Who Does Ben Bernanke Really Work For?

The announcement of Ben S. Bernanke’s successful nomination for a second term brings forth a curious question. Who does the Fed Chairman really and truly work for?

Before we get into today's topic, a quick comment on the state of the market here and now.

There is a bit of debate going round as to whether traders should be anticipating the demise of the epic 2009 market rally... washing their hands of the nutty action entirely... or jumping back in, jack-be-nimble style, to catch a piece of the last hurrah.

Different traders will come to different conclusions, of course. It takes all kinds to make a market. Just two quick observations and we'll move along.

First, there is a reason they call it "greater fool theory." And second, trends have life spans – just like people.

Trend mileage can vary widely, of course. But this is true of people too. Statistically speaking, a Japanese woman has far better odds of reaching 85 than a Russian man does of reaching 65.

Point being, when your humble editor looks at this market rally from a trading perspective, he does not see a bright-eyed Japanese grandmother puttering around in her garden. Instead he sees a 64-year-old Vladivostok dock worker... an ashen-faced, barrel-chested man with a heaving cough, a clogged aorta, and a mean addiction to Stolichnaya vodka and Sobranie cigarettes.

But, as Dennis Miller used to say, "That's just my opinion. I could be wrong..."

Two Cheers for Fireman Ben

In a notable bit of inside baseball this week, the Chairman of the Federal Reserve (Ben S. Bernanke) was officially locked in for a second four-year term.

Breaking the news from an elementary school gym in Martha’s Vineyard – Mr. Bernanke by his side – the vacationing Prez was effusive. "Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall," President Obama gushed.

Of course, there was no real mention of the serious Fed-induced problems that brought the financial system to the “verge of collapse” in the first place. Lest we forget, Bernanke stood shoulder to shoulder with his predecessor, Alan Greenspan, in regards to ignoring bubbles until they burst (“Bubble, what bubble?”)... injecting massive liquidity into the system post-crisis and leaving it there, reinflating new bubbles from the dregs of popped old ones... and, last but not least, in coming up with fanciful theories to blame fiscal imbalances on other nations (the infamous “global savings glut”).

For the POTUS to touch on such things would have been a breach of protocol. Instead, the regulator who almost burned the house down was lauded for knowing how to use a fire hose.

Bernanke “saved the world,” the Fed Chairman’s most enthusiastic boosters declare. Never mind that he saved it from the leverage-loving pyromaniacs (i.e. short-sighted greedy bankers) that were supposed to be under his watch in the first place.

Who Is This Man’s Boss?

In light of the Bernanke reappointment, now seems a good time to ask a curious question. Who does the Fed Chairman actually work for?

The obvious answers don’t quite jibe. The POTUS and Congress, for example, supposedly work for you and me. In theory, at least, they are held to account by the voting process and beholden to “the American people.”

But the Chairman of the Fed is not exactly elected. He is more or less anointed by way of smoky backroom horse trading, in which there is a lot of whispering and assurance-seeking before the Chief Executive reluctantly agrees to endorse.

Does the Chairman work for the President or Congress then? Not exactly... the Federal Reserve is a proud and unbending institution, fiercely protective of its cherished independence. There is definitely a kabuki dance of forged alliances, cultivated relationships, and so on. But a good Fed Chairman works the aisles up and down the Hill precisely so the Fed can maintain its vaunted independence, not give it up. Keeping Congress’ greasy mitts off the true levers of power is a top priority.

So perhaps the Fed Chairman is like a Supreme Court judge – appointed by the President and vetted by Congress, but hypothetically free of political influence thereafter. That, in turn, would make the Fed a quasi-official “fourth branch” of government, giving us the Executive... the Legislative... the Judicial... and the Financial.

The Supreme Court analogy hits uncomfortably close to home. The Fed no doubt despises any such “fourth branch” references, not because they are unflattering or inaccurate, but because such talk reveals too much. (Better not to give Congress any wild ideas, reining in the Fed’s power.)

Follow the Money

Yet there is something lacking in the Supreme Court analogy too. The black-robed nine spend their days solving thorny legal issues, handling landmark court cases gathered from across the land. To be a Supreme Court judge is clearly to be in thrall to American law, and to be in devoted service to an abstract ideal. The Fed has a far murkier agenda...

If we look not to words but deeds, the picture becomes more clear.

For instance Dennis Lockhart, the head of the Atlanta Fed, admitted in a Chamber of Commerce speech this week that the real unemployment rate is actually 16% (as opposed to the official July jobless rate of 9.4%). Such a number surely implies the Fed is not all that concerned about the working joes of this country.

Yet another Fed head, James Bullard of the St. Louis branch, further admitted last week that the Fed plans to keep interest rates “exceptionally low for an extended period of time,” according to Reuters. “I don’t think markets have really digested what that means,” Bullard added. If anything it means the Fed is more concerned with pumping up paper assets than protecting consumers and businesses from nominal price hikes.

Perhaps the question can be answered with a question. Who was the Federal Reserve meant to regulate? It is a paradox of government that the law-wielding regulators often find themselves kidnapped by the regulated... brain washed in a weird case of bureaucratic Stockholm Syndrome.

From a power and money perspective, regulatory Stockholm Syndrome makes perfect sense, however, because so much of both – power and money, that is – is concentrated in the private sector. The top four banking behemoths all have deposit bases measured in the trillions, for example. Is it any wonder the Fed, Treasury and FDIC merely kowtow?

Meanwhile, top Wall Street bank execs enjoy bonus-laden paydays in the tens to hundreds of millions. In stark contrast, the Federal Reserve Chairman’s 2008 salary of $191,300 is less than half the guaranteed minimum a rookie MLB relief pitcher would get... the Goldman Sachs equivalent of a waiter’s tip.

Ladies and Gentlemen, We Have a Winner...

When one considers the possibility that the Fed Chairman actually works for the banks, all the pieces begin falling into place.

It’s only natural, after all, given that the original mandate of the Fed was to preserve banking stability. It is the Federal Reserve’s job, first and foremost, to make sure that the U.S. financial system (and by extension the executives who stride atop it) perseveres through all economic storms.

In principle, the good of the country and the good of the U.S. financial system are supposed to be one and the same thing. In practice, the two can be at odds, sometimes dramatically so.

The charade of pretending that the two considerations are one and the same, though, is a key aspect of the brilliant bait-and-switch job foisted upon us all. Whenever a Fed (or Treasury) official’s actions can be wrapped in the guise of “saving the system,” it is implied that said action was undertaken for the good of everyone. Ha!

What’s more, not all bankers are created equal... as with seating arrangements in the king’s court, it is always better to be closer to the throne. Given their combination of heft, gravitas and “too big to fail” status, the top four banking institutions probably wield more power and influence than the next 40 combined. And beyond that, no man’s land. One can trace out the priorities of the Fed and Treasury in real time by observing how the giant money center banks get attended to hand and foot. The Bumbershoot Bank of Kalamazoo Kansas, meanwhile, is left to choke on prairie dust.

Banana Republics and Dictatorships

The main trouble with arrangements like this one is the way they tend to be favored by banana republics and dictatorships. When a small, concentrated “elite” class is consistently favored at the expense of everyone else, the long-run result is rarely pretty.

A tendency to endorse “socialism for the rich, capitalism for the rest,” as James Grant and others have put it, is not the best recipe for sustaining and growing a free-market economy. Unfortunately, in granting semi-autonomous power to a “fourth branch” mainly beholden to the banks, that is pretty much what the United States has signed up for.

Simon Johnson summed up the forward-looking concerns nicely in a recent Seeking Alpha piece, “Is a Two-Track Economy Emerging from the Rubble?”

The United States has, over the past two decades, started to take on characteristics more traditionally associated with Latin America: extreme income inequality, rising poverty levels, and worsening health conditions for many. The elite live well and seem not to mind repeated cycles of economic-financial crisis. In fact, if you want to be cynical, you might start to think that the most powerful of the well-to-do actually don’t lose much from a banking sector run amok – providing the government can afford to provide repeated bailouts (paid for presumably through various impositions on people outside the uppermost elite strata).

If we as Americans still have some true fighting spirit left in us – and enough of a grasp on revolutionary history to spark it – then perhaps Fed Chairman Bernanke will get more than he bargained for in the next few years.

What do you think? Does the Fed Chairman work for the people... or the banks... or someone else entirely? Is he doing a good job, or should we listen more to the Ron Pauls of the world and take some kind of action before it’s too late? You can deliver the full force of your opinions here: [e-mail].

Comments

[Disa Anja:]

Fantastic! I love how well you put the Fed works for the foregin bankers and is robbing the American people!

Aug 28 10:25 AM

[CautiousInv...:]

Each of the twelve Federal Reserve Banks is organized into a corporation whose shares are sold to the commercial banks and thrifts operating within the Bank's district. And the Federal Reserve, itself, is owned by the the twelve District Reserve Banks.

Reserve Bank boards of directors are divided into three classes of three persons each. Class A directors represent the member commercial banks in the District, and most are bankers. Class B and class C directors are selected to represent the public, with due consideration to the interests of agriculture, commerce, industry, services, labor, and consumers. Class A and class B directors are elected by member banks in the District, while class C directors are appointed by the System's Board of Governors in Washington.
In sum, member banks elect six directors and three are appointed by the Board of Govenors.

The Board of Govenors, who exercise broad supervisory control over the entire Reserve system and comprises members, is appointed by the President and each appointment is subject to Senate confirmation. The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve.

With this structure it is very easy to conclude the Federal Reserve, while in theory an independent body, is indirectly owned through the shareholders (banks) of the twelve regional district banks. And by the invested authority of the President to appoint the members to the Board of Govenors, the character and nature of the Board is inherently political.

Bottom line: the Fed is politicized and very responsive to big bank interests.

Aug 28 10:27 AM

[ALue167:]

Socialism for the rich & powerful should be shifted to socializing the financial sector where the bonus paracites only get teacher's pay. The same goes for the insurance sector..... esp. health insurance. Add socializing the lawyers into teacher's pay.. .These thieving profiteers should not be in charge of the distribution of money. They don't produce anything but stealing money.
The distribution of money should only be the domain of the government who work for government salaries that should be reduced closer to teacher's pay.
Also, put the shareholders in charge of corporate management pay
scales not the board of diectors.
This will save the public about a $Trillion a year.
Also the corporate military industrial complex with troops in 130 countries and two unnecessary losing wars at a cost of $ 2 Trillion a year should be eliminated. Pull all the troops home as fast as they can pack their bags.and that should save another $Trillion a year after expenses for homeland security. It's insane that this banana republic of ours is still trying to rule the world.
Sadly, this will never happen. This is, after all, a demopublican dictatorship with a revolving door to wall street and a banana republic printing funny money and depending on the kindness of strangers like China to pay it's bills just like the other banana republics.
.

Aug 28 10:44 AM

[Pat C:]

Very well written, I have been wondering about the same thing myself. This institution has clearly stepped over the line but I'm not sure how far. SA was some wonderful other posts by K. Denninger and others. Clearly we have the cart before the horse. Congress has delegated its consitutional responsibility. It will have to come from them but it may take and informed public to get them to do anything sensible.

Aug 28 10:47 AM

[Donald Ingram:]

The Fed is privately owned and serves private interest, first and fore most - pure and simple. For a private enterprise formed in 1913, they have done an excellent job of robbing the American nation absolutely blind through inflation and control of the currency. The American dollar has lost 98% of it's purchasing power since 1913. Not bad for a privately owned bank! The beast from Jekyll Island.

Aug 28 11:34 AM

[nova:]

It appears that SA bared Tyler Durden (Zerohedge) from contributing.

It is very interesting. Who paid to SA for doing so?

PS
Zerohedge website itself is very active with its substantive and detailed reviews and commentaries.

Aug 28 11:52 AM

[twitee:]

All you have to do is to look at the shares of the top six banks since march 9, 2009. JPM, BAC, WFC and GS, BCS, CS UBS and DB

Their share price has risen over 300% each........is this a bubble in the financial or taxpayer money hard at work for the thieves

Aug 28 12:32 PM

[Davewmart:]

It is excellent news if Tyler is barred - it proves that his articles are hitting a nerve.
I certainly intend to continue following the best commentator on Seeking Alpha, even if I have to go to Zero Hedge to do so.

Aug 28 01:01 PM

[Dave Wrixon:]

Which may explain why Uncle Sam's money is being pumped straight into the bottom line of the big banks. Isn't the Fed currently lending these guys Billions at zero percent to invest in Treasury Bonds with a yield of about 3.75%? Jesus, how are you supposed to lose money on a deal like that! You don't need to be any kind of financial bloody wizard. A ten year old could bring home the bacon with those advantages but no doubt they will still up with million dollar bonuses.


On Aug 28 10:27 AM CautiousInvestor wrote:

> Each of the twelve Federal Reserve Banks is organized into a corporation
> whose shares are sold to the commercial banks and thrifts operating
> within the Bank's district. And the Federal Reserve, itself, is owned
> by the the twelve District Reserve Banks.
>
> Reserve Bank boards of directors are divided into three classes of
> three persons each. Class A directors represent the member commercial
> banks in the District, and most are bankers. Class B and class C
> directors are selected to represent the public, with due consideration
> to the interests of agriculture, commerce, industry, services, labor,
> and consumers. Class A and class B directors are elected by member
> banks in the District, while class C directors are appointed by the
> System's Board of Governors in Washington.
> In sum, member banks elect six directors and three are appointed
> by the Board of Govenors.
>
> The Board of Govenors, who exercise broad supervisory control over
> the entire Reserve system and comprises members, is appointed by
> the President and each appointment is subject to Senate confirmation.
> The Federal Open Market Committee (seekingalpha.com/symbo...)
> consists of twelve members--the seven members of the Board of Governors
> of the Federal Reserve System; the president of the Federal Reserve
> Bank of New York; and four of the remaining eleven Reserve.
>
> With this structure it is very easy to conclude the Federal Reserve,
> while in theory an independent body, is indirectly owned through
> the shareholders (banks) of the twelve regional district banks. And
> by the invested authority of the President to appoint the members
> to the Board of Govenors, the character and nature of the Board is
> inherently political.
>
> Bottom line: the Fed is politicized and very responsive to big bank
> interests.

Aug 28 01:33 PM

[socrateazz:]

Policies have been and continue to be favortism for some and others need to behave and agree with those making the rules. You are right the rich are becoming richer and the middle class is being crushed while they are being told they are being supported. Producers are expected to produce while many folk take advantage of their efforts. What can you expect? Many of the current leaders actaully believe they were elected to do as they want. And I am not sure they were really all elected fairly. Sadam Hussein convinced many he was elected fairly at extreme numbers. Was He? I may be wrong, but I really believe fairness in elections depend on what is being elected and why.

Aug 28 02:38 PM

[TinyTim:]

Very nice article.

Is there any doubt that the Fed works for the banks??
Another part of the problem is the Fed's ability to be manipulated by the executive and legislative branches practically at will.


"the regulator who almost burned the house down was lauded for knowing how to use a fire hose."

We may be out of the crisis envisioned when TARP was rammed through, but only the future will show us what the cost will be.
What good is saving the house when the forest around it burns down?

Aug 28 03:25 PM

[Fighting Yoda:]

A better question would be what is Fed policy - short term or long term, sustainable or stimulated growth, bubble and Ponzi schemes or moral hazard. We know from Fed actions over last 20+ years - it simply is bubble and bailouts - that is what their masters, the politicians love - they want a big party - hangover we will deal with it tomorrow.

Now nothing is even in the closet - bailouts - AIG style or PPIP or money printing, helicopter dropping of money - it is all official and public - who could have thunk. But it goes on - we have the world by their @#$% via the reserve currency and we will abuse it- till the world completely implodes.

Aug 28 06:38 PM

[PainfullyAware:]

If this is true it is a tragedy. The Source Is Not As Important As The Validity Of The Information.


On Aug 28 11:52 AM nova wrote:

> It appears that SA bared Tyler Durden (Zerohedge) from contributing.
>
>
> It is very interesting. Who paid to SA for doing so?
>
> PS
> Zerohedge website itself is very active with its substantive and
> detailed reviews and commentaries.

Aug 29 01:05 AM

[PainfullyAware:]

".....or should we listen more to the Ron Pauls of the world and take some kind of action before it’s too late?" - Justice Litle

I Would Suggest Listening To The "Fringe" Since They Are "Hyper Sensitive" In Their Recognition.

Ron Paul is not the "Fringe"; Yet He Understands This Cannon.

Recognition Of The "Danger" Is Different Than Recognition Of "Remedy".

The "Canary In The Coal Mine" Was Not Put There To "Show The Way Out".

Aug 29 01:17 AM

[H. T. Love:]

Worse, it denies all SA readers of the important disclosures that ZeroHedge (Tyler Durden) provides.

Although I realize SA is a for-profit organization, this censorship is concerning, if true. Does it mean that SA is now part of the MSM and only allowing "duly authorized" folks to post?

HardToLove


On Aug 29 01:05 AM PainfullyAware wrote:

> If this is true it is a tragedy. The Source Is Not As Important
> As The Validity Of The Information.

Aug 29 10:41 AM

[H. T. Love:]

Alright, let's flex our collective muscles. Let's everyone e-mail SA to bring back ZeroHedge!

contact-other@seekinga...

HardToLove


On Aug 29 10:41 AM H. T. Love wrote:

> Worse, it denies all SA readers of the important disclosures that
> ZeroHedge (Tyler Durden) provides.
>
> Although I realize SA is a for-profit organization, this censorship
> is concerning, if true. Does it mean that SA is now part of the MSM
> and only allowing "duly authorized" folks to post?
>
> HardToLove

Aug 29 10:45 AM

[Glen L.:]

I agree that this is an excellent article. The author does a nice job of logical deduction, and strikes at the root of the evil tree. And suggests maybe we should pay more attention to Ron Paul, to boot. Bravo!

The FED is a cartel of the largest US banks that exists for one reason only: to maintain and preserve their own wealth and power by controlling the nation's money supply. Since there is no free market in money, there is no free market, period. Only by ending the FED and allowing anyone to coin precious metals and sell them to be used as money will we ever have a chance to reap the benefits of truly free markets. Until then, we will continue to see disastrous booms and busts, and the Left will blame them on the nonexistent "unregulated" free markets. With each crisis, the stranglehold of the statist parasites tightens.

Can the People protect themselves by throwing out all the scoundrels? Yes, but I have very little faith it will ever happen via the ballot. These days, the Left has infiltrated and controls both major parties, so that we oscillate between socialism and fascism.

But, let's give it a try. First step for the grass roots is to implore their representatives to put pressure on Barney Frank to let Ron Paul's Audit the Fed bill out of committee. Then pass it in both houses. Obama will veto, which will ensure he's a one-term prez, and we go from there.

Aug 29 12:12 PM

[H. T. Love:]

On Aug 29 12:12 PM Glen L. wrote:

><snip>
> But, let's give it a try. First step for the grass roots is to implore
> their representatives to put pressure on Barney Frank to let Ron
> Paul's Audit the Fed bill out of committee.

seekingalpha.com/insta...

"Barney Frank says ... will pass in October".

> Then pass it in both
> houses. Obama will veto, which will ensure he's a one-term prez,
> and we go from there.

If Frank is converted and the Prez's ratings continue dropping, I think he won't veto.

HardToLove

Aug 30 08:14 AM

[H. T. Love:]

This comment has some links for folks that are not aware of the issues with the Fed. They're the same I've posted before, so if you've followed these links before, no changes.

seekingalpha.com/autho...

HardToLove

Aug 30 08:18 AM

[H. T. Love:]

Quinn says Frank was lying now.

seekingalpha.com/insta...

HardToLove


On Aug 30 08:14 AM H. T. Love wrote:

> On Aug 29 12:12 PM Glen L. wrote:

Aug 30 08:21 AM

[H. T. Love:]

Folks,

This is possibly the most important economic tussle of our lifetimes. It was a monumental power struggle to create the Fed and was only accomplished via subterfuge, political intrigue and lies, more lies and damn lies.

As pointed out many places, the Fed js responsible for 94% devaluation of our purchasing power and (if you believe the links I've posted speak the truth) the cyclicality of business.

There is no reason for any of this.

Our wise founders recognized the wickedness inherent in a debt-money system and for that reason directed that the treasury would issue the country's money, in proportion to need. Past instances have proven this a wise and effective strategy.

We *must* get back to basics - eliminate the Fed and do what is constitutional.

Call your reps and senators and make sure HR 1207 passes with overwhelming majority - veto proof. This is the first step in a sure-to-be long and contentious "war" to regain our constitutional foundations and, thereby, our self-respect and the respect of others around the world.

The economic results would be astounding.

HardToLove

On Aug 30 08:18 AM H. T. Love wrote:

> This comment has some links for folks that are not aware of the issues
> with the Fed. They're the same I've posted before, so if you've followed
> these links before, no changes.
>
> seekingalpha.com/autho...
>
> HardToLove

Aug 30 08:39 AM

[H. T. Love:]

Received this from SA:

"We have put them on hold for the time being, as we look into concerns
which may prevent them from conforming to our standards; you can read
more about our compliance standards here:
seekingalpha.com/page/..."

HardToLove


On Aug 29 10:45 AM H. T. Love wrote:

> Alright, let's flex our collective muscles. Let's everyone e-mail
> SA to bring back ZeroHedge!
>
> contact-other@seekinga...
>
> HardToLove

Sep 01 06:27 AM