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Fed Up With The Fed

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July 20, 2009

Last week’s news that Goldman Sachs reported $3.44 billion in earnings for the second quarter of 2009 provoked widespread outrage that was rather hard to avoid.  Even Jon Stewart saw fit to provide his viewers with an informative audio-visual presentation concerning the role of Goldman Sachs in our society.  Allan Sloan pointed out that in addition to the $10 billion Goldman received from the TARP program, (which it repaid) Goldman also received another $12.9 billion as a counterparty to AIG’s bad paper (which it hasn’t repaid). Beyond that, there was the matter of “the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company”.   Sloan lamented that despite this government largesse, Goldman is still fighting with the Treasury Department over how much it should pay taxpayers to buy back the stock purchase warrants it gave the government as part of the TARP deal.  The Federal Reserve did more than put Goldman on the fast track for status as a bank holding company (which it denied to Lehman Brothers, resulting in that company’s bankruptcy).  As Lisa Lerer reported for Politico, Senator Bernie Sanders questioned whether Goldman received even more assistance from the Federal Reserve.  Because the Fed is not subject to transparency, we don’t know the answer to that question.

A commentator writing for the Seeking Alpha website under the pseudonym:  Cynicus Economicus, expressed the opinion that people need to look more at the government and the Federal Reserve as being “at the root of the appearance of the bumper profits and bonuses at Goldman Sachs.”  He went on to explain:

All of this, hidden in opacity, has led to a point at which insolvent banks are now able to make a ‘profit’.  Exactly why has this massive bleeding of resources into insolvent banks been allowed to take place?  Where exactly is the salvation of the real economy, the pot of gold at the end of the rainbow of the financial system?  Like the pot of gold and the rainbow, if we just go a bit further…..we might just find the pot of gold.

In this terrible mess, the point that is forgotten is what a financial system is actually really for.  It only exists to allocate accumulated capital and provision of insurances; the financial system should be a support to the real economy, by efficiently allocating capital.  It is entirely unclear how pouring trillions of dollars into insolvent institutions, capital which will eventually be taken out of the ‘real’ economy, might facilitate this.  The ‘real’ economy is now expensively supporting the financial system, rather than the financial system supporting the real economy.

The opacity of the Federal Reserve has become a focus of populist indignation since the financial crisis hit the meltdown stage last fall.  As I discussed on May 25, Republican Congressman Ron Paul of Texas introduced the Federal Reserve Transparency Act (HR 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve as well as its member components, and require a report to Congress by the end of 2010.  Meanwhile, President Obama has suggested expanding the Fed’s powers to make it the nation’s “systemic risk regulator” overseeing banks such as Goldman Sachs, deemed “too big to fail”.  The suggestion of expanding the Fed’s authority in this way has only added to the cry for more oversight.  On July 17, Willem Buiter wrote a piece for the Financial Times entitled:  “What to do with the Fed”.  He began with this observation:

The desire for stronger Congressional oversight of the Fed is no longer confined to a few libertarian fruitcakes, conspiracy theorists and old lefties.  It is a mainstream view that the Fed has failed to foresee and prevent the crisis, that it has managed it ineffectively since it started, and that it has allowed itself to be used as a quasi-fiscal instrument of the US Treasury, by-passing Congressional control.

Since the introduction of HR 1207, a public debate has ensued over this bill.  This dispute was ratcheted up a notch when a number of economics professors signed a petition, urging Congress and the White House “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”  An interesting analysis of this controversy appears at LewRockwell.com, in an article by economist Robert Higgs.  Here’s how Higgs concluded his argument:

All in all, the economists’ petition reflects the astonishing political naivite and historical myopia that now characterize the top echelon of the mainstream economics profession. Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions.  Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy — its monetary order — cannot produce money and set interest rates better than free-market institutions can do so.  It is high time that they extended their education to understand that central planning does not work — indeed, cannot work — any better in the monetary order than it works in the economy as a whole.

It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.

Close down the Federal Reserve?  It’s not a new idea.  Back on September 29, when the Emergency Economic Stabilization Act of 2008 was just a baby, Avery Goodman posted a piece at the Seeking Alpha website arguing for closure of the Fed.  The article made a number of good points, although this was my favorite:

The Fed balance sheet shows that it injected a total of about $262 billion, probably into the stock market, over the last two weeks, pumping up prices on Wall Street.  The practical effect will be to allow people in-the-know to sell their equities at inflated prices to people-who-believe-and-trust, but don’t know.  Sending so much liquidity into the U.S.economy will stoke the fires of hyperinflation, regardless of what they do with interest rates.  In a capitalist society, the stock market should not be subject to such manipulation, by the government or anyone else.  It should rise and fall on its own merits.  If it is meant to fall, let it do so, and fast.  It is better to get the economic downturn over with, using shock therapy, than to continue to bleed the American people slowly to death through a billion tiny pinpricks.

So the battle over the Fed continues.  In the mean time, as The Washington Post reports, Fed Chairman Ben Bernanke takes his show on the road, making four appearances over the next six days.  Tuesday and Wednesday will bring his semiannual testimony on monetary policy before House and Senate committees.  Perhaps he will be accompanied by Goldman Sachs CEO, Lloyd Bankfiend, who could show everyone the nice “green shoots” growing in his IRA at taxpayer expense.

Our Generation Got Old

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October 13, 2008

As John McCain’s Presidential campaign goes swirling down the toilet during the final desperate weeks of its existence, we see its surrogates cling to the non-issue of Obama’s contact with 1960s radical activist, Bill Ayers.  As I said on October 2, McCain missed his chance to take control of this race by opposing the 700-billion-dollar “bailout bill”, which has yet to inspire the confidence of the investing public, foreign markets or the banks.  By reuniting with his old ally from the “campaign finance reform” days, Democratic Senator Russ Feingold of Wisconsin, as well as Democratic rising star, Senator Maria Cantwell of Washington, the “Blue Dog” Democrats and the so-called “House Republicans” led by Jeb Hensarling and Mike Pence, McCain could have secured his position as the man who would take the Republican Party into the new century.  Instead, he chose to follow the advice of the lobbyists who run his campaign:  Steve “Skinhead” Schmidt and (Jeffrey Dahmer look-alike) Rick Davis.  These “Guys on the Plane” (if I may steal an expression from Peggy Noonan) have their careers rooted in the negative campaigning strategies created by Lee Atwater and refined by Karl Rove.  These operatives have no other cards to play.  They have no experience in successful reliance upon a strategy, based solely on portraying their own candidate in a positive way.

As the nation’s economic condition becomes more perilous, the McCain campaign leans more heavily on its claim that Obama’s contacts with Bill Ayers should determine the outcome of the 2008 Presidential election.

At this point it’s starting to get funny.  Worse yet  … it is an indicator (to me, at least) of how old I am and how old my generation has become.  Back in my old home town (a place called Chicago) there is a writer for a local paper called the Chicago Tribune.  His name is John Kass.  Kass is an outspoken opponent of Chicago’s current mayor, Richard M. Daley and Kass has a nickname for him, just as I have nicknames for such worthy characters as Senator Joe “The Tool” Lieberman.  On Sunday, October 12, Kass expressed his outrage that Marilyn Katz, Ayers’ fellow member of the 1960s radical group, Students for a Democratic Society (SDS), is involved in Obama’s Presidential campaign.  Kass took particular umbrage at the fact that Marilyn Katz now has a successful public relations firm called: MK Communications.  According to Kass, MK Communications now represents the Chicago Police Department, City Colleges of Chicago, the city’s “Law Department” (actually referred to as the Office of the Corporation Counsel for the City of Chicago), and numerous other city departments  … including the venerable “Streets and San”.  Kass seemed like a shoe salesman trying to fit an old foot that was accustomed to the “militant radical” style of the 1960s, into the new, 21st century, “Terrorist” model. It  doesn’t fit.  The militant radicals of the 1960s used small bombs to make political statements.  There is an absence of information about the number of alleged casualties or injuries resulting from such bombings.  Today, “terrorists” use small bombs to take down airplanes and they use airplanes to take down skyscrapers.  The use of the “terrorist” label to a 1960s radical is an obvious stretch.

The rant by the Tribune’s Kass about how former radical, Marilyn Katz, has become a “mainstream” figure in Chicago’s Public Relations business community, reminded me of an old song.  On August 17, 1969, Grace Slick and her band, Jefferson Airplane, woke up the crowd at the Woodstock Music and Arts Fair with what she described as “morning maniac music”: the title song from their upcoming album, Volunteers.  Included among the song’s lyrics was the following passage:

One generation got old.
One generation got soul.
This generation got no destination to hold.

The Marilyn Katz story and the Bill Ayers story tell me that our generation got old.  The former radicals of that era are now playing important roles within what they used to consider an archaic milieu, referred to as “the establishment”.  Nevertheless, many members of this latest “establishment” generation are in a fight to retain the claim of having “soul” by helping to bring an African-American to The White House for the first time in this nation’s history.  The crowds at the McCain and Palin rallies have expressed their fear of what an Obama Administration might bring to America.  These McCain supporters have been able to replace their fears of how they are going to economically survive from day to day and how to fund their retirement plans with the fears conjured up by Schmidt, Davis and their ilk.  The ball is now in the court of the Obama campaign to help establish a legacy for these people and all Americans – by righting the ship capsized by the “perfect storm” of greed, corruption and deregulation.  Another three-pointer would be nice.

McCain Loses His Chance

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October 2, 2008

It was the opportunity for a “game-changing move” in the 2008 Presidential campaign.  Just as John McCain was dropping back in the polls, providing Barack Obama the chance to “close the deal” even more decisively than he did with Hillary Clinton, McCain missed the opportunity to turn the game around.  Last week, he arrived in Washington (after the pseudo-suspension of his campaign) on a mission to save us all from the crisis declared by Treasury Secretary Henry Paulson.  After McCain arrived, he found a number of both Republican and Democratic members of the House of Representatives opposed to the revised, 110-page, economic “bailout bill” (the Emergency Economic Stabilization Act of 2008).  At that point in time, McCain had the opportunity to break with the unpopular Bush Administration and band together with the 133 Republican and 95 Democratic House members (who eventually voted against the bill) to form a “coalition of mavericks” (oxymoron, non-sequitur or both?) resisting this bailout of the big banks and other “fat cats” on Wall Street.  He didn’t.  He chose instead, to copy whatever Barack Obama was doing.  Besides, his move dovetailed well with the pseudo-“bipartisan” duet he had been playing, throughout the entire campaign, with Joe “The Tool” Lieberman.  Had McCain stood with those 133 young Republican members of the House and the 95 Democrats (many of whom consider themselves conservative, “Blue Dog” Democrats) he could have re-ignited his flatulent campaign.  (Is it really safe to do that?  —  Let’s ask Johnny Knoxville.)

Howard Fineman provided an interesting retrospective of this phase in the evolution the economic “bailout bill” at the Newsweek website on September 30:

The Paulson Plan is not great. Some two hundred academic economists have ridiculed it, and so have the House Republicans, by a 2-1 margin.  Public opinion (and not just the angry phone callers) is turning against the measure—to the extent that anybody understands it.

But the consensus is that Washington has to do something, and that the current version is far better than what the lawmakers started with.

McCain made a show of returning to Washington to try to jam the original measure through.  He deserves credit for the instinct. An old Navy motto is: Don’t just stand there, DO something!  That is McCain to the core, and so much the better for it.

But when he got to town, he realized something that no one had bothered to tell him, apparently:  the grassroots of his own party (the grassroots that has never really trusted him) hated the Paulson Plan.  They weren’t about to support it and risk their own necks.  McCain worked the phones, but fell back in the ranks.

When the second revision of this bill (at over 400 pages) finally made it to the Senate floor for the vote on Wednesday, October 1, there were 9 Democrats, 15 Republicans and Independent Senator Bernie Sanders of Vermont, voting against it.  McCain again missed the opportunity for a truly bipartisan resistance to this measure.  Such an act would have demonstrated genuine leadership.  He could have rejoined his old buddy, Wisconsin Senator Russ Feingold, as well as Florida Democrat Bill Nelson and rising Democratic star, Maria Cantwell from the State of Washington, all of whom voted against this measure.  Such a move would have emboldened resistance to the “bailout bill” in the House of Representatives, where the term of office lasts only two years.  (The short term results in greater accountability to American voters, who are believed to have notoriously short memory spans.)

Is this bill really necessary?  On the October 1 edition of MSNBC’s Countdown with Keith Olbermann, Paul Krugman, Economics Professor at Princeton University, admitted that:

…  it will be relatively ineffective, although rejecting it will cause a big run on the system.  Then we will come back and do it right in January or February  …

When Keith Olbermann asked Krugman about the likelihood that nothing consequential would happen if this bill did not pass, Krugman responded by saying that such possibilities have “shrunk in the past week”.  Krugman went on to claim that “the credit crunch has started to hit Main Street”, using, as an example, the rumor that: “McDonald’s has started to cut credit to its franchisees.”  McDonald’s has issued a press release stating that this was not the case.  What is really happening is that the banks are acting like spoiled children, holding their breath until the government gives them what they want, using the threat of unavailable credit as a gun to the head of Congress.

Public opposition to this bailout was best summed up by Peggy Noonan, when she appeared on The Daily Show with Jon Stewart on October 1:

But we are in a real economic crisis and the American political establishment said we must do A, B and C to deal with it and the American people  …  said:  “No.  We don’t trust you to handle this.  We don’t trust you to do the right thing.”

John McCain had the opportunity to stand with those people, as well as the 133 House Republicans and 15 Senate Republicans, to do “the right thing”.  He decided to forego that opportunity.  Barack Obama said, on the Senate floor Wednesday, that it was not worth risking the American economy and the world economy by challenging this bill.  John McCain decided that it was not worth risking his Presidential campaign on such a challenge.  That’s too bad for him.  The gamble probably would have paid off.

Will It Work?

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September 29, 2008

This is the question on everyone’s mind as they ponder the new “bailout bill”, officially known as the Emergency Economic Stabilization Act of 2008.  It is available for everyone to read on the Internet (all 110 pages of it), but most people are looking for answers to the most important questions:  Will it pass and will it work?

Just after midnight on Monday morning, David Rogers, of Politico.com, reported that the bill (which goes to the House floor on Monday and the Senate floor on Wednesday) was still facing resistance from both the right and the left, despite the support voiced by both Presidential candidates.  Republican Congressman Chris Shays of Connecticut was quoted in the article as saying that:  “For this to pass, a lot of people are going to have to change their minds”.  The following passage provided more light on the view of this bill from those House Republicans providing resistance to the measure:

Yet a closed-door party meeting Sunday night illustrated all the problems anew.  The session ran for hours, and while Minority Leader John Boehner (R-Ohio) said he would vote for the bill, he could not predict the number of votes he would have for it, and he famously referred to the measure as a “crap sandwich” before his rank and file.

Jackie Kucinich reported for TheHill.com that earlier in the day, Congressman Mike Pence of Indiana had sent out a letter to his fellow Republicans in opposition to this bill:

The decision to give the federal government the ability to nationalize almost every bad mortgage in America interrupts this basic truth of our free market economy …  Republicans improved this bill but it remains the largest corporate bailout in American history, forever changes the relationship between government and the financial sector, and passes the cost along to the American people.  I cannot support it.

The opposition to the bill from the Democratic side was discussed in another Politico.com article:  this one by Ryan Grimm.  Grimm’s article discussed an “intense” Democratic Caucus meeting.  He quoted Minnesota Congressman James Oberstar as describing resistance to the bill coming from across the complete spectrum of Democratic opinion, from liberal to conservative.  California Congressman Brad Sherman had met with Republican Darrell Issa before the meeting.  Sherman’s contribution to the Caucus discussion was described this way by Ryan Grimm:

Sherman spoke out against the bill during the caucus meeting, arguing that billions of dollars would flow to foreign investors, that oversight was lax and that limits on executive compensation were too weak.   Rep. Joe Baca (D-Calif.) said he was leaning toward a no vote, too.

The House vote on the bill is scheduled to take place after a four-hour debate, beginning at 8 a.m. on Monday.

Whether or not this bill will ultimately “work” is another question.  Paul Krugman, Economics Professor at Princeton University, wrote in the Sunday New York Times:

The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing.  But it’s not what you’d actually call a good plan, and it won’t end the crisis.  The odds are that the next president will have to deal with some major financial emergencies.

Steve Lohr’s report from the Sunday New York Times, discussed the outlook for this plan, as voiced by Robert E. Hall, an economist and senior fellow at the Hoover Institution, a conservative research group at Stanford.  Lohr observed:

There was no assurance that the bailout plan would work as intended to ease financial turmoil and economic uncertainty.

Lohr’s article then focused on the opinion of Nouriel Roubini, an economist at the Stern School of Business at New York University:

The $350 billion to $400 billion in bad credit reported by the banks so far could eventually exceed $1.5 trillion, he estimated, as banks are forced to write off more bad loans, not only on more housing-related debt, but also for corporate lending, consumer loans, credit cards and student loans.

The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government’s role to move it along instead of coddling the banks if the financial system is going to return to health.

A more unpleasant perspective appeared in an editorial published in the September 25 edition of The Economist:

If the economics of Mr Paulson’s plan are broadly correct, the politics are fiendish.  You are lavishing money on the people who got you into this mess. Sensible intervention cannot even buy long-term relief:  the plan cannot stop house prices falling and the bloated financial sector shrinking. Although the economic risk is that the plan fails, the political risk is that the plan succeeds.  Voters will scarcely notice a depression that never happened.  But even as they lose their houses and their jobs, they will see Wall Street once again making millions.

Whatever your definition of “success” might be for this plan, the experts agree that things aren’t going to return to “normal” for a long time, if ever.