'Tarnished' Fed shouldn't oversee risk

Latest Daily Bell Issue 349 • Thursday, July 16, 2009

"The monetary managers are fond of telling us that they have substituted 'responsible money management' for the gold standard. But there is no historic record of responsible paper money management ... The record taken, as a whole is one of hyperinflation, devaluation and monetary chaos."

- Henry Hazlitt

Investors say 'tarnished' Fed shouldn't oversee risk

Win McNamee/Getty Images

The Fed's "credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitized products," the report by the Investors' Working Group said. Lawmakers are considering legislation that would enact President Barack Obama's regulatory overhaul, the most sweeping change to financial oversight since the 1930s. Backed by a group of pension funds, the report might sway Democrats in Congress, especially those concerned that the central bank has too many conflicts and inadequate accountability. Obama proposed that the Fed become the main overseer of firms whose collapse could roil markets, and bring hedge funds and private equity under federal scrutiny. The plan would create an agency to monitor consumer financial products. Treasury Secretary Timothy Geithner urged quick action by Congress. - Bloomberg

Dominant Social Theme: Weigh the Fed's role carefully.

Free-Market Analysis: The liquidation of the American Federal Reserve continues apace. Instead of receiving more power and authority after this latest business cycle debacle, the Fed and the men around it have likely been rocked back more than a bit. The Obama administration intends to direct more power their way, but it is looking less likely that this will occur.

The Fed, and central banks in general, have been the victims of their own successes and of the Internet which has exposed these successes and what lies behind them. It is not a complex matter, after all. The Fed inflates, the economy has a boom and then bust, the financial industry is blamed and regulators - including the Fed - get more power. Repeat as many times as it takes to fully centralize the economy and create a complex regulatory democracy into which responsibility for many - and wealth - flows into the hands of a few.

But thanks to the Internet, the cycle has not worked out this time around. The Federal Reserve has not covered itself with glory on any level, nor accrued additional prestige for its various missions. YouTube videos of Congressional testimony show chairman Ben Bernanke brusquely pushing aside requests for more information about the deliberations of the private body. Inspector general, Elizabeth Coleman's bumbling showing - and refusal to shed any more light on internal workings than Bernanke - has received some two million Youtube hits and counting. And now the Obama administration's intent to make the Federal Reserve the main body for risk regulation seems to be hitting considerable resistance.

The Fed is under attack. The Daily Bell has assiduously followed this most important story and been near or at its forefront. We announced the beginning of the end of the Federal Reserve and of central banking the moment Coleman's videos hit the Internet. But the Fed's troubles only began with its Inspector General. It is also being sued by Bloomberg News (of all news-sites) for additional internal information. Then there are the bills in the House and Senate to more fully audit the Fed. Ben Bernanke (pictured above left) himself may be a lame duck. And now the Fed may well be deprived of additional responsibility to monitor the nation's financial risk taking.

The difficulties in which the Fed finds itself entangled are symptomatic of central banking in general in the 21st century. The mechanism of setting interest rates is a form of price fixing for money and cannot be defended when explained in plain language, and the mechanism is the same the world over. While the powers-that-be may sustain some form of central banking, it is bound to change because its insupportable process has become too well known thanks to the internet, Youtube, etc.

Conclusion: The idea of those who manage central banking is perhaps that the globe can move to a more centralized but still controllable monetary system - via the IMF or regional currencies, etc. But the world is moving very fast. It is probably just as likely over time that the larger financial system will collapse back into some sort of gold or silver money standard - despite the efforts of the monetary elite to continue to control the currency through further globalization.