Tag Archives: Federal Reserve

Alexander Hamilton Supports Auditing the Federal Reserve

The Republican Party may add the call for an audit of the Fed to its party platform. Bloomberg.com reports:

Republicans are considering including a plank in their party platform calling for a full audit of the central bank.

Prodded by the failed primary bid of longtime Fed critic Ron Paul — and the grassroots enthusiasm the Texas congressman’s cause inspired among bail-out weary Tea Party activists and small government advocates — Republicans are entertaining a prospect that has long made them and some of their financial supporters cringe.

Paul, in an interview, warned that if Romney’s backers resist the effort, it could result in a politically distracting and messy fight in front of the national media. “It’s good economics and it’s good legislation, but it’s also good politics, because 80 percent of the American people agree with it,” Paul said. If Republican leaders “exclude it, I would think some of my supporters would be annoyed and feel strongly enough to take it to the floor under the rules.”

When Congress established the First Bank of the United States in 1791 at Alexander Hamilton’s recommendation, the Treasury Department was given the power to inspect the bank’s books at any time. Furthermore, while the Treasury oversaw the First Bank of the United States, the House of Representative repeatedly audited Hamilton and the Treasury Department, each time finding nothing wrong.

While it is important for the Federal Reserve to be independent, just as the First Bank of the United States was independent, this powerful government-created institution needs oversight. All publicly-traded corporations are audited by CPAs and federal government agencies are  audited  by the General Accounting Office. The Federal Reserve should be bound by rules similar to those established for government agencies and public corporation.

If we are to have a government-granted monopoly over money printing (something the Founders would have opposed), it should at least be subject to the principles of checks and balances that our Founding Fathers held so dear. A regular audit of the quasi-government agency known as the Federal Reserve is something the Founders would have supported to prevent the accumulation and misuse of power.

Alexander Hamilton’s Treasury Department had oversight over the First Bank of the United States. Today’s Treasury and Congress should have similar oversight over today’s central bank, which is much more powerful than the national bank of 200 years ago.

New bank fees the result of Fed policies

We all remember Bank of America’s recent attempt to initiate a debit card fee of $5. It failed because of bad publicity. However, BofA and the other banks are not giving up. The New York Times reported yesterday:

Banks Quietly Ramping Up Costs to Consumers

Even as Bank of America and other major lenders back away from charging customers to use their debit cards, many banks have been quietly imposing other new fees.

Need to replace a lost debit card? Bank of America now charges $5 — or $20 for rush delivery.

Deposit money with a mobile phone? At U.S. Bancorp, it is now 50 cents a check.

Want cash wired to your account? Starting in December, that will cost $15 for each incoming domestic payment at TD Bank. Facing a reaction from an angry public and heightened scrutiny from regulators, banks are turning to all sorts of fees that fly under the radar. Everything, it seems, has a price.

“Banks tried the in-your-face fee with debit cards, and consumers said enough,” said Alex Matjanec, a co-founder of MyBankTracker.com. “What most people don’t realize is that they have been adding new charges or taking fees that have always existed and increased them, or are making them harder to avoid.”

Banks can still earn a profit on most checking accounts. But they are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees. In addition, with lending at anemic levels and interest rates close to zero, banks are struggling to find attractive places to lend or invest all the deposits they hold. That poses another $8 billion drag.

Put another way, banks would need to recoup, on average, between $15 and $20 a month from each depositor just to earn what they did in the past, according to an analysis of the interest rate and regulatory changes on checking accounts by Oliver Wyman, a financial consulting firm.

For consumers, the result is a quiet creep of new charges and higher fees for everything from cash withdrawals at ATMs to wire payments, paper statements and in some cases, even the overdraft charges that lawmakers hoped to ratchet down. What is more, banks are raising minimum account balances and adding other new requirements so that it is harder for customers to qualify for fee waivers.

…read the rest of the story here…

While consumer blame the “greedy” banks and Occupy Wall Street whines and complains about how this is another example of the one percent sticking it to the ninety-nine percent, this is really a story of government policies. As mentioned in the article, the banks “are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees. In addition, with lending at anemic levels and interest rates close to zero, banks are struggling to find attractive places to lend or invest all the deposits they hold. That poses another $8 billion drag.”

The first change–new rules on overdraft and debit card swipe fees–come straight from new government regulations. The latter–low interest rates–come from the Federal Reserve. I will focus on how low interest rates hurt banks and consumers because it is not easily observed.

Interest rates near zero give banks little room to make money. In the good old days, banks would take deposits and use the proceeds to lend or buy bonds. Just a few years ago, banks could easily buy short-term debt yielding two or three percent. Now, it earns less than one percent. Banks today could choose to take on risk and earn about four percent lending money to a home buyer, if it can find a credit-worthy borrower. Just a few years ago, mortgages yield seven or eight percent. The spreads banks earn have clearly declined, giving them less opportunity to earn a profit or even to cover expenses.

Look at money market funds, for example. With the government’s 3-month T-bill yielding 0.01 percent, money markets that invest in those securities lose money even when it pays no interest because of fund expenses. Even the 3-month interbank rate at 0.46% makes it difficult for money markets investing in commercial paper to earn a profit.

Normally, banks make money using the risk spread or the time spread. With the risk spread, banks borrow cheaply and lend to riskier clients, booking a profit on the risk taking. With the time spread, banks pay out lower short-term interest rates and collect higher long-term interest rates. With the current environment of low rates all around–a result of deliberate Federal Reserve policies–earning a profit in normal banking operations has become impossible. Instead, the banks are forced to initiate or raise fees.

Of course, the government loves this. The government creates this problems, consumers blame the banks for the new fees, and then the government steps in to further regulate the banks. Government creates the problems without taking the blame, then solves it and takes all the credit.

– Michael E. Newton is the author of the highly acclaimed The Path to Tyranny: A History of Free Society’s Descent into Tyranny. His newest book, Angry Mobs and Founding Fathers: The Fight for Control of the American Revolution, was released by Eleftheria Publishing in July.

Federal Reserve discovers that paying people not to work equals fewer people working.

In case you didn’t know, the Chicago Fed reports:

A research paper published by the Chicago Fed has concluded that extra jobless benefits — unemployed workers can now get up to 99 weeks of benefits — may be contributing up to 0.8 percentage points to the current unemployment rate, which was 9% in January. The Chicago Fed paper said the extra benefits may still be worthwhile, given that in their absence workers may be forced to take jobs that represent poor matches for their skill levels. Also on Thursday, Minneapolis Fed President Narayana Kocherlakota said the natural rate of unemployment — basically, the smallest rate of unemployment that won’t lift inflation — ranges between 5.9% and 8.9%.

For those who are not economically literate, let me summarize: If the government pays people not to work, fewer people will work.

I don’t know why the Fed had to do a study to determine that. Maybe they were just trying to figure out not if it had an effect but how large the effect is. Or maybe it was just a study devised to keep a few economics employed during the recession.

What I really don’t understand is this line:

The Chicago Fed paper said the extra benefits may still be worthwhile, given that in their absence workers may be forced to take jobs that represent poor matches for their skill levels.

So the Chicago Fed thinks it is better to have people sitting around doing nothing rather than do a job below their current skill level? These people really do live in ivory towers.

Irish bailout in perspective. Hello Weimar Republic.

According to this article:

Lenihan said Ireland needed less than euro100 billion ($140 billion) to use as a credit line for its state-backed banks, which are losing deposits and struggling to borrow funds on open markets.

Ireland has been brought to the brink of bankruptcy by its fateful 2008 decision to insure its banks against all losses — a bill that is swelling beyond euro50 billion ($69 billion) and driving Ireland’s deficit into uncharted territory.

To put this in perspective, Ireland has approximately 4.5 million citizens. So Irish banks have already lost about $15,333 per person and Ireland will be receiving a credit line of up to $31,111 per person.

<Sarcasm> Good thing the EU and IMF do not actually have to produce and sell any goods to provide these funds. God bless the power of printing money out of thin air and dropping it from helicopters. If the EU, IMF, and Federal Reserve didn’t have these powers, we’d be seeing a financial crisis the likes of which we have not seen in generation. <End Sarcasm>

We always joke about our government fiddling while Rome burns. But in this case, the government is actually doing something. Too bad it is the wrong something. Instead of throwing water on the fire, they are putting piles of paper money onto the fire. And as we learned from the Weimar Republic, paper money burns just as well as firewood, but is much cheaper.

China vs. United States on monetary policy.

China continues its verbal assault on the United States’ quantitative easing plan:

China announced new measures Tuesday to curb inflows of foreign speculative capital, as senior government officials stepped up criticism of excessively loose monetary policies abroad, such as those of the Federal Reserve.

Tuesday’s announcements were accompanied by fresh criticism from Beijing officials of loose monetary policies abroad and consequent risks in emerging markets.

Chinese Finance Minister Xie Xuren blamed excessively loose monetary policies by issuers of major currencies as compounding fiscal and debt risks.

The comments, made during a meeting with a delegation of British trade representatives, including U.K. Chancellor of the Exchequer George Osborne, appeared to be thinly veiled criticism of the Federal Reserve’s latest quantitative easing moves.

Similarly, Chinese Vice Premier Wang Qishan said Tuesday that volatility in global markets was negative for market confidence and that he saw excessively liquidity globally.

Many believe China is an evil communist country that enslaves its people and destroys its environment. While some or all that may be true, China appears to be the good guy when it comes to monetary policy. How is it possible that Communist China understands that creating paper money out of thin air does nothing but create economic distortions while the United States is blind to that reality?

Maybe, instead of having Chinese study economics and business in American universities, we should send some of our student to China to learn economics because they seem to have a better grasp of it.

China warns QE2 could create emerging market bubble

China is giving the United States an economics lesson:

Beijing leveled new criticism at the latest round of quantitative easing unveiled by the Federal Reserve, warning the policy could swamp emerging economies with destabilizing inflows of speculative capital.

“For the U.S. to undertake a second round of quantitative easing at this time we feel is not recognizing the responsibility it should take as a reserve currency issuer, and not taking into account the effect of this excessive liquidity on emerging-market economies,” Vice Finance Minister Zhu Guangyao told reporters at a press conference in Beijing.

Zhu said the first round of quantitative easing by the Fed was justified to help stabilize markets “at the height of the financial crisis.”

However, the second round — dubbed “QE2” in financial circles — comes at a time when economic recovery is beginning to kick in, he said.

“Financial markets are not lacking capital; rather they are lacking confidence in the global economy. Financial institutions have large amounts of cash,” he said.

You know how low you’ve sunk when China, technically the People’s Republic of China ruled by the Communist Party of China, makes more economic sense than the Federal Reserve.

Worldwide backlash against quantitative easing.

Apparently, I’m not the only one concerned about the Fed’s quantitative easing.

Yesterday, I wrote a piece: Quantitative easing. What is it good for? Absolutely nothing!

Today, we get similar sentiments from around the world:

Could this move turn out to be a modern-day Smoot-Hawley? For those of you who are too young to remember, the Smoot–Hawley Tariff Act was passed in 1930, raising tariffs, and being a major contributor to the Great Depression.

Quantitative easing. What is it good for? Absolutely nothing!

The Federal Reserve “unveiled plans to purchase $600 billion of Treasurys by the end of June 2011 to revive the economy.

Maybe one of my readers can explain to me how the Federal Reserve buying Treasury bonds will “revive the economy.” I just don’t get it. The Federal Reserve will be doing nothing more than printing Dollar bills and exchanging those Treasuries. Nothing of value will be created. No new goods will appear on the market. No jobs will be created. Simply put, Treasury bonds owned by individuals or corporations will be replaced by Dollar bills.

Owners of Treasury bonds own them because they want to save/invest their money. Buying the bonds from these people won’t convince them that they need to spend what they had been saving. They will simply invest their money elsewhere: in stocks, corporate bonds, overseas, gold, or in cash. No real wealth will be created through this so-called quantitative easing and it will not encourage any wealth-creating activities. It is simply moving money from one pocket (Federal Reserve cash) to another (Treasuries bonds) from the government’s perspective and the converse from Treasuries to cash from the people’s perspective.

The argument is that buying Treasuries will help keep interest rates low. But who benefits from this? Investors/savers will earn less on their deposits/bonds, but creditors (corporations, mortgages) will pay less interest. But those two will largely offset each other. No net benefit.

In the end, there is one entity that has so much debt that it will be the largest beneficiary: the United States government. Instead of paying interest on bonds, the government is choosing to print money instead. On $600 billion of intermediate-term debt yielding between 0.33 (2-year yield) and 2.57 (10-year yield) percent, the government would “save” about $600 million a month. That’s it? With a deficit running at about $125 billion a month, that’s just 0.5% if the deficit. Again, what for?

The Federal Reserve is simply manipulating the economy for no real purpose. Oh yes, it has the purpose of enabling the government to spend with reckless abandon and run large deficits because it now has a ready market for its debt. But to do so, it must print all those Dollars, and that is driving down the value of the Dollar which is very evident by the huge rally in gold since the “Great Recession” began.

The government is destroying OUR long-term prosperity for ITS short-term gain. A good deal for the Federal Reserve and the Treasury Department, but not for you and me.

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?