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Fedbashing Is On The Rise

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It seems as though everyone is bashing the Federal Reserve these days.  In my last posting, I criticized the Fed’s most recent decision to create $600 billion out of thin air in order to purchase even more treasury securities and mortgage-backed securities by way of the recently-announced, second round of quantitative easing (referred to as QE2).  Since that time, I’ve seen an onslaught of outrage directed against the Fed from across the political spectrum.  Bethany McLean of Slate made a similar observation on November 9.  As the subtitle to her piece suggested, people who criticized the Fed were usually considered “oddballs”.  Ms. McLean observed that the recent Quarterly Letter by Jeremy Grantham (which I discussed here) is just another example of anti-Fed sentiment from a highly-respected authority.  Ms. McLean stratified the degrees of anti-Fed-ism this way:

If Dante had nine circles of hell, then the Fed has three circles of doubters.  The first circle is critical of the Fed’s current policies. The second circle thinks that the Fed has been a menace for a long time.  The third circle wants to seriously curtail or even get rid of the Fed.

From the conservative end of the political spectrum, the Republican-oriented Investor’s Business Daily provided an editorial on November 9 entitled, “Fighting The Fed”.  More famously, in prepared remarks to be delivered during a trade association meeting in Phoenix, Sarah Palin ordered Federal Reserve chairman Ben Bernanke to “cease and desist” his plan to proceed with QE2.  As a result of the criticism of her statement by Sudeep Reddy of The Wall Street Journal’s Real Time Economics blog, it may be a while before we hear Ms. Palin chirping about this subject again.

The disparagement directed against the Fed from the political right has been receiving widespread publicity.  I was particularly impressed by the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009.  Here is the most-frequently quoted portion of Bunning’s diatribe:

.   .   .   you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail.  Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Michael Grunwald, author of Time magazine’s “Person of the Year 2009” cover story on Ben Bernanke, saw fit to write a sycophantic “puff piece” in support of Bernanke’s re-confirmation as Fed chairman.  In that essay, Grunwald attempted to marginalize Bernanke’s critics with this statement:

The mostly right-leaning (deficit) hawks rail about Helicopter Ben, Zimbabwe Ben and the Villain of the Year,   . . .

The “Helicopter Ben” piece was written by Larry Kudlow.  The “Zimbabwe Ben” and “Villain of the Year” essays were both written by Adrienne Gonzalez of the Jr. Deputy Accountant website, who saw her fanbase grow exponentially as a result of Grunwald’s remark.  The most amusing aspect of Grunwald’s essay in support of Bernanke’s confirmation was the argument that the chairman could be trusted to restrain his moneyprinting when confronted with demands for more monetary stimulus:

Still, doves want to know why he isn’t providing even more gas. Part of the answer is that he doesn’t seem to think that pouring more cash into the banking system would generate many jobs, because liquidity is not the current problem.  Banks already have reserves; they just aren’t using them to make loans and spur economic activity.  Bernanke thinks injecting even more money would be like pushing on a string.
*   *   *

To Bernanke, the benefits of additional monetary stimulus would be modest at best, while the costs could be disastrous. Reasonable economists can and do disagree.

Compare and contrast that Bernanke with the Bernanke who explained his rationale for more monetary stimulus in the November 4, 2010 edition of The Washington Post:

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.

*   *   *

But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.

Bernanke should have said:  “Pushing on a string should help us fulfill that obligation.”

Meanwhile, the Fed is getting thoroughly bashed from the political left, as well.  The AlterNet website ran the text of this roundtable discussion from the team at Democracy Now (Michael Hudson, Amy Goodman and Juan Gonzalez – with a cameo appearance by Joseph Stiglitz) focused on the question of whether QE2 will launch an “economic war on the rest of the world”.  I enjoyed this opening remark by Michael Hudson:

The head of the Fed is known as “Helicopter Ben” because he talks about dropping money into the economy.  But if you see helicopters, they’re probably not your friends.  Don’t go out and wait for them to drop the money, because the money is all going electronically into the banks.

At the progressive-leaning TruthDig website, author Nomi Prins discussed the latest achievement by that unholy alliance of Wall Street and the Federal Reserve:

The Republicans may have stormed the House, but it was Wall Street and the Fed that won the election.

*   *   *

That $600 billion figure was about twice what the proverbial “analysts” on Wall Street had predicted.  This means that, adding to the current stash, the Fed will have shifted onto its books about $1 trillion of the debt that the Treasury Department has manufactured.  That’s in addition to $1.25 trillion more in various assets backed by mortgages that the Fed is keeping in its till (not including AIG and other backing) from the 2008 crisis days.  This ongoing bailout of the financial system received not a mention in pre- or postelection talk.

*   *   *

No winning Republican mentioned repealing the financial reform bill, since it doesn’t really actually reform finance, bring back Glass-Steagall, make the big banks smaller or keep them from creating complex assets for big fees.  Score one for Wall Street.  No winning Democrat thought out loud that maybe since the Republican tea partyers were so anti-bailouts they should suggest a strategy that dials back ongoing support for the banking sector as it continues to foreclose on homes, deny consumer and small business lending restructuring despite their federal windfall, and rake in trading profits.  The Democrats couldn’t suggest that, because they were complicit.  Score two for Wall Street.

In other words, nothing will change.  And that, more than the disillusionment of his supporters who had thought he would actually stand by his campaign rhetoric, is why Obama will lose the White House in 2012.

The only thing I found objectionable in Ms. Prins’ essay was her reference to “the pro-bank center”.  Since when is the political center “pro-bank”?  Don’t blame us!

As taxpayer hostility against the Fed continues to build, expect to see this book climb up the bestseller lists:  The Creature from Jekyll Island.   It’s considered the “Fedbashers’ bible”.


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The Federal Reserve Is On The Ropes

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November 23, 2009

Last February, Republican Congressman Ron Paul introduced HR 1207, the Federal Reserve Transparency Act of 2009, by which the Government Accountability Office would be granted authority to audit the Federal Reserve and present a report to Congress by the end of 2010.  On May 21, Congressman Alan Grayson, a Democrat from Florida, wrote to his Democratic colleagues in the House, asking them to co-sponsor the bill. The bill eventually gained over 300 co-sponsors.  By October 30, Congressman Mel Watt, a Democrat from North Carolina, basically “gutted” the bill according to Congressman Paul, in an interview with Bob Ivry of Bloomberg News.  Watt subsequently proposed a competing measure, which was aided by the circulation of a letter by eight academics, who were described as a “political cross-section of prominent economists”.  Ryan Grim of The Huffington Post disclosed on November 18 that the purportedly diverse, independent economists were actually paid stooges of the Federal Reserve:

But far from a broad cross-section, the “prominent economists” lobbying on behalf of the Watt bill are in fact deeply involved with the Federal Reserve.  Seven of the eight are either currently on the Fed’s payroll or have been in the past.

After HR 1207 had been undermined by Watt, an amendment calling for an audit of the Federal Reserve was added as amendment 69B to HR3996, the Financial Stability Improvement Act of 2009.  The House Finance Committee voted to approve that amendment on November 19.  This event was not only a big win for Congressmen Paul and Grayson — it also gave The Huffington Post’s Ryan Grim the opportunity for a “victory lap”:

In an unprecedented defeat for the Federal Reserve, an amendment to audit the multi-trillion dollar institution was approved by the House Finance Committee with an overwhelming and bipartisan 43-26 vote on Thursday afternoon despite harried last-minute lobbying from top Fed officials and the surprise opposition of Chairman Barney Frank (D-Mass.), who had previously been a supporter.

*   *   *

“Today was Waterloo for Fed secrecy,” a victorious Grayson said afterwards.

Scott Lanman of Bloomberg News pointed out that this battle was just one of many legislative onslaughts against the Fed:

The Fed’s powers and rate-setting independence are under threat on several fronts in Congress.  Separately yesterday, the Senate Banking Committee began debate on legislation that would strip the Fed of bank-supervision powers and give lawmakers greater say in naming the officials who vote on monetary policy.

*   *   *

Paul and other lawmakers have accused the Fed of lax oversight of banks and failing to avert the financial crisis.

Federal Reserve Chairman Ben Bernanke is feeling even more heat because the Senate Banking Committee will begin hearings concerning Bernanke’s reappointment as Fed Chair.  The hearings will begin on December 3, the same day as President Obama’s jobs summit.  Senate Banking Committee chair, Chris Dodd, revealed to videoblogger Mike Stark that Bernanke’s reappointment is “not necessarily” a foregone conclusion.

Let’s face it:  the public has finally caught on to the fact that the mission of the Fed is to protect the banking industry and if that is to be accomplished at the public’s expense — then so be it.  Back at The Huffington Post, Tom Raum explained how this heightened awareness of the Fed’s activities has resulted in some Congressional pushback:

Many lawmakers question whether the Fed’s money machine has mainly benefited financial markets and not the broader economy.  Lawmakers are also peeved that the central bank acted without congressional involvement when it brokered the 2008 sale of failed investment bank Bear Stearns and engineered the rescue of insurer American International Group.

Tom Raum echoed concern about the how the current increase in “anti-Fed” sentiment might affect the Bernanke confirmation hearings:

Should Bernanke be worried?

“Not only should be worried, he’s clearly ratcheted up his game in terms of his communications with Congress,” said Norman Ornstein, a senior fellow at the American Enterprise Institute.

Ornstein said the Fed bashing this time is different from before, with “a broader base of support.  And it’s coming from people who in the past would not have hit the Fed.  There’s a lot of populist anger out there — on the left, in the center and on the right.  And politicians are responsive to that.”

Populist anger with the Fed will certainly change the way history will regard former Fed chairman, Alan Greenspan.  Fred Sheehan’s new book:  Panderer to Power:  The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, could not have been released at a better time.  At his blog, Sheehan responded to five questions about Greenspan, providing us with a taste of what to expect in the new book.  Here is one of the interesting points, demonstrating how Greenspan helped create our current crisis:

The American economy’s recovery from the early 1990s was financial.  This was a first.  The recovery was a product of banks borrowing, leveraging and lending to hedge funds.  The banks were also creating and selling complicated and very profitable derivative products.  Greenspan needed the banks to grow until they became too-big-to-fail.  It was evident the “real” economy — businesses that make tires and sell shoes — no longer drove the economy.  Thus, finance was given every advantage to expand, no matter how badly it performed.  Financial firms that should have died were revived with large injections of money pumped by the Federal Reserve into the banking system.

It’s great to see Congress step up to the task of exposing the antics of the Federal Reserve.  Let’s just hope these efforts meet with continued success.



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