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

http://www.theatlantic.com/images/issues/200905/fed-map.gif
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.