Is the Fed Bankrupting America?

Don't be mad, but I told you so!

Oh yes, I told you so, and more than once. Drowned by the robotic one-note din of market participants clamoring for more and greater Fed rate cuts since August, I and a few others have argued (for example here one September 4th and October 1st) that more rate cuts would open a clear road to disaster, a superhighway to the downfall of the American superpower.

Since my October 1st predictions, the dollar has fallen 10% against the Euro and the Yen, copper has risen 8%, gold 20%, oil a stunning 50%, natural gas a mind-blowing 57%,... Need I go on? Food prices are now so high that there have been riots in several developing countries. We worry about the stock market. Other people around the world have more pressing concerns.

Then on October 8, I expressed an idea that maybe, just maybe, the Fed was too attentive to the worries of some on Wall Street, and not attentive enough to the households of America. Fixing a few hedge funds and Bear Stearns may be a good idea, but it is less of a good idea if the American middle-class is paying for it through lower returns on savings accounts, and through higher inflation. It is also perhaps not such a good idea if the Fed opens its discount window to investment banks.

And on December 12, I argued that the Fed's mandate needs to be reexamined in this age of globalization. The consequences of Fed actions, not only today but for a period going back 10 years, have siphoned an enormous amount of wealth from the United States to other countries which are now flexing their muscle via sovereign wealth funds. These funds are now estimated to hold $3 trillion in assets and to be growing at a $500-billion-a-year clip if oil remains at $100 per barrel. Oil is now approaching $120. Unless we are willing to see our independence and sovereignty jeopardized, the Fed needs to incorporate a strategic component into its thinking. Growth with low inflation are fine goals but no longer sufficient by themselves as America loses its leadership position.

Now that the storm has receded, perhaps temporarily, the media is getting louder in its criticism of recent Fed action. The Wall Street Journal, never a fan of lax monetary policy, has gotten increasingly loud, as in today's editorial:

"Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake."

Last week, the Journal published an op-ed by Stanford Professor Ronald McKinnon, arguing for higher interest rates.

Across town, Bloomberg news is suggesting Bernanke ought to act more like Volcker in order 'to avoid being tagged Burns'.

On September 4, in Nanny Capitalism, we wrote the following:

If History is a guide, and it often is, government intervention in the markets is not always a recipe for stability and it can sometimes make things worse than if the market took its own course. The collapse of the most aggressively careless of risk-takers is a necessary component of a well-functioning free market and the Fed's move to shore up this group will only mean greater trouble for everyone down the road. Advancing leverage to a greedy speculator is like handing a case of whiskey to an alcoholic but the Fed insists that we can drink all we want without getting intoxicated.'

Comments

[icandoitdon]

couldn't have said it better myself.....

anyone investor who thinks this fed is their friend is sorely misguided. it's in nobody's interest in our become a bananna republic, which is what is happening....

[AmesTiedeman]

Awesome post. Keep it up!

[Rollin]

You forget who are the ultimate shareholders of the FED. It is not the U.S. govenment but a group of foreign investors holding major shares in U.S. Institutions.

[User 130076]

Good article. If the fed had held interest at 5% we would had a recession but would be in a lot better shape today than we are now. The feds job is not to bail out wall street.

[richjoy]

The WSJ editorial is powerfull...I'd like to see an opposing view.

[sivere]

It is time to TakeBackTheFed.com

[User 169191]

The "FED" is no more "independent"... than the assistant principal is independent of the School District.
Ben works for George W. George W works for his Party. His Party works for its "main" supporters whose funds are needed to "buy" the voters.
The supporters "with the money" want to maximize their returns.
George W's mission is to help them maximize their returns.
When their returns are threatened, George W tells BEN to shape up if he wants to keep his job.
BEN is no fool.
He grabs the "slush fund" and sends it to the supporters who felt "threathened"...
He takes some flack for a few days but he keeps his job, just like the "Maestro did".
Truth is "who do you know would not do exactly the same thing in this country?". What we have is a shortage of honest people among those whom the "voters" have chosen as their leaders.
In a nation of cannibals, how likely is it that a missionary will be elected "President"?

[razormdthe2nd]

...can't agree...the fed's cuts were mainly a psychological play to reassure the public that the feds were paying attention to the deteriorating credit markets and were ready to take action to prevent economic disruption...at the time the markets were being rocked almost daily by stories of this or the other financial institution teetering on bankruptcy...liquidity was drying up as everyone feared economic collapse...resolving this fear was a priority and towards that end the fed was quite successful...the markets stabilized and money started to move again...the cuts triggered a weakening of the dollar and related increases in oil prices...however, the dollar is still stronger than where it was in 1995 and short term inflationary pressure does not necessarily translate into long term effects...and the statement that "rate cuts would open a clear road to disaster, a superhighway to the downfall of the American superpower" is so absurd that it hardly bears comment...there simply is NO HISTORICAL EVIDENCE to support such an argument...and to think that a percentage point here or there is going to alter long term economic development seems irrational...no one has a crystal ball of sufficient strength to predict much of anything long term economically...neverth... the world seems full of "sidewalk superintendents" ready to rail about about what should of been done...but their "after the fact" analysis contributes essentially nothing.

[pharma]

American national interests were prostituted by both major US political parties.

The Fed converted US financial markets in some form of a casino that enriches few and gets control of US political system.

It appears that US financial and political system are totally compromised and unfunctional any more. Just look at quality of the major presidential candidates.

Consequences are very grim. Just to fleece big agribusiness, US politicians created runaway food inflation with hunger raising its ugly head all over the world.

[sivere]

It is true that the alternative (Congress retaking control of the Fed) is not attractive, but it is a Constitutional alternative, and we may end up having no choice but to do it. For the moment, things seem stable. But what is going to happen 3 months from now or 6, or even next week?

Let's get this thing under control now, when we still have a chance:

TakeBackTheFed.com !!!

[sivere]

BTW Pharma, your website link does not work.

[barnburner]

Congress take back the Fed? Hell, the only thing they can agree on is a break to get out of D.C., why would you think they can run the Fed? As I see it the Fed has become too tight with the "in" administration starting with Greenspan and Clinton and in spades with Ben and GW. Somehow we have to get an independent Fed, maybe a Fed chair elected by the people every Presidential cycle-at least they would answer to someone besides the President.

[sivere]

The Fed is supposedly independent already, and look what they did. Whether the mess they created supported policy goals of the administration and congress is possible, but they did it on their own. Congress had minimal information about what was happening inside the Fed and the banks- maybe this is what they wanted. Also, what was occuring IS congress' constitutional responsibility, regardless of who is calling the shots.

The system needs to be reworked completely, and only the congress has the constitutional authority to do it. We are talking about a complete collapse occuring right now, before our eyes. All this fantasy about this being another cycle that will correct by mid-year or early 2009, is a bit of a fantasy.

We need to act now to save our nation.

TakeBackTheFed.com

[Truth4told]

Ben works for George W? Somebody needs a lesson in history! In 1913 our government signed over its money supply to a group of wealthy bankers...the FED. The FED submits the candidates to the President and the FED tells the president who to pick. Both Ben and George are figure heads....but Ben's boss is the private banking cartel. I suggest you watch zeitgeistmovie.com to understand how deep this all goes.