Tuesday, August 11, 2009

The Federal Reserve Out of Control

There is no better indication of how out of control and intertwined with the markets the Federal Reserve has become than the report this morning out of FT that the Fed is in the middle of a huge program to hire more traders:

The New York Fed - the arm of the US central bank that implements its monetary policy - plans to increase the staff in its markets group to 400 by the end of the year - up from 240 at the end of 2007...

The Fed's need for more traders is a direct consequence of the central bank's efforts to keep credit flowing through the US economy. The Fed has been buying fixed-income securities at such a rate that its assets have more than doubled to $2,000bn in the past year, leading the central bank to conclude that it needs more people to monitor the markets and to manage its credit risks.

Patricia Mosser, senior adviser, said: "Once we started to have to implement programmes that were clearly outside the traditional credit-easing tools that the Fed has used before, it became illogical to manage some of the new programmes inside the current structure."

She said many of the new programmes - ranging from first-ever purchases of mortgage-backed securities to lending money to hedge funds to buy securities backed by loans - "needed their own resources"...

One of the key issues ahead is how the Fed will manage its exit strategy. "What are the markets going to look like when we pull out?" said Ms Mosser. "It is hard to know, even in markets that are functioning better because the Fed has stepped in."
The markets are so different from even a year ago, as a result of the huge Federal Reserve footprint, that Ron Paul's End the Fed book could not be more timely.

For all practical purposes, Fed chairman Ben Bernanke is the most powerful man in the financial world right now. Who really knows what the Fed is buying at what price? An audit of the Fed is certainly called for, if it weren't for the left co-opting the effort.

It is really time to move on to the end the Fed effort.

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