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Author Topic: Is Washington corrupting the Federal Reserve?  (Read 1256 times)
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WhiskeyGirl
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« on: May 24, 2009, 07:46:26 AM »

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Don't Monetize the Debt

The president of the Dallas Fed on inflation risk and central bank independence.

...he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be "the handmaiden" to fiscal profligacy. "I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program."

The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it.  He adds, "I must have been asked about that a hundred times in China."

"We're out of money"  "No one wants to buy our debt."

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...He spent his earliest days in government at Jimmy Carter's Treasury. He says that taught him a life-long lesson about inflation. It was "inflation that destroyed that presidency," he says.

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Mr. Fisher has led the Dallas Fed since 2005 and has developed a reputation as the Federal Open Market Committee's (FOMC) lead inflation worrywart. In September he told a New York audience that "rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior" that brought about the economic troubles we are now living through. He also warned that the Treasury's $700 billion plan to buy toxic assets from financial institutions would be "one more straw on the back of the frightfully encumbered camel that is the federal government ledger."

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...he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion." In March, he is believed to have vociferously objected in closed-door FOMC meetings to the proposal to buy U.S. Treasury bonds.

Obama only talks about a trillion here or there.  He seems to believe the debt obligations of others fall outside of his responsibility.  Is that why he continues to spend with wild abandon?  He just ignores the debt?  It wasn't part of his administration, so he can just ignore it and spend more?  What happened to change for the better?

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"The second thing is that the regulators didn't do their job, including the Federal Reserve." To this he adds what he calls unusual circumstances, including "the fruits and tailwinds of globalization, billions of people added to the labor supply, new factories and productivity coming from places it had never come from before." And finally, he says, there was the 'mathematization' of risk." Institutions were "building risk models" and relying heavily on "quant jocks" when "in the end there can be no substitute for good judgment."

I seem to recall lawsuits where finance folks sued Lotus because the models didn't work - they didn't hit the recalc button (or had turned off the auto-recalculation feature) - it was the human fault.

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"I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside." He says he also saw this "inherent conflict of interest" as a fund manager. "I never paid attention to the rating agencies. If you relied on them you got . . . you know," he says, sparing me the gory details. "You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That's why we never relied on them." That's a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.

On Main Street, if you didn't like the appaised value of a home, you just found another appraiser.  I wonder how many have left the appraisal business?  Fly by night appraisers?

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...In his Kennedy School speech, Mr. Fisher himself fretted about the U.S. fiscal picture. He acknowledges that he has raised the issue "ad nauseam" and doesn't apologize. "Throughout history," he says, "what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it."

They just blame it on decades of mismanagment, and don't have any viable solutions, they just want to spend more, keep spending when we're broke.

This is the real scary thing - take away the voices on Main Street -
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Voices like Mr. Fisher's can be a problem for the politicians, which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. Does Mr. Fisher have any thoughts about that?

This is nothing new, he points out, briefly reviewing the history of the political struggle over monetary policy in the U.S. "The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street.

"Now we have this great populist fervor and the banks are arguing for Main Street, largely. I have heard these arguments before and studied the history. I am not losing a lot of sleep over it," he says with a defiant Texas twang that I had not previously detected. "I don't think that it'd be the best signal to send to the market right now that you want to totally politicize the process."

I think it's totally a political process and job rotation.  TARP recipient banks - Treasury - Federal Reserve - Congress - Fannie/Freddie - a cycle of job rotations.  The regional banks don't seem to be part of the rotation.

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..."The ship," he explains, "has to maintain its integrity." What is more, "no mathematical model can steer you through the kind of seas in that picture there. In the end someone has the wheel." He adds: "On monetary policy it's the Federal Reserve."

http://online.wsj.com/article/SB124303024230548323.html

Our national ship has the job rotation cycle with it's many conflicting interests - personal interests seem to come first.

jmho
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All my posts are just my humble opinions.  Please take with a grain of salt.  Smile

It doesn't do any good to hate anyone,
they'll end up in your family anyway...
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