Category Archives: Federal Reserve

Enumerated Powers Amendment for the Constitution

In addition to repealing the 16th and 17th Amendments and getting rid of the Federal Reserve (all of which began in 1913), I propose this new Amendment:

The federal government shall have no powers beyond those specifically enumerated in the Constitution or absolutely required for the enforcement of those enumerated powers.

The general welfare and commerce clauses do not give the federal government any powers beyond those specifically expressed elsewhere in the Constitution.

All commitments and liabilities of the United States must be honored and paid out either immediately or in their due course. No new commitments or liabilities from unconstitutional programs may be added after the ratification of this amendment.

If anybody has suggestions to improve this amendment, feel free to comment below or email me from the contact page.

Federal Reserve says: Damn the torpedoes, full speed ahead!

Fed vice chairman Janet Yellen acknowledges that the Fed’s low interest rate policy is creating a moral hazard and may cause companies to take too much risk but that the Fed will pursue this policy any way. AP reports:

Record-low interest rates may give companies an incentive to take excessive risks that could be bad for the economy, the Federal Reserve’s new vice chairwoman warned on Monday.

Janet Yellen has supported the Fed’s policy of ultra-low interest rates to bolster the economy and to help drive down unemployment. Her remarks, which don’t change that stance, may be aimed at tempering critics. They worry she’ll want to hold rates at record low levels for too long, which could inflate new bubbles in the prices of commodities, bonds or other assets.

Yellen, who was sworn in as the Fed’s second-highest official last week, made clear she is aware of the risks.

“It is conceivable that accomodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking,” Yellen said in remarks to economists meeting in Denver. It marked her first speech since becoming vice chairwoman.

Yellen has a long history with the Fed. Before taking her current job, she served as president of the Federal Reserve Bank of San Francisco since 2004. She also was a member of the Fed’s Board of Governors from 1994 to 1997, when Alan Greenspan was chairman.

As vice chairwoman, Yellen will help build support for policies staked out by Ben Bernanke, the current chairman.

The Fed at its November meeting is expected to take new steps to energize the economy. It’s likely to announce a new program to buy government bonds. Doing so would lower rates on mortgages, corporate loans and other debt. The Fed hopes that would get people and companies to buy more, which would strengthen the economy.

The new effort is expected to be smaller than the $1.7 trillion launched during the recession. Under that program, the Fed bought mostly mortgage securities and debt, although it did buy some government bonds, too.

The Fed has held its key interest rate at a record low near zero since December 2008. Because it can’t lower that rate any more, it has turned to other unconventional ways to pump up the economy.

By now, we all know that low interest rates created the housing bubble. And before that, the tech bubble. Almost all bubbles are created by the Fed lowering interest below the market rate and encouraging companies and individuals to take on excess risk. They are at it again.

So where is/will be the next bubble? Treasuries? Gold and silver? Equities? All of the above?

Second Fed official opposes Quantitative Easing.

In a follow-up to my previous blog post Fed planning trillion dollar Quantitative Easing. Fed official admits it won’t work, another Fed official announced his opposition to the planned trillion Dollar quantitative easing:

Dallas Fed President Richard Fisher, who will get a vote on the policy setting Federal Open Market Committee next year, on Friday made his case against a new round of bond purchases, saying it is not clear the benefits of further quantitative easing outweigh the costs. Fisher, according to a copy of prepared remarks he’s due to deliver in Vancouver, made the case that removing or reducing the tax and regulatory uncertainties is the best way to promote business spending and have firms “release the liquidity they are hoarding and invest it robustly in hiring and training a workforce that will propel the American economy to new levels of prosperity, rendering moot the argument for QE2,” he said. “I consider this to be a far more desirable outcome than being saddled with a bloated Fed balance sheet.”

The key words are IT IS NOT CLEAR THE BENEFITS OF FURTHER QUANTITATIVE EASING OUTWEIGH THE COSTS.

Doesn’t this seem to the motto of our current government? Purchase mortgages, expand the Fed’s balance sheet, and print more money even if there is no evidence that this helps the economy. Enact a trillion Dollar stimulus bill, pass a TARP bill, extend unemployment benefits to two-years and drop the requirement to look for work, and raise taxes on the rich even though logic and history prove that this things also do nothing for the economy.

Fed planning trillion dollar Quantitative Easing. Fed official admits it won’t work.

The Fed is currently planning a one trillion dollar quantitative easing program. As Jonathon Trugman of the NY Post reports:

The Fed will likely undertake a very large quantitative easing program sooner rather than later, if the economic data doesn’t get markedly better in the very near future.

This QE2 will need to be far more aggressive than most expect, for there is not going to be a QE3. It is essentially the last chance the Fed has. It will want to eradicate any doubt about its ability to work; it is, in essence, the nuclear option.

The measure could be as much as $750 billion to $1.5 trillion. And expect far more aggressive purchases than in QE1.

Mortgage-backed securities, the root cause of the economic collapse, will be the cornerstone of the purchases, thereby allowing a possible 10 percent to 15 percent increase in home prices, which would do wonders for the flat-lined economy.

Credit card-backed paper will be on the tab as well as some auto loans to keep the administration happy.

Sadly, with credit still unavailable to the “middle class” due primarily to poor fiscal policy and economic leadership, the Fed will have to dramatically increase the money supply in order to spur spending. It will work, but it’s going to be complicated.

So Mr. Trugman believes this quantitative easing will work, but that it has to be huge to spur spending. He fails to ask the simple question: will such an aggressive program be worth the benefit?

But others are arguing that the quantitative easing will have no effect at all. Marketwatch reports:

A new round of Federal Reserve purchases of bonds would have little impact on markets or the economy, Minneapolis Fed President Narayana Kocherlakota said in a speech on Wednesday.

Speaking in London, Kocherlakota on Wednesday outlined several reasons why buying government bonds wouldn’t make a major impact. For one, banks already have nearly $1 trillion in excess reserves. “QE gives them new licenses to create money, but I do not see why they would suddenly start to use the new ones if they weren’t using the old ones,” he said, according to a copy of the text he was due to deliver.

As to the first round of quantitative easing by the Fed, Kocherlakota cited an academic study showing that the $1.5 trillion purchase of agency debt, agency mortgage-backed securities and Treasuries by the Fed between Jan. 2009 and March 2010 reduced the term premium on 10-year Treasurys relative to 2-year Treasurys by about 40 to 80 basis points, which in turn led to a slightly smaller fall in the term premia of corporate bonds.

Kocherlakota estimates a new round of QE would have a more muted effect, because financial markets are functioning much better than they were in early 2009. “As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them,” he said.

So Trugman says this aggressive quantitative easing will work, but Kocherlakota says it won’t. In reality, who knows? The real problem is that there is so little discussion of the risks and costs involed. Marketwatch explains the risk in one sentence:

Kocherlakota also said that the impact of quantitative easing is to shift the interest rate risk on bonds from investors to taxpayers.

So the real impact of this quantitative easing will be to socialize risk. The Fed risks creating further moral hazard. The Fed risks producing interest rates that are too low, which will create more bubbles. The Fed is going to create distortions in the market system. But despite these risks, there is no guarantee of success.

I applaud Minneapolis Fed President Narayana Kocherlakota’s efforts to restore reason and common sense to our ineffective and inefficient monetary policy.