Fed Raises Discount Rate

Is this the beginning of the Fed's turnaround and tightening?

The Federal Reserve on Thursday raised its discount rate to 0.75% from 0.5%, an effort to return its lending facilities to more normalized levels.

The Fed said the move, along with other recent modifications to its credit programs, does not signal a change in its outlook for the economy or for monetary policy, and the more important fed funds rate remains in its range of 0% to 0.25%.

The Discount Rate is what the Federal Reserve charges banks to borrow in order to meet reserve requirements.

The Fed chairman, Ben Bernanke, was very careful to use mild language in describing the future stance. The Fed Funds Rate was held at 0-.25%. So, it's still unclear if this is small augmentation or if it is the beginning of more serious.

The equity markets will be of great interest over the next few weeks. When Alan Greenspan raised rates suddenly, that popped the internet bubble. This was also a mild surprise and futures are already down on the news. So, it will be interesting to see what sort of a reaction equities will have.

The Fed in Reverse?

Fed Chairman Ben Bernanke has signaled what he will do to make sure that his loose money policy won't create hyper inflation.

The Federal Reserve could begin pulling back its unprecedented stimulus for the U.S. economy by first removing some cash from the financial system and then raising interest rates, Fed Chairman Ben Bernanke said Wednesday.

The U.S. central bank has pumped more than $1 trillion into the economy after it
slashed benchmark rates to near zero to combat the worst financial crisis since the Great Depression.

While the economy has grown for the past two quarters, unemployment is at a lofty 9.7 percent. In his most detailed description to date of how the Fed aims to dismantle the extensive emergency support facilities it put in place during the crisis, Bernanke made clear the Fed's thinking on its exit strategy had advanced even though the time for tightening monetary policy was still some ways away.

So, what Bernanke will do is largely reverse everything he's done over the last couple years. Right now, the Fed Funds Rate is at zero. He will raise that though he hasn't indicated how high.
Beyond that, he'll sell back most, if not all, of the bonds that he's bought over the last couple years.

This will of course increase interest rates significantly. Tightening the money supply will also stunt economic growth. What most people aren't talking about is what this constant yo yo monetary policy does to long term economic growth. Bernanke spent 2007-2008 furiously lowering rates. He spent the next year furiously increasing the money supply. Now, in 2011, he'll just as furiously do the opposite. Greenspan did something similar in 1999-2003 in which he furiously raised and then lowered rates. This sort of schizophrenic interest policy stunts long term growth, encourages bubbles, and creates chaos and confusion. Monetary policy is a powerful thing but used too liberally it can cause disaster.

The Politics of Bernanke's Renomination

If you've read this site some, you know I have no use for the Federal Reserve. I also believe that Ben Bernanke is wilfully repeating the mistakes of his predecessor, Alan Greenspan. Still, I am watching most of the opposition, from both sides, to the renomination of Bernanke and almost all is political in nature.

The folks are ticked off. They are looking for someone to blame and the Fed Chairman is an easy target. It's also the wrong target. The Federal Reserve itself has plenty of blame, in my opinion, for the current financial crisis. Furthermore, I believe that the Bernanke's current loose money policy will have a devastating effect on our economy down the road.

What most politicians are trying to do is blame Bernanke for the current crisis. That's, of course, nonsense. Bernanke took over at the end of 2006. By then, the wheels were already long in motion for our current crisis and nothing was going to stop it. It's clear, however, that most in Congress haven't the faintest clue what the role of the Fed is and what Bernanke has done in his office. Here's what Boxer said.

In a statement Friday morning, Senator Barbara Boxer, Democrat of California, came out against Mr. Bernanke, who was named to his post during the Bush administration. She said she had “a lot of respect” for him and praised him for preventing the economic crisis from getting even worse. “However, it is time for a change,” she said. “It is time for Main Street to have a champion at the Fed.”

“Our next Federal Reserve chairman must represent a clean break from the failed policies of the past,” Ms. Boxer said.

I'd ask Senator Boxer two questions. First, what Fed Chairman represented the interests of Main Street and second, how can we have a Fed Chairman that has a clean break with the past. The Federal Reserve is the bankers' bank. By nature, he represents the interests of the banks. Ordinary citizens can't get a loan at the Fed's window. Only banks can. How would a Fed Chairman represent the interests of Main Street as Fed Chairman? Given that this crisis touched all parts of our financial world, how exactly would we get someone with a clean break from the past. To do that, we'd need to get a Fed Chairman entirely void of financial experience over the last ten years.

Both Jeff Sessions and Jon Cornyn have put some of the blame for the current crisis on the shoulders of Bernanke, and here's how Oregon Senator Jeff Merkey characterized the scenario.

Oregon Sen. Jeff Merkley said Friday he would vote against granting a second term to Federal Reserve Chairman Ben Bernanke, concluding that Bernanke was partly to blame for the nation's deep recession and that he is ill-equipped to lead a recovery.

In explaining his decision in a floor speech, Merkley credited Bernanke for the major role he played in keeping the nation from tumbling into a depression.


That is not enough to justify another four-year term, Merkley said, suggesting that that Bernanke was too close to bankers and Wall Street financiers. Merkley, who serves on the Senate Banking Committee, also opposed Bernanke's nomination for a second term when the question came before the committee.

Let's try and put this into perspective. What Fed policies caused the crisis? Wasn't it the loose monetary policies that caused interest rates to be kept far too low far too long? This is what Merkey blames Bernanke for even though it was Greenspan's leadership that had these policies. What policies is Merkey crediting Bernake for in lessening the current crisis? Isn't it the same loose money policies that have caused interest rates to be even lower for an even longer period?

Senator Merkey is blaming Bernanke for the policies of Alan Greenspan. Worse than that, he's then congratulating Bernanke for instituting the same policies. This is the level of political thought on the Federal Reserve out of Congress.

In 2002-2003, these same Senators were congratulating Alan Greenspan for saving the same country from the brink for the exact same policies. Now, years later they are blaming the same Fed for the policies of the past. At the same time, they are congratulating the same Fed for those very same policies in the present.

Bernanke on the Brink

As the media breathlessly tracks every move of Scott Brown and watches over the remnants that was the centerpiece of the President's agenda, here's just one story that should be getting more attention.

Ben Bernanke's confirmation for a second term as Federal Reserve chairman will go down to the wire and could be a closer vote than seemed likely just a few weeks ago.

Bernanke's current term as Fed chairman expires at the end of the month, and a Senate confirmation vote has been pushed off until next week at the earliest. Bernanke met with Senate Majority Leader Harry Reid Thursday as Democratic and Republican leaders surveyed senators to tally votes on the nomination. Bernanke needs 60 supporters to win approval for another four-year term.

I don't remember any Senate vote that was anything but a rubber stamp. So, the fact that it's even close is itself unusual. Bernanke is a controversial figure but then again, every Fed Chairman winds up being controversial.

You simply can't take on as much power as the Fed chair without drawing some controversy. His handling of the financial crisis will be a major point of contention. Bernanke is drawing fire from the far left and many conservatives so this nomination fight could draw some very unusual political bedfellows.

This nomination fight could be an opportunity for our news cycle to examine the role of the Fed within our economy but our twenty four hour news cycle simply hyperanalyzes one or two stories and this one hasn't made the cut yet.

Geithner Still in the Hot Seat

With the Massachusetts election, Haiti, and health care reform all taking up oxygen in the news cycle, there is a very important story that is getting little reportage. That's the events surrounding AIG's lack of disclosure that they would use bailout money to pay Goldman Sachs 100 cents on the dollar on some of their counter agreements. Knee deep in this are both Tim Geithner, then head of the New Yok Fed and current Fed Chairman Ben Bernanke. Bernanke spoke about it today.

Federal Reserve Chairman Ben S. Bernanke invited congressional auditors to conduct a “full review” of the central bank’s aid to American International Group Inc. after lawmakers accused the Fed of trying to conceal information about the bailout.

“The Federal Reserve would welcome a full review by GAO of all aspects of our involvement in the extension of credit to AIG,” Bernanke said today in a letter to Gene Dodaro, acting head of the Government Accountability Office, that was released by the Fed.

Some of this little known scandal is wrapped in boring financial paperwork and filings. Others are very easy to understand. AIG was required by law to file a series of disclosures effectively about what it was going to do with tax payer money. It never disclosed the fact that some of the money wouldn't merely go to paying back debts owed based on positions it took against Goldman Sachs but that it would pay Goldman Sachs 100 cents on the dollar. Effectively, we would be giving AIG a bailout then so that Goldman Sachs could be paid back for risky positions that it took.

The reason that AIG didn't make this filing is because it was encouraged not to by then New York Fed Chairman Tim Geithner. It may or may not be illegal but it absolutely looks awful. So far, Geithner has remained relatively quiet about the story. So far, the story has been relatively quiet. Once the news cycle clears, watch for this story to take a front seat. Then, both Bernanke and Geithner will have a lot to answer for.

The Fed Won't Rule Out Repeating History

Fed Chairman Ben Bernanke says that stricter regulations would have prevented the current crisis. He downplayed the Fed, and his predecessor's involvement, and then threw a financial shot across the bow.

Bernanke said, however, in a speech to the American Economic Association, that policy makers can no longer eliminate rate increases from their arsenal to prevent future crises.

"If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplemental tool for addressing those risks,'' he said.

Bernanke conceded that efforts by the Fed and other regulators beginning in 2005 came too late or were insufficient to slow the housing bubble.

That's nice. The last time the Fed raised rates to stop a bubble was in 1999-2000. That certainly did pop the asset bubble in the internet and technology sectors. That also lead directly to the recession of 2001-2003. Then, the Fed lowered rates furiously leading directly to the bubble that's caused the current crisis.

Now, the Fed has lowered rates so low that they can't go any lower. They're now telling people that future bubbles will be popped by the Fed itself. Of course, last I checked, popping bubbles wasn't in the job description of the Fed chairman. At least this one is being honest. When Greenspan popped the internet bubble, he claimed he was raising rates to head of inflation, which was of course non existent at the time.

Bernanke Named Time Person of the Year

Ben Bernanke has been named Time Person of the Year.

Federal Reserve Chairman Ben Bernanke, who helped steer the nation through the worst economic crisis since the Great Depression, was named TIME Person of the Year 2009 on Tuesday, eclipsing finalists who included President Barack Obama and House Speaker Nancy Pelosi.

“He didn’t just reshape U.S. monetary policy; he led an effort to save the world economy,” Time’s Michael Grunwald writes in the cover story, which will be on newsstands Friday.

Asked by Time in a Dec. 8 interview if bankers make too much money, Bernanke replied: “I think that bankers ought to recognize that the government and the taxpayer saved the financial system from utter collapse last year. And in recognizing that, I would think that bankers ought to look in the mirror and decide that perhaps there should be some more restraint in how much they pay themselves, given what the government and the taxpayer did to protect the system.”

Bernanke certainly has transformed monetary policy. He has taken it to new levels, however, whether that's a good thing or something dangerous is still a matter of debate. Did Bernanke keep the U.S. economy from going into a tail spin? He probably at least contributed. How did he do this though? He lowered the Fed Funds Rate to zero and created more than two trillion dollars worth of new money? Is that bold and courageous or reckless? That's a question that remains.

There was a time that Alan Greenspan was seen as an oracle. He was similarly seen as saving the U.S. economy in 2001-2002. He's now viewed by many as the villain that created the current crisis. The same may wind up being seen of Bernanke.

It's important to note that what Bernanke did was neither bold nor innovative. Anyone can lower rates until they can't go any lower. Anyone can create trillions of dollars in new money. That's not bold or innovative. What would be bold and innovative would be to keep the economy from collapse without doing these things. This sort of monetary policy has all sorts of unintended consequences that haven't materialized yet. So, today's man of the year can be tomorrow's villain very quickly.

UPDATE:

Speaking of Bernanke,the Fed minutes just came out. The rates remain unchanged. The language says that the economy remains weak. The Fed Funds Rate is now at zero for just over a year. The Fed just called inflation "subdued".

Bernanke Pleads for More Fed Power

Fed Chairman Ben Bernanke took his case for expanded Fed power to the people with an Op Ed.

The chairman of the Federal Reserve is concerned that congressional efforts at financial reform could weaken the central bank's ability to handle future crises and may politicize monetary policy.

Fed Chairman Ben S. Bernanke made the comments in an Op-Ed piece to appear in Sunday's Washington Post, five days before the Senate Banking committee holds a hearing on his nomination for a second term. His current four-year term expires Jan. 31.

Bernanke wrote the nation is challenged to design a financial oversight system that will "embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause."

It's now a standard M.O. for the Fed, and/or its backers, to scream "politicizing monetary policy" whenever anyone dares to question it, it's power, or worse tries to lessen its power. It's become the monetary policy version of the race card. That's what they did when confronted with the Ron Paul challenge of auditing the Fed.

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

This is becoming a mantra for the Fed. Any time, anyone challenges it on anything, they are "politicizing monetary policy". No one really understands monetary policy and so they surely don't want to be accused of "politicizing" it. What some, like me for instance, call scrutiny and checks on near absolute power, the fed calls "politicizing monetary policy".

I say beware of anyone that makes political cliches. Trotting out the race cad is a political cliche and so too is the cliche of "politicizing monetary policy".

The Coming Asset Bubble

The weak dollar and it's potential to create an asset bubble is even concerning the Federal Reserve.

US Federal Reserve officials are stepping up scrutiny of the biggest US banks to ensure the lenders can withstand a reversal of soaring global-asset prices, according to people with knowledge of the matter.

Supervisors are examining whether banks such as JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. have enough capital for the risks they take, how much they know about the strength of their counterparties and whether risk managers have authority to influence bank practices and policies.

..

The policy is raising the ``systemic risk'' of new asset bubbles, Bill Gross, who runs the world's largest bond fund at Pacific Investment Management Co., said in a note posted on the Newport Beach, California-based company's Web site yesterday. Finance officials in Asia say a bubble fueled by the Fed's low rates has already arrived.

There's a few things of note here. First, I've recently noticed, and been pointing out, that equities have been moving in the opposite direction of the dollar. So, strength in equities has come at the expense of the dollar.

Second, having the Federal Reserve be concerned about this is rather ironic. If in fact a bubble is forming then Federal Reserve is the first, second, and frankly only culprit in creating it. The weak dollar can be attributed to 1) artificially low rates and 2) the expansion of the money supply. Both of those are caused entirely by the Federal Reserve.

Third, Nouriel Roubini and his dollar carry back asset bubble theory are NOT mentioned in the story. That's peculiar because the story described his theory to a T. Roubini believes that the weak dollar is causing investors to borrow dollars and invest them in foreign markets where returns are potentially much higher. What is being described here? That's exactly what's being described.

The Fed isn't about to raise rates or sell back some of the assets they've recently bought to increase the money supply. Instead, they want to monitor the capital of banks and make sure that domestic banks are aware of their "counter parties" strengths. In other words, the Federal Reserve will monitor more closely to make sure that banks aren't overextended and that they're dealing with banks of good repute in the third world.

That's all good and well, but the Federal Reserve pumped the system with trillions in new dollas and lowering rates to zero causing this concern. Now, they want to monitor banks to make sure don't take too much advantage of the situation. That's sort of like your crack dealer making sure you aren't sharing needles. The right thing to do is to take away the crack, the massive amount of dollars and the obscenely low rates, not to make sure the banks are operating properly in the environment they've created.

Perpetual Zero Rates?

The President of the Fed in St. Louis is hinting that the Fed Funds rate will be at zero until early 2012.

Federal Reserve Bank of St. Louis President James Bullard said past experience suggests policy makers may not start to raise rates until early 2012, while facing a “too low for too long” argument that may “weigh heavily” on the central bank.

“If you look at the last two recessions, in each case the FOMC waited two and a half to three years before we started our tightening campaign,” Bullard said today in a speech in St. Louis. “If we took that as a benchmark, that would put us in the first half of 2012.”

That would mean that this Fed Funds Rate would be at zero for more than four years. To put that into perspective, Alan Greenspan kept the same Fed Funds rate at .75% about a year and a half, and many, like me, believe that loose money policy lead directly to the current mortgage crisis.

We're already facing an unprecedented loose money policy. We're already facing continued zero Fed Funds rate for the indefinite future. Now, that future might not end until 2012.

Giving banks the ability to borrow for nothing leads to all sorts of consequences, namely having those same banks take risks they normally wouldn't. That's good if you want to stimulate the economy but it can also lead to over stimulation. That can lead to inflation and bubbles.

It's clear the Fed doesn't think we're anywhere near a recovery. It also believes that monetary and not fiscal policy will lead us into a recovery. Yet, it also could be a sign of recklessness and desperartion. This sort of monetary stimulus is unheard of. Before Greenspan dropped the fed funds rate below 1%, that was unheard of. Now, Bernanke has not only dropped it to zero but will keep it there at least two and half years and maybe as many as four years.

It doesn't take all that much financial knowledge to know that such looseness in monetary policy leads directly to a new crisis. All such policy requires some semblance of balance. The problem by the Federal Reserve is that its been so aggressive that for each problem solved it created a new problem Greenspan popped the bubble and that caused the recession. Then, Greenspan dropped rates below 1% to get us out of the recession. Now, Bernanke is trying to get us out of this crisis with even more extreme monetary policy.

At some point, some other folks might point out that the Fed is the problem not the solution.

Alan Grayson and the Age Old Question

There's a cliche, there's no such thing as bad publicity. If that's true, Alan Grayson is about to test that theory. Grayson first gained notoriety by taking on Fed Chairman Ben Bernanke.



That clip became a cult classic. It was especially classic to those of us that have problems with the Fed, but those folks aren't much of the population. So, this clip came out in July and Grayson was still a relative unknown.

He didn't get known by the public at large until he claimed that Republicans want people "to die quickly".




It went downhill from there. He went on Rachel Maddow and slammed Republicans. He suggested that Dick Cheney was a vampire. Finally, it was revealed that he called a Federal Reserve deputy a "whore".



His behavior is not only erratic but totally inexplicable. He comes from a swing district that surrounds Orlando. He's a first term Congressman. He's no lock to win re election. Why is he saying things that are outrageous?



Certainly, Congressman Grayson is now known by the mainstream. If it's true that there's no such thing as bad publicity, then all of this makes sense. Grayson, however, is challenging that notion and stretching it.

Grayson may wind up helping Grayson. After all, he's become a hero of the far left. He has an open invitation to any show on MSNBC and Air America. Now, everyone knows Alan Grayson. Certainly, his profile has been expanded exponentially. Yet, it doesn't do any favors to his party. Grayson will only go on left wing shows, but the Democratic party may wind up on another network. They're asked about him and forced to distance themselves from their colleague. So, their may be no bad publicity for Alan Grayson but his publicity doesn't necessarily help the Democratic party.

Fed Creating Another Bubble

So says famed economic analyst, Nouriel Roubini,

The Federal Reserve is running the risk of creating another bubble, and needs an exit strategy from its credit easing policy, says former Clinton White House economist Nouriel Roubini.

The sharp increase in the stock market and commodities, and narrowing of credit spreads since March, are partly due to a wall of global liquidity chasing assets and already causing asset inflation, Roubini writes in The Wall Street Journal.

Now, it's important to point out that Nouriel Roubini is nicknamed Dr. Doom because he's much more apt to take a negative position than a positive one. He's also now famous because he's one of the few economists that called the bubble and collapse of the housing market while others were chasing money.

I bring this up only because Roubini is echoing things I said months ago.

Back in 2002, the Fed Chairman Alan Greenspan lowered the Federal Funds Rate to .75%. The Federal Funds Rate is the rate at which banks borrow from each other. At the time, we were still recovering economically from the internet bubble popping. The pop of the internet bubble eventually cost three trillion Dollars in paper lost. The bubble burst was topped by the economic devastation of 9/11. About one million jobs were lost in October, November, and December of 2001. Then, this was followed by the revelations of accounting malfeasance at Enron et al. I bring this context because when Greenspan lowered the Federal Funds Rate this low so called experts justified it as an appropriate response to extreme economic weakening.

...

Now, new Fed Chairman Ben Bernanke has lowered the Fed Funds Rate to 1%, just .25% higher than Greenspan lowered it to. The reason no one is crying bloody murder is once again so called experts believe that Ben Bernanke is responding with aggressive action to an unprecedented economic weakness. The reason this is happening is that most people don't blame Alan Greenspan for even starting the mortgage crisis.

Bernanke is repeating very recent Fed history and he's repeating it even more aggressively. I had a very simple explanation. Bernanke, as Greenspan before him, is creating loose money. (that is money that's too easy to borrow) Once money is too easily available, it's borrowed and spent to accomodate the relative ease with which its gotten and not because there's necessarily a good place to put it. This, in my opinion, is a common trigger for bubbles. Roubini is far more technical but both of us believe that current Fed policy is creating the next bubble.

Some Thoughts on the Fed Minutes

The Fed released its minutes a few hours ago. These are the most predictable minutes that I can remember. To no one's surprise the Fed kept the Fed Funds Rate at its current levels. Also to no one's surprise, the Fed analyzed the current state of the economy as bottoming out and steadying.

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

If you are looking at a graph of an economic cycle, we are at the bottom and, according to the Fed, at the beginning of the upswing.

The most important question going forward is just how quickly will we recover. Will we see unemployment below five percent in the next year or year and half? Or, is it more likely that growth and unemployment will stagnate and the economy will grow slowly and keep unemployment fairly high for years?

The Federal Reserve outlook seems to be closer to the second scenario than the first. The markets initially reacted positively. At one point the Dow pushed above 9900 and the Dow was up nearly one percent. Yet, in the last hour and a half the Dow lost everything and another 81 points. Meanwhile, the ten year U.S. Treasury bond pushed down to 3.41% after being as high as 3.49% during the day. This may have something to do with the outlook of the Fed of upcoming inflation.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Often the initial reaction to Fed minutes is indicative of little long term and so I would caution anyone with reading too much into any of this.

Finally, the Federal Reserve said it would " continue to employ a wide range of tools to promote economic recovery and to preserve price stability". The Fed continues.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

So, while I wouldn't expect the sort of loose money policy that we saw over the last twelve months, we should expect loose monetary policy for the indefinite future.

The Recession is Over?

Economists seem to be using new math to guage the start and end of this recession. When I learned economics in high school, I was taught that a recession was any period in which there were two quarters of negative growth in gross domestic product. That's why I had trouble understanding why economists everywhere began, at the end of 2008, to say that this current recession began at the end of 2007. At the end of 2007, the economy was still growing. Now, the roots of the recession certainly started there but the technical definition is nothing like what these economists were using to define the beginning of the recession.

Now, the fed chairman is using similar logic to mark the end of the recession.

Federal Reserve Chairman Ben Bernanke said Tuesday that the worst recession since the 1930s is probably over.

Bernanke said the economy likely is growing now, but it won't be sufficient to prevent the unemployment rate, now at a 26-year high of 9.7 percent, from rising

.

Technically, a recession ends when GDP stops dropping and begins growing. Of course, that happened at the end of 1933 and no one says the great depression ended in 1933.

So, the technical end of the recession and the end of the recession as the public will see it are going to be two totally different things. So, while it's fine for Chairman Bernanke to say that he believes the recession is over, it's not something I would advise the president to say. It's very likely that we will see growth in this quarter and that woud be a technical end to the recession.

The technical end of the recession is not the most important thing regardless. What's most important is the pace of the recovery once the recession ends. The recession of 1982-1983 was deep and long. Yet, once the economy recovered, the recovery was booming. That's the sort of recovery I am sure the president is hoping for. That will be the ultimate test of his policies.

Unemployment is currently near 10%. We expect that to grow even higher. Much more important than the technical end of the recession will be just how quickly we see jobs growth and more than that, how much jobs will grow once that happens.

Auditing the Fed Is Economic Suicide?

That's the view from this particular blog.

The free market understands that auditing the fed is a very dangerous line to cross. If crossed, U.S. inflation will likely skyrocket over the next decade to unseen levels. U.S. economy tanks. Bond investors lose money as interest rates rise. Stock investors earn negative real return as equity risk premium rises and aggregate PE ratio tank. The US Dollar erodes due to higher domestic inflation relative to foreign inflation. Gold and commodity prices rise.

The thesis of this blog is that if Congress knows what is in the books of the Fed, they can then use that information to put pressure on the Fed Chairman to influence their decisions going forward.



This is the mantra that comes from all those that are against the a full audit of the Fed. In fact, the Fed Chairman, Ben Bernanke, has said the same thing himself.

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

It's not totally clear just how a full audit would give Congress the license to influence policy. For one, most Congress people wouldn't have the first clue what will be in the audit anyway. The thinking, I assume, goes that if Congress knows what the Fed is holding onto as far as financial instruments, cash and liabilities, that they can use this knowledge to put pressure on the Fed to influence policy.



The explanation goes that the Fed needs total independence and any influence could politicize monetary policy. Let's think about this for a minute. The Fed is required to go to Capitol Hill regularly to testify. The Fed Chairman is selected by the President and confirmed by Congress. No one that claims that an audit would threaten the Fed's independence claim that all of these political interventions now threaten the Fed's independence.



I am not discounting that the only thing worse than the Fed Chairman running the Fed is Congress. I am not discounting the idea of unintended consequences. Yet, the Federal Reserve now trades trillions of dollars of a plethora of sophisticated assets. They do this in markets, with other central banks, and with other banks in the U.S. We, the people that it's supposed to serve, don't know exactly what they are holding on to. Can this be?



So, the argument against a full Fed audit is that someone could see a scenario under which this audit could then be used by Congress people would influence Fed policy. So, we're all supposed to dismiss the very real fear that our own central bank can make decisions worth trillions of dollars without having the public know exactly what they are doing because someone has a scenario under which the solution would lead to its politicization.



Now, it's important to point out that this particular blog is one I haven't heard of. I only found it after a scan of the much more popular blog, Little Green Footballs. Charles Johnson, the proprietor of LGF, has a thing against Ron Paul, the person most responsible for legislation calling for auditing of the Fed. As such, in the view of Johnson, anything that Paul champions must be loopy. It is in fact Johnson that linked to this blog as some sort of authority. Now, I doubt that Johnson could explain how auditing the Fed would lead to its politicization. In fact, I doubt that Johnson could explain much of anything on Fed policy. It's an area he's better to simply stay away from. Yet, he can't resist because it's an opportunity to attack Paul. So Johnson, without having a clue about the authority and expertise of the site in question, puts it out there as a site of expertise.

If you think auditing the Fed might not be a bad idea, I suggest you read this: Auditing the Fed Is Economic Suicide.

As such, Johnson engages in little more than propaganda. It's just one of many unfortunate examples of the internet being the wild, wild west. Lot's of people actually trust Johnson's words as an authority, and they might even conclude that this blog is also an authority. That piece in which he purports to act as an authority on monetary policy does them no favors.

The Dubious Language of Fed Chairman Bernanke

This morning Ben Bernanke said two very curious statements. First there's this one.

We have been bold or deliberate as circumstances demanded, but our objective remains constant: to restore a more stable financial and economic environment in which opportunity can again flourish and in which Americans’ hard work and creativity can receive their proper rewards.

Then, he said this.

Mr. President, I commit today to you and to the American people that, if confirmed by the Senate, I will work to the utmost of my abilities--with my colleagues at the Federal Reserve and alongside the Congress and the Administration--to help provide a solid foundation for growth and prosperity in an environment of price stability.

Now, it's hard to tell if Bernanke is simply unaware or if he knows what he is doing and hopes that no one will notice. After all, let's review what he's done since he took over. He's dropped the Fed Funds Rate about 4%. He's pumped well over a trillion dollars into the system. He's bought trillions of dollars worth of bonds to keep interest rates artificially low.



I am reminded of this statement by then President Bush.

I've abandoned free-market principles to save the free-market system.

Let's think about this for a minute. Interest rates have been manipulated downward dramaticaly in the two years he has been the Chairman. He's pumped trillions into the economy in order to manipulate the money supply. He's bought trillions worth of bonds in order to artificially manipulate interest rates lower.



Does this sound like someone that is trying to create a "stable financial and economic environment"? Does this sound like the policies of someone trying to create "an environment for price stability". Generally, you don't create price stability by manipulating interest rates with trillions in bond purchases. Generally a "stable" financial environment isn't created by pumping trillions into the system using money created out of thin air. All of this may stimulate the economy but it certainly doesn't create an environment of stability.

The reality is that the Fed, more than any one or thing, has contributed to an environment of instability over the last decade and more. This has continued under Bernanke. I know that fed policy is very complicated and so most people really don't understand its effects. As such, the Chairman can engage in policies that do everything to create instability and yet claim they are working to create stability. It's still rather stunning when so brazenly the Chairman says something so false.

Some Thoughts on Bernanke's Re Nomination

The president will nominate again Ben Bernanke to be Federal Reserve chair. It's a story that will get a little coverage and even less analysis. Most people will nod and move on their way. Just think about that for a minute. The Fed chairman controls the money supply in the country and by extension the world, and this story will get little mention and even less analysis.

The Federal Reserve chairperson is arguably the most powerful person in the world and yet the dynamics by which they are nominated and nominated again receives less attention than a story on Brittney Spears. By many, Fed Chairman Ben Bernanke is credited with pulling the economy back from the brink. This is a dubious analysis for several reasons. First, it's still not clear the economy is back from the brink. Second, it's impossible to prove what pulls an economy back from the brink. Third, and most importantly, no one has talked about what the effects will be of his loose money policy.

Back in 2002-2003, most of the same folks now praising Bernanke were also praising then Fed Chairman Alan Greenspan. Back then, Greenspan dropped the Fed Funds Rate to below one percent, a level not seen in a very long time. He left it there for more than a year and when the economy boomed in late 2003 and continued to hum for four plus years, Greenspan was given a great deal of credit. Of course, by lowering the rate that much, Greenspan actually created loose money. Loose money leads to irresponsible behavior and that's exactly what happened. Some, like me, put a lot of the blame for the crisis on to Greenspan. Yet, Bernanke has doubled down on loose money policies in dealing with this crisis.

Not only has Bernanke lowered the fed funds rate to zero but he has stepped in to buy about $1.5 trillion bonds, both mortgage and treasury, in order to not only pump money into the system but to keep rates artificially low. In fact, history says that such enormous loose money policies only creates a series of booms and busts and continues to keep the economy in a state of chaos. That's exactly what Greenspan's aggressive monetary policy has created and now when Bernanke has continued with it he is being lauded for "saving the economy".

This morning we are expecting an announcement that earlier projections for budget deficits over the next ten years are about $2 trillion light. The government was already spending at unsustainable rates and now we learn that they have been spending at even more massive rates. How is the government able to get all this money? In part it's because the Federal Reserve is buying the bonds the Treasury uses to borrow. In other words, the Fed acts as the drug dealer to feed the Treasuries insatiable appetite for spending. This is what is being lauded by much of the public as "saving the economy".

Now, I am not saying this to proclaim I am right and the Fed Chairman is wrong. What I am saying is that Fed policy affects all of us and it affects all of us in a very significant way. Yet, this policy receives less scrutiny than a story on Brittney Spears. Today, the Fed Chairman will be nominated for another four year term and no one will bat an eye. There will be little analysis or debate as to whether or not he deserves it. Then, he'll spend the next four years making decisions that will have a significant effect on each and every American and there will likely be just as much analysis of that.

Finally, let me play a clip that I think is important for everyone to see. This is Rep Alan Grayson grilling the Fed Chairman about a policy in which he creates a "shadow currency market". Maybe, after watching this, we should all think twice about just how great Bernanke is.



Frankly, that this video has been a viral sensation but not a media sensation says all everyone needs to know just how critically the media treats fed policy.

The Federal Reserve, and the Shadow Currency and Interest "Markets"

That's a video that everyone that cares about the future of this nation should watch carefully. It's Democratic Rep Alan Grayson from Florida grilling Fed Chairman Bernanke about something called "liquidity swaps". Ask one thousand people what a liqudity swap is and I doubt more than one will have heard of it. All one thousand will have no experience trading them. That's because a "liquidity swap" is something only central bankers trade. That should scare everyone.

That's because, according to the testimony, Rep Grayson said that between 2007 and the end of 2008, liquidity swap trading increase from $23 billion to $553 billion and there was virtually no trading in liquidity swaps prior to 2007.

Think of a liquidity swap as a way for the Central banks of the world to trade currency without having those trade affect the currency market. In other words, through liquidity swaps, Central banks trade currency outside the currency system. Instead of a central bank buying dollars on currency exchanges, they buy dollars from the Federal Reserve which keeps them in reserve. Does that sound like a good idea? Does it sound like a good idea to allow central unelected bankers trade currency without having those trades affect the currency markets? Whether or not this does or doesn't have an impact is entirely up for debate? Congressman Grayson asked if it was mere coincidence that the nominal Dollar exchange rate shot up 20% at the exact same time that the Fed was making these swap transactions in earnest. The Federal Reserve chairman answered that it was.

Central banks, lead by the Fed, have their own shadow lending market created and run just by themselves. The Federal Funds Rate, for instance, is only available to banks in the Fed System. They even have their own shadow currency market as illustrated by the "liquidity swaps". These selected groups of central bankers simply create financial tools that are available only to themselves and then trade these vehicles amongst themselves. Here in the U.S. at least, their activities are left largely unscrutinized. There is very little oversight of our central bank, the Federal Reserve.

H.R. 1207, the act that would force a full audit of the Fed, is very popular but has little hope of passing. As such, the people of the country know very little of the trillion dollar transactions that the Fed engages in. Furthermore, the Fed uses dubious authority to create all of these shadow markets. In the clip referenced, Bernanke alludes back to the Federal Reserve Act of 1913. That was created nearly a century ago and it gave no specific authority for a "liquidity swap" because a liquidity swap was a figment of the imagination of bankers then. Yet, it's now being traded in half trillion dollar amounts by a group of central bankers that have absolutely no oversight.

Again, in the clip, Bernanke acknowledges that authority was given by the Federal Open Markets Committee. That is the group of Federal Reserve regional chairmen and the Chairman himself. None of these people is elected. More than that, they face little scrutiny. The Fed has never gone through the sort of forensic audit that most other government institutions are required to go through.

This exchange received nearly no scrutiny itself. Shouldn't everyone be concerned that our central bank has suddenly decided to make a monumental new investment in a shadow currency market? Such a monumental transaction should require the greatest of transparency. Instead, its hidden, given the least of acknowledgement, and downplayed by the chairman when questioned about it.

Everyone must understand once and for all that the most powerful force in the world today is the Federal Reserve bank. It controls the money supply. There is no more greater power than that. Unlike the president, the bank faces no election. It barely faces an audit. Almost none of its financial transactions are ever scrutinized. This exchange is a rarity and most exchanges amount to financial worship. Until the Federal Reserve is reigned and controlled so that its power is signficantly diminished the future of our economy is in constant threat by a central bank that is drunk on power.

Some Perspective on GDP Growth and the W Shaped Recovery

Here is a chart of GDP growth from 1929-1940.

Now, if you just looked at the years 1933-1940 you might not even know that we were in a depression. In fact, from the period of 1933-1940 unemployment never reached single digits. In fact, by 1938 unemployment was still at 19%. GDP growth was solid all the way from 1933-1937. Of course, in order to recover from the economic contraction of 1929-1932, it was going to take more than merely "solid" growth. That's why despite what looked like solid GDP growth all throughout the Presidency of FDR we continued in a depression.

Under Reagan's term, Reagan came in with an economic contraction that wasn't nearly as dramatic but still intense. In fact, the second quarter of 1980 saw the economy contract by 10.2%. It dipped another 5.7% and 5.6% in the last quarter of 1981 and the first quarter of 1982. So, it wasn't going to take a solid economic growth to get the economy out of that recession. In the second quarter of 1983 that's exactly what happened. The economy grew by 10.2% and every quarter after that for the rest of the year the economy grew at 6% and more.

The recession of 2001 was even more mild. The economy never even contracted. Instead, it barely grew in 2001 (.02%) and grew somewhat slowly in 2002 (1.9%). By 2003, the economy was growing at 3.7% and we entered a four year period of not economic properity.

We'll have no such luxuries this time. Here are the last six quarterly GDP growth numbers -1%, -6.4%, -5.4%, -2.7%, +1.5%, and -.7%. Now if 2.5% GDP growth is enough to keep an economy growing at a decent or C average pace, and we've lost an average of 2.6% over the last six quarters, then the economy would need to grow by just over 5% over the next six quarters just to get us back to normal.

Now, Fed Chairman Ben Bernanke believes that the economy will start to grow the next quarter of the final quarter of 2009. That's when the real work will begin for the economy. The economy will need some remarkable growth in the next six quarters in order to usher in a recovery.

That's when all the new debts the government has taken on will become an albatross. If the economy were to show that kind of recovery, then that would create higher interest rates. That's when all the deficits that we've built up not only over the last six months but the last eight years and more will kick in. Either remarkable growth will lead to massive inflation or it will lead to higher interest rates that will stunt the recovery and a W shaped recovery. So, we still have plenty of potential pitfalls in front of us and there are no good options.

The Fed's Red Herring

During Congressional hearings yesterday, the Federal Reserve Chairman, Ben Bernanke, was again questioned vigorously by Congressman Ron Paul regarding more transparency at the Fed. Congressman Paul has introduced H.R. 1207 which would demand more transparency from the Federal Reserve. Currently, and shockingly, the assets, liabilities, and other investments of the Federal Reserve are not open to public scrutiny nor to the scrutiny of just about anyone. No one outside the circle of the Federal Reserve has any idea just how much, and what make up, the current investment portfolio of the Federal Reserve is and how it's doing. Here's how Bernanke justified the limited scrutiny of the Federal Reserve.

We have recently taken additional steps to better inform the public about the programs we have instituted to combat the financial crisis. We expanded our website this year to bring together already available information as well as considerable new information on our policy programs and financial activities.2 In June, we initiated a monthly report to the Congress (also posted on our website) that provides even more information on Federal Reserve liquidity programs, including breakdowns of our lending, the associated collateral, and other facets of programs established to address the financial crisis.3 These steps should help the public understand the efforts that we have taken to protect the taxpayer as we supply liquidity to the financial system and support the functioning of key credit markets.

The Congress has recently discussed proposals to expand the audit authority of the Government Accountability Office (GAO) over the Federal Reserve. As you know, the Federal Reserve is already subject to frequent reviews by the GAO. The GAO has broad authority to audit our operations and functions. The Congress recently granted the GAO new authority to conduct audits of the credit facilities extended by the Federal Reserve to "single and specific" companies under the authority provided by section 13(3) of the Federal Reserve Act, including the loan facilities provided to, or created for, American International Group and Bear Stearns. The GAO and the Special Inspector General have the right to audit our TALF program, which uses funds from the Troubled Assets Relief Program.

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

In other words, there's already plenty of transparency and any more would make the Federal Reserve politicized. The Chariman worries that if the Congress knew too much, they would try and influence monetary policy. Keep in mind that the portfolio of the Federal Reserve is likely in the several trillions. Yet, the same Federal Reserve would like absolutely no sunshine on exactlyt the make up of this portfolio because they worry that too much sunshine might politicize their decision making process.

This is a total red herring. The Federal Reserve chairman and all the Governors are selected and their terms are four years. The testimony the Chairman just gave is a regular occurrence. Of course, it's very difficult to question an individual when you really don't know exactly what he's doing. There's already some political pressure on the Fed. Yet, they are a totally independent financial institution. The decisions of the Chairman and the board are final. Short of corruption, removing any of them prior to the end of their terms is nearly impossible.

Sunshine influencing monetary policy is much more perception than reality. Sure, Congress can pontificate and bloviate. They can do that now. Frankly, most of them wouldn't have the first clue what any of the numbers mean anyway. The decisions of the Fed and its board are final and independent. Yet, transparency is critical. The Federal Reserve holds onto trillions of dollar investments. The bank literally controls and manipulates the money supply. Yet, the people of this country have absolutely no idea what's going on. We don't know how much is in the portfolio. We don't know how it's made up. Near daily, the Federal Reserve manipulates the money supply by buying and selling securities. Yet, the public doesn't know. That's neither open or transparent. In fact, the Federal Reserve operates as monetarial MONARCH. Transparency would be the first step toward reducing its power, and that's what this anti transparency stance is really all about.