a crisis, discount and discount heavily.� --Walter Bagehot (1826-1877),
�I believe that banking institutions
are more dangerous to our liberties than standing armies. Already they have
raised up a monied aristocracy that has set the government at defiance. The
issuing power (of money) should be taken away from the banks and restored to
the people to whom it properly belongs.� --Thomas Jefferson (1743-1826),
3rd U.S. President.
�By this means [printing money]
government may secretly and
unobserved, confiscate the wealth of the people, and not one man in a million
will detect the theft.� --John Maynard Keynes (1883-1946), British
December 16, the Bernanke Fed took the most unusual
step of lowering the overnight inter-bank lending rate, the federal funds rate,
to a level never reached before, i.e., zero percent with an upside limit of
It also announced that it will buy �large quantities of�
mortgage-backed securities and is considering doing the same thing with
Treasury bonds of longer maturities, in order to lower the entire yield curve.
What it did not say explicitly is that the Fed is ready to
debase the U.S. dollar to artificially low
levels in order to reflate the U.S. economy. What the Fed wants is to trigger
monetary inflation and change deflation expectations at all costs through
large-scale debt monetisation and thus floating excess debts in a sea of newly
Overall, what the Fed has done, in effect, is to announce
that it is suspending the normal functioning of private credit and capital
markets, according to supply and demand, and has decided to micro-manage such
failing markets for the foreseeable future, that is to say as long as
deflationary pressures, in its own view, persist in the U.S. economy. The Fed
is also taking big chunks of ownership in large private U.S. banks in order to
recapitalize them and to let them deleverage themselves in an orderly way.
People may want to know why the Fed went to that �socialist�
extreme and what will be the financial and economic intended and unintended
First of all, let�s keep in mind that the Fed is the only
central bank in the world that is partly publicly owned and partly privately owned.
Bankers sitting on the Fed board can make decisions to lend new money to
themselves at whatever rate they choose. The entire American financial and
fiscal system is run by bankers, either at the Fed or at the Treasury. Indeed,
beginning on January 20, 2009, the Obama administration�s Treasury secretary
will be the current president of the New York Fed, Mr. Timothy Geithner,
who will be replacing Secretary Henry Paulson, himself a former CEO of the Wall
Street investment bank Goldman Sachs.
Although the U.S. president initiates and Congress approves
the nominations of the seven members (currently only five in exercise) of the Federal Reserve Board of Governors
(for a 14-year term), the de facto managing of the Fed is left to
bankers. This is done through the Federal Open Market Committee (FOMC) which
implements monetary policy through open market operations and other discounting
policies and discount loans. It is comprised of the seven members of the Board
of Governors and five presidents of the 12 Federal Reserve District Banks. The chairman
of the Fed board is also the chairman of the FOMC. The president of the New
York Fed is always on the FOMC and acts as its vice chairman. (The remaining four
Fed-member slots are shared and rotated among the remaining 11 district banks.
In fact, the presidents of all 12 Federal Reserve District Banks are present at
the FOMC meetings, but only five are enabled to vote at any given time. But,
since members of the Fed board often originate from the regional Fed banks or
from private banks, bankers are often in the majority in deciding American
Secondly, by taking over private financial markets, the Fed
is, in effect, covering its own mistakes (and those of the SEC and of the U.S.
Treasury) for having allowed the building up of a shaky pyramid of asset-backed securities (ABS), not
the least being the toxic mortgage-backed securities, and the gambling-prone credit default swaps (CDS), that has been crumbling to the
It is my feeling that the Fed, by creating a bond bubble, at this time is only postponing the day of reckoning and is
buying time. When the bond bubble bursts, and believe me, it will burst, as all
bubbles do, this will push the U.S. economy further down. For instance, when
this happens, many capitalized pension funds could fail and many retirees could
be then pushed toward poverty. Future spikes in interest rates will hurt
investments and damage the economy even more.
Meanwhile, a bout of competing currency devaluations
has been launched, since other governments and other central banks will have to
try to debase their own currencies if they want to avoid importing the worst of
the U.S. economic downturn. This will be reminiscent of what happened during
the 1930s� economic depression. Not a pretty prospect for the future of fiat
It seems that the Fed has an uncanny talent for creating
financial and economic bubbles. In the late 1990s, after the Asian financial
crisis and after the near failure of the hedge fund Long-Term Capital Management (LTCM), in September 1998, the Greenspan
Fed flooded the U.S. economy with liquidity and created the 2000 tech bubble.
The same Greenspan Fed aggressively lowered the Federal Funds rate from 6.5
percent to 1 percent in 2004, thus paving the way to the worst housing bubble
in American history. Now, the Bernanke Fed is at it again, and, by lowering the
federal funds rate to close to zero and by announcing that it stands ready to
monetize U.S. Treasury debt, it is actively blowing into what has the
appearance of one of the worst bond bubbles ever.
Of course, the Fed has bestowed so much money on banks in
exchange for their bad debts while the banks themselves are unwilling to lend,
that U.S. banks� excess reserves at the Fed have
exploded to more than half a trillion (November �08), which is 10 times what is
required. This is a sign that the U.S. economy is currently in a liquidity trap.
There is a lot of money in the system, but it is not
circulating. The velocity of money is down. In such a situation of excess
liquidity, when the Fed creates more liquidity, it is like pushing on a string.
Therefore, by lowering short-term interest rates to close to zero, the Fed is
helping itself before helping others, since it will be paying less interest on banks�
excess reserves, most of which came from the Fed anyhow. Some of the excess
liquidity can spill into the stock market and lift all boats for awhile.
However, the true test of the Fed�s recent desperate move will be if banks
increase their lending. We shall know in due course.
Rodrigue Tremblay lives in Montreal and can be reached at firstname.lastname@example.org. He is the author of the book ��The New American Empire.� His new book,
�The Code for Global Ethics,� will be published in 2008. Visit his blog site at thenewamericanempire.com/blog.