The Federal Reserve Is Playing Defense
by Gary North: Bernanke's
Clone: Sarah Raskin Says 'Trust Us'
missed any media coverage of the September 26 speech by Federal
Reserve Board of Governors member Sarah Raskin. The media ignored
it. You would be wise not to ignore it.
a few brief news reports about it. There was no detailed analysis.
The media usually ignore speeches by any FED Board member other
reveals what is slowly dawning on the public. The economy is getting
worse, and the FED is powerless to stop it.
was an attempt to reassure her listeners that the FED really does
know what it's doing, contrary to the evidence. The Federal Reserve
has spent 45 months trying to deal with the sagging U.S. economy.
Nothing is working. It looks as though nothing will work. But she
wants us to believe that it's not the FED's fault. She did not say
whose fault it is.
I have offered
a line-by-line analysis of her speech. If you have money in a retirement
fund, you would be wise to read it. I
have posted it here.
I do not expect
many people to read it. People are too busy. Bernanke knows this.
The other Board members know this. They give their speeches, which
get little coverage. They receive little criticism. They receive
little applause. They have little power.
Open Market Committee has the power. Every eight weeks, the FOMC
makes decisions in closed-door sessions that affect a billion people.
Then why read
speeches by members of the Board of Governors? Officially, they
are the government's only source of indirect control over the FOMC,
which is made up of presidents of the regional Federal Reserve banks,
who in turn are appointed by regional FED banks, which are privately
the Board are appointed by the President. Their organization's Web
address ends in .gov. Legally, the Board is in charge of the entire
system. This is a convenient myth for public consumption. Operationally,
the Board acts as the mouthpiece of the New York Federal Reserve
Bank. The New York FED is the most important private economic organization
in the world.
are apologists for the New York FED. When I say "apologists," I
mean this in the theological sense: "apologetics" the defense
of the faith. I do not mean it in the sense of offering an apology.
The FED never says it is sorry for anything it has done. That would
be perceived by Congress and the public a sign of weakness.
SYSTEM OF REPRESENTATION
The main spokesman
for the FED is the Chairman of the Board of Governors: Bernanke.
He is legally the agent of Congress. He is operationally the barrier
between Congress and the New York Federal Reserve Bank.
This is how
all government agencies work, and the Board of Governors is a government
agency. The head of every cabinet-level department is appointed
by the President and confirmed by the Senate. He serves at the convenience
of the President. He imposes the President's wishes on the bureaucracy.
In a pig's
of Education is close to impotent to change any major policy. There
is only one way to change policy: stop all funding to every branch
of the bureaucracy that implements the old policy. Fire them all.
Sadly, this is illegal. They are protected by Civil Service law.
just stop the funding the old policy. Shut down the departments.
Move all employees to other departments.
can be done. It is never done. There would have to be hearings before
both houses of Congress. Endless hearings. The American Federation
of Teachers would scream bloody murder, meaning the nearly permanent
senior officers in the AFT would scream bloody murder. The hearings
would go on for years. Then the President leaves office. His reform
cannot be fired. The newly appointed Secretary of Whatever goes
out on the hustings to give speeches to special-interest groups
related to the Department of Whatever. He has little authority over
the day-to-day operations of the department. His task is to defend
the budget and the reputation of "his" department.
the departmental Secretary is the agent of the Administration. Operationally,
he becomes the agent of the department he oversees for a few years.
He will leave. The employees will remain. If you want to grasp this
system in two minutes, watch
this segment from Yes, Minister.
the FED's Board of Governors are appointed for 14-year terms. We
full term of a Governor is 14 years; appointments are staggered
so that one term expires on January 31 of each even-numbered year.
A Governor who has served a full term may not be reappointed, but
a Governor who was appointed to complete the balance of an unexpired
term may be reappointed to a full 14-year term.
Governors may not be removed from office for their policy views.
The lengthy terms and staggered appointments are intended to contribute
to the insulation of the Board and the Federal Reserve
System as a whole from day-to-day political pressures to
which it might otherwise be subject.
There is no
industry-related agency of the U.S. government that is more insulated
from politics. Therefore, there is no agency that is more completely
under the domination of the industry that it is supposed to control.
(The CIA and the NSA are not representatives of industries. They
are separate fiefdoms.)
If the United
States Army were this insulated from politics, the USA would live
in a militarized society. The Army would run the show. Its only
major rivals would be the Air Force, the CIA, the NSA, the FBI,
and the Federal Reserve. To imagine that Congress would have any
say in such a society would be naive. The defense industry would
be the premier industry in the society.
is a bankers' society, meaning a handful of large banks. The supreme
mark of this is the openly announced independence of the Federal
Reserve from politics. No other agency of government has publicly
claimed this degree of independence from politics, which means independence
from the voters.
In every textbook
on history or politics that mentions the FED, the author assures
the readers that this utterly undemocratic arrangement is for the
good of the people. The fact that the arrangement is a flagrant
violation of the religion of democracy, which governs all tax-funded
educational institutions, is never mentioned in polite circles.
So, our elected
officials are not the operational agents of the voters in matters
of banking. They are the operational agents of the big bank cartel.
Until the crash
of 2008, most voters were unaware of this system of representation.
But that crash changed the old climate of opinion. The reason was
Ron Paul. His candidacy for the Republican nomination for President
in the second half of 2007 got the message out. Then the crash and
the bailouts confirmed his message.
This had not
happened in the history of the Federal Reserve. The FED's Board
is now playing defensive politics. Yet, legally, it is not a political
This is why
people should pay more attention to speeches by members of the Board
I will only
go over the highlights here. I have covered the speech in detail
Like all members
of the Board, she is burdened by the inescapable reality of the
sagging economy. Unemployment is over 9% two and a half years after
the beginning of the recovery. This has never happened before.
are still falling. The bubble that popped in 2006 is still in decline.
There is no sign that we are close to the bottom.
is stalled. This is a mark of government and central bank policy
failure for a Keynesian economist. The only worse mark is falling
the FED for falling interest rates. She claimed that the FED's monetary
policies have achieved this positive result. What she, Bernanke,
and other Board members never mention is this: falling interest
rates are the universal mark of a recession in progress. Investors
buy bonds in order to lock in an interest rate. They see this as
since 2007 have been the result of investors who have moved their
capital to government bonds. But FED officials claim that FED policies
achieved this. So, Mrs. Raskin said this.
than reviewing the vast academic literature regarding the effect
of conventional monetary policy, I will simply pose the counterfactual
question: What would have happened to U.S. employment if monetary
policy had failed to respond forcefully to the financial crisis
and economic downturn? Economic models the Fed's and others suggest
that if the federal funds rate target had been held at a fixed level
of 5 percent from the fourth quarter of 2007 until now, rather than
being reduced to its actual target range of 0 to 1/4 percent, then
the unemployment rate would be several percentage points higher
than it is today. In other words, by following our actual policy
of keeping the target funds rate at its effective lower bound since
late 2008, the Federal Reserve saved millions of jobs that would
otherwise have been lost. Of course, substantial uncertainty surrounds
various specific estimates, but there should be no doubt that the
FOMC's forceful actions helped mitigate the consequences of the
crisis and thereby spared American families and businesses from
even greater pain.
rate is the rate that applies to banks' overnight lending to each
other. Demand for this type of short-term funding collapsed in 2008.
Banks have increased their holdings of excess reserves to $1.7 trillion.
This is why we are not seeing hyperinflation. Bankers are afraid
of another recession. They want money in the bank.
The FED can
take credit for having given credit to big banks in the big bank
bailout of October 2008, which was opposed by voters. The FED could
argue along these lines.
It is true
that interest rates fall in a recession. The last time in American
history that we have seen rates this low was in 1933. But, because
the Federal Reserve bought nearly worthless Fannie and Freddie bonds
at face value from the government after Hank Paulson unilaterally
nationalized the mortgage market in September of 2008, and because
the FED swapped at face value its portfolio of highly liquid T-bills
for illiquid toxic corporate bonds held by large banks, we are not
in a depression. Which do you want: low interest rates with 9% unemployment
or 12% unemployment. Those were our only choices in 2008 and 2009.
But this is
not the Party Line at the FED. The Party Line is that the FED's
increase of about $2 trillion in its portfolio was the source of
bank stability, corporate survival, and an acceptable though unfortunate
unemployment rate of 9.1%. The FED pushed down interest rates
rates that would have stayed high, contrary to all historical records
of recessions. That saved the American economy and the world economy.
great praise on the FED.
the magnitude of the global financial crisis and its aftermath,
the Federal Reserve clearly needed to provide additional monetary
accommodation beyond simply keeping short-term interest rates close
to zero. Consequently, like a number of other major central banks
around the world, the FOMC has been deploying unconventional policy
tools to promote the economic recovery.
This is exactly
what we would expect from one of five members of a government Board
that governs monetary policy, and which is supposed to be held responsible
for failure. But, as the video from "Yes, Minister" indicates, no
one is ever supposed to be held responsible in a government agency.
She thinks they deserve a round of applause.
FOMC colleagues and I have recently been faced with complex decisions
about the use of unconventional policy tools under extraordinary
economic and financial conditions. And while we may not all agree
with every decision, I believe that the public can have a very high
degree of confidence in the fundamental integrity and soundness
of our decisionmaking process.
is to give them a standing zen ovation: the sound of millions of
one-handed people clapping.
offered no evidence for hope of reduced unemployment, revived business
investing, or increased consumer spending. She was remarkably silent
on these issues. She reaffirmed the decision of the FOMC. It will
be mid-2013 before the FED dares reverse its present policy of twisting.
August, we decided to be more specific about the timing, and our
two most recent meeting statements have indicated that "economic
conditions including low rates of resource utilization and a subdued
outlook for inflation over the medium run are likely to warrant
exceptionally low levels for the federal funds rate at least through
So, we are
still in the swamp of low growth. We will remain in it for a long
time, politically speaking. She has issued President Obama a challenge:
run your campaign in a stagnating economy.
no analysis of the labor market. Yet her speech was entitled "Monetary
Policy and Job Creation."
was a defensive speech. It indicates that the FED has no plan to
get the economy back on track.
interest rates are the preliminary sign of a looming recession.
What will the
FED do when recession hits next year, as seems likely? What rabbits
will they pull out of the monetary hat?
The FED is
on the defensive. Investors should take heed.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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