Tuesday, April 14, 2009

From the Atlantic Monthly

Recently, I have been thinking back to an early-morning conversation with Jonathan Melancon, which occurred in September of 2007. I was in Houston, Texas, on business for an AxSA client, and while I was en route to their Deer Park offices, Jon and I were talking about the Federal Reserve's "$38 billion in capital as something of an infusion, to keep financial markets from locking up on the perception of illiquidity." This allocation was, in keeping with quotes from the Axiom Quarterly of that time, "only a small fraction of the total $326-plus billion that has been kicked into markets all over the world, just to mitigate the same problem." I distinctly remember, as I was speeding along I-610, that I uttered one sentence to my dear friend on the other side of that mobile phone call: "Nothing good will come of this."

Everyone knows that I love being right--but this time, not so much, because nothing good came, at all.

While I have always understood the Fed to be a necessary evil in the control of our money supply, I have also been, at times, leery of whether or not their actions were above reproach. In fact, long before I launched this consulting firm, I was very critical of the role of the Fed in what was sure was an impending housing crisis . I also questioned if these guys were not paying attention to the fact that their post-9/11, low interest rates were wreaking havoc on equities markets, while helping to set us up for a commodities-market bubble.

So, yes, I got that part right...Unfortunately, I will not do a "told-you-so" dance any time soon, because that would not be right, and because I also did not join in a loud, public clarion urging our leaders to practice some sort of monetary prudence. (For that matter, until very recently, that needed, public outcry was nothing more a weak whimper from nearly all quarters of the citizenry. Now it is all about dusting off ideas like tea parties and writings from Ayn Rand, an approach of which, yup, I am also guilty.) And while I sat back and said nothing, along with the rest of the country, this dodgy group of unelected bankers and financiers was laying the seeds for additional economic turmoil.

I kind of knew this already, to be sure. After all, the Fed was very public about the use of its superpowers. Unfortunately, AxSA had never felt the need to keep a tally of all these numbers. Therefore, I had never put the entirety of their actions (since Q3 of 2007) into any fuller perspective. Now, as I look at the graphic below, I am thunderstruck, and left to agree with something uttered by Mark Cunningham: these bankers are out of control.

The actions of the Fed, if left unchecked, will surely provoke the third in a series of crises, the one wherein the value of the dollar will be ruined by wanton over-capacity; yet, the tragic and ironic certainty in it all is that these guys, especially Bernanke, know better than to proceed with this course of action filled with moral hazards. --gh

The Fed's Cash Machine

Sources: Federal Reserve Bank of New York, Milken Institute, U.S. Budget Watch

As the housing collapse has turned into a financial crisis, and the financial crisis into an economic calamity, the government has tried furiously to keep the country free of breadlines and trash-can fires. Two of its interventions-the $700 billion bank bailout known as TARP and the $787 billion stimulus package-have inspired levels of partisan acrimony and journalistic scrutiny befitting a war vote. But neither of those initiatives, expensive as they are, approach the civic munificence displayed by the Federal Reserve.

In the past year, the Fed has undertaken interventions in the economy broader and deeper than anything attempted since its founding in 1913. And with the credit system paralyzed, the central bank increasingly looks like the lender of both first and last resort. But the Fed's actions have stirred nothing like the debate surrounding TARP or the stimulus (pictured in detail below). And the particulars of its schemes remain almost entirely obscure.

Through a dozen programs introduced since the crisis began, the Fed will be on the hook for trillions of dollars in loans, bailouts, and asset purchases. The government expects to be repaid for most of these commitments, of course, with interest. But that's the tricky part. Largely unencumbered by congressional meddling, the Fed has in most cases refused to reveal the beneficiaries of its largesse-or what assets they've used as collateral-lest panicky investors and depositors lose faith. As a result, outside the walls of the Eccles Building, almost no one knows how sound those loans really are.


Tyler L. said...

Of course, I read your missive today, as I always do when I notice a new one. Then I looked in the right column where you've tucked away the news from Reuters, and there I also read "Recession fueling right-wing extremism..."

I cannot help but to think that's right. You see, Gary, these people are looking for an excuse to be angry, and unfortunately, some intelligent people like yourself are unwittingly giving them the ammunition they need.

Take this post for example. Ordinarily, you are very fair in your writing, but missives like this are unapologetically slanted, Gary, and they are not educational, even if they do originate from a story in Atlantic Monthly. Granted, you have a great way with words, but in this instance, they are only inciting confusion, fear and anger. Not once have you offered up a solution or alternative to the problems you see in this piece. And because you did not bother to present another side, to me, that makes your posting something like propoganda for the loons who are going to run out with this slanted information and want the Federal Reserve dismantled. Or they are just looking for a reason to blame President Obama or the Congressional Democrats for even the Federal Reserves actions that they cannot control. You are giving them that reason by helping to target the Federal Reserve's intervention program with limited information, when oddly you were for weeks saying that liquidity and credit were necessary to get the economy going again.

And before anyone says anything, I want to be the first to comment here, Gary. I want to remind people that before other commentators reply with their conservative views that when the Federal Reserve started its action it was in 2007, and it was not a partisan action. The Federal Reserve is supposed to be nonpartisan, and this chairman was appointed by Republican President George W. Bush, so there really will be no reason for them to try to come along and frame this as some political debate when it's not.

Try to keep a balanced opinion here, Gary. Don't get played into the wrong hands.

Digger in LV said...

Send me a Galt t-shirt. XL. I will be there standing with you, bud.

mike care said...

Gary, there is a young man from this side of the country who you need to acquiant yourself with. His name is Adam Kokesh. His conviction and passion reminds me of yours. Of course, you will either really like him or really not like his views. But I will tell you this as I see it. When I listen to him, I hear a lot of you, and you both make me feel good about the future.


Anonymous said...

you know something. the problem with this blog or kokesh or ron paul or the republicans is that no matter what one issue it is, the answer is always the same: rise up and overthrow...Sorry, but that is same fucked up mentality that the nazis were screaming when they took power in German, and republicans are no better. they hate everyone who doesn't look or act or sound like them. so if they got the chance they'd probably do all the same stuff "...in the name of The Lord" no less.

Mashoud said...

Tyler, first of all things, by coming out front and putting people with fiscally conservative views in the same camp as extremists, you have just made this a political argument.

"...I want to remind people that before other commentators reply with their conservative views..."

Secondly, from what I can tell about the people reading this blog, no one was going to say anything about Obama or Congress this time. The topic at hand was the Fed by itself. Contrary to popular, liberal beliefs, and unlike some of you, we conservatives are intelligent enough to know when an issue transcends partisan politics.

And lastly, Anonymous, you guys always do this crap. You always want to compare Republicans with the Nazis, because you feel like it may help you to demonize us and debunk the argument.

"...that is same fucked up mentality that the nazis were screaming when they took power in German, and republicans are no better."

None of this changes the fact that we are smart enough to know that the country is on the wrong course. What Gary did was make an effort to point that out here, and I have to commend him for that. I am not going to always agree with him, but I know the information he presented is not slanted. It is what it is. You guys need to stop hiding from it or trying to kill the messenger because of it. None of that will change the facts.

Jonathan B. Melancon said...

I am absolutely baffled at how unbelievable naive some of the commentators to this blog have shown themselves to be. Mashoud is correct, the fed and this issue transcend political partisanship. WAKE UP!

Gary's blog is dead on accurate and has nothing to do with political partisanship.

These people behind the Federal Reserve could careless what political party is in power, they do what they want and no US president has the legal authority to force them to do otherwise.

As for Anonymous, you have no credibility. You consistency make these audacious claims because you have no ability to articulate a counter point so you just call people who disagree with you as Nazis or whatever derogatory term you choose to use that day.

And rise up and overthrow is not the mantra of the Nazis its the mantra of each and every citizen who votes for a non incumbent.

John said...

Okay, I am a Democrat, and these other people don't speak for me. I know a lot of Republicans. And while they might be a little wrong in their beliefs, they are not Nazis. I am like them. I so do not want to see taxes go up on anybody because some of us pay too much, and I don't want working people to have to keep doing these bailouts for rich companies or rich people. When we get behind, nobody is bailing us out. Hello!

But I say all of this and then I have to stop and ask if all these people are losing their jobs and banks are failing, what choice do we have but to spend some money? How else do we built new roads, new schools, new cities? How else to pay for the poor? And how else you gonna pay off that debt I see running up? It's not like we are going to freely do it on our own. Tried that, remember, and it did not work.

Look, I'd like to be at a tea party too. But other than talking about cutting taxes what else are these people offering as an answer. I have not heard anything worth considering. So no, Republicans are not Nazis, but they don't all have any answers either.

Gary, I read an email you wrote last week to someone saying you support the existence of the Federal Reserve but you did not support their actions. I would never assume to know more about this than you do, but is this what you mean here?

Jonathan B. Melancon said...

What answers have you heard that are so unworthy of consideration? How about HR 1207? Why is having an audit of the Federal Reserve so unworthy of consideration?

These tea parties are NOT about Republicans or Democrats. Its about standing up against unbridled unchecked spending and unsustainable monetary policy. There is a disconnect between our government representative in Washington and middle America.

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