The 4th Branch of Government: The Federal Reserve.

Sometimes I am blown away by the sheer lack of basic economic understanding from influential people in politics, business, and academia. When I hear these people speak, I can’t help but put my hand on my forehead with an incredulous look on my face and think, “Does this person really believe this crap?” This interesting article from Fox Business is a good example of what I am talking about.

As Fox Business reports:

With a leadership vacuum consuming Washington since the financial crisis, one previously mystical institution has quickly morphed into the unofficial fourth branch of the U.S. government: the Federal Reserve.

I agree with that. The Federal Reserve certainly is the unofficial fourth branch of the government. This has been true for nearly 100 years, but it is truer now than ever.

…For most of its 100-year history, the Fed has worked behind the scenes, goosing interest rates when needed, keeping an eye on inflation and acting as a lender of last resort to distressed banks. But that role has changed. “The Fed is clearly getting more activist,” said Kristina Hooper, U.S. investment strategist at Allianz Global Investors.

*Face palm* “Goosing interest rates when needed”? News flash: Interest rates in a Free Market do not ever need to be “goosed”, whether being driven upwards or downwards. Interest rates will find their optimum level on their own. The question to ask is this: The Fed goosed interest rates as needed by whom, and to what ends? Answer: Interest rates were goosed as needed by politicians to bring about financial climates conducive to their self-serving political ends, and/or goosed as needed by bankers when they wanted to expand credit and thereby rake in more dough. “Keeping an eye on inflation”? I hear people say this sometimes, and it always boggles my mind. The Federal Reserve is the institution which inflates. They control the monetary base and reserve requirements. The Federal Reserve is not the watchful patron-from-on-high which restrains the evil inflationary tendencies of private banks; rather, the Federal Reserve is the root cause of all inflation. Whenever you’re pissed off about inflation, you can point your finger at the Federal Reserve and never be wrong. Saying they keep an eye on inflation is like saying the fox keeps an eye on the chickens. As for “The Fed clearly getting more activist”, all I can say is: It took her this long to figure that out? The Fed has been activist for 100 years, since the day it was created. It is an activist organization working in the interest of the large Wall Street banks. Read about the birth of the Federal Reserve to see what I mean.

The Fed held just $850 billion in assets on its balance sheet in July 2007, but that figure is set to swell north of $4 trillion by the time its bond-buying exercise is over. That represents about 25% of U.S. GDP, compared with just 7% during normal times. “No one ever conceived of monetary policy having that kind of power,” said David Jones, a former Fed economist and author of Understanding Central Banking: The New Era of Activism. “The power of the Fed in influencing market conditions really has become the first line of defense against a financial crisis and the most important actor in trying to enact a recovery.

*Hardcore facepalm* “First line of defense against a financial crisis”? This is what I was talking about in the first paragraph. Does Jones really believe that? The Fed has not, does not and never will defend against financial crises. The Fed meddling in market conditions is what produces financial crises. When someone says “The Fed defends against financial crises”, that can be directly translated to “The Fed intensifies and prolongs financial crises”. Insofar as “trying to enact recovery” goes, all the Fed does is try to fix the mess that they themselves created.  They can only do this by rolling back regulations and ending ongoing programs. The modern Fed does not enact recovery; it only kicks cans down the road. The recession of 2008 was not averted; it merely pushed the recession further down the road. It will be worse when next we meet.

In the U.S., the preferred method for treating the financial crisis would have been through strong fiscal policy enacted by Congress. But the deep budget deficit and its attendant political gridlock has rendered such a move impossible, leaving the Fed to fill the void. While Fed policymakers may often disagree with each other, the central bank at least has a “majority that is acting and moving and actually doing things,” Hooper said.

This is the worst reason for praising the Federal Reserve that I have ever heard. “At least they’re doing things”; and in the midst of the worldwide Great Depression during the 1930s, Adolf Hitler was doing things too (Godwin’s Law, ftw). The Fed certainly is doing things: but are they doing good things? No. We’d all be better off if the Federal Reserve did nothing at all. I’m serious. The Federal Reserve screws you over with every move it makes, unless that move is to halt inflation or rescind regulation. Or if you’re the CEO of a large Wall Street bank, the Federal Reserve never screws you over because it is designed to serve the interests of large banks like yours. As the article said earlier, the Fed acts as a “lender of last resort” to “distressed” (a.k.a. poorly managed) banks. I wish I had one of those; if I manage my finances poorly, chances are I’m going to live on the streets.

That’s more than can be said for Congress, which remains deeply divided and seems unlikely to enact pro-growth policies such as an overhaul of the tax code any time soon. “It seems like the Federal Reserve is the adult in the room. They are doing what they can to help the economy improve,” said Russell Price, senior economist at Ameriprise Financial.

Don’t listen to any of this “adult in the room” crap. The Federal Reserve loves to play up the idea that they are stalwart and neutral, working tirelessly through the fog of partisan politics to work in the interest of the American people. That’s total baloney from start to finish. The Federal Reserve is the almighty idiot in the room. The bozos at the Federal Reserve have no clue what they’re doing. They’re expanding the monetary base to stave off a recession (a badly needed recession), but that’s it. They have no clue what else to do, because there is nothing else they can do. What they’re doing is not helping the economy; it is only helping large Wall Street banks, investment firms, and connected corporations. Look around you: unemployment is rife, money is tight for regular people, and everyone is worried. Meanwhile, the Dow is breaking record highs.  Clearly, there is a disconnect between Wall Street and Main Street. The Federal Reserve is only helping Wall Street. Remember Obama’s famous quote? “The Private sector is doing just fine!” He was referring to how his banker and CEO golf buddies are doing just fine.

The best example of the more activist Fed came in November 2008 when it took action despite exhausting its normal policy tool — interest rate cuts — by enacting quantitative easing. The unconventional bond-buying program was aimed at promoting growth by forcing rates lower. “It was a necessary tool at that time to address the lack of liquidity in the market and the lack of confidence. We were on the precipice of something that could have gotten a lot worse,” said Hooper…. Supporters make a strong case that the emboldened Fed fought off a near-death experience in 2008 and 2009.

This woman is killing me. Indeed, if the Federal Reserve had not enacted the program known as Quantitative Easing (QE) post-2008, the recession would have gotten worse. What Ms. Hooper does not understand is this: Recession is the cure, not the problem. Things would have gotten worse, but as the recession was allowed to work it’s magic and money found it’s way back into the hands of sound decision makers (which is what happens during a recession), things would have gotten better. In fact, we would probably already be out of recession and looking forward to optimistic economic times ahead. Instead, the Federal Reserve pushed off the cure; but the cure is inevitable. The recession never really ended, and now we have yet another on the way. We will have another recession when the Federal Reserve ends QE. It will be worse than the recession of 2008. The fault will lie squarely on the shoulders of the Federal Reserve.

Close to the end of the article, we read:

“Do we become so dependent on central bank welfare that we’re not capable of handling the next crisis?” Hooper asked.

There is no question of “Do we become…?”. We have become. The US economy is now dependent on infusions of cash from the Federal Reserve. Wall Street has become a wild junkie, constantly yearning for it’s next liquidity fix. Like dealing with a drug addict, the only solution is to go cold turkey; cut off QE. This will produce a massive recession, but recession is the cure. The longer it is put off, the worse and more painful it will be.

 

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