Monday, January 02, 2006

 

'No Way To Challenge What The Fed Does'

Scripps Howard News Service had this short review of the Fed's history and the new nominee. "Ben Bernanke will succeed the retiring Alan Greenspan as head of the Federal Reserve at the end of this month, becoming the 14th chairman since Congress created the central bank to put an end to 'moneyed trusts' that politicians blamed for periodic financial panics."

"Before Congress chartered the Fed in 1913, it fell to Wall Street financiers, principally J.P. Morgan, and thousands of small community banks to bankroll American business and territorial expansion. The economy was based on a constant currency supply pegged to the price of gold so that money couldn't expand in case of a bank run. After a century of these panics, Congress set up the Federal Reserve System in hopes of maintaining an adequate supply of currency and credit and to try stabilizing a mushrooming industrial economy."

"The Federal Reserve Board of Governors, led by the Fed chairman, was established with 12 regional Federal Reserve Banks to supply the nation with money through commercial banks. The Fed also was set up to supervise nationally chartered commercial banks' operations. It a so serves as a credit regulator. The Fed also handles check-clearing duties. The Fed's policy-making Open Market Committee has charge of monetary policy and is made up of the chairman, the board members and a rotating group of regional Federal Reserve Bank chiefs."

"The committee uses interest rates that it charges member banks and the banks charge each other for overnight borrowing to increase or contract the supply of currency and credit and try keeping the economy on an even keel."

"The 1970s oil shocks and the end of all ties between the greenback and gold made the Fed's controlling of the world supply of U.S. currency central to its role, says economist Lee Hoskins, a member of the 'Shadow Fed,' a curmudgeonly committee formed in the 1970s to keep an eye on the central bank. Arthur Burns, the White House economic adviser Nixon made Fed chief in 1970, came to believe 'the logic of events' dictated expansive growth of the U.S. money supply on his watch, according to Burns biographer Wyatt Wells. "

"Eventually, inflation soared to double digits as the wage-price spiral raced out of control, and it fell to President Jimmy Carter's choice of Paul Volcker as Fed chief in 1979 to break the back of inflation by ratcheting up interest rates, sending mortgage and car loans soaring to 20 percent. As Volcker's successor in 1987, Greenspan stayed on the inflation-control course through interest rates. Inflation was targeted implicitly under Greenspan, whose verbal obfuscations were studied from Wall Street to Main Street for clues even after the Fed finally went public with announcements of interest rate decisions in 1994."

"Alan Greenspan came to enjoy mythic stature, enough so that 'Maestro' was the title of Bob Woodward's celebrity bio that praised Greenspan's rapid response to the 1987 stock-market crash, the '90s Mexican peso crisis and Asian 'contagion.' Fed accommodation when the tech bubble burst and the 2001 terrorist strikes only added to his luster. But the concept of Fed chief as financial rock star is a recent phenomenon and a role Bernanke isn't likely to repeat, Fed-watchers agree."

"Bernanke is one of a number of monetary economists to foresee focusing a central bank's role on fighting inflation through controlling the money supply. He's been 'hooked' ever since he read Milton Friedman and Anna Schwartz' seminal 1963 tome 'Monetary History of the United States' as a graduate student."

"To advance monetary policy, Bernanke has theorized in favor of 'inflation targeting,' in which the Fed sets explicit goals for inflation control 'to anchor public expectations about inflation.' Were he to translate inflation targeting theory to fact by winning the consensus of the Fed's Open Market Committee, 'It would make the Fed accountable because now there's no way to challenge what the Fed does,' says Shadow Fed founder Schwartz."

"Bernanke is also a student of the Depression, the Fed's most dismal failure. With mounting bank failures and depositor runs on banks that fought to stay open in the wake of the 1929 stock market crash and deepening recession, Congress moved to create a new array of bank, thrift, securities and insurance regulators."

"Those Depression-era firewalls separating banks, brokerage houses and insurance companies stayed largely in place until the 1990s. In 1999, Congress and President Bill Clinton agreed on a financial deregulation bill that made the Federal Reserve the super-overseer of a U.S. financial system that now promises one-stop financial shopping."

"It is a role and responsibility to which the Fed is still adjusting, says University of Pennsylvania political scientist Donald Kettl, author of 'Leadership at the Fed.'"

"Kettl notes that Greenspan hasn't hesitated to speak out the 'significant risks' of the federal budget deficit, an 'irrationally exuberant' stock market and other issues not strictly in the Fed's purview, something Bernanke says he doesn't plan to do."

Comments:
I used to enjoy watching Congressman Henry Gonzales rail against the Fed on the house floor, reminding everyone that there has never been an audit of the organization. I wonder why that is?
 
Ben! It is still very slow on this blog, so I decided to drop my 2 cents.
I look at FRB like I would look at big fund manager.
People who put money in funds think that fund manager's priority is best interest of their clients. But I disagree with that. The first priority of fund manager is to feed his family. If it comes with the best interest of his clients, good. Manager wants his clients interest to be taking care of, but not at cost of starving his family.
My point is: FRB being created to stabilize banking system and being corporation which shareholders are the banks, is acting in the best interest of BANKS, not the economy. Obviously the well being of economy is important to the banks, but, if the banks have to be protected at the expense of the economy, FBR will not "blink an eye" to sacrify the economy.
It amazes me that those big experts are talking about FED popping or not popping the housing bubble, because economy. FED couldn't care less. Their previous and present and future actions are taken from the perspective of the best interest of the banks, and banks only.
The credit bubble is just open buffet table for the banks. And now, if you think about it, banks dont hold that many mortgages, like they used to, the risk is all in the hands of MBS holders, domestic and abroad. That is why Fannie and Freddie Maes were protected by establishments. It was perfect outlet for the mortgages. If colapse in housing ruin some institutions, not many of them will be in the banking sector. I would worry more about Pension Funds. Though, I know there are other risks involved.
 
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