Federal Reserve Transparency - Audit the Fed

[Guest Busy Bee]

Read what the Federal Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. Lockhart had to say.

 

"I’m concerned about measures that would have the effect of politicizing the central bank—the Fed—and especially decision making on matters of monetary policy.

 

"Monetary policy has a long-term orientation and often takes effect with lags and interacts with other fundamental, longer-term forces in the economy. In my experience, monetary policy is about setting a course and making periodic adjustments in response to major changes in conditions. Importantly, monetary policy should not swing with the daily news or be influenced by short-term political pressures.

 

"I am concerned that certain legislative proposals could compromise the independence that enables staying on course. I’m referring to the “audit the Fed” amendments that were passed in the House and introduced in the Senate. The audits would be performed by the Government Accountability Office (GAO). In 1978, Congress thought it wise to exempt monetary policy from GAO review. Congress did this in keeping with established international practice and studied opinion that independent central banks do a better job of keeping prices stable. The effect of these proposals would be to roll back the clear exclusion of monetary policy. The Fed has no argument with audits in the conventional meaning of the term. We’re already subject to many audits by the GAO and external auditors. In government, the word “audit” can be misleading sometimes. GAO audits can amount to full-blown policy reviews. Fed operations outside of monetary policy are already subject to GAO policy review, so this proposal is about ad hoc, after-action reviews of monetary policy, potentially frequent. In my view, this notion is not about transparency and accountability. Both are bedrock principles to which the Fed should continue to be held. Rather, this is about politicizing a process that should remain apolitical.

 

"The Fed must have the capacity to make unpopular decisions—to take away the punch bowl, as it were. Many of you remember the circumstances of the early 1980s when the Paul Volcker–led FOMC acted against inflation. One should ask—would Volcker have been effective if the intense opposition to his policies was joined with formal, statutory methods of bringing pressure? The stakes in this issue are big.

 

"I am also concerned about ideas that have been floated that could have the effect—if taken too far—of politicizing the input of regional Federal Reserve Banks in policy deliberations. From its inception, the Federal Reserve System was designed to have checks and balances, to avoid concentration of power in New York and Washington, and to give every region of the country an apolitical voice in policy formulation.

 

"Let me explain how we work to give voice to people like you in the Southeast. During the time between meetings of the FOMC, the Federal Reserve Bank of Atlanta collects economic intelligence and policy views from some 44 board members of the Atlanta Bank and its five branches. Most of these board members make a number of calls to collect input from their community contacts. Also, we meet periodically with members of six advisory councils representing a range of major Southeast industries and constituencies. Before each FOMC meeting my staff and I make calls to informal advisers in industry and finance. I estimate we get input directly or through directors from about 1,000 citizens in the Southeast on ground-level economic conditions and the impact of policy. A number of members of this Rotary Club have contributed such advice over the years—some as members of our board of directors.

 

"I feel strongly this interactive channel of citizen input to national policy should be preserved. We have worked hard to democratize the region’s input on national policy decisions through aggressive outreach to business and other leaders.

 

"The mood today enveloping much of the discussion of needed financial and regulatory reform is affected by public anger and an impulse to punish. I fully understand these sentiments. The country is just now emerging from a long and painful recession caused largely by a crisis in our financial system. We need to fix things, but purported reforms that weaken how the country’s economic affairs are governed will be harmful and tough to undo. This debate is not a remote political one. It’s a Main Street issue. If markets come to question the independence of Fed monetary policy, that questioning could cast doubt on the country’s commitment to price stability. In the real world, uncertainty resulting from injudicious reforms will be factored into asset prices and borrowing rates by the world’s markets and will make recovery more expensive."

[Guest Fedup]

I am sure in theory independent central banks do a better job of keeping prices stable. But, what happens when the directors of the central banks become corrupt? Where is there a balance to regulate the bankers. I think Obama is right about taxing the banks. That way every transaction is recorded.

 

Good post Busy Bee. Do you know the source of this statement?

[Guest Widow's Son]

In harmony of Busy Bee here is a very good chronicle of the Federal Reserve's involvement with the "2007 Currency Panic".

 

http://www.frbatlanta.org/documents/news/conferences/10fiscal_policy_goodfriend.pdf

 

Imagine that our Central Bank (Federal Reserve) grew its balance sheet from around 900 billion dollars in mid-2007 to over 2 trillion dollars as of April 2009.

 

The Fed did so while reducing its purchases of US Treasury securities from over 800 billion to 550 billion dollars. The Fed funded its enormous increase in lending with over 250 billion dollars from the sale of Treasury securities, plus around 800 billion dollars growth of bank reserves, and around 300 billion dollars of additional deposits provided by the Treasury, for a grand total of over 1.3 trillion of Fed lending as of April 2009.

 

The Fed either injects newly-created reserves into the banking system by buying Treasury securities or drains reserves from the banking system by selling Treasury securities. The Fed returns to the Treasury all but a small fraction of the interest on the Treasury securities that it holds; the remainder is utilized to pay its operating expenses.

 

In effect, Fed credit policy works by interposing the US Treasury between lenders and borrowers in order to improve credit flows. In doing so, however, the Fed essentially makes a fiscal policy decision to put taxpayer funds at risk. In the event of a default, if the collateral is unable to be sold at a price sufficient to restore the initial value of Treasury securities

on the Fed’s balance sheet that was used to fund the credit initiative, then the flow of Fed remittances to the Treasury will be smaller after the loan is unwound. The Treasury will have to make up the shortfall somehow, namely, by lowering expenditures, raising current taxes, or borrowing more and raising future taxes to finance the increased interest on the floating debt or to retire the debt.

 

The question is: can the Fed be sure to have sufficient interest income to finance independently whatever interest must be paid on reserves as the economy emerges from the zero bound, or might the Fed need additional fiscal support from the Treasury? This question should be addressed even though nearly 1 trillion dollars of non-interest bearing currency provides the Fed with a large cushion of net interest income.

 

Lending to Facilitate the Acquisition of Bear Stearns by JP Morgan Chase

 

In mid-March 2008 Bear Stearns was pushed to the brink of failure after losing the confidence of investors and its access to short-term funding. The Fed judged that a disorderly failure of Bear Stearns would have threatened overall financial stability, and after talking with the Treasury and SEC, the Fed determined that it would invoke emergency authority to provide special financing to facilitate the acquisition of Bear Stearns by JP Morgan Chase. 13 In June, when the acquisition was completed, the Fed extended roughly 29 billion dollars to the limited liability company Maiden Lane I, which was formed to facilitate the transaction by acquiring a variety of mortgage obligations, derivatives, and hedging products from Bear Stearns.

 

As a central bank the Fed usually provides loans against good collateral to institutions deemed to be in sound financial condition. The Fed went beyond these two conditions in this case. It lent to a limited liability company Maiden Lane I formed for the purpose of acquiring certain assets of Bear Stearns. Maiden Lane I was funded by a 29 billion dollar loan from

the Fed and a 1 billion dollar loan from JP Morgan Chase. The first 1 billion dollar loss was to be borne by JPMC, any further loss up to 29 billion was to be borne by the Fed. And any realized gains beyond the 30 billion initial financing, which could occur because of revaluing the underlying assets, would accrue to the Fed. This arrangement meant that the Fed had all of the upside of the asset valuations and all but a small fraction of the downside by lending to Maiden Lane I. In effect, the Fed “purchased” the assets, a variety of risky mortgage obligations, derivatives, and hedging products acquired from Bear Stearns.

 

The Fed financed its loan to Maiden Lane I with funds from the sale of Treasury securities. Hence, in terms of the terminology presented in this paper, the loan to Maiden Lane I was a pure credit policy which, in turn, amounted to a debt-financed fiscal policy purchase of a pool of risky private financial assets.

 

Federal Reserve Support for AIG

 

Events surrounding the deterioration of financial conditions in the autumn of 2008 illustrate the consequences of allowing the Fed’s balance sheet to be the front line of fiscal support for the financial system. On September 7 the Treasury and the Federal Housing Finance Agency

announced they would place Fannie Mae and Freddie Mac into conservatorship.

 

Shortly thereafter, Lehman Brothers came under pressure as short-term secured funding was withdrawn from the investment bank, and Lehman filed for bankruptcy on Monday, September 15th.

 

The financial condition of American International Group (AIG), a large, complex insurance conglomerate, also deteriorated rapidly and on Tuesday, September 16th with the full support of the Treasury, the Fed announced an 85 billion dollar loan to AIG to support the firm whose failure it judged would have significant adverse effects on the economy.

 

A full-scale financial panic developed on Wednesday, September 17th after a major money market mutual fund “broke the buck” prompting widespread withdrawals from prime money funds and forcing the liquidation of their commercial paper holdings. The “flight to safety” pushed the 3-month Treasury bill yield to zero on September 17th.

 

The Fed’s financial support for AIG was criticized immediately by some important members of Congress as a questionable commitment of taxpayer funds, in effect, a “bridge too far.” At that point, and in light of the ongoing panic in financial markets, Fed Chairman Bernanke had little

choice but to call Treasury Secretary Paulson and tell him that the Fed had been stretched to its limits and couldn’t do anymore.

 

Although Paulson apparently had been resisting such a move for months, Bernanke said it was

time for the Treasury secretary to go to Congress to seek funds and authority for a broader rescue of the financial system.

 

On Thursday eve, September 18th, Paulson and Bernanke made their case to the congressional leadership—that the Congress should authorize a large expenditure of public funds to help stabilize the financial system. By that weekend, Congress and Paulson had agreed on the outlines of the700 billion dollar Troubled Asset Relief Program (TARP).

 

The problem was that in order to get Congress to appropriate the funds, Bernanke then had to argue that otherwise the US economy was at risk of a severe contraction, if not another Great Depression. When the House of Representatives rejected the initial TARP bill on Tuesday,

September 30th, stocks plunged.

 

To overcome resistance to funding the TARP program, Bernanke continued to argue that the legislation was needed to prevent a severe contraction. By the time the legislation passed on Friday, October 3rd, the public was thoroughly frightened. Equity markets in the

United States fell by over 30 percent in the four weeks to October 10th.

 

Risk spreads rose dramatically throughout the credit markets as never before in the credit turmoil. High-yield corporate bond spreads over comparable off-the-run Treasuries spiked briefly to 16 percentage points and remained above 10 percentage points, well above their previous peak in the credit turmoil of 6 percentage points.

 

The Financial Services Regulatory Relief Act of 2006 gave the Fed the authority starting in October 2011 to pay interest on reserves for the first time in its history. In May 2008 Bernanke asked that Congress give the Fed immediate authority to pay interest on reserves. Using authority granted under the Emergency Economic Stabilization Act of 2008, the Fed

announced on October 6 that it would begin paying interest on required and excess reserve balances.

 

Joint Statement by the Treasury and the Fed on Preserving Financial and Monetary Stability

 

The joint statement issued on March 23, 2009 by the Department of the Treasury and the Federal Reserve “The Role of the Federal Reserve in Preserving Financial and Monetary Stability” indicates that the authorities recognize that overall financial policy is well-served by clarifying the relationship between the Treasury and the Fed. The two institutions agree

 

1 ) to cooperate in preventing and managing financial crises,

 

2 ) that the Fed alone is responsible for monetary policy and that its monetary policy

independence is critical for the long-term economic welfare of the nation,

 

3 ) that the Fed should use all its tools in cooperation with the Treasury and other agencies to improve the functioning of credit markets, help prevent the failure of systemically important institutions, and to foster financial stability, 4) that the Fed’s lender-of-last resort responsibilities involve lending against collateral, secured to the satisfaction of the responsible Federal Reserve Bank,

 

5 ) that the Fed should improve financial conditions broadly and not aim to allocate credit narrowly,

 

6 ) that government decisions to allocate credit are the province of the fiscal authorities,

 

7 ) that the use of the Fed’s balance sheet in the pursuit of financial stability should not compromise its independence on monetary policy,

 

8 ) that the Treasury should help the Fed seek legislative action to provide additional tools to sterilize the effects of its lending or security purchases on the supply of bank reserves,

 

9 ) that the two institutions will work with Congress to develop a regime to allow the

government to address at an early stage the failure of a systemically important financial institution within a framework that spells out the roles of the Fed and other government agencies,

 

10 ) that the Treasury will remove from the Fed balance sheet the three Maiden Lane facilities.

[Guest Lee Tune]

Money coming back to the government is good? Right???

 

The Federal Reserve Board on Tuesday announced preliminary unaudited results indicating that the Reserve Banks provided for payments of approximately $46.1 billion of their estimated 2009 net income of $52.1 billion to the U.S. Treasury. This represents a $14.4 billion increase over the 2008 results ($31.7 billion of $35.5 billion of net income). The increase was primarily due to increased earnings on securities holdings during 2009.

 

Under the Board's policy, the Reserve Banks are required to transfer their net income to the U.S. Treasury after providing for the payment of statutory dividends to member banks and equating surplus to paid-in capital. In 2009, statutory dividends totaled $1.4 billion and approximately $4.6 billion of earnings were used to equate surplus to paid-in capital.

 

The Federal Reserve Banks' 2009 net earnings were derived primarily from $46.1 billion in earnings on securities acquired through open market operations (U.S. Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities), $5.5 billion in net earnings from consolidated limited liability companies (LLCs), which were created in response to the financial crisis, and $2.9 billion in earnings on loans extended to depository institutions, primary dealers, and others. The significant increase in earnings on securities was primarily due to increased securities holdings as a result of the Federal Reserve's response to the severe economic downturn. Net earnings from currency swap arrangements, which have been established with 14 central banks, and investments denominated in foreign currencies totaled $2.6 billion. Additional net earnings of $1.5 billion were derived primarily from fees of $0.7 billion for the provision of priced services to depository institutions.

 

Operating expenses of the twelve Reserve Banks, net of amounts reimbursed by the U.S. Treasury and other entities for services the Reserve Banks provided as fiscal agents, totaled $3.4 billion in 2009. In addition, the interest paid to depository institutions on reserve balances totaled $2.2 billion. The Reserve Banks were assessed for Board expenditures, including the cost of new currency, totaling $0.9 billion.

 

The preliminary results include valuation adjustments through September 30 for loans and consolidated LLCs. The final results, which will be presented in the Reserve Banks' annual financial reports and the Board of Governors' Annual Report, will reflect valuation adjustments through December 31.

[Guest Fedup]

Only if you don't consider the 1.4 Trillion dollars in Treasury bonds and other toxic assets the central bank (Fed) has purchased.

[Luke_Wilbur]

A friend of mine sent this video to me. It shows the historical value of gold compared to the U.S. dollar.

 

 

It is pretty simple to understand.

[Guest 420]

It is almost funny that America’s prosperity would increase if every American deflated the money supply by burning a $100 bill.

[Guest CNN Viewer]

NEW YORK (CNNMoney.com) -- Ben Bernanke and the rest of the Federal Reserve may think that low interest rates can continue to be just what the economy needs to get back on track.

 

But many disagree, including one of Washington's other big financial power brokers.

 

http://money.cnn.com/2010/01/15/markets/thebuzz/

[Guest LAW]

The House Oversight and Government Reform Committee unanimously agreed to add H.R. 2392, the Issa-Towns "Government Information Transparency Act," to legislation reauthorizing and improving the Federal Financial Assistance Management Improvement Act of 1999.

 

The Government Information Transparency Act standardizes the collection, analysis, and dissemination of business information by federal agencies. It mandates that the government adopt a single data standard for business information and requires that the collected information be made readily available for public access. Federal agencies including the SEC and the FDIC are already using the eXtensible Business Reporting Language (XBRL) standard to make bank filings and public companies’ financial statements more transparent. The Issa-Towns amendments would help other federal agencies follow the SEC and FDIC’s lead.

 

The Issa-Towns amendments also would bring transparency to federal grants by making grant filings – including applications for taxpayer money and follow-up reports on its use – fully public and searchable online. Citizens, applicants, and watchdog groups could automatically search filings from hundreds of separate federal grant programs, administered by more than two dozen agencies. For the first time, American taxpayers would be able to see for themselves the promises and projections that grantees make to the government in order to receive public money – and hold them directly accountable.

[Guest No Money]

This article by Mike Whitney is dead on. Too bad it took us over two years to understand what it means.

 

http://www.marketoracle.co.uk/Article464.html

 

Market Rigging

 

“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:

 

“The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline; need to be prevented by a rally already in flight. To get that rally, the PPT's key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer's account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today's prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals' rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own.” (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)

[Guest The Daily Bell]

The American Federal Reserve is a power elite promotion, an entity that allows a small group of men almost full control over American money production under the pretense that it is supervised by government and knows what's best for the rest of us. It is in fact, in many ways organized as a public entity, but its actions are opaque and its powers are wielded by a few insiders.

 

We have to believe the Fed and its insiders are in an increasingly uncomfortable position. They must actually support the absurd idea, day-to-day, that the Fed is a public trust - rather than what it is in our opinion, an instrument of terror and rapine, an engine of middle class destruction, an entity that has singlehandedly destroyed American industry and devalued the dollar, over the past century, by perhaps 99 percent. Bernanke is now stuck with defending a secretive machine of exploitation and presenting it as a responsible overseer. The rhetoric surrounding the Fed was always just that - comforting words intended to reassure a know-nothing public about its "mission." But, Lord, no one took it seriously, least of all those managing the entity.

[Guest U.S. Senator Barbara Boxer]

U.S. Senator Barbara Boxer (D-CA) made the following statement today expressing her opposition to a second term for Federal Reserve Chairman Ben Bernanke:

 

 

I have a lot of respect for Federal Reserve Chairman Ben Bernanke. When the financial crisis hit in late 2008, he took some important steps to prevent what many economists believe could have been an even greater economic catastrophe.

 

However, it is time for a change – it is time for Main Street to have a champion at the Fed. Dr. Bernanke played a lead role in crafting the Bush administration’s economic policies, which led to the current economic crisis. Our next Federal Reserve Chairman must represent a clean break from the failed policies of the past.

[Guest U.S. Senator Russ Feingold]

Statement of U.S. Senator Russ Feingold in Opposition to Another Term for Ben Bernanke as Chairman of the Federal Reserve

 

A chief responsibility of the Chairman of the Federal Reserve is to ensure a sound financial system. Under the watch of Ben Bernanke, the Federal Reserve permitted grossly irresponsible financial activities that led to the worst financial crisis since the Great Depression. Under Chairman Bernanke’s watch predatory mortgage lending flourished, and ‘too big to fail’ financial giants were permitted to engage in activities that put our nation’s economy at risk. And as it responds to the crisis it helped to usher in, the Federal Reserve under Chairman Bernanke’s leadership continues to resist appropriate efforts to review that response, how taxpayers’ money was being used, and whether it acted appropriately. When the full Senate considers his nomination, I will vote against another term for Chairman Bernanke.

 

In 1999, Feingold voted against repealing the Depression-era safeguards put in place to protect businesses, investors, and consumers. In 2008, Feingold voted against the Troubled Asset Relief Program (TARP) and in 2009 voted against authorizing more funding for TARP.

[Guest Sen. Bernie Sanders]

Amid growing doubts that Federal Reserve Chairman Ben Bernanke could survive a Senate confirmation vote, Sen. Bernie Sanders (I-Vt.) said today replacing the Fed chief would give President Obama a once-in-a-lifetime opportunity to reform Wall Street.

 

“The defeat of Ben Bernanke would give President Obama a golden opportunity to nominate someone who will move the Fed in a new direction and put an end to the Fed’s relationship with big banks and Wall Street,” Sanders said. “Instead of reappointing one of the key architects of George Bush’s economic agenda, a new Obama appointee could transform the Fed into an instrument for the middle class of this country rather than high rolling Wall Street executives.”

 

A new Fed chairman, Sanders added, could make affordable direct loans to small businesses, cap skyrocketing credit card interest rates, break up financial institutions that are too big to fail, protect homeowners from foreclosure, and be honest with American taxpayers about which financial institutions have received trillions of dollars in secret loans.

 

Saying that Bernanke has presided over a financial system that "has not been as unsafe, unsound, and unstable since the Great Depression," Sanders has led the charge against Senate confirmation of the former top economic advisor to President George W. Bush.

 

Under Bernanke, Sanders said, the Federal Reserve has failed at its four main responsibilities: to conduct monetary policy in a way that leads to maximum employment and stable prices; to maintain the safety and soundness of financial institutions; to contain systemic risk in financial markets; and to protect consumers against deceptive and unfair financial products.

 

Last Aug. 25, Sanders announced his opposition to Bernanke on the same day he was nominated for a second term. On Dec. 5, Sanders placed a hold on Bernanke’s nomination, effectively raising to 60 votes the threshold for Senate confirmation of the central bank chief.

 

“People do not want another term for the man whose major job as Fed chairman was to protect the safety and soundness of our financial system but instead was asleep at the switch,” Sanders said.

[Guest Deb]

The Federal Reserve Bank of New York said that it welcomes Federal Reserve Chairman Ben Bernanke’s call for a comprehensive review by the U.S. Government Accountability Office (GAO) of all aspects of the Federal Reserve’s involvement in American International Group, Inc. (AIG). The New York Fed also announced that it has delivered detailed records requested by the House Committee on Oversight and Government Reform related to AIG.

 

“We are in favor of a full and objective review of our actions and look forward to the opportunity to document for the public and members of Congress our involvement in AIG. All of the Federal Reserve’s actions regarding AIG were undertaken to protect the American people from an even more severe economic downturn and to safeguard U.S. taxpayers’ interests in the company,” said Federal Reserve Bank of New York President William C. Dudley.

 

“We are confident that a comprehensive GAO review and the documents we have provided to Congress will clarify the government’s role in AIG and underscore the importance of the intervention,” Mr. Dudley said.

 

The New York Fed has also posted a memorandum on its website regarding its participation in the preparation of securities disclosures by AIG relating to Maiden Lane III, a facility created in November 2008 to address AIG’s increasing liquidity strains.

[Guest Deb]

The Federal Reserve has responded aggressively to the crisis since its emergence in the summer of 2007. Following a cut in the discount rate (the rate at which the Federal Reserve lends to depository institutions) in August of that year, the Federal Open Market Committee began to ease monetary policy in September 2007, reducing the target for the federal funds rate by 50 basis points.1 As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy response stands out as exceptionally rapid and proactive. In taking these actions, we aimed both to cushion the direct effects of the financial turbulence on the economy and to reduce the virulence of the so-called adverse feedback loop, in which economic weakness and financial stress become mutually reinforcing.

 

These policy actions helped to support employment and incomes during the first year of the crisis. Unfortunately, the intensification of the financial turbulence last fall led to further deterioration in the economic outlook. The Committee responded by cutting the target for the federal funds rate an additional 100 basis points last October, with half of that reduction coming as part of an unprecedented coordinated interest rate cut by six major central banks on October 8. In December the Committee reduced its target further, setting a range of 0 to 25 basis points for the target federal funds rate.

 

The Committee's aggressive monetary easing was not without risks. During the early phase of rate reductions, some observers expressed concern that these policy actions would stoke inflation. These concerns intensified as inflation reached high levels in mid-2008, mostly reflecting a surge in the prices of oil and other commodities. The Committee takes its responsibility to ensure price stability extremely seriously, and throughout this period it remained closely attuned to developments in inflation and inflation expectations. However, the Committee also maintained the view that the rapid rise in commodity prices in 2008 primarily reflected sharply increased demand for raw materials in emerging market economies, in combination with constraints on the supply of these materials, rather than general inflationary pressures. Committee members expected that, at some point, global economic growth would moderate, resulting in slower increases in the demand for commodities and a leveling out in their prices--as reflected, for example, in the pattern of futures market prices. As you know, commodity prices peaked during the summer and, rather than leveling out, have actually fallen dramatically with the weakening in global economic activity. As a consequence, overall inflation has already declined significantly and appears likely to moderate further.

 

The Fed's monetary easing has been reflected in significant declines in a number of lending rates, especially shorter-term rates, thus offsetting to some degree the effects of the financial turmoil on financial conditions. However, that offset has been incomplete, as widening credit spreads, more restrictive lending standards, and credit market dysfunction have worked against the monetary easing and led to tighter financial conditions overall. In particular, many traditional funding sources for financial institutions and markets have dried up, and banks and other lenders have found their ability to securitize mortgages, auto loans, credit card receivables, student loans, and other forms of credit greatly curtailed. Thus, in addition to easing monetary policy, the Federal Reserve has worked to support the functioning of credit markets and to reduce financial strains by providing liquidity to the private sector. In doing so, as I will discuss shortly, the Fed has deployed a number of additional policy tools, some of which were previously in our toolkit and some of which have been created as the need arose.

 

http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm

[Guest Deb]

Lessons of the Crisis: The Implications for Regulatory Reform

 

January 20, 2010

 

William C. Dudley, President and Chief Executive Officer

 

Remarks at the Partnership for New York City Discussion, New York City

 

In my opinion, this crisis demonstrated that a systemic risk oversight framework is needed to foster financial stability. The financial system is simply too complex for siloed regulators to see the entire field of play, to prevent the movement of financial activity to areas where there are regulatory gaps, and, when there are difficulties, to communicate and coordinate all responses in a timely and effective manner.

 

Effective systemic oversight requires two elements. First, the financial system needs to be evaluated in its entirety because, as we have seen, developments in one area can often have devastating consequences elsewhere. In particular, three broad areas of the financial system need to be continuously evaluated: large systemically important financial institutions, payments and settlement systems and the capital markets. The linkages between each must be understood and monitored on a real-time basis. Second, effective systemic risk oversight will require a broad range of expertise. This requires the right people, with experience operating in all the important areas of the financial system.

 

In this regard, I believe that the Federal Reserve has an essential role to play. The Federal Reserve has experience and expertise in all three areas—it now oversees most of the largest U.S. financial institutions; it operates a major payments system and oversees several others; and it operates in the capital markets every day in managing its own portfolio and as an agent conducting Treasury securities auctions. Also, as the central bank, it backstops the financial system in its lender-of-last-resort role.

 

Compared with where we were in late 2008 and early 2009, financial markets have stabilized, and the prospect of a collapse of the financial system and a second Great Depression now seems extremely remote. Even with this progress, however, credit remains tight, especially for small businesses and households. Economic growth has resumed, but unemployment has climbed to punishing levels. So while circumstances have improved, they are still very far from where we want them to be. We have no cause for celebration when the challenges facing so many businesses and households remain so daunting.

 

Aggressive and extraordinary official interventions were imperative to bring about this nascent stabilization of our financial markets and economic recovery. The Federal Reserve has been at the center of many of these interventions. For example, its efforts over the past two years to promote market functioning and minimize contagion were critical in preventing the strains in our financial markets from resulting in even more severe damage to the economy. These “lender of last resort” interventions on the part of the Fed, including facilities such as the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), as well as programs such as the foreign exchange reciprocal currency agreements, are examples of the rapid and responsive application of basic central bank tenants to the unique challenges we faced as this crisis evolved. Indeed, in many ways, the crisis has underscored why the Federal Reserve was created almost a century ago: to provide a backstop for a banking system prone to runs and financial panics.

 

Where it proved necessary and feasible to do so, the Fed also used its emergency lending authority to forestall the disorderly failure of systemically important institutions. These actions truly were extraordinary—well outside the scope of our normal operations, but our judgment was that not taking those actions would have risked a broader collapse of the financial system and a significantly deeper and more protracted recession. Faced with the choice between these otherwise unpalatable actions and a broader systemic collapse, the Fed, with the full support of the Treasury, invoked its emergency lending authority and prevented the collapse of certain institutions previously considered to have been outside the safety net.

 

The fact that the Fed needed to take those actions provides a stark illustration of the significant gaps in our regulatory structure, gaps that must be eliminated. Among those holes was the absence of effective consolidated oversight of certain large and deeply interconnected firms; the collective failure of regulators—including the Federal Reserve—to appreciate the linkages and amplification mechanisms embedded in our financial system; and the absence of a resolution process that would allow even the largest and most complex of financial institutions to fail without imperiling the flow of credit to the economy more broadly. Addressing these shortcomings will require important reforms in our country's regulatory architecture.

 

We entered the crisis with an obsolete regulatory system. For one, our regulatory system was not structured for a world in which an increasingly large amount of credit intermediation was occurring in nonbank financial institutions. As a result, little attention was paid to the systemic implications of the actions of a large number of increasingly important financial institutions—including securities firms, insurance conglomerates and monolines. In addition, many large financial organizations were funding themselves through market-based mechanisms such as tri-party repo. This made the system as a whole much more fragile and vulnerable to runs when confidence faltered.

 

With the benefit of hindsight, it is clear that the Fed and other regulators, here and abroad, did not sufficiently understand the importance of some of these changes in our financial system. We did not see some of the critical vulnerabilities these changes had created, including the large number of self-amplifying mechanisms that were embedded in the system. Nor were all the ramifications of the growth in the intermediation of credit by the nonbank or “shadow banking” system appreciated and their linkages back to regulated financial institutions understood until after the crisis began.

 

With hindsight, the regulatory community undoubtedly should have raised the alarm sooner and done more to address the vulnerabilities facing our banks and our entire financial system. But this was difficult because our country didn’t have truly systemic oversight—oversight that would be better suited to the new world in which markets and nonbank financial institutions had become much more important in how credit was intermediated. Without a truly systemic perspective, it was unlikely that any regulator would have been able to understand how the risks were building up in our contemporary, market-based system. The problem was that both banking and nonbank organizations played an important role in credit intermediation but were subject to differing degrees of regulation and supervision by different regulatory authorities.

 

Although these gaps had existed for years, their consequences were not apparent until the crisis. Difficulties in one part of the system quickly exposed hidden vulnerabilities in other parts of the system, in a way that our patchwork regulatory system had not been designed to detect or readily address. In the same way, the crisis revealed the critical deficiencies in the toolkits available to the regulators to deal with nonbank institutions in duress. Emergency lending by the Fed might be enough to forestall the disorderly failure of a systemically important institution and all the wider damage such a failure might cause, but it was a blunt and messy solution, employed as a stopgap measure because better alternatives were not available. What is needed—what our country still lacks—is a large-firm resolution process that would allow for the orderly failure even of a systemically important institution.

Thus, in the fall of 2008, regulators and policymakers found themselves facing the prospect of the total collapse of a complex and interconnected system. It was these circumstances, and the prospect they created for an even deeper and more protracted downturn in real economic activity and employment, that required truly extraordinary actions on the part of the Federal Reserve, as well as the Treasury and many other agencies. This is a situation in which the United States must never again find itself.

 

For its part, the Federal Reserve is hard at work on developing and implementing new regulations and policy guidance that take on broad lessons of the recent crisis. We are working with other banking regulators in the United States and overseas to strengthen bank capital standards, both by raising the required level of capital where appropriate and improving the risk capture of our standards. We are issuing new guidelines on compensation practices so that financial sector employees are rewarded for long-term performance and discouraged from excessive risk-taking. And we are working with foreign regulators to develop more robust international standards for bank liquidity. We are working to make the tri-party repo system more robust and reducing settlement risk by facilitating the settlement of over-the-counter derivatives trades on central counterparties (CCPs). But more needs to be done and much of this requires action by Congress.

 

Congress is now considering several proposals for comprehensive regulatory reform, proposals that merit careful study and debate. Let me offer some general thoughts on the principles that should guide how we approach reform.

 

First, it's important to take a clear-eyed and comprehensive view of the financial system we have today. As I've already suggested, if there is one overriding lesson to be drawn from the events of the past 18 months, it is that the financial system is just that: a system, and a very complex one at that. The operational, liquidity and credit interdependencies that characterize contemporary financial markets and institutions mean that the well-being of any one segment of the system is inextricably linked to the well-being of the system as a whole. Because of this, our approach to reform must be guided by a coherent sense of the system as a whole, not merely by a focus on some of its component parts, as important as they may be.

 

We need a new regulatory structure that provides for comprehensive and consistent oversight of all elements of the financial system. This includes effective consolidated oversight of all our largest and interconnected financial institutions and oversight of payment and settlement systems. We must make sure that the people doing the regulation have the power and expertise to ferret out and bring to heel regulatory evasion as it occurs to prevent abuse and excess from building up in the financial system. In the end, the gaps, not the overlaps, have been the main shortcoming of our existing regulatory framework.

 

A second fundamental point is that regulatory reform has to ensure that the financial system will be robust and resilient even when it comes under stress so that it will not fail in its critical role in supporting economic activity. No economy can prosper without a well-functioning financial system—one that efficiently channels savings to the businesses that can make the most productive use of those savings, and to consumers that need credit to buy a home and support a family. The fact that our financial system isn't functioning well right now is part and parcel of our current economic difficulties. This critical link between the “real” and the “financial” is why we care so much about the systemic risks inherent in banking and finance.

 

One critical element of systemic risk is what is known as the “too big to fail” problem. Without sufficiently high capital and liquidity standards, and, as a backstop, a resolution mechanism that is credible, regulators are faced with a Hobson’s Choice when a large, systemically important financial firm encounters difficulties. On the one hand, if authorities step in to respond to prevent failure, contagion and collapse of the broader system, that action rewards the imprudent and can create moral hazard—that is, encouraging others to act irresponsibly or recklessly in the future in the belief that they will also be rescued or “bailed out.” On the other hand, if authorities do nothing and let market discipline run its course, they run the risk that the problem will spread and unleash a chain reaction of collapse, with severe and lasting damage to markets, to households and to businesses.

So what can we do about the “too big to fail” problem? It is clear that we must develop a truly robust resolution mechanism that allows for the orderly wind-down of a failing institution and that limits the contagion to the broader financial system. This will require not only legislative action domestically but intensive work internationally to address a range of legal issues involved in winding down a major global firm. Second, we need to ensure that the payments and settlement systems are robust and resilient. By strengthening financial market infrastructures, we can reduce the risk that shocks in one part of the system will spread elsewhere. Third, we need to reduce the likelihood that systemically important institutions will come close to failure in the first place. This can be done by mandating more robust capital requirements and greater liquidity buffers, as well as aligning compensation with the risks that are taken by the firm’s employees. In addition, instruments such as contingent capital–debt that would automatically convert to equity in adverse environments–need to be considered. Such instruments would enable equity capital to be replenished automatically during stress environments, dampening shocks rather than exacerbating them.

 

I would now like to take some time to discuss some of the proposals that Congress is debating regarding regulatory reform. As Congress and the Administration consider what legislative changes are warranted, the Federal Reserve's actions before and during the crisis have been getting close inspection. Given the Federal Reserve's key role in our financial system, and the scale of the damage caused by the financial crisis, this careful scrutiny is necessary, appropriate and welcome.

 

Not surprisingly, there are legislative proposals that would significantly alter the Federal Reserve's powers and responsibilities, particularly with respect to supervision of bank holding companies. Again, that's entirely within Congress's purview: the Federal Reserve only has the powers and responsibilities that Congress has entrusted to us. But in drawing up new legislation, it's important not to throw the baby out with the bathwater—we should preserve what has worked and fix what hasn’t. A dispassionate analysis of what is needed will almost certainly lead to better decisions and a more effective regulatory framework.

The legislative proposals concerning the Federal Reserve are not limited to the Federal Reserve’s role in supervision. Consider, for example, one proposal that calls for what it terms "audits" of the Federal Reserve by the U.S. Government Accountability Office (GAO), an arm of Congress. These wouldn't be audits at all in the commonly understood sense of the term. The Federal Reserve's financial books and transactions are already audited by wide range of professionals internal and external to the institution. Rather, these new audits would involve ex-post review of Federal Reserve monetary policy decisions, a potential first step toward the politicization of a process that Congress has carefully sought to insulate from political pressures.

The notion that the Federal Reserve's financial dealings are somehow kept hidden from the public is a surprisingly widely held view—and it is simply incorrect. An independent outside audit of the Federal Reserve's books is conducted annually. You can find the results online, including a detailed accounting of the Federal Reserve's income and operating expenses in its annual report. The financial books of the regional Federal Reserve Banks also undergo independent outside audits, also available online. In addition, the GAO is empowered to review almost all Federal Reserve activities other than the conduct of monetary policy, including the Federal Reserve's financial operations, which the GAO has done so frequently. The Federal Reserve's balance sheet is posted online weekly, with considerable detail, in what's called the H.4.1 report. Finally, an additional accounting of the Federal Reserve's emergency lending programs created over the last two years is available online in a monthly report.

 

But my objection that GAO oversight would be broadened to include a review of monetary policy decisions is not based just on the fact that the Fed is already subject to considerable oversight. My principal concern is the damage that could potentially result to the Fed’s ability to achieve its mandate of price stability and maximum sustainable employment. The effectiveness of monetary policy depends most of all on the Federal Reserve’s credibility with market participants and investors. In particular, both groups need to know that the Fed will always act to keep inflation in check. That's why Fed Chairman William McChesney Martin famously joked that the Fed would sometimes need "to take the punchbowl away just as the party gets going." As you can well imagine, this may not always enhance our popularity, especially among those who were enjoying the party. But, the fact that markets know that the Federal Reserve will tighten monetary policy when needed helps keep inflation expectations in check. This, in turn, helps keep inflation low since inflation expectations affect actual inflation. The consequence is credibility with respect to the conduct of monetary policy. This gives the Fed more latitude not to tighten when inflation rises for transient reasons—say, due to a short-lived spike in oil prices—and more scope to ease credit to support the economy during economic downturns.

 

Recognizing these benefits, Congress wisely acted many years ago to exempt monetary policy decisions from the GAO's wide powers to review Federal Reserve activities. Congress' decision to bolster the Fed's monetary policy independence has been followed by similar actions around the world—substantial independence for the central bank in the conduct of monetary policy is now widely regarded as international best practice. Policy independence does not absolve the Federal Reserve from accountability for its monetary policy decisions and the need to clearly explain why they were taken. But it avoids the politicization of monetary policy decision-making. And this is good because politicized central banks generally do not have enviable records with regard to inflation, economic growth or currency stability. Risk premia on financial assets are typically much higher in countries with politicized central banks.

 

Of course, a reversal of Congress's earlier decision would not amount to legislative control over monetary policy decisions. That's not the issue. The issue is that a reversal of Congress’ earlier decision could create the appearance that the legislature seeks to influence monetary policy decisions by establishing a mechanism to publicly second guess those decisions. Such a move would blur what has been a careful separation of monetary policy from politics. Market confidence here and abroad in the Federal Reserve would be undermined. Asset prices could quickly build in an added risk premium, which might lead to tighter credit conditions. These unintended consequences would undermine the legislation’s intent.

 

I’m also concerned about those proposals under consideration that would move the regulatory and supervisory functions now held by the Federal Reserve to other agencies, new or existing. At present, the Federal Reserve is the consolidated supervisor for bank holding companies, a group that has expanded recently as investment banks and other companies formerly outside the Federal Reserve's purview have been brought under Federal Reserve oversight. In my view, further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system. Funneling information streams into diverse institutional silos leads to communication breakdowns and too often to failure to "connect the dots."

 

In addition, there are clear synergies between the supervisory process and the Federal Reserve's monetary policy and financial stability missions. The information we collect as part of the supervisory process gives us a front-line, real-time view of the state of the financial industry and broader economy. Monetary policy is more informed as a result. Only with this knowledge can a central bank understand how the monetary policy impulse will be propagated through the financial system and affect the real economy.

 

Similarly, involvement in the supervisory process gives us critical information in fulfilling our lender-of-last-resort responsibilities. Information sharing with other agencies is simply not as good as the intimate knowledge and understanding of markets and institutions that is gathered from first-hand supervision. Indeed, many institutions at the center of the crisis and arguably the most troubled—Bear Stearns, Lehman Brothers, Merrill Lynch, AIG and the GSEs—were not supervised by the Federal Reserve. Consequently, when those institutions came under stress, the Federal Reserve had poorer quality and far less timely information about the condition of these institutions than would have been the case if we had had the benefit of direct supervisory oversight.

 

In fact, some of the hardest choices the Federal Reserve had to make during the most chaotic weeks of the crisis concerned systemically important firms we did not regulate. It is not surprising that, in the wake of the crisis, some countries that had separated bank supervision from the central bank monetary policy role are now reconsidering that division of labor. That is mainly because coordination problems created difficulties in responding quickly and effectively in the crisis. Separation made it more difficult to communicate in a timely way and to understand the broader implications of what was transpiring. It is critical that we not introduce new inefficiencies and impediments. No matter what steps are taken to improve our regulatory system and strengthen market discipline, history tells us that there will inevitably be circumstances in which an informed and effective lender of last resort will play a critical role in preventing shocks and strains in financial markets and institutions from generating a broader collapse of the financial system.

 

Of course, there are legitimate questions as to how broad the Federal Reserve's regulatory and supervisory responsibilities should be. That question is up to Congress, and should be decided on the merits. What is fundamentally at issue here is not “turf,” but rather how we as a nation can best ensure that we never again re-live the events of the past few years—that the legitimate public interests associated with a safe, efficient and impartial banking and financial system are well served.

 

In the end, it is critical that financial reform be decided on the basis of the merits. If objective and careful policymaking prevails, we will all be the better off for it. In contrast, if we fail in this endeavor, that would truly be tragic. We must act informed by the important lessons that we have learned from this crisis.

[Guest ziegfeld]

This article by Mike Whitney is dead on. Too bad it took us over two years to understand what it means.

 

http://www.marketoracle.co.uk/Article464.html

 

Market Rigging

 

“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D. has provided a description of how it works which seems consistent with the comments of Robert Heller. McHugh lays it out like this:

 

“The PPT decides markets need intervention, a decline needs to be stopped, or the risks associated with political events that could be perceived by markets as highly negative and cause a decline; need to be prevented by a rally already in flight. To get that rally, the PPT's key component — the Fed — lends money to surrogates who will take that fresh electronically printed cash and buy markets through some large unknown buyer's account. That buying comes out of the blue at a time when short interest is high. The unexpected rally strikes blood, and fear overcomes those who were betting the market would drop. These shorts need to cover, need to buy the very stocks they had agreed to sell (without owning them) at today's prices in anticipation they could buy them in the future at much lower prices and pocket the difference. Seeing those stocks rally above their committed selling price, the shorts are forced to buy — and buy they do. Thus, those most pessimistic about the equity market end up buying equities like mad, fueling the rally that the PPT started. Bingo, a huge turnaround rally is well underway, and sidelines money from Hedge Funds, Mutual funds and individuals' rushes in to join in the buying madness for several days and weeks as the rally gathers a life of its own.” (Robert McHugh, Ph.D., “The Plunge Protection Team Indicator”)

 

No Money,

You are one of the few that understand the Plunge Protection Team.

 

Follow this National Archives Link

 

http://www.archives.gov/federal-register/codification/executive-order/12631.html

 

Executive Order 12631 -- Working Group on Financial Markets

[Guest Stu]

Why does Congress not have the right to review the Federal Reserve's financial operations?

[Guest Janice]

Dear All Congressman and Senators who signed the petition to Audit the Fed…….

we are still waiting for you to DO IT!

 

I guess the NWO /Illuminati’s /CFR/CZARS carry more power than your suppose to eh?

 

Well, our next congressman and congresswoman won’t be from either party but a Peoples Party so guess your stalling will cause you to loose your jobs !

 

Then , when America goes totally broke, I guess you’ll also be loosing your pension/ retirement like the rest of us……

 

If I were you I would fire Bernanke and Geithner, I sure wouldn’t reinstate them…

You all are so manipulated its a joke anymore to watch you’s……

 

You’ve got nothing done but talk talk talk talk talk , give speeches , give speeches give speeches…….while we are being robbed and robbed and robbed..

 

We want our banks back , we want our money bank and we want our jobs back……Snap to it!

[Guest Fedup]

This is explosive news from the Nation:

 

http://www.thenation.com/doc/20100208/greider

 

People can go to jail if they willfully withhold material information from shareholders and the Securities and Exchange Commission (SEC), or they may be sued for investor fraud. Yet that is what the New York Fed told AIG to do. The company officers wanted to report fully to the SEC. Their Fed overseers told them to take out the disclosure out of their report to the SEC (the facts were ultimately not disclosed until five months later). The Fed, remember, is the government's principal banking regulator. It is supposed to enforce the laws, not tell regulated firms to break them.

 

What was the Fed anxious to hide? Clearly, it was the clandestine and illegitimate conduit it had devised at AIG to funnel billions to the banks, unseen by the public. Keeping this bailout secret would avoid arousing even greater anger about the bailouts. It might also help prop up stock prices at endangered banks, though savvy financial players swiftly figured out what was going on. Only the people needed to be kept in the dark, along with their elected representatives in Congress.

 

The Federal Reserve was trying to cover its own butt. And Timothy Geithner's. Geithner was at the center of arranging the backdoor handouts on the New York end.

[Guest Fedup]

Republican Sen. Judd Gregg is making sure that the Fed Audit does not happen. So much for Republicans being with the Tea Party movement.

 

This move to bring the Fed’s conduct of monetary policy under thecontrol of Congress is a grave threat to our economy. Congress hasdemonstrated time and again its inability to manage the nation’s fiscalpolicy, illustrated by our staggering national debt in excess of $12trillion, so how can anyone think that its involvement in monetarypolicy would be good for the country. - Sen. Judd Gregg

[Guest RT]

Treasury Secretary Tim Geithner is expected to face intense questioning on Capitol Hill later this week as more information comes to light on the US government's bailout of AIG. Will heads roll over the controversy, or is it just another example of how nothing has changed between the Bush and Obama Administrations?

 

[Guest Bruce Rogers]

Ben is not fit to run the Fed. Ben gave Citibank a secret loan of $500 Billion dollars and a year later is still fighting to keep it secret. Citibank had a market value of $20 billion at the time of the loan. This is taxpayer’s money Ben. You can not keep it secret that Citibank was given a $500 Billion loan, over a year later because you think Citibank may have a run on the bank. The taxpayer has the right to know where the money is and how much. You can not hide the Fed’s money.

[Guest T Black]

Fall Of The Republic documents how an offshore corporate cartel is bankrupting the US economy by design. Leaders are now declaring that world government has arrived and that the dollar will be replaced by a new global currency.

 

President Obama has brazenly violated Article 1 Section 9 of the US Constitution by seating himself at the head of United Nations' Security Council, thus becoming the first US president to chair the world body.

 

A scientific dictatorship is in its final stages of completion, and laws protecting basic human rights are being abolished worldwide; an iron curtain of high-tech tyranny is now descending over the planet.

 

A worldwide regime controlled by an unelected corporate elite is implementing a planetary carbon tax system that will dominate all human activity and establish a system of neo-feudal slavery.

 

The image makers have carefully packaged Obama as the world's savior; he is the Trojan Horse manufactured to pacify the people just long enough for the globalists to complete their master plan.

 

This film reveals the architecture of the New World Order and what the power elite have in store for humanity. More importantly it communicates how We The People can retake control of our government, turn the criminal tide and bring the tyrants to justice.

 

A film by Alex jones