Friday, January 29, 2010

Ben Bernanke Moves to Consolidate Inflation Creating Power in Washington DC

The real story yesterday wasn't that, after putting on a good carnival act, the Senate confirmed their insider, Ben Bernanke, for a second four-year term as chairman of the Federal Reserve. No the real story was buried in a Bloomberg piece, 19 paragraphs down.

As I reported earlier, the Fed is thinking of adopting the interest rate on reserves as their key monetary policy target rate. This is important.

They are using the excess reserve rate to control monetary policy in a de facto way now, but officially recognizing what the Fed is doing will put more power to inflate in the hands of Washington D.C.

As I regularly point out, short paragraphs and clauses are put into legislation that few understand but that can have enormous and powerful consequences.

Bloomberg points out how such a short clause on recognizing reserve rates as the target rate will have profound consequences:
The new reliance on reserve interest could also increase the policy clout of Fed governors in Washington at the expense of the 12 regional Fed bank presidents...

Congress gave only the Fed governors the authority to set the deposit rate. The presidents have historically favored higher rates and voiced more concern about inflation.
Got that? Right now the regional Fed bank presidents, who are scattered around the country at 12 districts, have input on monetary policy because of their rotating votes on the Fed funds rate. If policy officially switches to the reserve rate, the say and influence of the regional Reserve bank presidents is gone. Power will be consolidated in Washington D.C. among the Fed governors.

Bloomberg accurately points out that historically it has been the presidents who have been most vocal about fighting inflation, that brake would be removed on officially recognizing interest rates on reserves as the key rate.

You really have to wonder what these guys have in store that curiously eliminates any say so from Fed presidents around the country, and leaves interest rate and inflation rate policies solidly in the hands of the very Washington politicized Federal Reserve governors.



  1. This is just another "Dog bites man" story. New technique...same policy. The FED has always been about manipulating the money supply to benefit the government. Let me know if you find a "man bites dog" story relating to the FED or even a "man bites man" story. That would be entertaining.

  2. Excellent analysis and timely reporting ... Your report gets to the very heart of the matter.

    If I were a banker, I would dump the Treasuries, which make up the so called "excess reserves", and go short Treasuries with TBT, and short the markets with EEV, REW, SJH, TWM, EPV; as well as invest in gold. But then, I know I might suffer some type of "accident", or be asked to leave the bank.

    I think it will be "all for one", meaning all bankers will go all in for what ever the Fed wants and attempts to do; after all it was the Fed that gave the bankers the gilded Treasures in exchange for the toxic CDOs, RMBS, commercial loans, etc. And they got their precious bonuses.

    Furthermore, some of the banks and investment bankers are dealers for the Treasury so they really would suffer harsh sanctions if they were short sellers.

    You know, the banks that cooperate with the Fed, get a haircut to their advantage, it's called an interest rate swap, that is kept off balance sheet in notational reference only; these are for the most part a wealthy asset for the banks.