Wednesday, September 30, 2009

The Treasury-Goldman Sachs Hotline

Nypo's John Crudele has finally recieved a response from the Treasury on a Freedom of Information request he filed seeking Hank Paulson's schedule and phone logs, while he was Treasury Secretary. He found that there was pretty much a hotline between Treasury Secretary Paulson and Goldman CEO Blankefien, during the height of the crisis. In a column titled, The Secret to Goldman Sachs' Good Fortune. Crudele reports:
On Wednesday, Sept. 17, 2008 -- the day before the one I am writing about -- the stock market performed horribly.

By the end of the session the Dow Jones industrial average tumbled 449 points as investors worried about the nation's financial system. The next morning, Sept. 18, Paulson placed his first call of the day at 6:55 a.m., to Lloyd Blankfein, who succeeded Paulson as CEO of Goldman. It's unclear whether the two connected because Blankfein called Paulson minutes later.

And then Blankfein placed another call to Paulson at 7:05 a.m. for what looks like a 10-minute conversation.

After that Paulson called Christopher Cox, Securities & Exchange Commission Chairman twice; British Chancellor Alistair Darling and New York Federal Reserve head (and now Treasury Secretary) Tim Geithner two times.

Then Paulson took another call from Goldman's Blankfein.

It wasn't even 9 a.m. yet -- 30 minutes before the stock market was to open -- and Paulson and Blankfein had already exchanged three phone calls.

This wasn't particularly unusual.

On Wednesday, Sept. 17, the day the stock market was in trouble, Paulson spoke with Blankfein five times, including a pair of calls at 7:20 p.m. and 8:45 p.m. One of the earlier calls -- at 12:15 p.m. -- is listed on Paulson's log in the same five minute interval as a call to Geithner, which could indicate that this was a conference call.

If Paulson did set up a conference call, it would have been an extreme instance of putting someone who wielded a lot of power -- Geithner -- together with someone -- Blankfein -- who could profit from that connection.

And all of this doesn't include possible cell phone calls. The Treasury turned over to me Paulson's official schedule and phone records after I made a request under the Freedom of Information Act.

There's no way for me, or anyone else, to know what Blankfein and Paulson talked about during those first three calls on Sept. 18.

But it would be reasonable to assume that the conversation, coming as it did in a period of market turmoil, had something to do with what was happening on Wall Street.

So no matter how you slice, dice or excuse it, Blankfein by 9 a.m. would have had information that was not available to anyone else who makes their money trading securities. And, as you can imagine, there is a whole lot of value in that kind of inside access.

Robert Scully, a co-president of Morgan Stanley, called Paulson at 8:50 a.m. on the 18th.

But he appears to be the only Wall Street-type who was in contact with Paulson until Larry Fink, head of the private investment firm Blackrock, called at 12:40 p.m.

By then the stock market was going down again. But the decline wouldn't last long.

Stocks began a miraculous recovery at 1 p.m. on Sept. 18, when rumors started to spread that Paulson was considering a "government entity to bail out troubled banks" and that a meeting was going to be held that night on the matter.

At 1:05 p.m. Blankfein called Paulson again. Paulson would call Blankfein for the last time that day at 4:30 p.m. when he "left word."

That was the sixth time these two men called each other on Sept. 18.

That's one time less than Paulson spoke with Federal Reserve Chairman Ben Bernanke, arguably the most important person when the financial markets are in trouble. But Bernanke didn't get his first call from Paulson until 9:30 a.m. -- and it included Cox and Geithner.

President Bush only spoke with Paulson twice that day. To be fair, on the afternoon of Sept. 18 Paulson did call John Mack, head of Morgan Stanley (at 1 p.m.) and Merrill Lynch's John Thain(at 1:10 p.m.).

But Fink is the only one who seems to have gotten through to Paulson anywhere near the time the market started rallying.

By the end of the day, the Dow was up 410 points in an astonishing comeback.

Treasury Announces Initial Closings of Public-Private Investment Funds

The Treasury is still pumping out prop up money. Today, it announced the initial closings of Public-Private Investment Funds (PPIFs) established under the Legacy Securities Public-Private Investment Program (PPIP). As of today, the following two PPIFs have completed initial closings, each with at least $500 million of committed equity capital from private investors:

Invesco Ltd. (Invesco Legacy Securities Master Fund, L.P.)
The TCW Group, Inc. (UST/TCW Senior Mortgage Securities Fund, L.P.)

Firms that are partnering with the fund managers completing initial closings today include:

· Atlanta Life Financial Group, through its subsidiary Jackson Securities
· Muriel Siebert & Co., Inc.
· The Williams Capital Group, L.P

To date, collectively the PPIFs have closed on approximately $1.13 billion of private sector capital commitments, which have now been matched 100 percent by Treasury, representing total equity capital commitments of $2.26 billion. Treasury will also provide debt financing up to 100 percent of the total capital commitments of each PPIF, representing approximately $4.52 billion of total equity and debt capital commitments.

The Treasury does realize it is a bit behind in just funding this program at this point, as part of its release it stated:

In recent months, financial market conditions have improved and the prices of legacy securities have appreciated. In addition, the results of the Supervisory Capital Assessment Program enabled banks to raise substantial amounts of capital as a buffer against weaker than expected economic conditions. While these developments have enabled Treasury to proceed with the PPIP program at a scale smaller than initially envisioned, Treasury remains prepared to expand the amount of resources committed to PPIP should conditions deteriorate.

Paul Volcker on China and U.S. Global Leadership

Last night, on the 'Charlie Rose' show, host Charlie Rose interviewed former Federal Reserve Chairman Paul Volcker.

He said the rise of China and other emerging economies has underscored a decline in the comparative economic and intellectual leadership of the U.S. The growth of emerging economies is “symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, intellectual and otherwise,” Volcker said.

Volcker talked about the rise of China: “I don’t know how we (the U.S.) accommodate ourselves to it. You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

And on the future leadership role of the U.S. in the global economy : “I would like to think that given the history, the past, given the strength -- actual and potential -- of the American economy, we can and still provide a kind of indispensable element of leadership here. But it's not going to be dictatorial, I'll tell you that. And it's very hard to herd these cats together.”

The Volcker interview will be aired again tonight on Bloomber Television at 8PM and 10PM ET, and simulcast on Bloomberg Radio. Bloomberg Radio is broadcast on 1130AM in the New York Metropolitan area and is available on XM and Sirius.

An Unintended Consequence of Cash for Clunkers

With Obama's plan causing used cars to be destroyed, used car prices are going through the roof. WSJ reports:
One widely followed measure of used-car prices, the 14-year-old Manheim Used Vehicle Value Index, will likely hit a record when data for September are released in early October, says Thomas Webb, chief economist for Manheim Consulting, a subsidiary of Cox Enterprises Inc...

"What has happened over the last couple quarters is with supply being down, we've seen wholesale prices continue to appreciate. It's just a basic supply-and-demand model," CarMax President Tom Folliard said in a conference call.
Further, during a downturn, used cars tend to climb in price anyway since they are more of a consumption good then a new car, i.e. their value extends over a shorter period of time--it is consumed quicker.

Paying to Front Run

The stock market started to dive minutes before the weak Chicago PMI was released this morning. Front running? Sort of.

The Chicago PMI is assembled by Kingsbury International. Bespoke Investment Group explains the trading that occurred before the pre-public release this way:
On the company's website, Kingsbury describes the Chicago PMI as, "a proven monthly ‘first look’ at business,government and NGO economic activity in the USA." They then go on to say that subscribers to Kingsbury's data will receive "access to this market-moving data 3 minutes before public release." In other words, Kingsbury will 'leak' the report to anyone who is willing to pay at least $200 per month

Money Flows Out of Stock Mutual Funds and Into Bond Funds

Total estimated inflows to long-term mutual funds were $16.03 billion for the week ended Wednesday, September 23, the Investment Company Institute reported today.

Equity funds had estimated outflows of $1.88 billion for the week, compared to estimated outflows of $1.39 billion in the previous week. Domestic equity funds had estimated outflows of $2.03 billion, while estimated inflows to foreign equity funds were $152 million.

The money flowed into, of all things, bond funds!

With interest rates near decades long lows, and huge Treasury debt to be issued in coming years, bond funds are the last place to be. Yet, bond funds had estimated inflows of $12.91 billion, compared to estimated inflows of $12.69 billion during the previous week.

Chicago Purchasing Managers Index Declimes

More signs of a double dip.

The Chicago purchasing managers index is the first of three to be announced. It fell to 46.1% in September from 50.0% in August, according to the NAPM-Chicago. Readings below 50% indicate contraction.

The national ISM manufacturing index will be released tomorrow, and the national ISM non-manufacturing index on Monday.

This Chicago index is for both manufacturing and service activity and generally tracks the national index.

Sugar is the New OIl

Sugar is the new crude oil for investment-hungry hedge funds, which are pushing sugar prices near 30-year highs and ushering new global shortages, reports Paul Tharp of Bloomberg.

"The fundamentals and macroeconomic factors are coming together and more money is there," said economist Sergey Gudoshnikov of the International Sugar Organization. "Sugar is one of the better commodities for investing and the fundamentals are helping."

Weather problems at major producing areas in India and Brazil, along with increased use of cane for creating ethanol, have helped fuel hedge funds' sugar highs.

In trading here yesterday, raw sugar surged as much as 4.4 percent to 25.15 cents a pound before settling at 25 cents, up 3.5 percent, the highest close since 1981.

Sugar consumption is also surging faster than expected, with consumers currently using 8.3 million more metric tons of sugar than is produced -- up dramatically from the 5.1 million shortfall forecast in June.

The Big Idiots are Short the Dollar

On the heels of our recent post where we turned short-term bullish on the dollar, Nic Lenoir of ICAP points out:
Investors are long commodities as a placement AGAINST the value of the USD, and banks and governments around the world borrow in USD. Germany and Austria have recently issued debt that is USD denominated, and they were soon immitated by...Venezuela. That to me is a sign the short-USD trade is ripe for a reversal, when basically even the biggest idiot in the house is short.

Federal Reserve Governor Confirms Fed Gold Swaps

By Patrick A. Heller

Five months ago, the Gold Anti-Trust Action Committee (GATA), filed a second Freedom of Information Act (FOIA) request with the Federal Reserve System for documents from 1990 to date having to do with gold swaps, gold swapped, or proposed gold swaps.

On Aug. 5, The Federal Reserve responded to this FOIA request by adding two more documents to those disclosed to GATA in April 2008 from the earlier FOIA request. These documents totaled 173 pages, many parts of which were redacted (covered up to omit sections of text). The Fed's response also noted that there were 137 pages of documents not disclosed that were alleged to be exempt from disclosure.

GATA appealed this determination on Aug. 20. The appeal asked for more information to substantiate the legitimacy of the claimed exemptions from disclosure and an explanation on why some documents, such as one posted on the Federal Reserve Web site that discusses gold swaps, were not included in the Aug. 5 document release.

In a Sept. 17, 2009, letter on Federal Reserve System letterhead, Federal Reserve governor Kevin M. Warsh completely denied GATA's appeal. The entire text of this letter can be examined at

The first paragraph on the third page is the most revealing. Warsh wrote, "In connection with your appeal, I have confirmed that the information withheld under exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

Read the entire article here.

A Wide Range of World Inflation Rates

Expected inflation rates for the third quarter of 2009 run the gamut from negative to quite high, according to the Institute for Economic Research's World Economic Survey:

Ireland, -2.6%;

Japan -0.3%;

China 0.6%;

Germany 0.8%;

United States 1.3%;

Brazil 4.4%;

India 4.5%;

Russia 13%;

Venezuela 30%.

(Via The Daily Stat at HBM)

Tuesday, September 29, 2009

States' Quarterly Tax Revenue Plunges 17%

State tax revenue in the second quarter plunged 17% from a year earlier, according to Census Bureau.

It was the sharpest decline since at least the 1960s. The biggest drop was in state income taxes, which were down 28% in the second quarter from a year earlier.

Some of the sharpest tax declines were in states that have been among the hardest-hit by the recession, in particular those with high concentrations of jobs in the battered housing sector. In Arizona, overall tax revenue fell 27% in the second quarter from a year ago. Tax revenue fell 12% in Florida and 14% in California.

Why Tom Woods Set Off Mel Watt's Voltage

The Tom Woods' congressional testimony last week Friday in favor of the 'Audit the Fed' bill had two very curious turns, he set off extremely hostile questioning from two congressmen, by the hearings Committee Chair Barney Frank and Representative Mel Watt. Every other Congressman that questioned Woods, and Fed General Counsel Alvarez, was seemingly concerned about where the money the Fed is printing is actually going. But not Frank and Watt.

I discussed Frank's hostility, here. Watt was even more hostile. It looked like he was hit by a lightning bolt everytime Woods tried to answer a question that Watt posed. He interrupted Woods everytime, as though Woods was taking food off of his dinner table. But, maybe that's exactly how Watt's saw Woods testimony.

Most of the top industries donating to Watt are major beneficiaries of Fed money printing. His top industry donors are at #1 the commercial bankers industry, at #3 the building trade unions (All that Fed money printing benefited the building trade unions probably more so than anyone else), and at #5 the securities and investment industry. The current #1 corporate donor to Watt is Citigroup Inc.

During 2007-08 his top contributors were:

#1 Bank of America

#2 Wachovia Corp

#3 American Express

#4 American Bankers Assn

Overall in 2007-08, he received $187,359 from the Finance/Real Estate sector, more than double the amount of money he received from any other sector. Outside of North Carolina, his home state, Watt received the most contributions from Washington D.C. and New York City. Hmm, NYC donations for a North Carolina boy.

I wonder if the good people of North Carolina know what master their representative is really serving? Representative Watt's high voltage act during Woods' testimony suggests that Watt knows all too well where a tiny bit of the money the Fed is printing is ending up, and he is really making sure that tiny money flow doesn't stop, above anything else.

Ron Paul on the ‘Daily Show’ Tonight

Ron Paul is the guest tonight (Tuesday) on the Daily Show with Jon Stewart (Comedy Central).
The show is repeated three times tomorrow (Wednesday).

It will also be available on their website starting tomorrow.


U.S. Government Gold Manipulation Document Declassified

The Federal Reserve, in the 1970's, had a secret agreement with the German government whereby the German government agreed not to buy gold in the open market, or from other governments, at a price above the then-official U.S. government price of $42.22 per ounce, despite the fact that the open market price for gold was then trading between $160 to $175 per ounce.

The information has come to light as a result of a declassified Memorandum sent by then-Federal Reserve Chairman Arthur Burns to President Gerald Ford. The document was originally classified as "Strictly Confidential".

The document was originally posted at ZeroHedge and brought to my attention by Lori Smith. I have since verified the authenticity of the document in a conversation with the Gerald R. Ford Library archivist Mark Fischer. Although the document appears to have a declassification date stamped on it of 6-28-05, Fischer tells me that the document was declassified just recently on 9-15-09.

The document also sheds light on a disagreement between the Treasury and the Fed, whereby the Treasury was willing to accept freedom in the way governments conducted their gold transactions and the Federal Reserve was opposed. The documents shows that France was a leader in opposing a ceiling on government purchases of gold and that Burns went as far as contacting then-Secretary of State Henry Kissinger to see if some type of quid pro quo could be extracted from France if the U.S. took a less hostile position on gold accumulation.

Interestingly, the full Ford Administration had knowledge of the secret agreement with Germany. Then Secretary of the Treasury, William Simon, Kissinger, then-Chairman of the Council of Economic Avisors, Alan Greenspan, then-Director of the OMB, Jmaes Lynn, and then-Ford economic advisor, Bill Seidman, were all cc'd on the memorandum.

The entire declassified document is here.

Ron Paul On the Timing of the Most Recent 'Disclosures' on Iran


Obama' s Big Payoff to Supporter and Oligarch Soros

Billionaire investor, globals scale manipulator, and Obama supporter, George Soros, bought an $811 million stake in Petroleo Brasileiro (Petrobras) in the second quarter of 2009, making the Brazilian state-controlled oil company his investment fund’s largest holding.

As of June 30, the fund's stake in Petrobras made up 22 per cent of the $3.68 billion of stocks held by Soros Fund Management, according to a filing with the SEC. Twenty-ywo per cent!!

Since then the U.S. government has indicated that it will provide up to $10 billion in loans to finance the development of massive hydrocarbon reserves off Brazil’s coast.

President Barack Obama’s national security adviser, Gen. James Jones, discussed the matter with officials during a visit in August to Brazil, Brazilian Planning Minister Paulo Bernardo da Silva told reporters.

He said the U.S. Export-Import Bank already has signed a letter of intent in that regard with Brazilian state oil company Petrobras.

Is Obama Planning a VAT Surprise for America?

The latest mad scheme by the President may be an attempt to introduce a Value Added Tax in the United States. James Pethokoukis at Reuters outlines his concerns this way:
So John Podesta, co-chairman of Obama’s presidential transition team, says a value-added tax is “more plausible today” than ever, adding that “there’s going to have to be revenue in this budget.” A few thoughts:

1) Podesta is also president of the George Soros-funded Center for American Progress, a liberal think tank closely allied with the White House.

2) It’s consensus among centrist economists, like those in the White House, that America will need to raise taxes to cover budget shortfalls and a VAT is the most efficient way of doing this.

3) At the G20, Obama promised more coordinated economic policies, including having the US lower its borrowing and consume less. This could be done via a VAT, which would also let the US have more tax synchronization with other OECD countries.

4) It seems like the WH is staring to redefine its pledge not to raise taxes on those making less than 250k as applying only to income taxes.

Bottom line: These Podesta remarks sure sound like a trial balloon by the White House.
Of course, this being Obama, it will likely be a VAT that is scaled against certain types of consumption, while directing consumption to other products. This is where Obama's Cass Sunstein comes in with his mad nudges of the people.

Very scary.

Will they attempt to blame the next crash that Bernanke is setting the stock market up for on too high deficits, and then justify a VAT as the way to "save" the economy?

Fannie Mae Delinquencies Jump

Fannie Mae the largest provider of funding for U.S. home mortgages, said that delinquencies on loans it guarantees has accelerated.

Delinquency on loans in its single-family guarantee business jumped by 23 basis points to 4.17 percent in July, the most recent data available. A year earlier it was 1.45 percent.

The multifamily delinquency rate also rose, up 5 basis points to 0.56 percent in July. A year earlier it was 0.13 percent.

Fannies total mortgage investment portfolio is currently $779.4 billion.

China's Huge Nigerian Oil Play

China continues to liquidate parts of its dollar position with major assets purchases.

A Chinese state-owned oil company is in talks with Nigeria to buy large stakes in some of the world’s richest oil blocs in a deal that would China control over one-sixth of Nigeria's oil reserves.

Monday, September 28, 2009

Feldstein Warns on a Possible Double Dip Recession

My favorite mainstream economist is at it again. He is warning of a potential double-dip recession. He told Maria Bartiromo that:
...the current economic upturn is being “force fed” by government stimulus and not driven by the usual business cycle in which growth begets more growth. At some point, the stimulus programs have to end – be it Cash for Clunkers (which is already over), tax breaks for home purchases or historically low interest rates... Feldstein believes there will also be political pressure to keep rates low because unemployment is expected to remain a problem in the early stages of recovery. However, keeping rates too low for too long would lead to inflation.

Other reasons Feldstein sees potential danger include...the burgeoning federal budget deficit with little talk of how to bring it back to more normal levels, and “the real disaster” looming in commercial real estate.

The CIA and the Fed?

Is the Fed helping prop up countries friendly to the U.S.?

A a person closely watching the debate on the 'Audit the Fed' bill, and who is very knowledgable about the history of U.S. government activities, writes with regard to the Fed's particularly adamant position on not revealing its activities with foreign financial entities and governments:
[O]ne thing I suspect... is a foreign-policy angle to all this, some type of collusion with the CIA, etc. It is very hard to imagine the central bank not reinforcing the regime's policies in one way or another.

Did the Testimony of Tom Woods Come Too Close to Home for Barney Frank?

During the testimony by Tom Woods on Friday, in favor of H.R. 1207, Congressman Barney Frank stepped up to the plate with some hostile questioning. I'll let Woods give the play by play:
In my opening remarks I added to my written statement, which I wasn’t strictly reading, a phrase for which Barney Frank (D-MA) would take me to task. In my written statement, I noted that the Fed is indeed independent in the sense that it can make trillions of dollars available to unknown friends on unknown terms. I then wrote that I couldn’t imagine any self-respecting American hesitating for a moment to challenge that kind of independence. In my oral remarks, after "self-respecting American" I added the words "who isn’t bought and paid for."

Note that I wasn’t saying that anyone who opposes HR 1207 is necessarily in the pay of anyone. I was suggesting that people who thought it was just fine for the Fed to have such extraordinary discretionary powers might have a material interest at stake in the question.

As surely true as those words are, whether I should have said them is obviously debatable. But Barney Frank’s shocked and indignant reply was still a bit over the top. Who is bought and paid for, he demanded to know. Well, how about the firms on the receiving end of Fed largesse, for one? How many of those oppose this kind of Fed independence (and how many support 1207)? I didn’t want to get into this particular subject, but I mentioned the work of Professor Lawrence H. White of George Mason University, who has shown the economics profession to be completely in thrall to the Fed – what with millions of dollars in research grants (one of the points I made to Congressman Frank) and countless other levers of influence. (See his [.pdf] article "The Federal Reserve’s Influence on Research in Monetary Economics." You might also note the more recent article on the Huffington Post, "Priceless: How the Federal Reserve Bought the Economics Profession," making the same point.) When we read about monetary economists urging the maintenance of Fed "independence," therefore, surely it’s not unreasonable to bear these factors in mind.
Of course, maybe the problem that Frank had with Woods' testimony is that it hit a little too close to home. Many of Frank's donors are clear beneficiaries of Fed money printing activities. The top donor to Frank, so far, in 2009/10 is FMR Corp (the parent name for Fidelity). Others in the top 20 donors for Frank include the American Bankers Association, the American Financial Services Assn, the Independent Community Bankers of America and, one of the greatest beneficiaries of past easy money policy, the National Assn of Home Builders. Did Frank have a guilty conscience and mistakenly think that Woods was referring to him?

Ron Paul in NYC on Tuesday

At noon on Tuesday, September 29th, Ron Paul will be signing copies of End the Fed at the Borders in the New York financial district at 100 Broadway. That same evening, he will be on the Daily Show with Jon Stewart.


U.S. Economy Weakened in August, Chicago Fed Says

The scent of double dip is in the air.

Only one of the four broad categories of indicators made a positive contribution in August. The production and income component was positive for the second straight month. Employment, consumption and housing, and sales made negative contributions.

Thirty-one of the 85 indicators made positive contributions. Forty-seven of the 85 indicators improved relative to July.

The index was at negative 2.01 in August 2008, and was at negative 4.13 in JanuaryThe Chicago Fed's National Activity Index dropped back to negative 0.90 in August from an upwardly revised negative 0.54 in July.

A Serious Warning From the Federal Reserve about Interest Rates

This gets a bit technical, but the Federal Reserve is flashing that there could be serious, I am talking major league serious, interest rate hikes down the road.

The first clue to this was last week Thursday's report out of FT that the Fed may use mutual funds as a source to shrink Fed reserves by conducting reverse repurchase agreements with the the funds. When something like this is leaked by the Fed, they are trying to alert the markets so they won't be surprised by such a move when it occurs. As I wrote last week, I saw one reason for this move as the Fed:
...contemplating doing this, if banks start to lend against excess reserves, as a back up to Bernanke's plan to control money growth via the interest rate it pays on excess reserves.
Okay, so the Fed has a back up plan, but now there is an interesting story in WSJ's weekend edition headlined: Official Sees Aggressive Rate Boosts in the Offing. The story reports:

A senior Federal Reserve official said the central bank could push interest rates up more aggressively than usual when it decides to shift away from its easy monetary policy.

Fed officials have gone to great lengths in recent weeks to reassure investors that they will keep interest rates low for "an extended period." Until now, they haven't articulated how aggressively they would move once interest-rate increases do kick in.

"When the decision is made to remove policy accommodation further, prudent risk management may prescribe that it be accomplished with greater swiftness" than is customary, said Kevin Warsh, a Fed governor, at a conference on banking Friday at the Federal Reserve Bank of Chicago.

Mr. Warsh was a close adviser to Fed Chairman Ben Bernanke during the financial crisis
I think the signal from Warsh, and that's what it is a signal, and the leak about doing reverse repos are related in this way. During a speech in July, Bernanke made it clear the interest rate now being paid on excess reserves would be a key to controlling money growth:
Perhaps the most important such tool is the authority that the Congress granted the Federal Reserve last fall to pay interest on balances held at the Fed by depository institutions. Raising the rate of interest paid on reserve balances will give us substantial leverage over the federal funds rate and other short-term market interest rates, because banks generally will not supply funds to the market at an interest rate significantly lower than they can earn risk free by holding balances at the Federal Reserve
But here is the problem, which Bernanke must realize given these leaks. The banks are keeping so much money with the Fed as excess reserves because it is currently the best alternative. When real rates rise, this may not be the case, and banks may lend out those excess reserves, thus exploding the money supply. At such time, the Fed may have to drain reserves very quickly (thus the leak about using mutual funds as away to drain via reverse repos), or raise rates rapidly (thus the Warsh warning about a rapid rate hikes), to stem an otherwise explosive growth in money supply.

This isn't likely to occur in the very near future since the Fed's current tight money policy is creating a near deflationary environment where real rates are low, but any money printing down the road as a result of a misguided attempt by the Fed to manipulate the economy into an unsustainable structure, or as a result of the Fed supporting the Treasury market, could result in very rapid interest hikes.

Trend Trackers Starting to Detect the Second Dip

Trend trackers who really dig through the data, but who operate blindly without a business cyle theory, are starting to catch on that the U.S. economy is likely headed for a double dip. They aren't all the way there, but they are starting to detect the problems. WSJ reports:

Consumer sentiment and new-home sales showed signs of improvement Friday, while sales of durable goods fell, signaling the U.S. economy's recovery won't be a smooth ride.

Optimism among U.S. consumers reached its highest level in September since January 2008, and new-home sales posted their fifth-straight month of improvements. But manufacturers' orders for durable goods -- big-ticket items designed to last three years or more -- tumbled 2.4% to a seasonally adjusted $164.44 billion in August, on a plunge in aircraft orders.

Together, "it's indicative of a patchy, slow recovery," said Joshua Shapiro, MFR Inc.'s chief economist. "In that type of environment, you're going to get some things that disappoint; you're going to get some things that are allright."...

On Thursday, a report showed that existing-home sales dropped 2.7% in August after four months of improvements.

"On the whole, this was a somewhat disappointing report, and when combined with the poor existing-home sales report yesterday, suggests that the recent positive momentum in the U.S. housing market may be slowing," TD Securities' Millan L.B. Mulraine wrote in a note to clients.

The new home sales, btw, over the summer were boosted by government programs that are now done, watch those number start to drop in particular.That'll really scare the trend trackers.

An Opportunity to Join the Pigs at the Trough

Goldman Sachs has launched an aggressive recruiting drive to build its asset management business at a time when its rivals are pulling back from fund management, reports FT.

The bank plans to hire up to 200 staff across all regions in an attempt to establish a dominant position as one of the world’s leading asset managers. In 2007 Goldman was ranked 17th in the world in terms of assets under management.

The Plotting Turns Domestic

This afternoon, Secretary Geithner will meet with the Financial Stability Oversight Board.

Oversight Board members:

Secretary of the Treasury: Timothy Geithner

Chairman of the Board of Governors of the Federal Reserve System: Ben Bernanke [chair]

Secretary of the Department of Housing and Urban Development: Shaun Donovan

Chairman of the Securities and Exchange Commission: Mary Schapiro

Director of the Federal Housing Finance Agency: James Lockhart

Ebeling on the Economic Crisis

Richard Ebeling, professor of economics at Northwood University, delivered a public lecture at the University on "Economics, Freedom,and the Current Economic Crisis."

In the lecture, he explains how government monetary and interventionist policy created the economic crisis we are in, and why a return to a truly free market is the only lasting and sustainable way to overcome the current recession. This is a great lecture.

Ebeling is one of the top active Austrian economists. His analyses are always hardcore Austrian. If you want to understand how the economy really works, pay attention to Ebeling. His lecture is here.

The Severity of Unemployment in Califormia

Michael Bernick in the San Francisco Chronicle has a great summary:
The latest numbers show unemployment in California at 12.2 percent, its highest level since World War II...To be sure, since 1970 state unemployment has soared near or over double digits several times, and each time the economy came back. In the early 1980s, amid a downturn in heavy manufacturing, state unemployment reached 11 percent in February 1983, only to come back down to near 8 percent within a year. In 1993, with major cuts in defense and aerospace jobs, state unemployment reached 9.9 percent in January, but the figure came down to near 8 percent by November 1994.

During those recessions, unemployment seemed endless, but employer and consumer confidence returned, and hiring commenced in significant numbers.

The current California recession differs from those in the past...The 12.2 percent rate (affecting more than 2.2 million workers) is not only the highest, but it does not cover the roughly 1.3 percent of the California workforce (more than 200,000 workers) classified as discouraged workers or marginally attached or the roughly 5.8 percent (nearly 1 million workers) employed less than full time for economic reasons...

The construction sector in California is the biggest loser and continues to be in free-fall,losing more than 140,000 jobs over the year (18.5 percent of the total) and over 300,000 jobs since December 2006. Business and professional services (loss of 133,000 jobs over the year, 5.9 percent), and trade, transportation and utilities (loss of 191,000 jobs, 6.7 percent) also have seen dramatic cutbacks.

Sunday, September 27, 2009

Michigan's Babysitting Gestapo

A West Michigan woman says the state is threatening her with fines and possibly jail time for babysitting her neighbors' children. Lisa Snyder of Middleville (pictured above) says her neighborhood school bus stop is right in front of her home. It arrives after her neighbors need to be at work, so she watches three of their children for 15-40 minutes until the bus comes.

The Department of Human Services received a complaint that Snyder was operating an illegal child care home. DHS contacted Snyder and told her to get licensed, stop watching her neighbors' kids, or face the consequences.

"It's ridiculous." says Snyder. "We are friends helping friends!" She added that she accepts no money for babysitting. Mindy Rose, who leaves her 5-year-old with Snyder, agrees. "She's a friend... I trust her."


They Never Learn: Fed Mortage Bond Securities Manipulation

The Fed has purchased 71% of new Agency MBS issuance so far in 2009, and currently owns about 10% of all MBS outstanding.

How is the mortgage market ever going to adjust to a non-manipulated market, if the Fed continues to manipulate?

Roman Polanski Arrested in Switzerland

New Swiss cooperation with U.S. authorities apparently goes well beyond agreements over revelations about Swiss bank accounts.

Director Roman Polanski was arrested by Swiss police as he flew in for the Zurich Film Festival and faces possible extradition to the United States for charges of having underage sex in 1977.

In the past, Polanski had flown into Switzerland without incident. Polanski has lived for the past three decades in France.

US Dollar Rises Against Major Currencies

The dollar traded higher last week against the Euro, Sterling, Canadian Dollar, and the Australian Dollar. In my view, it's not a given because of international dollar overhang, but the lack of Fed money printing could mean surprise dollar strength, at least through the end of the year.

The Top Ten

Top Ten EPJ posts visited for the week ended Saturday, September 26, 2009.

1. US Missile Defense Halt Is First Signal that War With Iran is Near

2. Barney Frank and Ron Paul Opening Remarks at 'Audit the Fed' Hearings

3. Secret Service Confirm "Bean Bags" Shot at Protestors

4. A New Power Center for the New World Order

5. Shock: Inside the Healthcare Bill (This post has been in the Top Ten since I intially posted it on July 20. It has had well over 100,000 visitors.)

6. Is Wells Fargo Making AIG’s Suicidal Mistake?

7. The Economic Fallacy Of 'Too Big Too Fail' (By Taylor Conant)

8. Jail Time If You Don't Buy Health Insurance and Don't Pay the Fine?

9. Tom Woods Testimony Before Congress on 'Audit the Fed'

10. Four Seasons San Francisco 90-Days Delinquent

Antitrust as a Tool to Hobble Competitors

Google has a great new tool, Google Voice, which allows you to provide just one phone number to friends, business contacts, etc. that will ring all your numbers simultaneously, your cell, your home, the office. You can control which of your phones will ring for a given person. Just home, just the office. Or just the cellphone. It also provides immediate transcripts of all voicemails to your cellphone.

It's an awesome phone management/time management tool. I use it.

You can always tell when a new product is hot. Competitors will attempt to use government to slow or stop the growth of such a product. Google Voice is hot and really scaring competitors. ATT, for example, has pulled out the antitrust card to stop Google Voice. Amy Schatz at WSJ reports:
AT&T Inc. alleged Friday that Google Inc.'s Google Voice service is improperly preventing consumers from calling certain phone numbers, in violation of federal call-blocking rules.

In a letter to the Federal Communications Commission, the phone giant accused Google of violating rules designed to ensure phone companies connect all calls. AT&T also accused Google of violating "net neutrality" principles, which are designed to ensure consumers can use any legal Internet services they want.

Google Voice is an Internet call-forwarding system that allows consumers to sign up for a free phone number that, when called, simultaneously rings all of a consumer's other phones.

Google acknowledged it restricts outgoing calls to some phone numbers, including adult chat lines and conference-call centers, which charge higher access fees to carriers. Blocking such calls reduces Google's expenses for the service.
Bottom line: Google is providing a service that is FREE. It blocks outgoing numbers that charge high access fees. Since Google is mostly an incoming management tool, you still need a separate phone line/number to make out going calls. If anyone wants to call adult chat lines, conference numbers and other numbers that Google does not allow access to through there "switchboard", they can do so directly. Google isn't trying to stop this, and couldn't. So this is an amazing stretch of already absurd antitrust laws. It's Big Mama calling in the muscle of Big Government to harass a new competitor.

Saturday, September 26, 2009

Bartlett: 'Audit the Fed' Is a Crackpot Idea

Writes Bruce Bartlett:
Ron Paul finally got his wish yesterday and the House Financial Services Committee held a hearing on his legislation to audit the Federal Reserve. There were only two witnesses: the Fed's general counsel and Tom Woods, a historian from the Ludwig von Mises Institute...

I urge those curious about this issue to read both statements. I think it is abundantly clear that this is a crackpot idea. The Fed is already thoroughly audited in every area except two: monetary policy and dealings with foreign central banks. The only purpose of having additional audits of the Fed is to undermine its independence precisely with regard to these two areas. If Woods presents the best argument for doing so, the argument is very shallow indeed.
Reading only the prepared statements of Fed General Counsel Alavrez and Dr. Woods is is like reading only the introduction of a book and then critiquing the book. From Bartlett's comments, he clearly has not viewed the entire testimony.

For one, Ron Paul in his opening remarks, as I reported, knocked down the idea that H.R. 1207 is about auditing Fed monetary policy. It is not. Only Federal Reserve apologists continue to build this strawman.

Secondly, the questionning of Alvarez by Representative Alan Grayson should be enough to realize that an audit is necessary. Alvarez was evasive when Grayson quizzed him about Federal Reserve manipulation of the stock market. Alvarez also claimed he had no knowledge of front running by those who have inside information of Fed trading activities, when rumors about such trading are plentiful in the bond pits. Thus, while Bartlett attempts to focus on the strawman of auditing monetary policy, Grayson showed us two areas where a Fed audit is long over due---the area of front running the Fed, and any trading activities by the Fed in the stock market and stock futures markets. Further, an audit needs to be undertaken to determine what assets the Fed is buying. Alvarez, in testimony, attempted to deflect questonning by stating that the large majority of purchases are Treasury securities, but what the public should know is what else the Fed is buying.

Bartlett does acknowledge that Paul's bill would result in an audit of Fed activities with foreign entities, but does so grudgingly and misstates it as only an audit of foreign central banks, when, in fact, it would include an audit of Fed activities with foreign central banks, foreign governments and any other foreign entities the Fed trades with. As Representative Grayson put it, if there is a foreign savings bank called the Dick Cheney Savings Bank which has only a foreign account and the Fed is buying assets from the bank, shouldn't we know about this?

Why Bartlett, or anyone else, wouldn't want an audit of Fed transactions being done with foreign entities, is a real head scratcher.

I wonder if Bartlett would argue for giving Bernie Madoff a pass if he only ran his Ponzi scheme using foreign banks. Would it be a crackpot idea to audit Bernies foreign accounts? Using Bartlett logic it would be nuts to audit them.

Stanford Treated After Prison Fight

R. Allen Stanford, awaiting trial on charges he swindled investors in a $7 billion scheme, was hospitalized overnight after getting into a fight with an inmate in a Texas jail, a US marshal said, Bloomberg is reporting.

There's No Financial Crisis for Al Gore and Friends

Obama just slipped him $529 million to build a sports car.

Josh Mitchell and Stephen Power at WSJ with the details on how bailout money distorts the economy for the benefit of the inside elite:
A tiny car company backed by former Vice President Al Gore has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.
It's an f'ing sart up! WSJ continues:
The award this week to California startup Fisker Automotive Inc. follows a $465 million government loan to Tesla Motors Inc., purveyors of a $109,000 British-built electric Roadster. Tesla is a California startup focusing on all-electric vehicles, with a number of celebrity endorsements that is backed by investors that have contributed to Democratic campaigns.

The awards to Fisker and Tesla have prompted concern from companies that have had their bids for loans rejected, and criticism from groups that question why vehicles aimed at the wealthiest customers are getting loans subsidized by taxpayers.

Pritchard Discovers the Crashing Money Data

Ambrose Evans-Pritchard has joined the team that is aware that there is no growth in money supply and that many loan numbers are crashing. He writes:

Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise...

We are moving into a phase when most OECD states must retrench to head off debt-compound traps.

Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.
If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.

Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.

The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world.

Yet hawks are already stamping feet at key central banks...

Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."

M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.
Pritchard is a bit of a Keynesian here. He would like to see central banks, including the Fed start printing money again. This would be an error. In fact, if the central banks continue along their current path, they would wipe the scourge of inflation off the map.

But, first will come a period of pain, it is at this point that Bernanke and his overseas cronies will start printing money again, in panic. That panic period is not likely to be very far away. Pritchard talks about early next year as the beginning of panic. I don't think we have that long. My analysis says, we are likely talking weeks, not months---given the that the tight money period started in late February/early March. This is a very long period to have a no growth money supply with the stock market going up. It won't last.

An Object Lesson in Austrian Business Cycle Theory

ABCT states that central bank money creation tends to shift the capital/consumption ratio in favor of capital, since much bank lending of newly created money goes to the capital goods sector. If the central bank money printing stops, those industries that saw the influx of new money into their sectors of the economy suffer the worst during the downturn, i.e., the readjustment period toward the old non-manipulated capital/consumption ratio.

Keynes' aggregate demand theory over aggregates economic theory and simply looks at an the economy as suffering an overall drop in demand, without noticing that capital goods sectors, such as construction, are much more severely impacted. KT fails to notice that the drop in demand is not smooth across all sectors and that, indeed, some sectors, namely immediate consumption goods sectors, such as the movie theatre industry, actually experience growth.

Today's WSJ gives us an object lesson on how one capital goods sector beneficiary of central bank printing, the construction industry, is now suffering because of the halt in central bank money printing. Alexandra Berzon reports:

Over the past 25 years, Larry Valdez has worked as an electrician in Grand Junction, Colo.; Duluth, Minn.; Salem, Ore.; and more than a dozen other places.

A skilled tradesman with a union card, he could always hop from one job to the next, building a mall, a power plant or a microchip factory. Five years ago, he landed in Las Vegas as developers were breaking ground on a series of lavish hotels and casinos on the Strip.

Thousands of carpenters, ironworkers, electricians, pipefitters and other tradesmen were lured here by the concrete and steel rising from the desert -- and the promise of steady work and higher pay. Known in the trade as "travelers" or "boomers," they have long served as a sort of a roving labor pool, providing the skilled manpower needed to get big projects off the ground -- no matter where they popped up.

Now, many of those Las Vegas construction projects have been mothballed or are nearing completion. Usually, Mr. Valdez, 52 years old, would be striking out for the next job by now. Instead, he has been out of work since April, with no prospects

The economic downturn has hit construction harder than most other industries. The unemployment rate for construction workers was 16.5% in August, double the rate a year earlier and the highest of any industry. The industry shed nearly a million jobs in the past year, a fifth of all jobs lost, as development slowed nationwide.

In Las Vegas, there were 21,000 fewer construction jobs in August than a year earlier -- a 20% drop. It is a sharp turnaround for a city where developers had planned more than $55 billion of condo, hotel and casino projects. The centerpiece is MGM Mirage's $8.5 billion City Center resort and casino, which employs about 10,000 construction workers.

Steve Holloway, executive vice president of the Las Vegas Associated General Contractors chapter, said about 15,000 union travelers came to Las Vegas during the boom. "Everyone was saying, 'Jesus, are there enough workers to do all this work?'" recalls Marc Furman, president of the Southwest Regional Council of Carpenters. That changed in August 2008 when Boyd Gaming Corp. halted its $4 billion Echelon project on the Strip. "Now it's like musical chairs. Everyone got to Vegas and is just sitting here," he said.

What Tom Woods Should Have Said

Economist Tom Woods testified before Congress yesterday, in favor of Ron Paul's 'Audit the Fed' Bill. At one point he came under hostile questioning by Rep. Melvin L. Watt (D-NC), who at one point stated that Woods' remarks were simply "political."

Bob Murphy emails:
I can see how a politician would be frustrated with political answers.Tom should have said, "Would you like a military solution?"

In Support of H.R. 1207

Some months back I expressed reservations about Congressman Ron Paul's 'Audit the Fed' Bill (H.R. 1207). Since it was clear that many around President Obama wanted to "reform" the Federal Reserve and and the entire financial sector, I felt that H.R. 1207 would be used as the wedge to start discussions about financial "reform".

Since I have raised those concerns, it is clear that the interventionists don't need a wedge to go in and "reform" the financial sector. They are going to use a bulldozer, and major league new interventions on the financial sector are coming regardless of H.R. 1207. There is no danger that H.R. 1207 will unlock the gate for interventionists, they are in the process of knocking down the gate.

Thus, H.R. 1207 can do nothing at this point but shed light on activities that the Fed chooses to keep secret. It can do no harm.

I hasten to add, this does not mean that I believe Financial Services Committee Chairman Barney Frank has been won over by Ron Paul's free market arguments. He remains a tool of elite banking interests. However, H.R. 1207, under current conditions of growing interventionism anyway, will not provide any type of tool that elite banking interests will need to advance their agenda. Under present conditions, H.R. 1207 will simply be a tool by which free market advocates can harass elite banking interests.

I, thus, come out in full support of H.R. 1207.

Audit the Fed!

Friday, September 25, 2009

Jail Time If You Don't Buy Health Insurance and Don't Pay the Fine?

Politico reports:
Sen. John Ensign (R-Nev.) received a handwritten note Thursday from Joint Committee on Taxation Chief of Staff Tom Barthold confirming the penalty for failing to pay the up to $1,900 fee for not buying health insurance.

Violators could be charged with a misdemeanor and could face up to a year in jail or a $25,000 penalty, Barthold wrote on JCT letterhead. He signed it "Sincerely, Thomas A. Barthold."


Keep an Eye on Goldman for Signals of the Market Break

CNBC is pointing out that traders are closely watching action in Goldman Sachs. The stock broke below $180, after making a 52-week high earlier in the week at $188. It's back over 180, but should be watched closely. The market was led higher by Goldman, thanks to government money infusions, now that those have slowed, the market will likely head lower with Goldman in the lead.

Schiff: The Dollar is the New Peso

“I don’t know when [the dollar] is going to strengthen,” Peter Schiff told CNBC. “The dollar isn’t the new yen, it’s unfortunately the new peso.”

Schiff may be right long-term, or if internationals start bailing out of the dollar, but right now with Bernanke not printing any money, the dollar is likely to perform even better than gold.

Pepper-Gassed in Pittsburgh

A Reuters reporter, Michelle Nichols, tells her story:

I got my second dose of G20 pepper gas right outside my hotel.

After a long day following protesters and reporting on their clashes with police, I was exhausted. But just as I switched off the light in my hotel room I could hear the tell-tale sound of a Long Range Acoustic Device.

The police had been using the LRAD’s high-pitched, piercing noise (along with “beanbag” projectiles and the good old-fashioned baton) all day. Sure enough, when I looked out the window I saw a few protesters had come to me for once, and were moving from Pitt University toward our hotel on Forbes Ave.

It was after midnight but I still went downstairs to check it out. I passed very few people on the street and a saw a couple of hundred students looking down from their dorm balcony, taking pictures. I wouldn’t describe them as protesters — it was just where they lived.

I moved into the side street and waited for a line of riot police to move on so I could check out reports that business windows has been smashed.

The police moved forward and the two on the end of the line turned towards me. One nudged the other who then sprayed pepper spray directly at me. When I started to run he threw a larger canister of pepper gas in my direction.

The Secret Service, which is coordinating security in Pittsburgh during the summit has taken exception to descriptions of the gas as “tear gas.” Instead they said “CS vapor,” which is similar to pepper spray, was used by police. I had my first unpleasant experience earlier in the day.

It gets in your eyes, nose and throat, stinging and making you cough so much you are nearly sick.

As the police passed the students on their dorm balcony they sprayed pepper gas up towards them, causing them all to run back into their dorm. Several other students told me they the police had indiscriminately sprayed them.

“We were just looking, then there were loud sirens and then it was hard to breath and I was coughing up a lung,” said Pitt student Dustin DeMeglio, 19

Fascinating Alex Jones Video...

...on the phone with his reporters in Pittsburgh (especially the second half).

Rep. Alan Grayson Grills Fed General Counsel: "Has the Fed Ever Tried to Manipulate the Stock Market?"

Representative Grayson bio.

Russia Says Iran's Construction of Nuclear Enrichment Plant Violates UN Security Council Decisions

Russia has certainly done an about face on Iran, of late. What could possibly be behind the change?

G-20 Kidnapping?

Tom Woods Testimony Before Congress on 'Audit the Fed'

Prepared Testimony by Thomas Woods Jr. in Support of HR 1207, The Federal Reserve Transparency Act of 2009, House Financial Services Committee, September 25, 2009

I am speaking this morning in support of HR 1207, the Federal Reserve Transparency Act. As the Committee knows, this bill would require a full audit of the Federal Reserve by the Government Accountability Office (GAO).

On November 10, 2008, Bloomberg News ran the following headline: “Fed Defies Transparency Aim in Refusal to Disclose.” The story pointed out that the Fed was refusing to identify the recipients of trillions of dollars in emergency loans or the dubious assets the central bank was accepting as collateral. When the initial $700 billion congressional bailout was being debated last September, Fed chairman Ben Bernanke and then-Secretary of the Treasury Hank Paulson couldn’t emphasize their commitment to transparency strongly enough. But “two months later, as the Fed [lent] far more than that in separate rescue programs that didn’t require approval by Congress, Americans [had] no idea where their money [was] going or what securities the banks [were] pledging in return.”

Matthew Winkler, editor-in-chief of Bloomberg News, put it simply: “Taxpayers – involuntary investors in this case – have a right to know who received loans, in what amounts, for which collateral, and why specific loans were made.”

This has been portrayed as a trivial matter being pursued by some cynical and uppity Americans who don’t know their place. But there is no good reason for Americans not to know the recipients of the Fed’s emergency lending facilities. There is no good reason for them to be kept in the dark about the Fed’s arrangements with foreign central banks. These things affect the quality of the money that our system obliges the American public to accept.

The Fed’s arguments against the bill are unlikely to persuade, and will undoubtedly strike the average American as little more than special pleading. Perhaps the most frequent of the claims is that a genuine audit would jeopardize the alleged independence of the Fed. Congress could come to influence or even dictate monetary policy.

This is a red herring. The bill is not designed to empower politicians to increase the money supply, choose interest-rate targets, or adopt any of the rest of the Fed’s central planning apparatus, all of which is better left to the free market than to the Fed or Congress. It seeks nothing more than to open the Fed’s books to public scrutiny. Congress has a moral and legal obligation to oversee institutions it brings into existence. The convoluted scenarios by which merely opening the books will lead to an inflationary catastrophe at the hands of Congress are difficult to take seriously.

At the same time, as we hear this objection repeated time and again, we might wonder just how independent the Fed really is, what with its chairman up for reappointment by the president every four years. Have these critics never heard of the political business cycle? Fed chairmen have been known to ingratiate themselves into the president’s favor close to election time by means of loose monetary policy and the false (and temporary) prosperity it brings about. Let us not insult Americans’ intelligence by pretending this phenomenon does not exist.

Moreover, try to imagine a Fed chairman doggedly seeking to maintain the value of the dollar even if it meant refusing to monetize a massive deficit to fight a war or “stimulate” a depressed economy. It is not possible.

If there is any truth to the idea of Fed independence, it lay in precisely this: the Fed may reward favored friends and constituencies with trillions of dollars in various kinds of assistance, while keeping the public completely in the dark. If that is the independence we’re talking about, no self-respecting American would hesitate for a moment to challenge it.

A related argument warns that the legislation threatens to politicize lender-of-last-resort decisions. Again, this is untrue. But even if it were true, how would that represent a departure from current practice? I hope we are not asking Americans to believe that the decisions to bail out various financial institutions over the past two years, and in particular to allow them to become depository institutions overnight that they might qualify for assistance, were made on the basis of a pure devotion to the common good and were not political at all. Most Americans, not unreasonably, seem convinced of another thesis: that Goldman Sachs, for instance, might be just a little bit more politically well connected than the rest of us.

Opponents of HR 1207 have sometimes tried to claim that the Fed is already adequately audited. If this were true, why is the Fed in panic mode over this bill? It is the broad areas these audits exclude that the American public is increasingly interested in investigating, and these are the gaps that HR 1207 seeks to fill.

The conventional wisdom seems to be that the monetary system we have now is sound and beyond reproach, and certainly better than any system that preceded it. My purpose today is not to render judgment upon such views, however deeply misguided I happen to consider them, and however inaccurate their implicit view of nineteenth-century financial panics. My point is simply this: if our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance? How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?

Let me also make clear that supporters of this legislation are strongly opposed to a watered-down version of the bill – which, incidentally, would only increase public suspicion that someone is hiding something.

If the Federal Reserve Transparency Act passes and the audit takes place, the American people will have achieved a great victory. If the legislation fails, more and more Americans will begin to wonder what the Fed could be so anxious to keep hidden, and the pressure for transparency will simply intensify. A recent poll finds 75 percent of Americans already in favor of auditing the Fed. The writing is on the wall.

The Federal Reserve may as well get used to the idea that the audit is coming. That would be a far more sensible approach than the counterproductive and condescending one it has adopted thus far, in which the peons who populate the country are urged to quit pestering their betters with all these impertinent questions. The Fed should take to heart the words of consolation the American people are given whenever a new government surveillance program is uncovered: if you’re not doing anything wrong, you have nothing to worry about.

The superstitious reverence that Americans have been taught to have for the Federal Reserve is unworthy of the dignity of a free people. The Fed enjoys a government-granted monopoly on the creation of legal-tender money. It is not an unreasonable imposition for Americans to demand to know about the activities of such an institution. It is common sense.

Thomas E. Woods, Jr. is a senior fellow at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History.

Barney Frank and Ron Paul Opening Remarks at 'Audit the Fed' Hearings

I am following the hearings on the Ron Paul 'Audit the Fed' Bill (H.R. 1207). There were solid opening remarks by Ron Paul and Barney Frank. Paul countered most of the Fed's secrecy defenses, along the same manner I have done.

Barney Frank told an amazing history of how Republicans for decades blocked Paul from having these hearings. The history was a more detailed version of what the CQ Politics recently reported:
Long before he danced with the stars, then-House Majority Leader Tom DeLay two-stepped all over fellow Texas Rep. Ron Paul’s hopes of overseeing the Federal Reserve, according to an account provided by House Financial Services Committee Chairman Barney Frank .

In a broader interview with my colleagues Phil Mattingly and Benton Ives, Frank offered this assessment of how DeLay and other GOP leaders tiptoed around giving Paul — who wants to abolish the Fed — the gavel of the subcommittee with jurisdiction over it:

“In 2003, Ron Paul was in line to be chairman of the Domestic Monetary Policy Subcommittee of this committee. Specifically and solely to frustrate Ron from being the chairman, they merged the Subcommittee on Domestic Monetary Policy with the Subcommittee on International Monetary Policy. Ron Paul then complained to Tom DeLay, and Tom DeLay told [then-Chairman Mike] Oxley [R-Ohio] ‘Don’t change it’ … [T]wo years later, even though they merged the two subcommittees in the progression, Ron was then again ready to be chairman, this time of the combined one. [Then-Rep. Deborah] Pryce [R-Ohio] was dragooned to come back and assert a subcommittee chairmanship … Ron at that point said to me, ‘I guess I have to wait for you to be chairman for me to have any authority around here.’ The Republican Party was a staunch defender of the Fed against Ron Paul.”

Paul and Frank share an interest in auditing the Fed, though neither Frank nor any other member of the House has signed onto Paul’s bill to repeal the Federal Reserve Act.

The general outlines of Frank’s account — though not DeLay’s hand — were confirmed by Republican sources. Paul said he didn’t recall DeLay’s involvement, but he acknowledged Republican leaders didn’t want him to have the subcommittee chairmanship.

“They just got rid of one” subcommittee, Paul said of the first time he was passed over. “They wouldn’t have enjoyed me being chairman.”

But Paul has a defender in the current top Republican on the Financial Services Committee, Rep. Spencer Bachus of Alabama, who appointed him to the leading spot on the subcommittee with Republicans in the minority.

“There are people who said ‘Is this the best thing to do?’ I felt like it was,” Bachus said. “I’m glad I appointed him. I have no regret.
What will happen now that the hearings on the bill are taking place? How much trouble will Paul have in keeping the 'Audit the Fed' Bill from being a feast for big government types to use for extending the intervention of government in the financial sector? My thought on this has changed somewhat by listening to this testimony. The timing for Paul to keep the bill focused on what Paul wants the bill to accomplish may work, in that there are huge discussions about reforming the financial sector anyway. Over recent months, the government intervetionists have developed other avenues to extend their interventions, without needing the 'Audit the Fed' bill as a tool to use for reform. Thus, advocacy for this bill, given the timing, may result in the 'Audit the Fed' bill getting focused on just where Paul wants the focus.

Both Finance Services chairman Barney Frank and Rep. Melvin L. Watt both commented this morning that the bill should be part of a larger reform package. This type of action is a double edged sword. In a larger bill, it most likely won't get as much focus, so Paul can keep it focused on what he wants, on the other hand, if someone else in Congress hooks on to it and wants changes, who knows how the 'Audit the Fed' bill will turn out. But, right now, I am a little more optimistic that the bill will accomplish want Paul wants it to--only because intervetionists now have other platforms from which to do their intervening.

A New Power Center for the New World Order

The White House press release says it all:
The G20 leaders reached a historic agreement to put the G20 at the centre of their efforts to work together to build a durable recovery while avoiding the financial fragilities that led to the crisis.
According to FT, a communiqué will be issued that will say: “We designate the G20 to be the premier forum for our international economic cooperation.”

FT continues:
The communiqué, a substantial document of more than 20 pages, seen by the Financial Times, has familiar language on reforms to the financial system and bankers’ bonuses.

It will endorse a report from the Financial Stability Board that calls for bonuses to be linked to the long-term success of financial companies and not excessive risk taking. It will outlaw multi-year bonuses, call for bonus payments to be deferred and establish mechanisms for clawing back bonuses paid if a company subsequently fails. There will not, however, be a formal cap on individual bankers’ bonuses.

Instead, the communiqué will propose “limiting bonuses as a percentage of total net revenues” when it is inconsistent with a bank’s sound capital base.
An interesting part of this communiqué is the continued focus on bankers' pay. Remember, the Financial Stability Forum is headed by Mario Draghi, who Geithner met with earlier this week. None of this communiqué is a surprise to Geithner.

So what is all this focus on bankers' bonuses about, apparently with the endorsement of top insiders such as Geithner and Draghi? Draghi, being a former Goldman Sachs man and Geithner being a long-term tool of Wall Street, what is going on? This looks like it has top level Wall Street endorsement. Endorsement of a limitation on Wall Street bonuses by the Wall Street elite, WTF? The only conclusion that makes any sense is the argument developed by Robert Murphy, How to Predict the Coming Bank Pay Regulation, top insiders are trying to limit pay to lower echelon players. The pigs at the trough are trying to muscle out nursery pigs.

Alert: Audit the Fed Hearings Today

The House Financial Services Committee will hold hearings today, beginning at 9:00 AM EST on Ron Paul's 'Audit the Fed' Bill (HR 1207).

The hearings can be viewed live here.

Witness List & Prepared Testimony:

Scott G. Alvarez, General Counsel, Board of Governors of the Federal Reserve System

Thomas E. Woods, Jr., Ludwig von Mises Institute

Committee Members
Chairman Barney Frank represents Massachusetts' Fourth Congressional District.

The other Democratic members of the Committee are:
Rep. Paul E. Kanjorski, PA
Rep. Maxine Waters, CA
Rep. Carolyn B. Maloney, NY
Rep. Luis V. Gutierrez, IL
Rep. Nydia M. Velázquez, NY
Rep. Melvin L. Watt, NC
Rep. Gary L. Ackerman, NY
Rep. Brad Sherman, CA
Rep. Gregory W. Meeks, NY
Rep. Dennis Moore, KS
Rep. Michael E. Capuano, MA
Rep. Rubén Hinojosa, TX
Rep. William Lacy Clay, MO
Rep. Carolyn McCarthy, NY
Rep. Joe Baca, CA
Rep. Stephen F. Lynch, MA
Rep. Brad Miller, NC
Rep. David Scott, GA
Rep. Al Green, TX
Rep. Emanuel Cleaver, MO
Rep. Melissa L. Bean, IL
Rep. Gwen Moore, WI
Rep. Paul W. Hodes, NH
Rep. Keith Ellison, MN
Rep. Ron Klein, FL
Rep. Charles Wilson, OH
Rep. Ed Perlmutter, CO
Rep. Joe Donnelly, IN
Rep. Bill Foster, IL
Rep. Andre Carson, IN
Rep. Jackie Speier, CA
Rep. Travis Childers, MS
Rep. Walt Minnick, ID
Rep. John Adler, NJ
Rep. Mary Jo Kilroy, OH
Rep. Steve Driehaus, OH
Rep. Suzanne Kosmas, FL
Rep. Alan Grayson, FL
Rep. Jim Himes, CT
Rep. Gary Peters, MI
Rep. Dan Maffei, NY

Republican Members
Rep. Spencer Bachus, AL
Rep. Michael N. Castle, DE
Rep. Peter King, NY
Rep. Edward R. Royce, CA
Rep. Frank D. Lucas, OK
Rep. Ron Paul, TX
Rep. Donald A. Manzullo, IL
Rep. Walter B. Jones , NC
Rep. Judy Biggert, IL
Rep. Gary G. Miller, CA
Rep. Shelley Moore Capito, WV
Rep. Jeb Hensarling, TX
Rep. Scott Garrett, NJ
Rep. J. Gresham Barrett, SC
Rep. Jim Gerlach, PA
Rep. Randy Neugebauer, TX
Rep. Tom Price, GA
Rep. Patrick T. McHenry, NC
Rep. John Campbell, CA
Rep. Adam Putnam, FL
Rep. Michele Bachmann, MN
Rep. Kenny Marchant, TX
Rep. Thaddeus McCotter, MI
Rep. Kevin McCarthy, CA
Rep. Bill Posey, FL
Rep. Lynn Jenkins, KS
Rep. Christopher Lee, NY
Rep. Erik Paulsen, MN
Rep. Leonard Lance,NJ

Thursday, September 24, 2009

Penn Explains What Freedom Really Means

(Via Nick)

The Alvarez Failed Defense for Fed Secrecy

I have already linked below to prepared remarks by Federal Reserve General Counsel Scott Alvarez. The prepared remarks are for hearings tomorrow, by the House Financial Services committee, on the 'Audit the Fed' bill.

There are two things that stand out in his comments. The first being the considerable time he spends discussing how H.R. 1207 would be damaging to Federal Reserve monetary policy. His prepared remarks state:
Permitting GAO audits of monetary policy also would likely cast a chill on monetary policy deliberations if policymakers believed that GAO audits would result in early publication and analyses of their policy discussions.
But, Representative Ron Paul, the sponsor of the bill, has stated that H.R. 1207 has nothing to do with auditing day to day monetary policy:

The only thing that we [Barney Frank and I] have talked about, that we want to clarify, and I’ve agreed to, is that this bill in itself is not the bill to take over monetary policy and day-to-day management of monetary policy. He and I have agreed to that. The bill doesn’t do that.

Thus, Mr. Alvarez seems to be creating a gigantic straw man to be blown over in front of Congress.

The second area of focus by Mr. Alvarez seems to be with an audit of Fed transactions with what he identifies as "foreign central banks, foreign governments, and public international financing organizations."

A good starting point of disclosure for the Federal Reserve would be to identify what exactly the Fed considers a "public international financing organization". Does it mean the IMF, the World Bank or something else?

Aside from this, one has to be shocked that the Fed wants to hide its dealings with not only foreign central banks, but judging from Mr. Alvarez's testimony, direct dealings with foreign governments. One must ask, what kinds of dealings in totality are being conducted, and with which governments?

His prepared statement reads:
Adoption of H.R. 1207 also could disrupt the nation's relationships with foreign central banks and governments, relationships which are helpful in supporting the Federal Reserve's efforts to fulfill its statutory missions, and erect barriers to official cooperation among central banks and governments. Foreign central banks and governments likely would be less willing to engage in financial transactions with the Federal Reserve if these transactions were subject to policy review by the GAO, as H.R. 1207 would allow. These transactions, such as the deposit of international reserves and bilateral currency swap arrangements, help support the role of the dollar as a worldwide reserve currency and alleviate stresses in U.S. financial markets. For example, the temporary liquidity swaps entered into by the Federal Reserve with other central banks are designed to improve liquidity conditions in both domestic and international financial markets, guard against the spillover of volatility in foreign trading to U.S. money markets, and thereby reduce funding pressures in U.S. financial markets.
But it could just as easily be argued that the secrecy that the Federal Reserve desires to maintain around international transactions can fuel international nervousness about the dollar.

More then one currency crisis has been started by rumors that a central bank has had to step in to defend its currency. A reporting of true facts could not do as much damage as never ending secrecy that leads to outlandish rumors.

As Congressmen Paul has stated, a period of time, perhaps six months, before releasing international transactions could be agreed to, but certainly eternal secrecy will only spur rumors of behind the scenes manipulations. Rumors, I might add, that now exist whenever the stock market goes up after a prolonged decline. Because we are not privy to the minutes or activities of the President’s Working Group on Financial Markets, all kinds of rumors fly on about it. The Washington Post has even dubbed it the Plunge Protection Team.

This hampers markets by eroding confidence. Investors see an up market and wonder if it is a true up move or the Plunge Protection Team up to monkey business.

Thus, with the United States finding itself with huge debt being held by foreigners, and the prospect of much more debt needed to be raised in the very near future, panic rumors that will erode international confidence could occur at any time. Rumors, such as, what central banks had to do to stem panic in the dollar, or Treasury debt markets. The proper disclosure of the truth of what activities the Federal Reserve, with perhaps a six month time lag, could not possibly be as damaging as unchecked rumors in a panic period.

Disclosure of the more than $150 billion that was provided to AIG did not cause more panic in the markets, indeed, it turned out to result in a quieting effect on the markets, though justifiable anger ensued as to whether such money should have been poured into AIG and others. Thus, one has to wonder if there is some fear on the part of the Federal Reserve about anger that may ensue if the types of transactions that have occurred are disclosed. What kinds of transactions have been conducted, and with what central banks, what foreign governments and what public international financing organizations?

Maintaining secrecy to these questions is exponentially more dangerous than the concerns of disclosure raised by Mr. Alvarez

Secret Service Confirm "Bean Bags" Shot at Protestors

From Twitter: MacroscopeSecret Service confirms that police are shooting #g20 protesters with "bean bags." But check out what they look like:

Twitter Highlights from Pittsburgh

JackImageX: @Hryckowian DId they arrest the guy with the fake Stanley Cup? I was trying to figure out what he was protesting

SocialistZine: this is a police riot!

nunca433: racial profiling going on on police radio. middle eastern guy w/backpack being tailed

wrightwilliams: police scanner man on harriet is claiming to police he has bomb strapped to his body

HomaPourasgari: G20 Protesters Ordered To Stop March By Pittsburgh Police

michellenichols: #G20 police have used piercing noise and pepper spray to try and disperse protesters

SocialistZine: Video of gas and Sound attack at the G20

scottdetrow: Back at station filing. Best we can tell, small skirmishes going on here and there. Other outlets reporting some arrests

@psunate77: - Riot police clash with protestors from "Resist G-20"

JonDelano: Very, very quiet inside the #G20 convention center. Lots of media using their laptops, occasional TV standups. Overpriced food ($3 water).

Prepared Remarks of Fed General Counsel Scott Alvarez for Tomorrow's 'Audit the Fed ' Bill Hearings

The Federal Reserve has released the prepared marks that Federal Reserve General Counsel Scott Alvarez will deliver tomorrow during hearings before the Committee on Financial Services, with regard to Ron Paul's 'Audit the Fed' Bill (H.R. 1207). Judging by his remarks, the Fed seems particularly protective of the dealings it is has conducted "for or with foreign central banks, foreign governments, and public international financing organizations." I wonder what's up with that? Because of its importance, I reproduce Alvarez's prepared remarks in full below.

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I appreciate the opportunity to testify on H.R. 1207, the Federal Reserve Transparency Act of 2009. The Federal Reserve is accountable to the Congress and the public. To inform the Congress and the American people about our actions and accommodate appropriate oversight of those actions, the Federal Reserve has further strengthened its ongoing commitment to transparency. We provide substantial information to the Congress and the public on the policies, actions, and operations of the Federal Reserve; routinely testify before this and other congressional oversight committees on all areas of our responsibilities; and publish the results of annual audits of the Federal Reserve's financial statements by an independent accounting firm. Importantly, the Federal Reserve also is subject under current law to, and cooperates with, the Government Accountability Office (GAO) in its audits of nearly all of the functions and actions of the Federal Reserve.

In my testimony, I will discuss the various ways that the Federal Reserve is both accountable and transparent to the Congress and the public, including the wide range of Federal Reserve policies and functions that currently are subject to GAO audit. I also will discuss the substantial steps that we have taken to promote understanding of our actions during the financial crisis to foster financial and economic stability, to promote the availability of credit to businesses and consumers, and to restore economic growth. In addition, I will discuss the public benefits of ensuring that the Federal Reserve maintains independence in the conduct of monetary policy, and why granting the GAO broad new authority to audit the monetary policy and related activities of the Federal Reserve would be contrary to the public interest.

Accountability and OversightThe Federal Reserve is subject to oversight through a variety of mechanisms. Importantly, the Federal Reserve regularly reports to the Congress and provides both the Congress and the public a full range of detailed information concerning its policy actions, operations, and financial accounts. Indeed, our goal is to be as transparent as possible about our policies and operations without undermining our ability to effectively fulfill our monetary policy and other responsibilities.

For example, the Chairman of the Federal Reserve Board testifies and provides a report to the Congress semiannually on the state of the economy and on the Federal Reserve's actions to carry out the monetary policy objectives that the Congress has established.1 In addition, Federal Reserve officials frequently testify before the Congress on all aspects of the Federal Reserve’s responsibilities and operations, including economic and financial conditions, monetary policy, the supervision and regulation of banking organizations, consumer protection in financial services, payments system and clearing matters, and cash and check services provided by the Federal Reserve. In fact, since the beginning of 2007, Board members and other officials have testified before the Congress more than 80 times, including 28 times so far this year.

An independent public accounting firm that is selected and retained by the Board's Inspector General annually audits the financial statements for the Federal Reserve System, including the Reserve Banks. The Federal Reserve makes these audited financial statements available to the public and submits them to the Congress with detailed annual reports of our activities. These annual reports review the Federal Reserve's policy actions and operations during the year across the full range of our monetary policy, bank supervision, payments system, and consumer protection functions.2 In addition, the Board annually provides the Congress with a separate report that provides detail on the budgets, budget process, income, and expenses of the Board and the Reserve Banks.3

With respect to monetary policy, the Federal Open Market Committee (FOMC) releases a statement describing its monetary policy decisions immediately after each regularly scheduled meeting and publishes detailed minutes of each meeting three weeks later. We also publish summaries of the economic forecasts of FOMC participants four times a year and release full transcripts of FOMC meetings with a five-year lag.

During the financial crisis of the past two years, the Federal Reserve has instituted a number of important programs--using both open market operations and discount window lending--to promote financial stability and the monetary policy goals of maximum employment and stable prices. As Chairman Bernanke has noted, many of the recent improvements in financial conditions can be traced, in part, to the policy actions taken by the Federal Reserve.
We recognize that these programs must be accompanied by additional transparency so that the Congress and the public can be assured that we are exercising the best possible stewardship of the resources and responsibilities that have been entrusted to us. For these reasons, we have substantially increased both the type and amount of information that we disclose concerning our liquidity and asset purchase programs. Since the System began operations in 1914, the Federal Reserve has published its balance sheet every week, showing the assets and liabilities of the Reserve Banks, both individually and on a consolidated basis.4 During the crisis, we have added significant new information to these weekly balance sheets, including information about the amount of credit outstanding under each of our credit facilities.

The Board also recently created a section of its website that offers considerable new and detailed information about our policy programs and financial activities.5 Earlier this year, we initiated a detailed monthly report on the Federal Reserve's liquidity programs and balance sheet that provides the Congress and the public more detailed and timely information on our lending, the associated collateral, and other facets of programs established to fight the financial crisis. Importantly, these monthly reports provide the number and distribution of borrowers under each facility; the value, type, and quality of the collateral that secures advances under each facility, including the loans to the Maiden Lane entities formed to help prevent the disorderly failure of Bear Stearns and American International Group (AIG); and trends in borrowing under the facilities. The Board also files a report with the Congress every 60 days on each outstanding liquidity facility authorized under section 13(3) of the Federal Reserve Act.6 Moreover, the Federal Reserve has made public the significant contracts that we have entered into with private-sector vendors to assist in the management and administration of the special liquidity and asset purchase programs established to combat the financial crisis and restore economic growth.

We have taken these steps with the objective of increasing the information publicly available about the Federal Reserve and our programs so that the Congress and the public can more effectively assess our efforts in pursuit of financial stability and our monetary policy objectives. Altogether, we now provide more information about our operations than ever before, and we continue to explore whether additional information can be provided without jeopardizing the effectiveness of our efforts.

Existing GAO Audit AuthorityThere appears to be a widespread misconception about the role the GAO already plays in oversight of the Federal Reserve. We are subject to audits by the GAO across a wide range of our responsibilities. For example, all of our supervisory and regulatory functions are subject to audit by the GAO to the same extent as the supervisory and regulatory functions of the other federal banking agencies. Indeed, the GAO in recent years has conducted dozens of audits of the policies and practices of the Federal Reserve in its supervision and regulation of bank holding companies, state member banks, and other banking organizations. These audits have included assessments of our capital standards, a review of our consolidated supervision function, and audits of our actions in connection with troubled banking organizations.
In addition, the GAO has conducted audits of the Federal Reserve in a wide range of other areas, including our oversight and operation of payment systems; our implementation and enforcement of consumer protection laws; our policies on the acquisition of U.S. banking organizations by sovereign wealth funds; our efforts to address cyber security; and the need for financial regulatory reform. So far in 2009, the GAO has completed 14 engagements involving the Federal Reserve, and another 14 engagements are in process.

The Congress also recently granted the GAO the authority to audit the credit facilities extended by the Federal Reserve to "single and specific" companies under section 13(3) of the Federal Reserve Act. This authority allows the GAO to audit the loan facilities the Federal Reserve has created for AIG, Bear Stearns, Citigroup, and Bank of America. In addition, the Congress clarified the GAO's authority to audit the Term Asset-Backed Securities Loan Facility (TALF), a joint Treasury-Federal Reserve initiative, in conjunction with the GAO's reviews of the performance of the Treasury's Troubled Asset Relief Program. We have been cooperating closely with the GAO--as we have in the past--to assist their reviews under all of these authorities.

H.R. 1207 and Monetary Policy IndependenceThe Congress purposefully--and for good reason--chose to exclude from GAO review only two highly sensitive areas: one is monetary policy deliberations, decisions, and actions, including open market and discount window operations; and the other is Federal Reserve transactions for or with foreign central banks, foreign governments, and public international financing organizations. The limited exceptions for monetary policy and discount window operations were adopted to ensure that the Federal Reserve could "independently conduct the Nation's monetary policy."7

Considerable experience shows that monetary policy independence--within a framework of legislatively established objectives and public accountability--tends to yield a monetary policy that best promotes price stability and economic growth. Monetary policy independence prevents governments from succumbing to the temptation to use the central bank to fund budget deficits. It also enables policymakers to look beyond the short term as they weigh the effects of their monetary policy actions on price stability and employment. And it reinforces public confidence that monetary policy will be guided solely by the objectives laid out in the Federal Reserve Act. Thus, the Congress has sought to maintain an independent monetary policy not because it benefits the Federal Reserve, but because of the important public benefits it provides.
Through its investigations and audits, the GAO typically makes its own judgments about policy actions and the manner in which they are implemented and makes recommendations to the audited agency and to the Congress for policy changes or future policy actions. Accordingly, financial markets likely would see the grant of audit authority to the GAO with respect to monetary policy as undermining the Federal Reserve's independence in this crucial area, particularly because GAO audits or the threat of a GAO audit could be used both to second-guess the Federal Reserve's monetary policy judgments and to try to influence subsequent monetary policy decisions.

Permitting GAO audits of monetary policy also would likely cast a chill on monetary policy deliberations if policymakers believed that GAO audits would result in early publication and analyses of their policy discussions. Unfettered and wide-ranging internal debates are essential to identifying the best possible policy options for achieving maximum employment and stable prices in light of data that may be conflicting or, at best, ambiguous as to the optimum policy path.

Moreover, publication of the results of GAO audits related to monetary policy actions and deliberations would complicate and interfere with the FOMC's communications to the markets and the public about current economic conditions and the appropriate stance of monetary policy. Households, businesses, and financial market participants would understandably be uncertain about the implications of the GAO's findings for future decisions of the FOMC, thereby increasing market volatility and weakening the ability of monetary policy actions to achieve their desired effects.

The exception from GAO audit for monetary policy matters rightfully extends to the Federal Reserve's use of market credit and liquidity programs to support the functioning of financial markets, stimulate the economy, and unfreeze credit markets. During the crisis, as use of the federal funds rate and discount rate to achieve policy objectives became constrained by the zero bound, the Federal Reserve established several broadly available market credit facilities.8 These broad-based facilities are fundamentally different from the institution-specific loans that the Federal Reserve has made and that are already subject to GAO audit. These broader market facilities are designed to unfreeze credit markets and lower interest rate spreads and are a natural extension of the traditional central bank responsibility to serve as a backup source of liquidity during periods of financial strain.9 In this way, these facilities represent an essential part of the Federal Reserve's efforts to promote financial stability and its monetary policy objectives.

Permitting GAO audits of discount window lending and the broad liquidity facilities that the Federal Reserve uses to affect credit conditions generally could reduce the effectiveness of these facilities in promoting financial stability, maximum employment, and price stability. Experience, including during the current financial crisis, shows that banks' unwillingness to use the discount window can result in high and volatile short-term interest rates and greatly limit the effectiveness of the discount window as a tool to enhance financial stability. Indeed, one of the important difficulties that hampered the effectiveness of the Federal Reserve's early response to the crisis was the unwillingness of many banks to draw discount window credit because of concerns about stigma; institutions were concerned that, if their discount window borrowing from the Federal Reserve became known, they would be subject to adverse reactions from the market or other sources. Authorizing the GAO to audit the discount window and other broad-based lending programs could significantly increase potential borrowers' fears of stigma and adverse reactions.

H.R. 1207 would completely remove the exceptions from GAO audit in current law for monetary policy and discount window deliberations and operations, thereby allowing frequent and ongoing audits in these areas. Financial market participants likely would see passage of H.R. 1207 as a substantial erosion of the Federal Reserve's monetary policy independence. Accordingly, enactment of the bill would tend to undermine public and investor confidence in monetary policy by raising concerns that monetary policy judgments in pursuit of our legislated objectives would become subject to political considerations.

These concerns likely would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation. Indeed, the bond rating agencies view operational independence of a country's central bank as an important factor in determining sovereign credit ratings.10 Actions that weaken monetary policy independence thus could raise the Treasury's cost of borrowing. Higher long-term interest rates would further increase the burden of the national debt on current and future generations.

Adoption of H.R. 1207 also could disrupt the nation's relationships with foreign central banks and governments, relationships which are helpful in supporting the Federal Reserve's efforts to fulfill its statutory missions, and erect barriers to official cooperation among central banks and governments. Foreign central banks and governments likely would be less willing to engage in financial transactions with the Federal Reserve if these transactions were subject to policy review by the GAO, as H.R. 1207 would allow. These transactions, such as the deposit of international reserves and bilateral currency swap arrangements, help support the role of the dollar as a worldwide reserve currency and alleviate stresses in U.S. financial markets. For example, the temporary liquidity swaps entered into by the Federal Reserve with other central banks are designed to improve liquidity conditions in both domestic and international financial markets, guard against the spillover of volatility in foreign trading to U.S. money markets, and thereby reduce funding pressures in U.S. financial markets.

The modifications proposed by H.R. 1207 are not needed to allow the GAO to audit the Federal Reserve's supervisory and regulatory programs for banking organizations, its consumer protection functions, or the many other aspects of the Federal Reserve's responsibilities that are not related to monetary policy or transactions with foreign authorities. As I noted earlier, the GAO already has and exercises authority to conduct audits in these areas, and the Federal Reserve cooperates fully with the GAO on these reviews.

The Federal Reserve recognizes that there may be ways to further enhance the review of the operational integrity of our market credit facilities without endangering our ability to independently determine and implement monetary policy. We have worked and will continue to work with this Committee and the Congress to ensure that our credit facilities are operated in a way that promotes the highest standards of accountability, stewardship, and policy effectiveness.

Thank you for inviting me to present the Board's views on this very important subject. I look forward to answering any questions you may have.


1. For our most recent report, see Board of Governors of the Federal Reserve System (2009), Monetary Policy Report to the Congress (959 KB PDF) (Washington: Board of Governors, July 21). Return to text
2. See Board of Governors of the Federal Reserve System (2009), 95th Annual Report, 2008 (Washington: Board of Governors), . Return to text
3. See Board of Governors of the Federal Reserve System (2009), Annual Report: Budget Review, 2009 (703 KB PDF) (Washington: Board of Governors). Return to text
4. These balance sheets are made available each Thursday, for the week ending the preceding Wednesday, through the Federal Reserve's H.4.1 Statistical Release. The release for the week ending September 23, 2009. Return to text
5. See "Credit and Liquidity Programs and the Balance Sheet" on the Board's website. Return to text
6. The Federal Reserve's monthly reports and 60-day reports are available on the "Credit and Liquidity Programs and the Balance Sheet" section of the Board's website.. Return to text
7. See S. Rep. 95-723, at 2 (1978). Return to text
8. Examples of market credit facilities established by the Federal Reserve include the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, and the TALF. Return to text
9. The GAO's limited authority to conduct audits of the TALF does not directly implicate the independence of monetary policy, as the GAO may conduct audits of the TALF solely to assess the performance of Treasury's Troubled Asset Relief Program. Accordingly, as part of these audits, the GAO does not audit the Federal Reserve's decision to participate in the TALF in order to help achieve the Federal Reserve's monetary policy and financial stability objectives, or the effect of the TALF on the Federal Reserve's balance sheet or conduct of monetary policy. Return to text
10. See Standard & Poor's (2004), "Sovereign Credit Ratings: A Primer," March 15, Return to text