The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

Above All Else, Remember: The Federal Reserve Has Gone Malignant

Posted on | October 2, 2012 | 42 Comments

by Smitty

The New York Sun:

“Bernanke warns congress to butt out of interest-rate policy discussions . . .” is the headline up on the Drudge Report following the speech today by the Federal Reserve’s chairman at Indiana. It sounds to us like the chairman is warning Congress against passing Congressman Ron Paul’s audit-the-Fed legislation and Congressman Kevin Brady’s Sound Dollar Act, both of which would open up Fed policies to inspection. The chairman’s speech marks another step in the Fed and the Congress moving into what might be called open, if polite, confrontation.
It’s an important story. The fear the Fed chairman is trying to instill is that by conducting an audit of the Fed that includes its interest rate policy discussions, the Congress would open the Fed up to political interference. It strikes us as an illogical reach. The Fed, after all, is running one of the most radical interest rate programs in the history of the central bank. It’s been many an election since we’ve seen the Fed so close to the center of the presidential campaign.

“Zimbabwe” Ben Bernanke is #2, after #OccupyResoluteDesk, on the list of people who Have. Got. To. Go. in my opinion.

And Ben himself may not be a bad guy; maybe it’s the office. But the Federal Reserve has been for too long the bi-partisan vehicle for funding federal irresponsibility. The madness will stop. The question is whether the sudden deceleration is going to snuff the economy with it.


42 Responses to “Above All Else, Remember: The Federal Reserve Has Gone Malignant”

  1. pacoent
    October 2nd, 2012 @ 11:17 pm

    You’re right on the money!

  2. CPAguy
    October 2nd, 2012 @ 11:18 pm

    You have no understanding of the Fed.

    They are trying to stave off economic collapse. They played chicken with Clinton and it worked….however, Obama didn’t take the bait.

    The Fed has consistently warned that Congress is making terrible budgeting decisions and must take drastic action to cut spending.

    I’m not a fan of QE3, I don’t think it will work, but they are out of ammo as Obama has given them more targets than they have bullets.

    The Fed, like the rest of us, can only pray that Congress gets a clue.

  3. Adjoran
    October 2nd, 2012 @ 11:23 pm

    As you know, I believe the independent FRB is far superior to allowing elected officials to determine monetary policy, the idea being the further those decisions are removed from elective politics the more they can be based on sound economics and the less on political considerations.

    But that certainly doesn’t mean a blank check and no accountability. The FRB seems to want exactly that with the unprecedented “Quantitative Easing” (which should be defined as “inflationary monetary infusions designed to have a delayed effect” – something like the embezzler who buys Lotto tickets in the hope he can win enough to replace his loot before it is missed by the boss). It cannot be allowed.

    There is no reason the deliberations need to be secret. They could be transcribed without identifying the individual Governors (except the Chairman). I can’t think of any reason the public shouldn’t see them, much less Congress and Treasury.

    When Paul started his “audit the Fed” demands, they were pure nonsense. Everything was on the record in great detail, Congress could access the numbers easily. The proceeds of the various QE iterations and “twisting” have not been treated with the same transparency. What evidence we do have suggests banks are being given free money, in essence, in the process by crediting them with interest on deposits they do not own, and that some banks are being favored in a significant way for reasons which are unclear. This needs a full inquiry – beyond a typical audit.

  4. K-Bob
    October 2nd, 2012 @ 11:30 pm

    I dunno. I think Bernanke is more of a symptom and less of the disease, in general.

    Harry Reid and Nancy Pelosi are definitely part of the mainline disease process. I could certainly be wrong. Some people live longer lives then expected, by simply controlling the symptoms.

  5. Adjoran
    October 2nd, 2012 @ 11:39 pm

    It’s not the Fed. It’s the Chairman first and also the Governors. Volcker did what needed to be done and we emerged from a necessary recession with a strong dollar and vibrant, more efficient economy. Greenspan was an idiot but the luckiest idiot in world history. His pronouncements generally had little to do with describing the situation and more with being cryptic enough for everyone to read what they needed to into them.

    Bernanke thinks he is a Sooper Genius, even when he admits he hasn’t the foggiest notion what to do. In that respect, he is much like Obama. In any case, his tenure has been a disaster, and he cannot be allowed to continue to operate with no checks or balances on what he can do.

    Part of the problem is they are trying to do things that are not and should not be in their charter. Jobs and the economy are problems for the politicians, not the FRB. They should be regulating the money supply with the single focus on keeping it as precisely accurate as possible, erring only slightly on the inflation side (because of the more devastating and unmanageable effects of even slight deflation).

  6. K-Bob
    October 2nd, 2012 @ 11:41 pm

    Fragrant Resource Basket?
    Fellowship of Religious Brethren?
    Funicular Reels of Braid?
    Fondant Remoulades Brulee?
    Fiscal Reimbursement Belligerants?

    Damn. Sometimes a large vocabulary is no frikkin’ help at all.

  7. CPAguy
    October 2nd, 2012 @ 11:44 pm

    Volcker was a fool whose saving grace was the economic might of the US…which even he could not diminish.

  8. K-Bob
    October 2nd, 2012 @ 11:44 pm

    “As you know,…”

    Oh now we’re really laying it on.

    I’ll have you know I know no such thing.

    However, upon further introspection, I believe I am open to further inquiry.

    But I agree on the point about Paul’s call to “audit the fed.”

    I’m on familiar ground there. I think.

  9. K-Bob
    October 2nd, 2012 @ 11:51 pm

    Holy crap! I agree! I’ve told people for years that Carter’s best move ever was in appointing Volcker. Add that to the deregulation he started (airlines, but still), and he almost appears conservative by comparison to guys like Clinton, Gore, and Obama.

    Of course, he hammered boards in the hot sun too many years afterward, and transmogrified into “Jew Hatin’ Jimmy.” But that’s a story for another time.

  10. Adjoran
    October 3rd, 2012 @ 12:20 am

    Volcker took over an FRB which had deteriorated to a tool of the Executive and reasserted its independence, performed the absolutely necessary tightening to rein in stagflation, forced us to endure the necessary recession.

    The “near-0%” interest + stimulus plan was tried by the Bank of Japan in response to their banking crisis of the late ’80s & ’90s. It’s now called “The Lost Decade.” Bernanke is just following that plan because he has no other.

    He should have listened to the ancient wisdom that “nothing is usually the right thing to do, and always the right thing to say.”

  11. Adjoran
    October 3rd, 2012 @ 12:23 am

    I’ve bedded more models than Carter ever pounded boards. He shows up, has his picture taken holding a hammer, then leaves in a limo, allowing others to do the actual work so a poor family can default on their no-money-down low-interest mortgage later.

    But he also proposed (early on) sunset legislation for federal laws & regs, and even spoke of Zero Base Budgeting. DC Dems chased Bert Lance to show Jimmah he shouldn’t rock the boat, and he got the message until threatened by a rabbit.

  12. Finrod Felagund
    October 3rd, 2012 @ 12:32 am

    Romney should appoint Herman Cain as the next Chairman of the Fed.

  13. Adobe_Walls
    October 3rd, 2012 @ 12:39 am

    The Fed or at least it’s chairman also recommend “revenue enhancement” in addition to spending cuts, a profoundly incorrect policy. The Fed chairman believes that FDR’s policies eventually ended the Great Depression, a profoundly incorrect analysis. The Fed Chairman also believes in Keynesian economic theory, a profoundly incorrect economic theory even if implemented exactly as Keynes envisioned (something that has never happened). The stated purpose of “monetary easing” is to inject liquidity thinking it’s in short supply, it’s not. Bernanke is an unmitigated disaster and all of the Quantitative Easing programs have been nothing more than welfare for bankers.

  14. Adobe_Walls
    October 3rd, 2012 @ 12:40 am

    Ron Paul should be next Fed Chair.

  15. Adobe_Walls
    October 3rd, 2012 @ 12:43 am


  16. crosspatch
    October 3rd, 2012 @ 1:01 am

    NOOOO!! Do NOT have Congress audit the Fed under any circumstances. The LAST thing we want is to have politicians messing with monetary policy. Bernanke is doing about the best he can do to maintain his mandate under conditions that Obama is creating. If you want to change the mandate, then fine, but DO NOT under ANY CIRCUMSTANCES have Congressmen sticking their fingers in the Federal Reserve or have a detailed public release of any information from it. That is GUARANTEED destruction.

    Right now the primary mandate of the Federal Reserve is inflation. The goal is to keep inflation to 2% over time. If you want jobs or total government debt to be part of that mandate, fine, make it so. But if you open up the fed to meddling by Congress there will be no end to the micromanagement, pandering, and corruption.

    Right now the BEST thing we can do is get Obama the hell out of Washington DC and get someone in there that knows what we are doing. The problems we currently have are NOT caused by the Federal Reserve. The problems we have now are caused by Congressional meddling in markets. We don’t want to extend that meddling to monetary policy.

  17. Buck O'Fama
    October 3rd, 2012 @ 1:08 am

    Back in July, Barrons had an interview with economist Stephanie Pomboy who predicted the END of fiat money within five years and a return to a gold or hard-asset backed currency. Look at the EU, Japan and the Fed… I don’t doubt it. It may be 5 years, it may be 10, it may be 5 months, but it’s gonna happen.

  18. Adjoran
    October 3rd, 2012 @ 4:16 am

    I think the Governors should all be chosen from the limited pool of bankers/financiers who never needed or accepted government bailouts (very narrow since Paulson forced many to take money they didn’t need in 2008 to avoid stigmatizing those who needed help in 2008). They would be large-but-not-mega-bankers, 70 or older, with a limit of two terms and a statutory charge to keep the money supply accurate and not assume economic omniscience or omnipower.

    Cain and Paul are smart, accomplished men, but neither has even the minimal expertise to begin to understand the task at hand. It is of critical importance and quantum complexity. The Governors should all have a nodding acquaintance with the formulas and theory behind what they are tasked with doing. The main thing is to prevent them from usurping other powers in the process.

  19. Adjoran
    October 3rd, 2012 @ 4:24 am

    2% inflation isn’t the goal, it’s a benchmark. The FRB should aim roughly for that because it leaves a manageable and safe margin for error (at least in normal times). The goal is a money supply adequate for the economy. Ideally there would be 0% inflation, but the harm of deflation is so severe that low levels of inflation are better tolerated than deflation be risked.

    Bernanke isn’t doing that. Like Greenspan, he sees himself as Keeper of The Economy, a dangerous usurpation. Quantitative Easing didn’t avoid a reckoning in the market, it merely postponed it and magnified the level of distress it will cause. More of the same is making things worse and postponing real recovery.

    Interest rates SHOULD rise. Only that can force the federal government, Congress and Executive, to face the reality of necessary cuts beyond accounting legerdemain.

    I hate people who can’t do their own job competently but insist on taking over everyone else’s authority anyway. That’s Bernanke. Screw the rat bastard.

  20. Adjoran
    October 3rd, 2012 @ 4:29 am

    Arithmetic is hard, but unforgiving. There is no conceivable way to institute a gold standard without creating a deflation that would put out the lights of economic activity for a generation or more. We are talking making the Great Depression look like a GAO conference trip with open bar.

    Obama has done a fool’s job of the Presidency, but we don’t seek to abolish the office because of it. The world needs better money supply regulation, but we do that by getting rid of the louts.

  21. crosspatch
    October 3rd, 2012 @ 5:39 am

    Oh, I think Bernanke should be out on his ass the day Romney takes office but I do NOT want Congress messing with the Federal Reserve. You think things are bad now? They would be a lot worse with Congress tinkering with it.

  22. scarymatt
    October 3rd, 2012 @ 5:53 am

    Yes. I have a lot of problems with the Fed, but more involvement from Congress is the opposite of solving them. The extent of Congress’ action right now should be to clarify and simplify the Fed’s mandate.

  23. Adobe_Walls
    October 3rd, 2012 @ 7:49 am

    An endless series of fatal conceits. Keep the dollar strong and that’ll do.

  24. JeffS
    October 3rd, 2012 @ 9:01 am

    Don’t fill the Fed Chair. Shut down the Fed, and remove one knife at our throats.

  25. JeffS
    October 3rd, 2012 @ 9:19 am

    The FRB was created for a purpose. This country gave the Fed control of the national currency nearly a
    century ago, and that was the first step onto a slippery slope of
    over-control of an economy that, by many accounts, can only be
    influenced, not controlled.

    But there was a purpose, and for whatever reason, the FRB has long since devolved into an idiotocracy run by out-of-control autocrats. Their collective policy seems to be riding a tiger because the horse needs new shoes before it can ridden again. Even if it is an attempt to stave off collapse, QE3 is a classic example of Albert Einstein’s definition of insanity.

    Perhaps the FRB can be fixed. But it seems to me that tinkering with the system, or just replacing the Chairman, may not be enough. Shutting down the Fed, and returning to older arrangements, may sound like anarchy, but we are already headed for anarchy, or at least collapse, thanks to the Fed.

  26. Finrod Felagund
    October 3rd, 2012 @ 9:50 am

    Herman Cain ran the Kansas City branch of the Federal Reserve, so I don’t get why you think he doesn’t have ‘even the minimal expertise’.

  27. Ten
    October 3rd, 2012 @ 9:51 am

    The dollar is fiat and thus insolvent. You cannot keep a declared policy, operated in partial light of day and mathematically destined to fail, “strong”. This is why everything’s going asymptotic and the dollar is worth three cents.

  28. Finrod Felagund
    October 3rd, 2012 @ 9:51 am

    Shutting down the Fed gives us the same problems that Obama had with shutting down Gitmo: what do you replace it with?

  29. Ten
    October 3rd, 2012 @ 9:53 am

    You could not be more wrong. Realize that the fiat dollar is insolvent before postulating how hard money – which is not and never has been insolvent – would itself fail.

  30. Ten
    October 3rd, 2012 @ 9:54 am

    In other words you are a Wilsonian progressive posting assertions in a conservative weblog.

  31. JeffS
    October 3rd, 2012 @ 9:59 am

    With what we had before the Fed: nothing.

    And, yes, I realize that we had more than one financial crisis pre-FRB. The only thing that has changed post-FRB is the nature of the problems.

    Is this the ultimate solution? Hell, no.

    But tinkering with a mechanism isn’t always the best approach. Admitting it’s broken and needs to go is an alternative. Maybe not the best, but given the tiger we ride, perhaps going on foot is something to consider.

  32. Ten
    October 3rd, 2012 @ 10:00 am

    There’s a lot of misconceptions in this comment thread. Look, fiat currency is debt. Debt money always goes broke. The right’s notion that an independent bank (that makes entities and calls them money by policy and in computers) is the right’s single greatest failing.

    “A debt-based monetary system has a lifespan-limiting Achilles heel:
    as debt is created through loan origination, an obligation above and
    beyond this sum is also created in the form of interest. As a result,
    there can never be enough money to repay principal and pay interest
    unless debt is continually expanded. Debt-based monetary systems do not
    work in reverse, nor can they stand still without a liquidity buffer in
    the form of savings or a current account surplus.

    “When debt grows
    faster than the economy, the burden of interest is bearable only so
    long as the rate of interest is falling. When the rate of interest
    reverses course, interest charges start rising faster than debt growth.
    This point was reached on 16 June 2003, the day the yield on the
    benchmark 10-year Treasury bottomed at 3.09%.”

    Debt money fails. Historically. Always.

    Ours failed just under ten years ago. We’re living the parabola.

  33. JeffS
    October 3rd, 2012 @ 10:00 am

    Creating a new currency, with all the hardships involved, maybe less painful, in the long term, than total collapse.

    Just a thought.

  34. Finrod Felagund
    October 3rd, 2012 @ 10:13 am

    That’s about as smart as deciding that you don’t like where the captain is steering the ship, so you’d rather have no captain at all and leave the ship adrift. The solution is to get a competent captain.

  35. JeffS
    October 3rd, 2012 @ 10:55 am

    You would be right, if the ship wasn’t sinking.

    But if the ship was sinking, and the captain was STILL trying to steer the ship, what you do? Rearrange the deck chairs?

  36. crosspatch
    October 3rd, 2012 @ 1:43 pm

    There is an additional problem in that fed actions can NOT be made publicly visible for several reasons. One reason is that if they are made too transparent, they can be thwarted or capitalized on by speculators that can distort fed actions and make them counter productive or not have the desired impact. Another reason is one of perception in that the federal reserve often deals with banks that are having a temporary liquidity problem but are otherwise healthy. Awareness of a temporary problem could make the situation worse if this is misinterpreted by the customers of that institution. It could cause a run on that institution where it isn’t warranted.

    What the Fed does must often remain confidential in order to maintain the effectiveness of the actions or to prevent speculation on the part of people who don’t understand the whole picture from causing a problem.

    We need a Federal Reserve that is independent of politicians.

  37. scarymatt
    October 3rd, 2012 @ 1:51 pm

    Not independent of politicians. That’s worse than what we have now. But a less powerful Fed has to be part of any solution, I think.

    I’m skeptical of your anti-transparency reasons, too. They strike me as looking at the wrong problem (the right problem being that the Fed is too powerful).

  38. Reserve Tyrant « The Camp Of The Saints
    October 3rd, 2012 @ 2:46 pm

    […] Smitty has details and analysis here. […]

  39. Adobe_Walls
    October 3rd, 2012 @ 7:32 pm

    According to Thomas Sowell you replace it with the same thing you replace a cancer with when one removes it.

  40. Adobe_Walls
    October 3rd, 2012 @ 7:41 pm

    The economy isn’t a ship or an engine, it’s an extremely diverse, complicated, organic econ-system. It can not be fully observed let alone fully understood and “managed”.

  41. K-Bob
    October 4th, 2012 @ 1:19 am

    I think it was a Jack-a-lope.

  42. K-Bob
    October 4th, 2012 @ 1:25 am

    Volcker was the first monetarist to head the Fed. The entire concept of a central bank is hinged on money supply, so it’s only natural that monetarist theory would actually have the best chance of making the whole miserable, rickety concept work.

    At least, as well as possible.

    That’s why Greenspan, for the first few years, tried hard not to f*ck it all up. He didn’t buy off on the entire concept of a central bank. But he did like being in charge. So he didn’t mess with Volcker’s strategy.

    Only in his last few years did Greenspan lose his grip on reality, and allow the fed to be used as a lackey of the Administration.