and interest on money make it possible for an economy to grow above potential during a boom phase. In the boom phase investors add leverage using credit which further intensifies the boom, creating shortages of materials and labour resulting in rising prices. Interest on money entices banks to lend money to leveraged investors. Credit makes it possible to create money out of thin air, which enables the banks to fuel the boom. When the cycle turns into bust, investors start to deleverage, which intensifies the bust, creating surplusses of materials and labour resulting in falling prices. What most economists do not see, is that credit and interest on money are the root causes of economic booms and busts.
It is possible to end the depression in a few months, to have constant economic growth at maximum potential without crisis, unemployment and government intervention. You can read more about it here:
http://www.naturalmoney.org/introduction.html
Who are you kidding here?
Do you really think that this Govt (or any for that matter) have any power over the International monetary
powers! Nonsense, it’s all a dog and pony show for the ignorant masses.
Banking committee, don’t make me laugh!
niphtrique gives a fine example that shows that 4% interest over a 2000 year period is impossible in physical terms. This is true. His conclusion is that “interest on money is unsustainable and leads to crisis”. This conclusion is false.
The true conclusion is that 4% real interest is not possible over a 2000 year period. A lower interest rate is possible. Also high interest rates are possible over short periods if they are regularly interspersed with periods of great destruction of wealth (eg wars).
@niphtrique
Yes, interest is ‘usury’. What otherwise would be the incentive to lend money? And the ‘hoarding tax’ quoted in the natural money theory is a tax on savings to force people to spend money. We already have this: it’s called inflation; we even have the president exhorting everyone to spend more. Notice how savings are disparaged as ‘hoarding’ – the practice of every socialist society is to rename every positive action with a negative term. So, naturally, savings in kind (e.g. ‘hoarding’ valuable non-spoiling goods, or, say, gold) would take place, and these goods would disappear from the market, probably causing the price to rise. Voila, instant black market. No problem, the state would then have a system of informers or would make laws to search and seize goods that were ‘hoarded’ (i.e. saved). The basis for a terror-based society is then in place; the basis of every socialist society, because socialism in any form is the antithesis of natural economics.
If you don’t want to pay interest, don’t borrow.
I will say that one aspect of the natural money theory has merit, and that is the idea of local currency, as sometimes existed in the 19th century in America, i.e. the abolishment of Central Banks and the mischief they cause – the same mischief that happens locally, but with the capability of the financial destruction of the whole nation, rather than just a local economy. And who is to say that the discount on money (i.e. interest) should be the same in Houston, Texas, where the demand for money may be high, as Detroit, where the demand for money may be low? This is the evil of a Central Bank, which is fundamentally a socialistic idea, the idea of forcing markets on everyone equally, rather than having local groups of people creating markets according to their needs.
Great points Robert. I see a perfect storm coming as EVERYTHING is centralized. There is one central monetary system, a central distribution of food and goods, power, water. If any of these fail, people will suffer en masse. Competition is a GOOD thing. Less government, WITH HONESTY is the solution. The more we throw morality, honesty, inegrity, and self-reliance out, the more chaotic society will become. Tyranny will become the ONLY solution.
This country in on the brinks of a total collapse. Never in a million years would I had expected to read such irresposibility from our govt. As I do now. This is not sims 2 here folks, this is our very govt. That is now standing on a skinny branch and is on a verge of losing our credibility as a productive country. I have read it all, it would only get worse if we saw social unrest followed by world war 3. Were doomed folks.
Robert Burch’s points are excellent, and it is worth noting that the main objection to the states’ former issuance of gold-backed currency
was undermined by the geographical impracticality in those days of
verifying backing, something that is easy in the jet age. The idea that Congress can, with the stroke of a pen- and supposedly with “the will of the people” burden each citizen and their yet-unborn offspring with
huge- and completely unknowable debt is how revolutions get started.
These enormous deficits did not exist until the Central Bankers got their talons on the economy- until the Greenspan era, since 99% of the public regards The Fed as a normal part of government, they carefully avoided using the phrase “Central Bank” at all, associated as it was with European royalty. Ask yourself: What does any sdelf-respecting nation, determined to balance its budget, have any need for anything other than a Treasury Department? Down with the Fed.
P.S.: Germany is today voting on a national balanced budget amendment- you won;t read that in the U.S. news!
Well, after 96 years it’s finally all coming apart for the Federal Reserve. I just hope that the Congress allows C-Span to broadcast the hearings on live television so that the American people can see with their own eyes that this has been one giant multi-trillion dollar scam on the people of this country. What ever happens to the central bankers they more than deserve and I hope it’s not trivial.
It is unfortunate that we are now the generation that has to face the possibility that the fiat dollar monetary sysyem currently in use is like a soldier who has been mortally wounded, has broken bones and is literally bleeding to death on the battle field. There are certain field medics at work trying to patch the fallen back together but this might not work and the soldier may indeed die.
Despite everything I hear on the mass media, I still have many doubts in my mind as to the possibility that this this bleeding, unconscious patiet will make it out of the field. What are the long term prospects that the government will not be succumbed by the avalanche of debt which it ever the more has to service and which ever the more it continues to create? The way I see it, if the government and powers that be keep doing what they are and have been doing since 1913 then, the nation’s fiat currency will most likely hyper-inflate and become worthless – and die. This is obviously very troubling for all of us who are watching and questioning the things that are being observed. At the present time, I don’t see any way out of this situation except for that of cutting government services, stopping the war and laying off government workers. If this does not happen now in a relatively peaceful and organized manner, making the necessary changes at a later time under greater durress will only create an even more perilous and uncertain situation. It is sad that we may we in fact be witnessing the end of the US dollar fiat reserve note currency system and possibly the start of new currencies. As a result of this, we could also be looking at the break-up of the United States and the restoration of a new governmental system with a very small central power base and more autonomous rule from the independent states – just as our founding fathers had envisioned. As we dangerously tread forward in time, it looks more and more like the US will not be able to solve its debt problems and that political changes on a massive scale will be set in motion.
HR 1207