'Do not underestimate the power of the Fed'

Commentary: Bankers, get your priorities straight

By Lou Barnes, Friday, March 27, 2009.

Flickr photo by <a href="http://www.flickr.com/photos/dianaoctavius/3333902343/" target=blank>dianaoctavius</a>.

There will be many turning points in this first global recession of the modern era, but this week marks one of the good ones. The players: the Fed, the Obama administration, and maybe, just maybe ... the bankers.

The Fed is a central bank. All nations have one, each with one unique capability: the authority to print money. In normal times, central banks print money cautiously but routinely through the banking system -- draining in good times, increasing in recessions.

In one corner of the Fed's giant conference room hangs an imaginary but thick, red, silken rope. The kind of thing a Victorian might have used to call the butler. However, the imaginary one at the Fed has a huge, red, steel handle on the end. Since 1913, everyone visiting that room has known the rope and handle hang there, but no one ever talks about it, and all avoid even glancing at it.

Last Wednesday, Fed Chairman Ben Bernanke pulled the handle. In extremis, in a flat-out national emergency threatening economic collapse, central banks must use the ultimate weapon: Bypass broken banks and enter markets directly to buy financial assets with invented money in whatever amount necessary.

Neither media, consumers, nor markets have grasped the magnitude of the event or its power. In mortgages alone, the Fed expanded its purchase operation from $500 billion to $1.25 trillion. There is still a standoff between this irresistible force and the immovable object of refinance demand, but nobody in housing or waiting in line to refi should worry about a rise in rates. We will not decline quickly, and over time maybe not far, but we're not going up -- normal upside volatility is completely gone.

Same for Treasurys (the Fed is buying those, too). On the day Bernanke pulled the handle, the 10-year T-note fell from 2.95 percent to 2.55 percent. This week the Treasury sold $100 billion in new paper, and the 10-year never rose beyond the 2.7s.

As much trouble as the world is in, do not underestimate the power of the Fed. The administration is flinching from declaring an emergency, but not the Fed.

President Obama is still struggling for voice, sticking with his budget focus and inane assertion that this Walter Mondale dream of Christmas is essential for recovery.

However, Tim Geithner found his voice, and then some. In testimony with Bernanke before Congress, the two men in 15 minutes cut the knees from under all the populist AIG howlers in both parties, exposed their ignorance, and their grave, bipartisan, and long-term failure to craft and support regulation of the financial system. ...CONTINUED

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Submitted by Gene Urban -- The Urban Team on March 27, 2009 - 3:02pm.

Lou,

You are scaring me. You sound like the actions of the FED are a good or reasonable thing.

You are right about one thing, most do under estimates the power of the FED. You just decribed a lever pull that dropped 750 billion fake dollars into the system. The press has barely mentioned this act.

The FED was a MAJOR player in creating our current economic troubles, yet they are so powerful few blame or even dare mention their role.

Even you blame corporate greed. However, it was the FED that placed huge sums of money in front of corporate America and said... let's play. Congress did everything in it's power to stop oversight and push for more lending, thus creating windfall profits and staggering sums of money.

It's like the guy who puts his new BMW on the street with the keys in it, a big sign saying "steal me" and is shocked when it happens.

Prior to and during the housing boom the Fed printed money, artificially lowered interest rates and flooded the mortgage market. Congress threatened banks, Fannie and Freddie to lower lending standards and promote affordable housing. Huge money was made from unwise actions and policy. Now that the house of cards has fallen, everyone is shocked.

The current outrage would be laughable if the media pointed the finger where it belongs... The Fed and Congress. They created the "cause" while the other players were the "effect."

As Tom Woods so eloquently wrote, the FED is the elephant in the living room that no one sees or talks about.

Let's start having a real conversation about the FED and both side of Congress before they pull the lever a few more times and inflate the dollar to the point where twenty bucks just buys a gallon of milk.

Gene Urban

www.UrbanLifeBlog.com
www.greatinvestmenthomesaz.com