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The Federal Reserve Is Playing Defenseby Gary North Recently by Gary North: Bernanke's Clone: Sarah Raskin Says 'Trust Us'
You probably 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. There were a few brief news reports about it. There was no detailed analysis. The media usually ignore speeches by any FED Board member other than Bernanke. Raskin's speech reveals what is slowly dawning on the public. The economy is getting worse, and the FED is powerless to stop it. Her speech 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. The Federal 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 owned. Members of 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. Board members 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. THE 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 eye. The Secretary 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. Well, then, just stop the funding the old policy. Shut down the departments. Move all employees to other departments. Legally, this 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 program ends. The bureaucracy 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. Officially, 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. Members of the FED's Board of Governors are appointed for 14-year terms. We read:
The 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. 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. Our 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 institution. This is why people should pay more attention to speeches by members of the Board of Governors. RASKIN'S SPEECH I will only go over the highlights here. I have covered the speech in detail elsewhere. 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. Housing prices are still falling. The bubble that popped in 2006 is still in decline. There is no sign that we are close to the bottom. Consumer spending is stalled. This is a mark of government and central bank policy failure for a Keynesian economist. The only worse mark is falling spending. She praised 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 safe-haven investing. Falling rates 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.
Rather 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. The FedFunds 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. Trust us. 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. Raskin heaped great praise on the FED.
Given 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.
My 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. My response is to give them a standing zen ovation: the sound of millions of one-handed people clapping. CONCLUSION Mrs. Raskin 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.
In 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 mid-2013." 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. She offered no analysis of the labor market. Yet her speech was entitled "Monetary Policy and Job Creation."
Falling long-term 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. October 1, 2011 Gary 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. Copyright © 2011 Gary North
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This
was a defensive speech. It indicates that the FED has no plan to
get the economy back on track.