May 25, 2009
For some reason, the Boston College School of Law invited Federal Reserve Chairman, B.S. Bernanke, to deliver the commencement address to the class of 2009 on May 22. While reading the text of that oration, I found the candor of this remark at the beginning of his speech, to be quite refreshing:
Along those lines, last spring I was nearby in Cambridge, speaking at Harvard University’s Class Day. The speaker at the main event, the Harvard graduation the next day, was J. K. Rowling, author of the Harry Potter books. Before my remarks, the student who introduced me took note of the fact that the senior class had chosen as their speakers Ben Bernanke and J. K. Rowling, or, as he put it, “two of the great masters of children’s fantasy fiction.” I will say that I am perfectly happy to be associated, even in such a tenuous way, with Ms. Rowling, who has done more for children’s literacy than any government program I know of.
Meanwhile, that great master of children’s fantasy fiction (and money printing) is now faced with the possibility that someday, someone might actually start looking over his shoulder in attempt to get some vague idea of just what the hell is going on over at the Federal Reserve.
The Federal Reserve’s resistance to transparency has been a favorite topic of many commentators. For example, once Ben Bernanke took over the Fed Chairmanship from Alan Greenspan in 2006, Ralph Nader expressed his high hopes that Bernanke might adopt Nader’s suggested “seven policies of openness”. Dream on, Ralph!
Speaking of children’s fantasy fiction, one expert on that subject is Congressman Alan Grayson. As the Representative of Florida’s Eighth Congressional District, his territory includes Disney World. Thus, it should come as no surprise that back in January of 2009, as a new member of the House Financial Services Committee, he immediately set about cross-examining Federal Reserve Vice-Chairman Donald Kohn about what had been done with the 1.2 trillion dollars in bank bailout money squandered by the Fed after September 1, 2008. Glenn Greenwald of Salon.com provided a five-minute video clip of that testimony along with an audio recording of his 20-minute interview with Congressman Grayson, focusing on the complete lack of transparency at the Federal Reserve.
Better yet was Congressman Grayson’s questioning of Federal Reserve Board Inspector General Elizabeth Coleman on May 7. In one of the classic “WTF Moments” of all time, Ms. Coleman admitted that she had no clue about the “off balance sheet transactions” by the Federal Reserve, reported by Bloomberg News as amounting to over nine trillion dollars in the previous eight months. If you haven’t seen this yet, you can watch it here. After reviewing this video clip, Yves Smith of Naked Capitalism was of the opinion that Coleman was not stonewalling, but instead was “clearly completely clueless”. Ms. Smith pointed out how opacity at the Federal Reserve may be by design, with the apparent motive being obfuscation:
But there is a possibly more important issue at stake. The interview is with the Inspector General of the Federal Reserve Board of Governors. The programs are actually at the Federal Reserve Bank of New York. For reasons I cannot fathom, the Board of Governors is subject to Freedom of Information Act requests, while the Fed of New York has been able to rebuff them.
So I take Coleman’s inability to answer key questions to be a feature, not a bug. The Fed of New York probably can answer Congressional questions, is taking care to limit what it conveys to the Board so as to keep the information from Congress and the public. Note in the questioning the emphasis on “high level reviews”.
In order to shine a bright light on the Federal Reserve, Republican Congressman Ron Paul of Texas has introduced the Federal Reserve Transparency Act, (H.R. 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve and its member components, and require a report to Congress by the end of 2010. On May 21, Congressman Alan Grayson wrote to his Democratic colleagues in the House, asking them to co-sponsor the bill. Among the many interesting points made in his letter were the following:
Furthermore, the Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system. The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury’s balance sheet. With discussions of allocating even more power to the Federal Reserve as the “systemic risk regulator” of the credit markets, more oversight over the central bank’s operations is clearly necessary.
The net effect of recent actions has been to isolate financial policy-making entirely from democratic input, and allow the Treasury Department to leverage the Federal Reserve’s balance sheet to spend money it cannot get appropriated from Congress. The public does not know where trillions of its dollars are going, and so has no meaningful control over the currency or this unappropriated “budget”. The extraordinary size of these lending facilities combined, the extreme secrecy, and the private influence is a dangerous seizure of Congress’s constitutional prerogative to appropriate public monies and control the currency.
You can do your part for this cause by signing the on-line petition. Let Congress know that we will no longer tolerate “children’s fantasy fiction” from the Federal Reserve. Demand an audit of the Federal Reserve as well as a report to the public of what that audit reveals.
Where The Money Is
June 1, 2009
For the past few months we have been hearing TV “experts” tell us that “it’s almost over” when discussing the Great Recession. Beyond that, many of the TV news-readers insist that the “bear market” is over and that we are now in a “bull market”. In his new column for The Atlantic (named after his book A Failure of Capitalism) Judge Richard A. Posner is using the term “depression” rather than “recession” to describe the current state of the economy. In other words, he’s being a little more blunt about the situation than most commentators would care to be. Meanwhile, the “happy talk” people, who want everyone to throw what is left of their life savings back into the stock market, are saying that the recession is over. If you look beyond the “good news” coming from the TV and pay attention to who the “financial experts” quoted in those stories are … you will find that they are salaried employees of such companies as Barclay’s Capital and Charles Schwab … in other words: the brokerages and asset managers who want your money. A more sober report on the subject, prepared by the National Association for Business Economics (NABE) revealed that 74 percent of the economists it surveyed were of the opinion that the recession would end in the third quarter of this year. Nineteen percent of the economists surveyed by the NABE predicted that the recession would end during the fourth quarter of 2009 and the remaining 7 percent opined that the recession would end during the first quarter of 2010.
Some investors, who would rather not wait for our recession to end before jumping back into the stock market, are rapidly flocking to what are called “emerging markets”. To get a better understanding of what emerging markets are all about, read Chuan Li’s (mercifully short) paper on the subject for the University of Iowa Center for International Finance and Development. The rising popularity of investing in emerging markets was evident in Fareed Zakaria’s article from the June 8 issue of Newsweek:
On May 31, The Economic Times reported similarly good news for emerging markets:
The Seeking Alpha website featured an article by David Hunkar, following a similar theme:
On May 29, The Wall Street Journal‘s Smart Money magazine ran a piece by Elizabeth O’Brien, featuring investment bargains in “re-emerging” markets:
As for The Wall Street Journal itself, the paper ran a June 1 article entitled: “New Driver for Stocks”, explaining that China and other emerging markets are responsible the rebound in the demand for oil:
Jim Lowell of MarketWatch wrote a June 1 commentary discussing some emerging market exchange-traded funds (ETFs), wherein he made note of his concern about the “socio-politico volatility” in some emerging market regions:
On May 29, ETF Guide discussed some of the exchange-traded funds focused on emerging markets:
A website focused solely on this area of investments is Emerging Index.
So if you have become too risk-averse to allow yourself to get hosed when this “bear market rally” ends, you may want to consider the advantages and disadvantages of investing in emerging markets. Nevertheless, “emerging market” investments might seem problematic as a way of dodging whatever bullets come by, when American stock market indices sink. The fact that the ETFs discussed in the above articles are traded on American exchanges raises a question in my mind as to whether they could be vulnerable to broad-market declines as they happen in this country. That situation could be compounded by the fact that many of the underlying stocks for such funds are, themselves, traded on American exchanges, even though the stocks are for foreign corporations. By way of disclosure, as of the time of writing this entry, I have no such investments myself, although by the time you read this . . . I just might.
Update: I subsequently “stuck my foot in the water” by investing in the iShares MSCI Brazil Index ETF (ticker symbol: EWZ). Any guesses as to how long I stick with it?
June 3 Update: Today the S&P 500 dropped 1.37 percent and EWZ dropped 5.37 percent — similar to the losses posted by many American companies. Suffice it to say: I am not a happy camper! I plan on unloading it.
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