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In response to Ben Bernanke’s claim of Fed independence

Federal Reserve Chairman Ben Bernanke gave a speech at the Bank of Japan on the importance of central bank independence and transparency…

Chairman Bernanke espoused a lot of platitudes… but the reality of the Fed’s actions is their deep entanglement with the administration, Congress and Wall Street…

I think we will be hearing more speeches attempting to justify the enormous powers of the Fed and the need to have minimal oversight as unemployment remains at exceptional levels and households continue to delever. The Fed will continue to develop and execute larger and larger efforts to prop up the economic system… they are sailing into the wind without a rudder…

For example Chairman Bernanke makes a stab at justifying the enormous expansion of their balance sheet to prop up the mortgage market and remove distressed assets from the banking system… by pointing to the income returned to the Treasury…

“…The issue of the fiscal-monetary distinction may also arise in the case of the nonconventional policy known as quantitative easing, in which the central bank provides additional support for the economy and the financial system by expanding the monetary base, for example, through the purchase of long-term securities.


The American people would like an explanation

Have a look at this video to get an idea of the true fire of democracy…

Senator Jeff Merkley, of Oregon, uses his heart and soul to push back against the power of Wall Street…

Kudos to Senators Merkley, Harkin, Levin, Dorgan, Cantwell, Lincoln, Kaufman, Whitehouse and all others who have taken to the floor of the Senate to mount a battle against the oligarchy of Wall Street.

Where is President Obama? Where?

Kite flying

From FT Alphaville some comments from Tullett Prebon economist Lena Komileva on the similarities and differences between the growing Euro sovereign contengion and Lehman’s collapse…

Basically she’s saying it’s an order of magnitude bigger this time… or maybe two orders of magnitude…

~~~ “…The current episode of the global crisis is similar to the crisis mechanism that we saw during the “Lehman” phase:

o The market has become aware of a substantial pool of solvency risk in a part of the market that previously traded as “low-risk”.

o As was the case in late 2008, the confidence and liquidity drain experienced in the stressed part of the global financial system – in this case Eurozone peripheral sovereign and bank markets – has not been prevented by the excessive central bank liquidity flooding the markets…The liquidity crisis that has taken hold of the markets is once again driven not by a shortage of liquidity but by the collective desire for capital preservation of each financial institution in the market.

o Furthermore, the negative effects for bank’s collateral quality, liquidity and capital stemming from deteriorating Euro sovereign credit risk in the debt markets and fears about the euro’s collapse, have transmitted the contagion across every capital market and asset class around the world.

But, Komileva argues, that are some significant differences between the “Lehman shock” and current crisis, as far as they underlying drivers thereof are concerned:

The main point is that the imbalance between leverage and capital (or income), i.e. the insolvency risk, in the financial system is considerably worse, which can become the catalyst of a potentially unprecedented systemic shock.

· First, this is because risky governments in the Euro area traded as “risk-free” until recently, reflecting an enormous mispricing of solvency risk.

· Second, because the policy stabilisation mechanism of containing bank solvency risk through government guarantees and monetary liquidity has already been exhausted.

· Third, and most importantly, the current re-pricing of sovereign risk which started with Greece and has now spilled over to other governments, is potentially unstoppable because there is no superior capital structure in the policy mechanism.

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So buckle up friends… stay liquid… and let’s hold the Federal Reserve and Treasury accountable for any commitments made without authorization from Congress… cause some some giant wads of money are starting to change hands… and we need some accountability…

Congressman Mike Spence on the floor questioning the US’s bailout of Greece while we won’t bailout California… he raises an important point…

Let the sunlight in…

Conservatives and progressives worked together to support Senator Sanders in his quest to have the Federal Reserve audited.

Kudos to Senator Sanders. We took a big step forward  in reclaiming our nation today.

Bloomberg reporting

~~~ “The Senate approved an amendment to the regulatory-overhaul bill authorizing a one-time audit of the Federal Reserve’s emergency-lending programs, and defeated a second proposal that would have allowed continuous inquiries.

Lawmakers voted 96-0 today for Senator Bernard Sanders’s proposal to let a congressional watchdog conduct an audit of every Fed emergency action since December 2007. The Senate rejected a measure from Louisiana Republican David Vitter that would have permitted unlimited reviews.

The Sanders amendment is closer to what Federal Reserve Chairman Ben S. Bernanke told legislators he would support. The Fed chief, during a February hearing, invited an audit of emergency loan programs, while raising concerns that broader audit authority could result in reviews of monetary policy.


The continuing expansion of the Federal Reserve’s scope

From Washington’s Blog:

~~~ “On Tuesday, I wrote:

The Fed argues that an audit would interfere with its monetary policy decisions. [But] decisions about what toxic assets should be accepted by the Fed as collateral, how such assets should be valued, and who bailout funds should be given to are wholly separate from the Fed’s core monetary policy decision: raising or lowering interest rates.

[F]unneling hundreds of billions to foreign nations and foreign banks, accepting worthless junk from the too big to fails and marking it at unrealistic valuations, and doing the other things which the Fed has been doing recently are not core monetary functions. Congress never authorized these actions when they passed the Federal Reserve Act.

Therefore, the Fed’s actions must be made transparent and subject to the light of day.

Eliot Spitzer wrote an important essay yesterday explaining that what the Fed is really doing is controlling our country’s fiscal – as well as monetary – policy:

The Fed over the course of this crisis has demonstrated that its influence goes far beyond the issue of monetary policy.

In monetary policy—controlling the supply of money—the Fed is constrained by reasonably well-understood policy levers that have a macro impact, and its decisions are rather evident in short order. Now, in contrast, the Fed is engaging in fiscal policy—spending money—and in fact has become the single largest fiscal actor in the U.S. economy, dispensing hundreds of billions of dollars to private parties. In doing so, the Fed is picking winners and losers. Why Goldman but not Lehman? Why guarantee the debt of some companies but not others?

The Fed has enormous discretion in its decisions. It is entirely appropriate to demand that they be carried out with greater transparency and be subject to greater oversight.”~~~


President Obama should do Americans a favor and get behind the AUDIT THE FED amendment rather than fighting it.

His actions in this matter subvert every campaign promise he made about accountability and transparency.

When Congress passes the Sanders “AUDIT THE FED” amendment today important information will be audited by the Government Accountability Office such as:

> > > Decisions about what toxic assets were accepted by the Fed as collateral

> > > How such assets were valued

> > > Who bailout funds were given to

These decisions are wholly separate from the Fed’s core monetary policy decision: raising or lowering interest rates.

The GAO audits the US Department of Defense but they dont second guess the battlefield plans of the generals.

In the same light the GAO will be examining that proper controls are in place to protect the interests of American taxpayers and examine whether Wall Street is being disproportionately benefited in trading and borrowing from the Fed.

Current cosponsors for “Audit the Fed” amendment:

More at Riski: Reform of the Federal Reserve

Euro crush

From the brilliant graphics team at the New York Times

~~~ “Banks and governments in these five shaky economies owe each other many billions of euros — converted here to dollars — and have even larger debts to Britain, France and Germany. Arrow widths are proportional to debt amounts.” ~~~

What is the solution? Haircuts… haircuts for the bondholders… we’ll see how long it takes to get there…

Audit the Federal Reserve

The Dodd bill (Senate bill 3271) grants enormous new powers to the Federal Reserve.

Senator Bernie Sanders of Vermont is filing an amendment (S. 3738) to “audit the Fed” which currently has fifteen cosponsors.

America needs ponder if a private, independent institution should control such a substantial part of financial system without complete and thorough oversight.

Under the Dodd bill the Fed will be responsible for:

1. Monetary policy
2. Controlling inflation
3. Full employment
4. Supervising the largest financial firms (banks)
5. Supervising other “systemically important” firms that the risk council designates (hedge funds, insurance firms, Citadel, Pimco, Blackrock etc…)
6. Overseeing payment and settlement systems
7. Interfacing with foreign central banks and global authorities

Because of the breadth of these responsibilities the Fed will handle trillions of dollars on a regular basis. As we saw with Bear, Lehman and AIG the potential for favoritism and forbearance is enormous for the Fed.

The Fed must be audited on a regular and independent basis by the Government Accounting Office.

Cosponsors of the “Audit the Fed” amendment S.3738 (as of 4/30)

Sen Feingold, Russell D. [WI] – 4/29/2010
Sen DeMint, Jim [SC] – 4/29/2010
Sen Leahy, Patrick J. [VT] – 4/29/2010
Sen McCain, John [AZ] – 4/29/2010
Sen Wyden, Ron [OR] – 4/29/2010
Sen Grassley, Chuck [IA] – 4/29/2010
Sen Dorgan, Byron L. [ND] – 4/29/2010
Sen Vitter, David [LA] – 4/29/2010
Sen Boxer, Barbara [CA] – 4/29/2010
Sen Brownback, Sam [KS] – 4/29/2010
Sen Risch, James E. [ID] – 4/29/2010
Sen Wicker, Roger F. [MS] – 4/29/2010
Sen Graham, Lindsey [SC] – 4/29/2010
Sen Hatch, Orrin G. [UT] – 4/29/2010
Sen Crapo, Mike [ID] – 4/29/2010

The people must have confidence in a sound central bank and currency.

This confidence comes from sunlight and honesty.

Audit the Fed.

More at Riski on reform of the Federal Reserve.

Lehman 2.0

The global financial system is a tight web of connections.

While the US Congress debates financial reform the Euro system is being shaken down by its weakest member Greece

In the financial crisis of 2007-2009 everyone was taken by surprise by “mortgage repayment” default risk…

The assumption had always been that RMBS were sufficiently varied by geography and contained the mortgages of borrowers able to repay.

It turned out that Wall Street, led by Goldman Sachs, among others, had obscured the risks and packaged and sold increasingly toxic securities.  Surprise!

Now financial markets are being blind-sided by “sovereign risk“… or the risk that a country does not have sufficient revenue to support its debt payments… this is an old story… think Louis XVI and many other sovereigns…

The chart above, from the German paper Spiegel (HT FT Alphaville), shows the concentration of exposure of various countries to Greece… note that the banking systems of various Euro countries exposed to Greece are very leveraged and weak… weak banks with weak capital… been there… done that…

Lehman 2.0?

Oh yes… could be… and who can bail out whole nations and banking systems again?

6 things worth fighting for in the Senate bill

Excellent table via Rortybomb… although it’s actually 7 or 8 things worth fighting for in the Senate financial reform bill…

Mr. Rortybomb misses a big one related to legislation on the Federal Reserve…

Ryan Grim of HuffPo writes about it the grant of $4 trillion of lending authority to the Federal Reserve with no Congressional oversight

~~~ “The Wall Street reform bill headed for a test vote on the Senate floor Monday night will allow the Federal Reserve to continue to pump trillions of dollars into major banks largely in secrecy, the co-author of House language that would open the central bank to an audit charged in a memo to the Senate.

“The Senate has a provision in its reform bill that purports to audit the Fed. But, it really doesn’t do anything of the sort. I’m going to run down the details for you, and reprint the legislative language so you can read it yourself,” writes Rep. Alan Grayson (D-Fla.).

It would not allow the GAO to look into the Fed’s massive purchase of toxic assets, its hundreds of billions in foreign currency swaps with other central banks or its open market operations, among other restrictions…” ~~~

No one has discussed the massive expansion of power for the Federal Reserve in the Dodd bill and the lack of  provision for the GAO auditing of the Fed … critical issues…

After Monday’s cloture vote the amendment race will begin…

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Bloomberg video — Amar Bhide, visiting scholar at Harvard University, says financial overhaul moving `Much too quickly’: