Ron Paul on the Fed

What the Federal Reserve still fails to realize is that intervention in the economy is always harmful. Unlike the late French economist, Frederic Bastiat, the Fed only sees what is seen, the superficial results of its policies, and not what is unseen, the effects of its monetary intervention throughout the economy. Monetary inflation leads to malinvestment and causes the boom phase of the business cycle. Once the malinvestment is realized the bust phase occurs, and these malinvested resources need to be liquidated in order for the economy to recover. But the Fed actively works to prevent this liquidation and does everything in its power to continue inflating in order to prolong the boom. The first act of intervention begets the second and subsequent interventions, each bigger than the first, as each economic bust gets larger and more severe.

The idea that a handful of brilliant minds can somehow steer the economy is fatal to economic growth and stability. The Soviet Union's economy failed because of its central planning, and the United States economy will suffer the same fate if we continue down the path toward more centralized control. We need to return to sound money, bring back free markets, and rein in the Fed.

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Last Two Rate Cutting Cycles

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Fed Rate Cutting Cycles

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The Fed's decision came just one week after the government reported that the economy grew in the third quarter, the first gain after a severe decline over the previous four quarters.

While it was widely assumed that the central bank would leave its federal funds rate in a range of 0% to 0.25%, economists and investors were eager to see how the Fed described the economy in its statement.

The Fed repeated language from earlier statements that economic conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period."

The federal funds rate is a benchmark used to set the rates paid on a wide range of business and consumer loans, such as home equity lines and credit cards. It has been near zero since December 2008.

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Paul's Audit the Fed Bill Gutted

Representative Ron Paul, the Texas Republican who has called for an end to the Federal Reserve, said legislation he introduced to audit monetary policy has been “gutted” while moving toward a possible vote in the Democratic-controlled House.

The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.

“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”

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Tom Woods on the Fed

A lot of people seem to believe that although the market economy is a swell system, it requires the equivalent of a Soviet commissar to be in charge of money and interest rates. This belief is altogether misplaced. The Federal Reserve System, or simply "the Fed," is both harmful and unnecessary.

Since the Fed was created in 1913 the dollar has lost at least 95 percent of its value...

We were once told that boom-bust business cycles were a thing of the past because, thanks to the Fed, we now had scientific management of the money supply... To the contrary, they artificially stimulate capital-goods production and long-term investment. They thereby deform the structure of production into a configuration that the public’s freely expressed pattern of saving and consumption will be unable to sustain. When this phony boom inevitably collapses, it is "capitalism" that takes the blame – when in fact the Fed, a non-market institution, is the culprit...

The Fed is the lifeblood of the empire, the great enabler of the perversion of the original American republic into the world’s largest and most powerful government. Even if the central bank did confer a net economic benefit, a contention the great Austrian economists F.A. Hayek and Ludwig von Mises strenuously denied (and indeed Hayek won the Nobel Prize in the process of denying), the alleged benefit could not possibly be worth the destruction of the American soul...

For the sake of American freedom and prosperity, it is long past time that, in the spirit of Andrew Jackson, we killed the monster.

read the essay

My thoughts: Naturally the people in Washington want to extend even more power to the Fed instead of abolishing it. Ron Paul's Audit the Fed bill gained a majority of the House as co-sponsors, yet it is unlikely that the Fed will ever be audited.

The Federal Reserve

More Rate Cuts From the Fed?

After what is likely to be the last in a long series of interest rate cuts Tuesday, the Federal Reserve is expected to continue its new, perhaps more effective monetary strategy: printing lots of money.

The Fed traditionally uses its rate-cutting tool to encourage lending and boost the economy. But despite a staggering 4.25 percentage points of cuts since September 2007, the economy has not improved - in fact, it has gotten worse, drifting in to a recession last December.

Economists expect the Fed to produce one more cut to its benchmark funds rate at the conclusion of its Federal Open Market Committee meeting Tuesday, trimming the rate to 0.5%, the lowest level on record. Whether one last rate cut will help stimulate economic growth remains to be seen.

At any rate, the Fed will likely continue to use its new favorite tool, quantitative easing, "Fed-speak" for pouring new money into the economy.

read the CNN story

My thoughts: Inflation has been the number one threat since the Fed started cutting interest rates. A market correction was needed, but the Fed tried to delay it; thus making matters worse in the long run.

Federal Funds Rate cut to 1%

The Federal Reserve cut a key short-term interest rate by a half-percentage point Wednesday and issued a gloomy outlook for the economy due to continued worries about the ongoing crisis in the financial and credit markets.

The rate cut put the central bank's federal funds rate at 1%. That matched the lowest level for this overnight bank lending rate ever -- the last time it was at 1% was from June 2003 to June 2004.

CNN story

Federal Funds Rate

The Federal Reserve is widely expected to cut interest rates again next week. But could the Fed soon go where it has never gone before and bring them below 1%?

The Fed lowered its federal funds rate, the benchmark overnight lending rate at which banks lend to one another, by a half-percentage point to 1.5% in an emergency announcement Oct. 8.

Many investors believe the central bank will cut rates by at least another half-percentage point following the end of a two-day meeting on Oct. 29.

In fact, the fed funds futures on the Chicago Board of Trade are now pricing in a 26% chance that the Fed will cut rates by three-quarters of a percentage point to 0.75% by that meeting.

read the CNN story

My thoughts: Expect a 0.5% cut to 1%. Easy credit will not solve the economic problem caused by easy credit.

Abolish the Fed

A on-line petition to abolish the Federal Reserve.

click to see the petition

International Cooperation on Rate Cuts

Joint Statement by Central Banks

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

read the CNN article

My thoughts: Inflation should be the biggest concern now. The recession is unavoidable. Inflation can be stopped but the Federal Reserve will continue to implement inflationary monetary policy. We will likely end up will double digit inflation and Bernanke will go done as one of the worst Fed chairman ever.

Federal Funds Rate Cut to 1.5%

The Federal Reserve, working in coordination with other central banks worldwide, enacted an emergency interest rate cut on Wednesday.

The Fed lowered its fed funds rate by half of a percentage point to 1.5%. This rate is the central bank's key tool to affect the economy. Lowering the rate pumps money into the economy by reducing the borrowing cost on a broad range of loans, including credit cards, home equity lines and many business loans.

"The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the Fed said in a statement.

read the CNN story

The Fed is Shooting Blanks

from the WSJ

Bernanke Effect

The Fed cut its short-term interest-rate target 0.75 percentage point to 2.25%, not the full point that markets had been expecting. It was the largest disappointment the Fed has delivered to markets since the central bank began cutting rates in September. the move was also a signal that because of the Fed's concerns about inflation, it expects its other initiatives to bear more of the burden of stimulating growth...

Recognizing that, the Fed signaled in its end-of-meeting statement that the prospect of more rate cuts remains on the table. "The outlook...has weakened further," it said. "Consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth." It said "downside risks to growth remain," and the Fed will "act in a timely manner as needed."

Nonetheless, the Fed has increasingly come to the view that lower rates alone won't restore order to the financial markets and prevent a severe recession. It has rolled out ever more creative and aggressive attempts to infuse cash into market corners where it normally doesn't operate, culminating in Sunday's decision to lend to investment banks from its "discount window," a privilege previously reserved for commercial banks. Chairman Ben Bernanke also has publicly backed action to use public money to stem a tide of mortgage defaults and foreclosures.

Highlighting the depth of the Fed's inflation concerns, two of the 10 voting members of the policy-setting Federal Open Market Committee voted against the 3/4-point cut. Charles Plosser and Richard Fisher, presidents of the Federal Reserve Banks of Philadelphia and Dallas, "preferred less aggressive action at this meeting," the Fed said.

from the WSJ

Federal Funds Rate Cut 0.75% to 2.25%

The Federal Reserve slashed a key interest rate by three-quarters of a percentage point Tuesday, the latest in a series of moves by the central bank to try and restore confidence in the economy and battered financial markets.

The Fed cut its federal funds rate, an overnight bank lending rate, to 2.25%. It is the sixth cut in the past six months and comes at a time when the Fed is trying to keep the economy from slipping into recession - although many think it's already entered one.

Some economists have argued the rate cuts will cause a continued weakening in the value of the dollar and a further spike in commodity prices -- which could lead to higher prices for gas, food and imported goods. According to a new national CNN/Opinion Research Corp. poll released Tuesday, Americans said inflation is their top economic concern.

The Fed acknowledged in its statement that inflation pressures have grown more than expected, and it promised to monitor prices in the months ahead. But it said it still believed the greater risk to the economy was that of slowing growth, not a spike in prices.

read the CNN story

Inflation is a far bigger threat than a necessary and needed market correction.

The Costs of "Fixing" the Sub-Prime Mess

"The Fed is supposed to make sure the entire economy, and not just the credit markets, run smoothly.

But Fed chairman Ben Bernanke risks fixing the credit crunch at the expense of inflation and the retirement accounts of many hard-working consumers that didn't go out and get some exotic adjustable-rate mortgage to buy a home that cost far more than they could afford."

from CNN

Jim Rogers is right. The Fed has failed. They create moral hazard, bail-out stupidity, and "solve" problems by de-basing the currency and promoting inflation.

Inflation is the Major Concern

The Fed needs to quit chasing declining GDP growth and instead focus on curbing inflation and anchoring inflation expectations. Recent allusions to the stagflation of the 1970s are appropriate. Gold has been hitting all-time nominal highs, and oil prices have shattered the inflation-adjusted record set in 1980 during the Iranian hostage crisis. The dollar, meanwhile, is trading at all-time lows against the euro.

Consumer price inflation was 4.1% in 2007 (the highest in 17 years) while the producer price index rose 7.4%--the most since 1981. Amid these alarming trends on the inflation side, output has stalled. Real GDP grew at a meager rate of 0.6% in the last quarter of 2007, and the private sector shed 101,000 jobs in February. The beginnings of stagflation are upon us.

In response, the Fed has slashed its target rate 2.25 percentage points since September, and has engaged in all manner of novel auction schemes to bolster liquidity, particularly among those holding the bag on soured mortgages. Yet despite momentary blips upward, the stock market and the overall economy continue to slide. Even as the Fed's actions pushed many short-term interest rates below the inflation rate, fixed mortgage rates have begun rising. As inflation expectations gather steam, the Fed will find itself painted into an ever-shrinking corner...

The Fed has abandoned the one thing it can truly control--the long-run increase in price levels--in a self-defeating attempt to keep the economy growing. A good portion of the housing mess itself is the result of Fed policy: In response to the 2000-2001 recession, chairman Alan Greenspan brought the federal funds rate down to a shocking 1% by June 2003, then held it there for a full year. The rate was then steadily ratcheted back up, reaching 5.25% by June 2006...

The painful and costly recessions of the early 1980s were the result of the inflationary policies of the Fed during the 1970s. In contrast, Fed policies during the 1980s and 1990s focused on curbing inflation and maintaining price stability; this shift in focus produced both low inflation and strong, steady real growth. It would be a terrible mistake to throw out that costly victory in an effort to avoid a recession today--one that's already baked in the cake.

The Fed should commit to long-term price stability, and it needs to back up that commitment with action. Recessions will always be with us, but they will be shallow and short when the Fed keeps inflation low and evenly paced. If the Fed continues cutting rates, we will simply get the worst of both worlds: prolonged recession and excessive inflation.

read the entire article

Bear Stearns and the Fed

"If you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the rich." Jim Rogers 3/12/08

Teetering on the brink of collapse from a lack of cash, New York-based Bear Stearns got emergency funding yesterday from the Federal Reserve and JPMorgan in the largest government bailout of a U.S. securities firm. The move failed to avert a crisis of confidence among Bear Stearns's customers and shareholders, who drove the stock down a record 47 percent.

After denying earlier this week that access to capital was at risk, Bear Stearns Chief Executive Officer Alan Schwartz said yesterday the company's cash position had ``significantly deteriorated'' in the past 24 hours. The Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement yesterday...

The Fed is taking on the credit risk from collateral supplied by Bear Stearns, which approached the central bank for emergency funds, Fed staff officials said yesterday.

The Fed, under Chairman Ben S. Bernanke, voted unanimously to lend the funds through JPMorgan because it would be operationally simpler than a direct loan to Bear Stearns, the staff said on condition of anonymity. The regulator invoked a little-used law that allows it to make loans to corporations and private partnerships, which required a Board vote, according to the staffers.

The Fed said it was "monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system.''

Bloomberg 3/15/08

In an extraordinary move, the Federal Reserve and J.P. Morgan Chase & Co. stepped in to keep Bear afloat following a severe cash crunch.

The maneuver signaled that the Fed was trying to move aggressively to prevent Bear's crisis from spreading to the broader economy. But it seemed to do little to soothe fears. Bear's shares fell 47% to a nine-year low of $30 in New York Stock Exchange composite trading at 4 p.m. The Bear crisis, coming on the heels of this week's implosion of a publicly held affiliate of Carlyle Group, further rattled Wall Street. The Dow Jones Industrial Average fell nearly 195 points.

The lifeline gives Bear access to cash for an initial period of 28 days. J.P. Morgan will borrow the money from the Fed and relend it to Bear. Exact terms weren't disclosed, but the amount is limited only by how much collateral Bear can provide, Fed officials said.

The Fed, not J.P. Morgan, is bearing the risk of the loan. It is the first time since the Great Depression that the Fed has lent in this fashion to any entity other than a bank...

After initial relief, credit markets have taken a turn for the worse in recent weeks, breeding an every-man-for-himself attitude among Wall Street firms. With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable.

from the WSJ

This could signal a major collapse. Consumer confidence will drop, the dollar will fall, oil will increase, Bernanke and the boys will be exposed as incompetent. This is likely the trigger event for a major recession.

Or I could be wrong.

Jim Rogers: Abolish the Fed

Federal Reserve Chairman Ben Bernanke should resign and the Fed should be abolished as a way to boost the falling dollar and speed up the recovery of the U.S. economy, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe Wednesday.

Asked what he would do if he were in Bernanke's shoes, Rogers, who slammed the Fed for pouring liquidity in the system and accepting mortgage-backed securities as guarantees, said: "I would abolish the Federal Reserve and I would resign."...

"No country in the world has ever succeeded by debasing its currency," he said. "That's what this man is trying to do. He's trying to debase the currency as a way to revive America. It has never worked in the long term or the medium term."...

"What is Bernanke going to do? Get in his helicopter and fly around the world and collect rents? That's absurd," Rogers said...

"Listen, investment banks have been going bankrupt since the beginning of time. If people make mistakes -- if you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the rich," he said.

read the article

Wow.

The Stock market and Interest Rate Cuts

Despite five interest rate cuts in the past six months, Wall Street has remained impervious to the Federal Reserve's wooing, with investors taking a "thanks, but..." attitude to Ben Bernanke & Co.'s attempt to recharge the economy and stock market.

Since September, the central bank has lowered its federal funds rate, a key overnight bank lending rate, to 3% from 5.25%. This included a 75 basis point emergency cut in January. There are 100 basis points in one percentage point.

Federal Reserve policy-makers will meet again on March 18 and are expected to cut rates by at least another 50 basis points, to 2.5%. Coincidentally, the Fed's next meeting also marks the six-month anniversary of the first cut in this easing cycle...

Since the first rate cut on Sept. 18 of last year, through Monday's close, the S&P 500 is down 16.2%. That makes this the worst performance for the market following a series of rate cuts since the 1950s, according to Standard & Poor's research. And that's taking into account other times when the economy was in a recession, as may be the case now.

read the CNN story