Feb. 18 (Bloomberg) — The Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.
CENTRAL bankers are an unobtrusive breed by nature and necessity. So it might have escaped the attention of many that Sydney is playing host to a meeting of some of the world’s top money men and women to celebrate the 50th birthday of the Reserve Bank of Australia.
(Reuters) - Citigroup said there are substantial risks facing U.S. bank stocks now, but in the near term these stocks can grind higher given a combination of the Federal Reserve’s accommodative stance plus a modest recovery.
What the good Professor is suggesting is that the Treasury doesn’t have to issue bonds at all. In fact, since the Treasury does control the electronic printing press, it could legitimately buy stuff with money it prints out of thin air. Sounds a bit like counterfeiting, doesn’t it?
But, let’s step back for a second: what is the functional difference for the federal government between Treasury securities and bank notes? Both are liabilities of the federal government. But liabilities of what? The only obligation they enforce on the government is the promise to repay with more paper (or electronic bank credits, if you will). For all intents and purposes, bank notes, reserve deposits, and Treasury securities are fungible: they are obligations to be repaid in the same fiat currency.
Edward Harrison in If the U.S. stopped issuing treasuries, would it go broke? - Credit Writedowns (via quotingthecrisis)
Former Fed Governor Frederic Mishkin wrote a piece in the FT called Not all bubbles present a risk to the economy. In it, he defends the actions of the Fed:
There is increasing concern that we may be experiencing another round of asset-price bubbles that could pose great danger to the economy. Does this danger provide a case for the US Federal Reserve to exit from its zero-interest-rate policy sooner rather than later, as many commentators have suggested? The answer is no.
Are potential asset-price bubbles always dangerous? Asset-price bubbles can be separated into two categories. The first and dangerous category is one I call “a credit boom bubble”, in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues.
He goes on to point out that it’s rather hard to determine if a bubble is the good kind or the bad kind, but the one where the dollar is shorted to buy Gold, Oil, Stocks, Bonds, and, well, everything with risk, is clearly the good kind (wait, I thought it was hard to tell… sigh).
As you might imagine, this bit of cheerleading has been met with some skepticism.
Yves Smith at Naked Capitalism writes Mishkin Defend Bubbles (and of Course, the Fed). Her whole analysis is quite good, but my favorite is her translation of Mishkin’s headline: “Nuclear wars don’t have to be bad for you.” Yves also notes that Mishkin argued against worrying about a housing crash in the US:
that this concern about burst bubbles may be overstated. To begin with, the bursting of asset price bubbles often does not lead to financial instability…Japan’s experience is that the serious mistake for a central bank that is confronting a bubble is not failing to stop it but rather failing to respond fast enough after it has burst….
Edward Harrison of Credit Writedowns made a couple posts. In the first, All bubbles are equal, but some bubbles are more equal than others, he takes Mishkin to task for his dubious predictions regarding Iceland (quoting Mishkin):
Our analysis indicates that the sources of financial instability that triggered financial crises in emerging market countries in recent years are just not present in Iceland, so that comparisons of Iceland with emerging market countries are misguided.
In the second, Harrison examines possible consequences for policy abroad in If the Fed is looking to inflate away problems, what should Asia do? There’s a link to the very popular Andy Xie in there, also recommended.
Others were a little more terse. Tyler Durden at Zero Hedge offered three bullet points on Mishkin’s “galactic stupidity trifecta” in today’s Frontrunning. He also mentions the Iceland failure.
Mike Larson at Interest Rate Roundup summarizes the common reaction with the rather concise Mishkin is an idiot.
Good times.
Update
Somehow I forgot to link to James Bianco’s The Federal Reserve’s Lame Attempt To Defend Itself Against Bubble Creation. Also good.
http://www.tumblr.com/audio_file/234474049/tumblr_ksnkymBFfH1qz6q52
A Mises Institute presentation from this past October, questioning Ben Bernanke’s (lack of an) exit strategy for the current fiscal policy.
Oct. 27 (Bloomberg) — In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.
The Board contends that it is serving the public’s interest by keeping all of this information secret from it, claiming that disclosure might harm the borrowers and, therefore, the entire U.S. economy. But the Board has offered no evidence – relying instead on hyperbolic speculation – from which this Court could conclude that such harm was likely to result from disclosure.
The Board’s interests in secrecy are, in fact, aligned with the banks’ interests and are contrary to the public interest. The Board wishes to continue to lend trillions of dollars of public money without oversight or accountability, and the banks wish to continue to reap the benefits of their access to public money without their depositors or shareholders – or the public at large – knowing anything about it…the public has a manifest interest in understanding and evaluating the government’s response to the recent economic crisis, in safeguarding its money, and in knowing whether its government is doling out its money to private entities imprudently.
Bloomberg Responds To Fed FOIA Appeal, Blasts Bernanke’s “Hyperbolic Speculation” Of Economic Collapse (via poortaste) (via ptbruiser)
Ron Paul talking about End the Fed on The Daily Show. A really professional and amusing interview; props to RP and Jon Stewart.
How well has the Federal Reserve performed for America? Mainstream pundits, of course, say that Bernanke has saved the world … . but they said the same thing about Greenspan. So let’s look at the actual historical record to determine how well the Fed has done.
If you solve the money monopoly problem by ending the Fed, you solve many other problems, too. Essentially you take away from the government the capacity to use financial trickery to expand without limit. It is the first step to restoring constitutional government. Without the Fed, the federal government would have to live within its means. It would still be too big and too intrusive, just like all state governments are today, but the outrageous empire at home and abroad would have to come to an end.
Ron Paul, End the Fed (via ptbruiser)
Federal Reserve Chairman Ben Bernanke, widely credited with taking aggressive action to avert an economic catastrophe after the financial meltdown last fall, will be nominated by President Barack Obama for a second term, The Associated Press learned Monday night.
Rep. Ron Paul usually stands far outside the mainstream in Congress, particularly in his campaign to kill the Federal Reserve. But the Texas Republican now has the bulk of his colleagues standing alongside him in a fight against the central bank’s autonomy.
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