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November 20th, 2009 at 9:19 pm
Fed Beaten: Bill To Audit Federal Reserve Passes Key Hurdle.
http://www.huffingtonpost.com/2009/11/19/fed-beaten-bill-to-audit_n_364546.html
I’ve been watching this interesting trend for a long time. I think it’s at the root of many of our societies problems. Your link fits into that theme well. I guess the discount may be near.
November 20th, 2009 at 9:52 pm
What a bunch of busy work! Youtube for Ron Paul Fed and what I see is the mind of a civil war era Representative pandering directly to his gold bug militia nut base.
What will an audit of the Fed accomplish? We know that’s where the money is printed. Get over it.
The question Ron Paul should have asked Bernanke is this one:
OK. So, you are setting money supply according to measurements of the economy right? What happens if your model calls for a negative interest rate? And if negative means throwing money from helicopters how can the Fed equitably implement a negative interest rate?
The crux of the problem is where the center of the needle meter reading is supposed to be. If the metering instrument has a dial that goes no lower than zero there is a problem with this model of money supply control. Any sensible person would see if you want to keep something steady you need a reading on both sides of the nominal reading. Thus, the Fed rate should actually be set nominally at 10 or 15 percent so you have some leeway on both sides. Or, you could just leave it at 5% and let the market itself make the adjustments.
The grandstanding “audit” bill completely misses the problem here. The Fed didn’t cause the current crisis. Even with a constant interest rate, lax regulation of who else can “print” money would still cause a problem. By “printing” I mean this. It should be illegal to trade any financial contract that is shielded from price discovery. Such contracts amount to printing money. We hear little of Milken these days. He was the money printer of his time:
http://en.wikipedia.org/wiki/Michael_Milken
Key point here. The Fed prints the money but who else, through whatever loophole, can also effectively print money and is not accountable to the Fed or Congress?
November 20th, 2009 at 10:45 pm
How you and I feel about it is not important.
Not since 1833 have there been calls to abolish a United States Central bank. That’s significant.
There is usually some disconnect between how we perceive current events, policy making and what actually happens, often resulting in trends that sustain longer than the public and policy makers expect.
The Fed’s policies may bring it’s own demise.
“We do not understand a thing until we see it growing from it’s beginning.” -Aristotle
November 21st, 2009 at 12:44 am
The Fed didn’t cause the current crisis - Blue Horseshoe
I 100% disagree with this. The Fed is at the heart of the problems we face today. It was their manipulation of interest rates trying to stop the dotcom bust that led us to where we are today.
November 21st, 2009 at 12:56 am
I agree Ken. People don’t do a good job at connecting the dot come bust to today, but in my mind they are so damn connected its not funny.
November 21st, 2009 at 2:32 am
Ken/Michael. Yes. How the money supply is set certainly can create a distortion. I agree with that. Dotcom and housing are the same in terms of bubble price appreciation. Interest rates created additional stimulus in both cases. But Dotcom popped gracefully. The government wasn’t left holding the bag. The fools who didn’t sell payed for it. There were no bailouts.
But, what does either thing have to do with the Fed operating policy? Ruling out actual malfeasance, all Fed can do is try to preserve the purchasing power of dollar relative to some consumer staples - food, rent, etc. On the other hand, if the Fed was stepping into the equity markets directly, then it would be illegal according to the Fed mandate at least if it was secret. Central banks are typically bound by law to disclose interventions within a certain time after the fact - 6 months typically. I hope I’m not defending the Fed too much here but I really think there is less going on in there than people think.
Congress can also sternly admonish the Fed to “watch for bubbles”, but how can the Fed actually implement stable money once and for all? If land is put into the consumer price index then some other asset will bubble up as throngs of idiots get swept up in a new frenzy.
[An aside. The consumer price index could be retooled perhaps. You could look at what people are spending their money on today and set interest rates according to price inflation in the top N consumer expenditures for example. But an audit of the Fed won't suggest anything like that. An audit usually slaps some wrists and then it's business as usual.]
So, without opening markets and merely targetting what blew up last time, banks or other firms could still see easy money again by lending to said idiots who are eager to bet the farm on the new Tulip Bulb Fad. I say banks, but it can be any firm which can print contracts and keep real prices of those instruments from being discovered for a time. This time (housing) banks did it by putting the contracts in the vault under the accounting loophole of hold to maturity and everybody had a private party for awhile - from investment banks to insurance companies.
The real problem this time (housing) was an utter lack of price discovery and the consequences of price discovery which has nothing to do with the Fed. Even at zero percent interest, price disovery would have dampened the housing market very quickly. There would have been a robust set of investors, taking the other side of the mortgage paper and insurance contracts instead of the delusional insiders high on their own marketing fumes. Even at zero percent interest any breather in the value of that paper would have attracted contrarian positions for one thing, and true hedging for another. Zero percent was unlikely to last forever as well. But, nobody at the banks and insurance companies wanted to make their trades on the CME Housing Futures. It isn’t required to consult the exchange traded markets for a price. It is much more profitable to make up your own price - the banks “knew better” and they knew for sure it would have put a very wet blanket on the fire if prices were subject to scrutiny even way back in 2006 after the steepest run-up. In fact it could have even ended in 2006 with a V shaped “pop” just like DotCom before it.
November 21st, 2009 at 9:00 am
Wow, Ken and I seem to agree on something.
Bluehorseshoe-
Some (hopefully) thought provoking questions-
1. Walk down the street and ask 100 people what they know about the fed or how it operates. I’ll guarantee you that 99 won’t know a single thing. Given how important money is in terms of our survival, isn’t it somewhat troubling that we have a monetary system which basically no one understands? Doesn’t that seem, just intuitively, like a situation begging to be abused.
2. If we define inflation as a loss of purchasing power for holders of currency (which I know is not the proper definition, because you can (and we often do) have inflation even with falling prices), where does the purchasing power go? I feel like society generally assumes that the purchasing power just somehow burns up into the atmosphere, but this cannot be true. Inflation does not burn up real resources, it simply (and stealthily) transfers resources from one party to another. If inflation simply destroyed real wealth, then we could create real wealth with via deflation, which is obviously impossible. Were the people to wake up to this relatively straightforward fact, everyone would feel much different about inflation and central banks.
November 21st, 2009 at 12:49 pm
“But Dotcom popped gracefully. The government wasn’t left holding the bag. The fools who didn’t sell payed for it. There were no bailouts.”
Gracefully??
Of course there was a bailout…it was called dropping rates to 1% after the initial March 2000 melt down (which bottomed out fall 02).
The FED seemingly had one goal at the time with that interest rate policy — prop up the Dow. It worked…until fall 08.
They have started the whole process over again now.
November 21st, 2009 at 1:05 pm
cy.
I readily agree that if a better way to measure buying power can be defined then it should be implemented right away. What I doubt is that ordinary people could understand the problem well enough to make a better way. We would all be worse off under some hastily conceived “turning off the tap” idea from the “gold militia” as I called them. Yet, I would be eager to see changes that reflect actual purchasing power - such as real time measurement of actual consumer expenditure distribution rather than a fixed basket of life’s necessities as defined by a government statistician.
Do look back at the history of money and you’ll see for one thing that fractional reserve banking was actually invented by medieval gold smiths for gold on deposit. So fractional reserve would seem to be a property of using money at all instead of direct barter. In the same history you will also see there are serious problems with the gold standard because the supply of gold is not necessarily distributed according to real wealth at the present and new supplies of gold in the ground, Moon, or asteroids would be an ongoing serious distortion to the system. My comment alone illustrates the absurdity - it would eventually become profitable to mine asteroids to increase the money supply! Should finding new supplies of gold be the primary objective of the society and financial system?
http://en.wikipedia.org/wiki/Full-reserve_banking
http://en.wikipedia.org/wiki/Gold_standard
Even with full reserve fiat money banking and no benchmark rate there will be interest bearing instruments like corporate bonds. These would have to take into account the relative demand for lending money compared to the future purchasing power of the underlying money in order to be marketable at all. So, too would there still be inflation or deflation without creating or destroying money and insisting on full reserve banking.
November 21st, 2009 at 3:37 pm
Without getting too much into the details, here are some general lessons I have learned over the years.
I agree with some of the general assertions of the above statements.
The Fed does not “pump” liquidity into the system, it merely makes it available. The market decides what to do with that liquidity.
In the long run, the Fed’s Policies are irrelevant(they don’t accomplish what they’re design to do) in that the Fed is just another player in the market place, it is part of a crowd. Much like others in the crowd, it plays its role within the market and responds in similar ways as the crowd to forces impinging upon it. The Fed does not freely make its decisions; it is constrained by the existence of markets which are much bigger than itself.
The Fed does not raise and lower rates in a random fashion; it raises rates for a while, then lowers rates for a while. Over long periods, the Feds behavior trends along with the markets it’s trying to control.
The Feds policies help “make” the trends(and problems) that it usually blames on others. It’s completely oblivious to the fact that its own policies are an integral part of the problem and so it goes on trying to solve a problem it helped create by passing more of the same policies.
In a world without a Central Bank a case can be made that markets may function more efficiently and freely and that business cycles maybe benign. The existence of the Fed and it’s unlimited access to liquidity has exacerbated the magnitude, frequency and duration of boom/bust cycles.
Them are my sentiments.
November 21st, 2009 at 9:18 pm
I think a pretty good argument could be made that the dotcom still has not completely popped. If it was “graceful” then it was because it was manipulated. Nothing in nature pops gracefully, a normal pop is sudden, sharp, and severe. But I agree with Michael, there has been nothing graceful about what’s happend the last 9yrs. Even the manipulation was not graceful!
November 22nd, 2009 at 1:59 am
Here is the origin of the word “Manipulation”: Sense of “skillful handling of objects” is first recorded 1826; extended 1828 to “handling of persons” as well as objects.
http://dictionary.reference.com/browse/manipulation
Does anyone really think the Fed “manipulates”, “props up”, or “controls” anything?
Over long time periods, the Fed’s actions often have massive “unintended consequences”. The Fed does not “do” anything. Doing implies intentionality.
The Fed is like a child with a gun. That is a big part of the problem.
Ultimately, the real power lies with the Crowd. And when the Crowd wakes up to a stupid idea, watch out!(as things may be about to change)
November 22nd, 2009 at 2:17 am
Pretty easy to see where the Fed put the ’stop’ so to speak!
Chart
November 22nd, 2009 at 6:53 am
Although some still attempt it, over the last century many central banks have learned that it doesn’t pay to fade or lag too far behind the markets.
The Fed may bring liquidity to the horse’s mouth but it can’t make it drink, so to speak. Although the Fed follows the market with a punch bowl the Public(and the Fed) may feel it’s actually in “control” and “pushing on a string”.
November 22nd, 2009 at 6:57 am
Likely, the Fed tailors its actions to please creditors in what is a multi-trillion dollar debt market many times bigger than the stock market. The power to determine interest rates is entirely in the hands of the credit markets. The last thing the Fed wants is a loss of confidence in government paper.
November 23rd, 2009 at 9:54 am
I don’t know if this thread is still active, but I’ll throw some ideas out for any of you that are as bored as I am.
Blue Horseshoe-
I’m glad you realize that the real problem is fractional reserve banking. However, just because goldsmiths invented it, or the fact that its been around forever, does not mean we should just accept it as a fact of monetary life. (Theft has also been around forever, but we don’t throw in the towel on that matter.) The simple truth is that you cannot simultaneously have money and lend it out at the same time. Think about it…it just makes no logical sense. There is no other business in the world that tries to operate this way. If you were to deposit your car in a garage, with the expectation of being able to get it back on demand, would it make any sense for the garage to lend out your car while you were away?
Secondly, I don’t understand how you can argue against a gold standard by saying that new supplies of gold would serve as a serious disruption to the system. Essentially, you’re saying that new gold supplies, which only amount to ~ 1% or so of the total supply each year, would prevent the system from functioning smoothly. Now let’s contrast that scenario with our current paradigm. The fed doubled (100%!!!) its balance sheet in the space of two or three months!!! It is a complete contradiction to worry about a supply increase of a percent or two a year, but then completely ignore the money supply growth that can (and does) take place with a virtually limitless printing press and an extremely inflationary fraction-reserve environment.
Also, while you seem to be worried about how large the gold mining sector would grow, you make no mention of how large the banking and finance sectors have grown in the present day. Half of all ivy league graduates go directly to wall street or to law school (so they can become corporate lawyers and get in on the action.) This doesn’t trouble you? Our financial sector has grown disproportionately large, and its growth explosion can be traced to our abandonment of the gold standard- severing any link to monetary discipline.
Trender-
You seem to be in the camp that we’d be better off without a fed than with one, but I cannot accept your general sentiment that the fed is largely harmless and irrelevant. The fed wrote a check to citigroup for $300 billion and took junk mortgages as collateral. It also wrote a check for $500 billion to various central banks with god knows what for collateral. Every time it prints and then hands out money it steals from everyone else. The dollar has lost 95% of its value under the fed’s watch. That’s simple theft. What’s more, the fact that the fed exists gives incentive for banks to take larger risks than they would otherwise. I see what you’re saying about the fed being reactionary, but their “reaction” is always to steal.
November 23rd, 2009 at 4:27 pm
cy,
I did not say the Fed is “harmless”. I said the Feds’ policies are “irrelevant” since they rarely accomplish what they’re designed to do. The Fed has no solutions since it’s an integral part of the problems it’s trying to address. Like I said, the Fed does not freely make its decisions.
Looking to the Fed to solve our problems is like looking to an arsonist to put out a fire. We can only solve our problem when the people wake up to what’s actually happening. All of us individuals, collectively, have to accept responsibility for our current situation, only then can we start to move in the right direction. The crowd(the people) is more powerful than any institution, government or standing army.
Michael’s message about responsibility in his movie really resonates with me. He makes a great point but often and sadly we often learn through pain and suffering.
p.s. Also, I don’t like getting bogged down by historical specifics. What deeply interest me are the general lessons. I don’t really care for what happened in the past as much as how the experience is put together. If you know how the problem is put together, you already know the answer. Seeking the “right” answer directly is a futile, although popular, approach.
November 23rd, 2009 at 8:15 pm
cy, p.s.s. keep in mind the Fed follows the market.
November 26th, 2009 at 3:57 am
Hi all. What I’m saying is choices could be made to put the Fed’s actions right up there with the Austrian School in terms of money preservation. What we have today is also a choice.
Right now, the Fed looks at unemployment, GDP, etc and also looks very slightly at some fixed domestic staples like food and housing cost as CPI. The formula they use is not adjusted for what people are actually spending their money on from month to month, so purchasing power is only weakly reflected. This could be changed radically and without introducing an external standard such as gold or other physical.
What I’m also saying is Ron Paul (aka Ross Perot II), would likely not be interested in doing something so simple when his base is obviously some flavor or version of a “rapture” movement where the world is at imminent end and only the “good people” will be saved because of their religious or other intangible beliefs. Preaching gold and bullets will keep such people a lot more interested than a solution that makes the necessary improvements and refinements to the existing system.
Let it be known that I’m not a fan of the current crew of photogenic empty suits like Geithner either as they are not doing anything to make such changes either.
My advice to everybody here is to make your own adjustments to monetary policy by actively hedging your allocations accordingly and voting for those who will take the practical steps to keep the markets open and expanding in terms of universality, liquidity, and price discovery. EVERYTHING should be exchange priced and anybody with the required collateral should be allowed to participate.