Monday, January 24, 2011

The FED Scares Me, And I'm Not Afraid to Admit It.

So, I'm reading this speech by Charles I. Plosser, the President and CEO of the Philadelphia FED, and I'm thinking that this guy sees it a little like I do. He says:
"Our experiences clearly showed that efforts to manage or stabilize the real economy in the short term were beyond the scope of monetary policy, and if policymakers made aggressive attempts to do so, it would undermine the one contribution monetary policy could and should make to economic stability — price stability."
I'm pretty sure that we're going to see some wicked inflation. I'm not sure Mr. Plossner agrees, but it would seem that he does think that price instability is a possible outcome of the FED's current policies. And I guess it's possible for prices to decrease.

No offense to Mr. Plossner, but it's a pretty dry speech. Things are going along ok, I'm just nodding off from the boredom, when he says "BOO!" really loud. He didn't really say BOO; but what he did say was:
"That is why I have advocated that the Fed and Treasury reach an agreement whereby the Treasury exchanges Treasury securities with the non-Treasury assets on the Fed’s balance sheet."

This seems innocuous enough, until you realize what he means by "non-Treasury assets". He's talking about the Mortgage Backed Securities (MBS) and Collateralized  Debt Obligations (CDO) that currently reside on the FED's balance sheet. The "illiquid assets" (read crap) that used to be on the balance sheets of the big banks. Check out my previous post called "How Scary Is This" for more information. Or, if you want, here is the document from the FED's site. The address says current, so it may change with time, but as I write this they have $1.079 Trillion in treasury securities and $.980 Trillion in MBSs.
He's saying, in essence,  "Well, we bought all this crap from the banks to make sure they didn't go bankrupt, but we should sell them to the Treasury  because it's really something that should be supervised by elected representatives of the people." I'm dead serious. Well, you may get something different out of it than that, and I invite you to read his speech and comment.

Now, if you couple that speech with this op-ed by Paul Hobby 
(chairman of the Houston Branch of the Federal Reserve Bank of Dallas) in the Houston Chronicle, you get to see a little of how the FED guys think.  To quote Mr. Hobby:
"Part of the problem in this public debate is that few of us have much personal experience with, or perspective on, monetary policy. It is simply not a visible part of most people's daily lives." 
Now maybe the rising prices of everything (except your house) is invisible to you. If that's the case, then I congratulate you on being rich and  oblivious. If not, you are very aware of the pernicious effects of monetary policy and it is a very visible part of your daily life.

I'm still looking for a quote from a FED official on this, but it's my opinion that the FED is trying to inflate in order to lower "real wages". So that your wages will stay the same because of the uncertainties associated with rampant unemployment, but the general rise in prices will make your wages buy less, resulting in that lowering of real wages that I mentioned earlier. Pretty heartless, but hey - they are bankers. What did you expect, Mother Theresa? 

And the FED, I can only guess that they figure no one will read their stuff (and they'd probably be right), is only too happy to comply. Check out this publication from the St. Louis FED. It's from 1999 and is a summation of an article by William Poole written by the Cato Institute. It states:
"In an environment of inflation, however, holding wages constant is a way for firms to lower real wages without lowering the face amount of employees' paychecks"
See why they call inflation "the invisible tax"?

If you actually checked out the FED's current balance sheet, you might have noticed Maiden Lane LLC. Now who is that and why do they appear so prominently on the FED's balance sheet? The explanation is right there on the site:
"To facilitate the acquisition of the Bear Stearns Companies, Inc. by JPMorgan Chase & Co., the Federal Reserve Bank of New York (FRBNY) created and extended credit to Maiden Lane LLC. Maiden Lane LLC is a limited liability company formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize the repayment of credit extended to it and to minimize disruption to financial markets. This line reports the fair value of the assets held by the LLC.

Because the FRBNY is the primary beneficiary of the LLC, the assets and liabilities of the LLC are consolidated onto the books of the FRBNY."
This just smells really bad to me. But I guess if you have no oversight, and no worries of a real audit, you can do whatever you want. They "created and extended credit" to a company that they just made up, with no real assets except that they are really the FEDIt only seems corrupt.

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