Thursday, December 2, 2010

The Fed is back in the news

The long awaited explanation for how much money the Fed has pumped into the system came out yesterday.
IT'S OUT - Federal Reserve Bailout Details Released
Courtney Comstock | Dec. 1, 2010, 12:02 PM |
In 2008, a Bloomberg reporter used the FOIA to request details from the Federal Reseve on the bailout that they don't want to publish. 
Well, THEY'VE JUST BEEN PUBLISHED. Everything but the info about the discount window, which will be published in 2 weeks.
First up, details on the Bear Stearns/ JPMorgan merger and bailout. There are tons of documents in that link, including the date the loans took place, the amount they were for, the collateral the bank posted in return. We're digging through it.
Then there are the details on the AIG bailout. Check out the spreadsheets at the bottom for date the loans took place, the amount they were for, the collateral posted in exchange.
The Fed's Primary Dealer Credit Facility loans were the loans that every bank received, some nearly daily between March 2008 and May 2009. Barclays, Morgan Stanley, and Merrill Lynch were among the first banks to receive the loans. Bank of America was the last, on May 19, 2009. 
Details about the TAF, which Term Auction Facility may be the most interesting of the new data dumps, because this program was designed to remove discount window stigma. more
These technical details are very interesting, but in the final analysis, the technical side of the Fed is NOT what causes folks to get so angry.  One of the reasons we have central banks, is because there are a LOT of advantages to having one.  It the political direction the Fed takes that is ultimately important.  And the Fed has not ALWAYS been as reactionary as it is now.  Marriner Eccles was probably the most important Progressive of his era and he was a Mormon banker from Utah!
The Federal Reserve We Need
It's the Fed we once had -- when a more democratically accountable bank was enlisted to patriotically finance America's war debt. 
TIMOTHY A. CANOVA | October 11, 2010 
Throughout the past year, Federal Reserve Chair Ben Bernanke has led the choir in warning about the size of the federal deficit. In July, he endorsed extending George W. Bush's tax cuts for the wealthiest households, while suggesting the need for spending cuts to offset the revenue loss. Bernanke's repeated alarms have heightened fears that public deficits could "crowd out" private borrowing, force up long-term interest rates, and choke off the anemic recovery.
Bernanke's view may well be the consensus of both Washington and Wall Street. But it is also the polar opposite of the fiscal advice offered by one of Bernanke's most effective predecessors, Marriner Eccles, the Fed chair in the 1930s and 1940s. Eccles called for larger deficits and increases in government-spending programs to pull the country out of the Great Depression. He then went on to enlist the Fed to finance the huge World War II debt at low interest rates, so that the postwar recovery could flourish. Eccles was proved emphatically right, first in 1937 when the economy fell into a steep nosedive after the Roosevelt administration tightened fiscal policy and then again when the massive World War II fiscal stimulus of the 1940s ended the Great Depression once and for all and fueled the highest economic growth rates in American history.
Today's fiscal conservatives prefer to ignore the history of the 1940s, a period when the Federal Reserve was far more accountable to elected officials and far more independent of the private financial interests that have come to dominate the Fed in recent decades. During the 1940s, the federal government spent and borrowed far greater than today as a percentage of overall economic activity. Today, federal spending is about 25 percent of gross domestic product; in the 1940s, spending peaked at nearly 45 percent of GDP. Today's federal deficit is about 9 percent of GDP; in the 1940s, the deficit peaked at 31 percent of GDP. Today, the federal debt held by the public is about 61 percent of GDP; in the 1940s, it peaked at over 114 percent of GDP. Did those higher spending and debt levels bankrupt the U.S. economy? Quite the contrary -- federal spending was critical to the war effort and the success of the U.S. economy.
After the war, massive federal spending funded social policy on a grand scale through the GI Bill of Rights, which made available job training, tuition-free higher education, health care, and housing subsidies to nearly 16 million returning veterans, a third of the workforce. The GI Bill thereby bolstered an expanding middle class and created the conditions for sustainable economic growth. The growing economy pushed up tax revenues, lowering the debt burden and helping the federal government pay down debt.
Although federal spending and borrowing in the 1940s was much higher than it is today, there was no rise in interest rates. From 1942 to 1951, the Federal Reserve was accountable to democratically elected officials. It was directed by the White House and Treasury to peg interest rates at three-eighths of 1 percent on short-term Treasury borrowing and 2.5 percent on long-term borrowing. This so-called pegged period of public finance began in the weeks following the Japanese attack on Pearl Harbor. As the Federal Reserve itself would later describe the division of responsibilities, the amount of government spending was properly determined by Congress, and it was the Treasury's responsibility to determine the rate of interest it would pay on its borrowing. It then became the Fed's duty to purchase government securities in any amount and at any price needed to maintain the interest-rate pegs for Treasury. more
And for Tony who thinks this is so brilliant, he called me tonight to encourage me to read it, a link to an essay on the importance of Progressives getting ahead of the curve on any debate as to a new direction for the Fed.
End This Fed 
Wednesday, 12/1/2010 - 10:11 am by Matt Stoller
Our Federal Reserve doesn’t work. Progressives have to get out in the fight to change it before Sarah Palin claims victory.
“We probably know more about tribes in the Amazon jungle than we do about the real nature of power in the United States. Neither political science, nor history, nor economics do very well on this.” - Tom Ferguson
Something new is happening around the contours of monetary policy. It’s becoming part of our popular political landscape. We saw this a few weeks ago, when Sarah Palin injected into the 2012 presidential race the idea of fundamentally reorganizing the Federal Reserve’s mandate. Republican Mike Pence, Senator Richard Shelby, and a host of other Republicans have jumped on this concept, and there will soon be legislation introduced to make this happen.
Beyond Republican politicians, the public is beginning to rethink our monetary order. A YouTube video on quantitative easing has over 3 million views. The video slams the Fed for missing the dotcom bubble, the subprime crisis, for being fundamentally undemocratic and unaccountable, and for being engaged in collusive dealings with Goldman Sachs. Financial blogs and CNBC discuss the Fed, and its associated characters, with deep insight and passion. And Bernanke drew 30 no votes in his confirmation hearing in 2009, the most ever for such a position, just four years after drawing almost none. The market nearly crashed on the possibility that Bernanke’s nomination would fail before the White House stepped up aggressive lobbying efforts. On the left, the last few years saw a remarkable grassroots coalition of economists and activists to bring transparency to the central bank, joining a long-sought libertarian crusade. I was a staffer for Rep. Alan Grayson, who was working with that coalition to require an independent audit of the Federal Reserve. Tomorrow, because of provisions put into Dodd-Frank by Senator Bernie Sanders and Congressmen Grayson and Ron Paul, the Federal Reserve will release details of its 2007-2010 emergency loans to the web. more
And in case anyone wonders why the tug-of-war over Fed direction could get so violent, consider what is at stake.
GOP Wants To Strip Fed Of Power To Combat Joblessness
Ryan Grim 
First Posted: 11-16-10 12:35 PM 
WASHINGTON -- Congressional Republicans are pushing to strip the Federal Reserve of its authority to address unemployment, leaving it with the lone responsibility of ensuring stable prices. Sen. Bob Corker (R-Tenn.), a key member of the Senate Banking Committee, became on Monday the latest Republican to propose that the central bank stop worrying itself with the jobless crisis.
"It is time that we work to clarify the mandate of the Federal Reserve," Corker said in a statement. "Providing our central bank with a clear and explicit focus on keeping inflation low will serve America better than the broader mandate approach we have today."
Congress, meanwhile, has not made a major attempt to address the unemployment crisis since passing the stimulus in early 2009, leaving the Fed as the policymaker of last resort for the jobless. An emergency extension of unemployment insurance is set to expire if Congress doesn't act shortly, prematurely costing two million people their benefits by the end of the year.
"I think the Fed should be focused on monetary policy, and clearly monetary policy has an impact on employment, but I don't think that should be a driving issue in their decision-making," Sen. Richard Burr (R-N.C.) told HuffPost when asked about Corker's suggestion.
"I've always interpreted [the Fed's mandate] to be dominated by monetary policy," Burr added, reflecting a widespread belief among both critics and defenders of the Fed that it is more concerned with battling inflation than with reducing unemployment, though the law requires it to give both equal weight.
Sen. Bernie Sanders (I-Vt.) has long been critical of the Fed for not doing enough to combat unemployment and fought against the re-confirmation of Bernanke. But, he said, stripping it of any responsibility to deal with the jobless crisis is not the answer. "Unemployment is a major crisis in this country. We need financial tools and monetary policy to deal with it as well, so I think the Fed has a role to play," he said. more
Some folks argue, with some fair amount of evidence, that monetary policy is an arcane topic that is so complex it cannot possibly sustain political interest over the long term.  I disagree. 

In 1963, I had an officer of the National Farmers Organization in southwest Minnesota explain fractional banking to me. I was 14 years old.  What was so interesting about that afternoon is that absolutely NOTHING he told me has proven to be wrong. Even more interesting, his explanation of monetary policy was clear enough so even someone as young as I was could understand it. Turns out, he was using some of the same phrases and arguments developed by the National Farmer’s Alliance and the Greenback Party in the 1870s. Some of these ideas are now over 150 years old–now THAT is staying power!

Even better, perhaps the most successful product of midwest Progressivism still lives on today as the State Bank of North Dakota and new converts like Ellen Brown still wonder at how well it works.

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