Archive for the Greenspan Category

The Kids (At The Fed) Are Not Alright (January 30, 2012)

Posted in Banks and Banking System, Bernanke, Federal Reserve, Greenspan, Kleptocracy, Prison/Criminology, Society on January 30, 2012 by e-ssay.org

. . .

K          “They sound like a bunch of seventh graders snapping their towels in the locker room and squealing at each other.”

J          “Seems that the model of adult life as ‘high school writ large’ has degenerated into ‘junior high school writ large.’”

K          “Civilization may be on the retrograde as our society slides into collapse.  Our national destiny may be heading toward a state of ‘kindergarten writ large.’  Too many of our politicians have problems ‘playing well with others.’  At least at the Fed, the clowns were all playing ‘Ring Around The Rosie’ with each other while disregarding the decline outside.”

J          “The Fed should be required to release transcripts every year rather than after five years.  What is transpiring and conspiring is too important to wait.”

K          “Years ago, the notion of ‘Groupthink’ was trendy.  The idea is that a group may be more concerned about maintaining harmony that developing a realistic perception of the situation they confront.  You wonder if even one of the Fed economists was writing internal e-mails warning of what was obvious to anyone who looked outside.”

J          “And got together after work with a friend over a beer and despaired about the situation.”

. . .

K          “Grab a sheet of paper and jot down the names of three individuals, trained as economists or not, who have a clue about what is going on in the economy.”

J          “. . .  How about two?”

K          “Two will do.”

J          “. . .  I am working on it.  . . .  How about one?”

K          “One is a start.”

J          “. . .  Can I have until tomorrow?”

K          “Take your time.  Larry Summers’ statement about women in scientific disciplines may be 180 degrees from the truth.”

J          “Summers is reliable because he is reliably wrong especially about the ‘dismal science.’”

K          “The only individuals who have a clue in our society about our economic circumstances are women – Brooksley Born, Sheila Bair, Elizabeth Warren, Yves Smith, Nicole Foss, Gretchen Morgenson, Terry Gross, Christine Lagarde, etc.”

J          “That is because women care.  When you think about it, the forte of our fellow males is starting wars and filling prisons.  When you get right down to it, the males who start the wars should fill our prisons.”

K          “Talent is a mix of a tutored and sage intellect, personal and intellectual integrity, and good old-fashioned courage.  America simply does not have talent at the top.  The élite is not élite.  And the current feeder system of universities, foundations and fellowships is designed to ferret out the same charlatans and promote them into positions of power in America.”

. . .

[See the article and comments in “The Washington Post” discussing the delusions at the Federal Reserve Bank six years ago at http://www.washingtonpost.com/business/economy/greenspan-image-tarnished-by-newly-released-documents/2012/01/12/gIQAvh0mtP_story.html.]

[See the “Frontline” program titled “The Warning” discussing the shenanigans of Greenspan, Summers, Rubin and their ilk and the courage of Brooksley Born at http://www.pbs.org/wgbh/pages/frontline/warning/.]

[See the “e-ssay” uploaded exactly six years ago to the minute titled "Greenspan’s Legacy – Apres moi, Le Meltdown (January 30, 2006)."]

Bumper stickers of the week:

The nerds won, but not the smart or courageous ones.

What clothes is the Emperor not wearing today?

Plus ca change . . .

Leave A Comment »

Rational Fear: Still “Unusually Uncertain” (November 8, 2010)

Posted in "L" Shaped Economy, Bailout/Bribe, Banks and Banking System, Bernanke, Depression, Federal Reserve, Greenspan, Kleptocracy, Technology, Unemployment, Volker with tags on November 8, 2010 by e-ssay.org

. . .

K         “Think about it.  Some maintain the blind conviction that the business cycle is ordained by nature like the tides to rise after it falls.”

J          “Faith in nature.  This season is bad so that the next season will be good because that is the way it is.  Good luck.”

K         “Some desire to return to unrestrained personal consumption and unbridled economic growth.  Even if it is attainable at this time it is not sustainable over time.”

J          “Faith in unchecked consumption.  With oil peaking and a world population that has not peaked, the prospects are not promising.  America had its opportunity to consume.  Other countries, particularly China and India, now want and have earned their opportunity to consume.  If the oil holds out.  And if the coal does not kill us.”

K         “Some believe that new technology will be pulled out of the hat and pull us out of this mess.”

J          “Faith in technological salvation.  The technology sector likely will continue to grow but not enough to propel the entire economy.  The tech world is producing some sexy developments and neat gadgets.”

K         “I’ve always supported free trade when it is truly free.  Decades ago, I could see that globalization would shift massive numbers of American jobs overseas.  They said the solution is to train and retool the America workforce.  The workforce is not retrained and retooled and may not be retrainable and retoolable.  Not many commentators in academic economics or in the financial press have a clue.”

J          “It is one thing to listen to Greenspan and know that everything he says is wrong, yet who is getting it right.  Knowing which way not to go in a maze is not the same as knowing which way to go.  Volker has a clue, yet he is on the sidelines.”

K         “Bernanke* has a clue.  Now that monetary policy has effectively failed, he is enacting what is effectively fiscal policy.  Fiscal policy is the province of the legislature, the Congress.  But Congress is broken.  The Humphrey-Hawkins Full Employment Act, an act of Congress, requires the Fed to promote full employment.  Perhaps he is actually trying to stimulate employment.”

J          “But there are no jobs, now or in the future.  Quantitative Easing II is nothing more and nothing less than TARP II implemented by the Fed rather than Congress.  The Fed’s purchase of bonds is nothing more and nothing less than a slick way to provide another bribe and bailout to Wall Street.”

K          “That is hard to dispute unless there are a few random hires here and there.  And he continues a tradition at the Fed of lying or at least deceiving the public.  He can do something.  He and the Fed regularly issue ‘Remarks’ and ‘Speeches’ on all manner of topics.  He should direct the Fed to issue a finding that a single bank with deposits and assets of more than 100 billion is a clear and present danger to the American economy and to the security and well-being of the Republic.  If a bank or other financial institution does not enter into an Enforcement Action with the Fed, close the resources of the Federal Reserve to the bank or financial institution.  In effect, require banks to downsize to manageable sizes.  They must be small enough to fail and to play well with others.”

J          “Won’t happen.  Our democracy is now a kleptocracy.”

K         “That won’t help employment, however.  But he could pull it off.  He can be bold.  He would have to play all his capital.  But for us citizens, however, the only things we have to fear are so many very real fears.”

. . .

Bumper stickers of the week:

The only things we have to fear are so many very real fears.

Don’t end the Fed, mend the Fed.

“And as things fell apart/Nobody paid much attention.”  “(Nothing But) Flowers” – Talking Heads

“This country’s hard on people, you can’t stop what’s coming.”  No Country for Old Men movie (2007)

Leave A Comment »

The Double Ought (00) “Decadent Decade” (January 4, 2010)

Posted in Afghanistan, Bailout/Bribe, Bernanke, Bush, China, Congress, Debt/Deficits, Economics, Federal Reserve, Foreign Policy, Greenspan, Health Care, Housing, Iraq, O'Bama, Presidency, Supreme Court on January 4, 2010 by e-ssay.org

1999:  No major wars yet percolating problems in a dozen venues; budget deficit surplus of about 236 billion dollars, although Bush inherited about a 5.7 Trillion dollar National Debt; and a boiling but unstable and slowly cooling economy.

The decade that threatened to come in with a bang sauntered in with only the traditional fire works.  Y2K may have been such an epic universal non-event because everyone realized that it was a real deadline that could neither be disregarded nor overlooked.  It was not Y2.001K.  Problems were timely addressed in a timely manner in time.  That was not the attitude for the remainder of the decade.

An outwardly non-descript and largely unknown bumbling scion who had been shepherded by others for their own purposes through an uneventful life was appointed by the Supreme Court to run things.  The ship of state sailed uneventfully for a time.  A written invitation to impending disaster delivered to and disregarded by the White House in August, 2001 was honored in September, 2001 by a quartet of airships.  The course of action was simple.  Know who we are and remain faithful to who we are.  Stay our course.  Redouble our vigilance and redouble it again (and redouble it one more time).  Too many in power and influence in the country lost their heads.  Leadership was non-existent.

A perfect storm.  An obscenely incompetent President, a flagitious and arrogant vice-President, a smug, bungling and petulant Secretary of War/Defense (Rumsfeld), hamstrung Secretaries of State (Powell and Rice), a mendacious Secretary of the Treasury in the second term (Paulson), a marginal Attorney General (Gonzales) and their ilk were not the Dream Team.  The damage they inflicted in the decade will take decades to repair.

Bush proclaimed that WeMaD (Weapons of Mass Destruction) and almost everyone joined in the madness.  No one ever made a compelling case for the invasion of Iraq.  The national press (WP, NYT and so many others) yearned for war, any war, just give us a war with photo ops and film at eleven.  The major television networks (NBC, CBS, ABC, Faux) were thrilled and went wild with glee.  It was a time, the only time, to watch their coverage non-stop to bear witness in real time to the folly and the madness.  The few dissenting voices (Warren Strobel and Jonathan Landay with Knight Ridder’s Washington Bureau, Terry Gross and guests with NPR/Fresh Air, Walter Pincus with the WP and a few dozen other courageous individuals) did not reach a wide audience.  They were voices in the darkness.  The Iraq quagmire is the greatest foreign policy blunder in American history.

Deficit spending and economic looting became the national pastimes.  Almost everyone involved in directing and controlling the economy (Reagan, Gramm and Rubin in earlier decades with the assistance of Bush, Greenspan, Paulson, C. Cox, Geithner, Summers and others in this decade) almost without exception (Brooksley Born and a few others) were committed to undermining the American economy at every opportunity for the benefit of a few.  One must concede that they succeeded handsomely.  Although they are domestic economic terrorists, their activities never became the subject of the vaunted “war on terror.”  No one ever made a compelling case for the bribery and bailout of Wall Street.  Bernanke* remains the enigma, the outsider and the ultimate insider, who did not recognize what was obvious before and after he became Chairman in February, 2006 and disregarded the advice of his colleague Edward Gramlich.

The first African-Irish-American was elected President.  There were a few things they did not tell him before he got elected that he learned quickly after he got elected.  He re-nominated Bernanke* to run the Federal Reserve which may be the only option given the limited economic talent in America.  His appointments to date are adequate, yet the administration is still seeking traction and direction.  Health care is becoming his domestic economic quagmire.  Although it is not really the job of the government to provide jobs and/or homes, the populace wants a job to go to during the day and a house to come home to at night.

About the House.  And the Senate.  Congress could be declared a natural disaster area.  The Republicans are useless, the Democrats are not particularly useful.  Forty-five percent of Americans respond to and are motivated by fear and loathing; the Republicans know and stoke their base.  The Republicans may make great strides in the November elections.  The party committed to destroying government may again be given that opportunity.

The nine members of the Supreme Court are more myopic and narrow-minded than just about any other Court in the history of the Republic.  The Court sports two religions (with one exception), two schools (with one exception), and two (mas o menos) schools of thought (with a few exceptions), yet it has two women, too.  The war at the Court and for the Court continues.  O’Bama may have an impact, although the impact of the economy on O’Bama’s future will greatly impact his impact on the Supreme Court.

The profit-maximizing universities in America should be part of the solution, but they are part of the problem; they may be more accurately described as part of the process and the processing.  They recruit, train and drill the next McNamaras and Rumsfelds.  To their credit, they adhere to a thirty-year business plan rather than the three-month strategy pursued by other businesses.

The information made public in the National Intelligence Reports over the decade patiently and exhaustively chronicles the decline of America’s role in the world after six decades of preeminence.  America has done much wrong during that time, yet America has done far, far, far more good, often with resentment and usually without thanks.  On balance, everyone is better off with the United States as the dominant superpower.  This is China’s century.

Now:  Multiple wars, battles, skirmishes and police actions with two major foreign base camps (Iraq and Afghanistan); massive and growing deficits and about a 12.3 Trillion dollar National Debt; zero private-sector employment gain and zero economic gain for the average family over the decade; and no industry to inflate other than the federal government industrial complex.

[See the “e-ssays” dated Jan. 5, 2009 titled “The Millennium to Date”; dated October 6, 2008 titled "A Bleak Day:  The Trillion Dollar Tragedy"; dated September 29, 2008 titled "Futile Efforts"; dated May 4, 2009 titled “Picking the Supreme Beings”; dated May 14, 2007 titled “Term Limits”; and dated Jan. 30, 2006 titled “Greenspan’s Legacy:  Apres moi, Le Meltdown.”]

Bumper stickers of the week:

The Recession is Over.

The Recession is Over; Let the Depression Begin

Halcyon Ano Nuevo

Leave A Comment »

Bernanke 2.0 (August 31, 2009)

Posted in Bernanke, Economics, Federal Reserve, Greenspan, Volker on August 31, 2009 by e-ssay.org

Bush’s best appointment is one of O’Bama’s better reappointments.  Bernanke is not the best choice yet is the right choice at this time.  Yet there should be some reservation about and reflection on the entire Federal Reserve scheme.

The Founding Fathers as they are known could not agree on the creation of a central bank.  The issue was at the heart of many early presidential elections.  Every sovereign nation needs a central bank.  The bankers created a central bank in 1913 and filled the vacuum.  America must examine the role of the Federal Reserve and incorporate it into our constitutional system characterized by a separation of powers and accountability to the populace.

The central bank has a history of competent and independent chairmen such as Paul Volker who pursued some harsh policies with painful but necessary consequences without any significant political intervention.

Alan Greenspan, a conservative Republican, acted as the “central planner” of the economy for far too may years with devastating consequences.  At least he has enough integrity and self-awareness to admit some mistakes.  Some thoughtful political intervention was appropriate and necessary during his tenure.

Faith in the Fed. has dissuaded Congress from taking more direct control and dictating policy.  Legislation such as the Humphrey-Hawkins Full Employment Act does set some guidelines and parameters.  However, the Fed cannot and should not attempt to establish full employment.

At this time, Ben Bernanke is determining both “monetary policy” and “fiscal policy.”  Fiscal policy has been and should be the province of Congress.  Monetary policy should focus on price stability.

Who should address these matters?  The politicians.  That should give one pause and yet motivate us to act.

Bumper sticker of the week:

Price stability

Leave A Comment »

Housing Revisited (June 22, 2009)

Posted in Case-Shiller/S&P Index, Depression, Economics, Greenspan, Housing, Recession on June 22, 2009 by e-ssay.org

Four years have past, four summers, with . . . the housing market continuing to deteriorate.  The cover of the June 18 – 24, 2005 edition of “The Economist” depicts a falling brick with the words “House Prices” on it and leads with an article entitled “After the fall.”  The article and earlier articles in the magazine were prescient in warning about the explosive rise and pending collapse of house prices.  In conclusion, the article notes:

“Of course, by the time American prices begin to fall, probably sometime next year [2006], they will not be Mr. Greenspan’s headache.  He will have retired and someone else will be in his job.  If weaker house prices push the economy towards recession, the awkward truth is that America’s policymakers will have much less room to manoeuvre than they did after the stock market bubble burst.  Short-term interest rates of only 3% leave less scope for cuts.  In 2000, America had a budget surplus.  Today, it has a large deficit, ruling out big tax cuts.

The whole world economy is at risk.  The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronized, and thus the effects of it will be shared widely.  The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.”

In the last few weeks, when someone applied for a building permit to construct a 12 by 16 foot shed, too many commentators were ready to proclaim the housing crash ended.  Few seem to realize that the housing market is just starting to crash.  The infection is now impacting families with reasonable fixed-rate 30-year mortgages and long-term ties to their communities who are losing their jobs and will soon lose their homes.

Until housing prices drop to at least the extrapolated historical levels of a bench mark such as the S&P/Case-Shiller Home Price Indices, the decline in prices will continue.  The Federal Funds Rate is zero which eliminates the primary tool to shape economic events.  The Fed is creating other gimmicks to stimulate the economy that are unwise, unwarranted and unfounded in law.  More later.

Bumper stickers of the week:

Still pushing hard on a string

Everything that goes down does not necessarily go up

Leave A Comment »

The Virtual Horserace (November 17, 2008)

Posted in Economics, Greenspan, Housing on November 17, 2008 by e-ssay.org

During the dot.com bubble, a small number of affluent investors (consultants, dentists, consultants to consultants, public employee retirement funds, consultants to consultants to consultants, candle stick makers, etc.) anteed up large bets in cash up front; few horses crossed the finish line a few years later; everyone absorbed the losses with little intermediate-term damage.  Okay, they will retire later and perhaps with less money.  Life went on.  [See the e-ssay dated December 4, 2006 entitled “When the Bubbles Burst”]

During the “Greenspan Bubble,” however, the seeds of the Depression were sown democratically across the land.  (Almost) everyone in the populace placed huge bets on credit; few horses will ever complete even the first stretch of a 30-year race (mortgage term); the negative consequences are predictable and devastating.  The intermediate-term loses may be 3 to 5 to 7 Trillion in the US and a few Trillion overseas.

Astute observers knew that something evil was going on behind the scenes during “Hurricane Al,” but the contours of the corruption did not emerge until recently.  The Wall Street Boys devised something noxious known as a “Credit Default Swap” that involves a “virtual horserace” without real money that jeopardizes the economy and the American economic and political system.  The real nightmares are the bets placed on bets placed on bets placed on bets placed on bets placed on bets placed on bets in this virtual and unregulated gambling casino using CDSs as tokens.  These players were betting on outcomes in the horse race and then insuring the outcomes without any money, margin or reserve.  The winners (who may need to lose in order to win) of the game want to be paid; the losers cannot pay and never intended to pay.

No one will say that these gamers are “domestic economic terrorists.”  Saying something that true and stark is deemed to be impolite and impolitic.  The CDSs are a cancer on the country.  The losses may be 25 to 50 Trillion or more.  The Economy cannot absorb the losses.

Bumper stickers of the week:

We will get fooled again.

“All you need in this life is a tremendous sex drive and a great ego.  Brains don’t mean a shit.”

Mayor Anthony “Captain Tony” Tarracino (1916 – 2008)

Leave A Comment »

A Bleak Day: The Trillion Dollar Tragedy (October 6, 2008)

Posted in Bailout/Bribe, Bush, Debt/Deficits, Economics, Federal Reserve, Greenspan, USA PATRIOT Act on October 6, 2008 by e-ssay.org

Congress failed.  Again.  The Bailout Bill will accelerate the Meltdown by misallocating funds and burning day light needed to address the underlying problems.

A three page travesty delivered by Bush became a 451 page travesty cum pork adopted by Congress.  These votes may rank with the Gulf of Tonkin Resolution, the Iraq war resolution, and the USA PATRIOT Act vote.

The public saw a 1.1 Trillion dollar drop in the value of their investments/401(k) IRAs last Monday and seemed to believe that a 700+ Billion bribe was worth the gamble.  The Bailout Bill will cost at least 1 Trillion to administer directly and will cause Trillions more in losses and damage.  Bribing the big players not to pull the plug until after the election is over is almost criminal if not treasonous.

Few note that the current crisis will be made worse by this bailout/bribe.  Beyond concerns about “moral hazard” and “bailouts for billionaires,” the problem is that the bailout is creating an even great credit crunch for the country.  There is way too much money in the economic system in the wrong hands.  The new money is being funneled into the wrong vessel, into a bowl not a colander.  The money will be hoarded.  The money is being not made available to the public.

Raising the deposit amount insured by the FDIC from $100,000 to $250,000 appears to offer something to the public, yet it also discourages the individual investor from monitoring his or her financial institution.  Individuals are deluded into believing that everything is ducky.  Individuals not just the government must act as regulators.  Banks that will soon be taken over by the FDIC are offering much higher interest rates to gobble up as much money as possible before the collapse.

Consumer confidence has never been higher.  Consumers are confident that the entire economic and political system is broken.

Business confidence has never been higher.  Businesspersons know that they are lying and, of greater import, that all other businesspersons are lying.  Reading between the lines of the economic reports is a challenge.  Reading between the lies is vexing.

So many fought to declare and establish independence for this country.  Last Friday, Congress voted to establish and fund a czar/dictator/central planner.  Two hundred thirty-two years later, we have a King of Finance.  Emperor Paulson.  One of the individuals who created the problem has been crowned to deepen it.

Fear once again triumphed over hope and reason.

Bumper stickers of the week:

Those who repeat history are doomed to repeat history.

If you think 401(k) is your mother-in-law’s bra size, then you might be a redneck.

—–Jeff Foxworthy

Leave A Comment »

The Legacy Of “Easy Al” And Easy Money (October 15, 2007)

Posted in Economics, Federal Reserve, Gold Standard, Greenspan, Housing on October 15, 2007 by e-ssay.org

John and Johanna, Juan and Juanita, Ivan and Ivana, their story is archetypical in architecture today.  They should have purchased a 1400 square foot starter apartment, but they were induced and seduced into purchasing a 2200 square foot single family two-story home.  They could not afford much more than the down payment.  They could not afford the subsequent 359 monthly payments.  They are being evicted.  They will have to live somewhere, someone observes.  They need to find a 1400 square foot apartment, but there are few available and many other evictees and evacuees competing for them.  And what about the 2200 square foot abode?  It sits empty.  (See the e-ssay dated April 24, 2006).

“Easy Al” Greenspan never met a problem he would not fix with a fix of easy money.  The Fed is charged with addressing monetary policy not fiscal policy.  He set fiscal policy without even acknowledging the need for safeguards against the irrationality his monetary policy unleashed.  Be suspicious of someone who falls under the spell of one and only one cult commentator; someone should distill the thoughts of 371 (give or take) thinkers in developing a worldview.  The Gold Standard crowd almost appears reasonable.  At least a gold standard sets a standard for the money supply.  Sound monetary policy requires a “goods and services” standard/benchmark.  The amount of paper injected into the economy should be measured against the goods and services.  Instead, more money than necessary was hurled at problems thereby begetting more problems.

Bumper sticker of the week:

“A cynic is a man who knows the price of everything and the value of nothing.”  Oscar Wilde

Leave A Comment »

Greenspan’s Legacy – Apres moi, Le Meltdown (January 30, 2006)

Posted in Bernanke, Economics, Federal Reserve, Greenspan, Housing on January 30, 2006 by e-ssay.org

In March, 2000, the economy began the well-publicized high tech slide.  Manufacturing and services continued to flee the country.  Technology was a transitional industry, but the best minds were disproportionately and increasingly foreign; too many of the goods and services could be and are being manufactured and provided overseas.  As one bubble burst, however, another one was being blown.  Only one remaining domestic industry existed that could also be subsidized effectively – the real estate industrial complex.  The Fed provided the steroids.  Interest rates (the Federal Funds Rate) were precipitously reduced which significantly undermined the retirement income for those retirees (born before 1935) who relied on interest income to support them during their golden years; sacrifices have to be made.

American land, American land owners, American (and Canadian) timber, American (and Hispanic) labor, American builders, American real estate agents, American appraisers, American surveyors, American bankers, and American candle stick makers all profited handsomely.  The land perforce cannot be moved offshore, the houses cannot be built overseas economically, and most of the players, with a few exceptions, cannot be outsourced.  Between 2001 and 2005, the construction trades and the financial and real estate service sectors provided seventy percent of the economic growth in America.  Yet the largest share of the real money to construct the house of cards was foreign-born.  Americans don’t own their homes today; foreigners own their homes and rent them to Americans.  The Fed should have issued stronger warnings and recommended Congressional action to supervise the spew of credit; in the face of inevitable inaction, the Fed should have corked the champagne in the summer of 2003 by bumping up the interest rates.  [See the April 25, 2005 e-ssay entitled "Our Friend the Fed."]  As the market peaked in the summer of 2005, however, increasingly marginal economic candidates were seduced by intoxicating no-money-down/interest only/adjustable rate mortgages to enter a hyper-inflated market.  The homes were ATM’s which provided the consumer spending that drove the economy for four profligate years.  [See the February 7, 2005 e-ssay entitled "The Microeconomics of Suburban Subsistence."]  The “wealth effect” engendered by the growing equity in homes encouraged more spending on credit.  The homes are now occupied by “renters” who are consuming a growing percentage of their income just to service the interest payments.  The savings rate predictably went down in 2005 for the first time since 1933. Something is in the cards; the house of cards will collapse by Christmas.  It could not go on forever; as many have observed, what cannot go on forever will not go on forever.  The last viable domestic industry has now run its course with devastating consequences.  And now the country is left with vast numbers of McMansions that will soon cost too much to heat.

Ben Bernanke may be Bush’s most promising appointment.  However, he will inherit a mess beyond repair or management.  There is no industry in America left to subsidize.  With consumers and the country up to their tonsils in debt, consumer spending is and will be inadequate to drive the economy.  Foreigners will quietly reduce their purchases of t-bills and demand more return for their remaining investment in dollars.  The growing demand for oil is occurring at a time when the supply may be interrupted by some unstable or unfriendly regimes.  Rising oil prices will drive up the producer and the consumer price indexes.  Not raising interest rates will allow inflation to soar.  Raising interest rates to check inflation will stall the collapsing economy.  The Fed is likely to raise interest rates to 5.0 percent to check inflation even though the economy is entering a period of “stagflation.”

Leave A Comment »

Our Friend the Fed (April 25, 2005)

Posted in Federal Reserve, Gold Standard, Greenspan, Housing on April 25, 2005 by e-ssay.org

(Part one of a two part series; part two appeared on February 7.)

(The Fed meets on May 3)

Montesquieu, a French guy who is sort of a founding grandfather, developed this notion to create three separate but interconnected branches of government – the executive, the legislative and the judicial.  His intellectual kids, the founding fathers, were keen on the ideas.  However, there was considerable disagreement and no agreement regarding the fourth branch of government – the economic.  (Shortly after the big gathering in ’87, the boys gathered again in ’91 and sagely addressed the concerns of the Fourth Estate in special interest legislation known as Amendment Uno.)

Later, in 1913, under the administration of someone who now would be known as a tax and spend liberal, a measure was passed to take a little money from all of us and another bill was passed to determine how much money we got to play with to begin with.  The Internal Revenue Act of 1913 (as amended) has gotten traction, although the 16th Amendment is not a household concept.  The activities and agendas of the scheming group of bankers who constitute the fraternity known as the Federal Reserve have never been adequately incorporated into our constitutional democracy.

The bankers establish monetary policy.  This is where most people turn to the racing form.  Monetary policy determines everything.  Put the racing form down and listen.  However, there is no constitutional blue print to guide the bankers.  Some of their tools are goals; some of their goals are tools.  The fellows who work with the Fed have not made news because they prudently stay out of the news.  They say it is okay to be rich, but it is not okay to be famous or infamous.  Few of them get involved with showgirls, at least not publicly, or wear collars that are not button-down, at least not publicly.  However, their actions make the news and determine the news.

What they do determines what we get to do.  The economy was slumping some time ago.  The jobs were going overseas and the stock market was going down the drain.  Many people who own houses (and vote) found that others coveted their houses.  Housing prices for existing stock went up.  The homeowners’ stocks had gone down, but they felt good that their housing stock had gone up.  The Fed flooded the economy with money by setting a low Federal Funds Rate and left us all, yup, awash in money.  There were also more people who needed and/or desired a house or a bigger house or an even bigger house, so more were built.  Low interest rates were a way of salvaging the American economy.  The homes were built on American soil, driving up the price of American soil owned almost entirely by Americans.  The homes were built with products made largely in America or Canada (wood, synthetic wood products).  The homes were built here in America by Americans, albeit a few who are categorized as “illegals” even though they are building America.  The one thing that Americans can do well here in America (and foreigners cannot do here in America) salvaged the economy.  And left us with a lot of big homes.

At what cost?  Low interest rates exacted a cost.  Many members of the Greatest Generation (they were) cobbled together a very comfortable retirement from 1) their employers who at one time actually provided adequate defined-benefit plans, 2) their government that at that time provided adequate social security benefits, and 3) themselves via interest payments from savings or bonds or other fixed-income investments.  The Great Triumvirate sustained them.  In a pinch, these good people retired comfortably by selling the home they purchased in 1953 and spent their last years bass fishing at the cabin.  The mortgage interest deduction rewarded them during their productive years; the $250,000 exemption from income on the sale of a personal residence protected the usufructs of their efforts and good fortune.  It was a good time in a good country.

What about all of those individuals who relied primarily on interest payments to finance their retirement?  Prudent personal financial planning and the insistence of the actuarial tables dictated that these seniors get out or stay out of risky investments as they got older and instead invest in regular interest-generating fixed income instruments.  However, they got little for their money and their efforts in recent years.  If they were fortunate enough to pay off their house and later sell it and if they could also could rely on 1) and/or 2) above, they could live comfortably in the smaller house.  Seniors without 1) and/or 2) above may strain to live modestly.

However, why not set the Federal Funds Rate at ten percent instead of one percent?  The old folks would receive more interest, although there may be restrictive pressure on growth.  Those who demand a return to the gold standard seek a standard, although the metal does not set standards.

The Fed had been allowed to operate under a loose alliance without congressional oversight (or with congressional oversight?).  For decades, the Fed addressed monetary policy and avoided fiscal policy.  The Fed’s current helmsman has been opining on fiscal policy of late.  Admiral Alan “Enron Award for Distinguished Public Service” Greenspan is adrift.  The Fed is the most significant player setting the course and speed for the economic ship of state.  There is no constitutional rudder to guide them.  The statutory helm is loose.  Incorporating the Fed into our constitutional scheme of democratic government is one of the challenges today.

Leave A Comment »

Follow

Get every new post delivered to your Inbox.