Given the Federal Reserve’s abysmal regulatory record in the runup to the crisis (even the uber bank friendly Office of the Comptroller of the Currency was more aggressive in going after subprime abuses, for instance), it should be no surprise that some of its directors are utterly lacking in propriety and common sense when it comes to defending the rights of banks to profit at the expense of customers and society at large.
The only good news about the latest example is that it was so ineptly done that it appears to be backfiring.
By way of quick summary, Bank of America entered into what is widely referred to as an $8.5 billion settlement. That would give it a broad waiver from suits by investors in the trusts that are covered by this pact, which represent virtually all of the Countrywide securitizations. The release goes well beyond the so-called representation and warranty liability, which resulted from the fact that Countrywide promised to put loans that met certain quality standards into their deals but instead put in quite a few dodgy loans. It also includes chain of title issues, which is a huge gimmie for Bank of America. Not only is the $8.5 billion amount arguably way too low just for the rep and warranty issue (AIG filed a $10 billion suit for bond issues representing a mere 6.6% of the total), but it is a screaming bargain by virtue of covering the potentially even bigger chain of title sinkhole.
Where this all gets squirrely is that BofA didn’t ink this deal with investors. The trustee on these deals, Bank of New York, is the one that agreed to the settlement. It conferred with only 22 investors, but some (like the New York Fed, Goldman Sachs, Pimco, and Blackrock) might prefer making the mortgage mess go away to maximizing their return on investment.
The settlement is subject to court approval, and a number of objections have already been filed. The biggest bombshell, as we discussed, came from New York attorney general Eric Schneiderman (although a later one by Delaware AG Beau Biden was no party either). The Schneiderman motion didn’t merely challenge the adequacy of the settlement, but it also took aim at Bank of New York. Schneiderman alleged that BoNY had engaged in fraud. First, it failed to preform its duty to investors by getting a very valuable indemnification, which we had characterized from the very outset as a bribe from BofA . Second, BoNY failed to perform required duties and tell investors that loans were defaulting. Third, BoNY made false certifications to investors regarding whether it held the collateral as stipulated in the pooling and servicing agreements, which is a violation of New York securities laws.
The third allegation, the false certifications, is a biggie and we’ve discussed it on the blog before. Frankly, we’ve been stunned no one has gone after till now, since this is as close as you ever get to a slam dunk in the litigation arena. The legal argument is simple and the facts, that is, proving that the trustee made false certifications, is remarkably easy (just look at the difficulties the banks have in proving chain of title when challenged for starters). Abigail Field in Fortune Magazine found a complete fail in Countrywide securitizations it examined in two New York counties. A probe by the New York Post published Sunday today found a 92% chain of title failure rate in Chapter 13 filings it examined in two Federal court districts in New York state. Not surprisingly, this issue was the centerpiece of the Delaware filing objecting to the settlement.
So what in the way of wounded noises do we get from the Bank of New York camp? Get a load of this, from Alison Frankel at Reuters:
A BNY Mellon spokesman told me the bank didn’t want to comment on the broader implications of the AG’s filing, but directed me to Kathryn Wylde, CEO of the Partnership for New York City, a business development non-profit. She said that the AG’s “careless action” hurts New York’s standing as a financial center.
“It’s disappointing from the standpoint of the business community that the AG would make a fraud accusation against a major financial institution — in the press,” she told me. “And to not have any consultation with the institution? The bank was blindsided by what appears to be an outrageous charge.”
“Fraud accusation…in the press”? This woman evidently has reading comprehension problems. If she had bothered to go through any of the news reports on the motion, the charges were not made in “the press”, they were made via a court filing.
She was quoted in Crain’s as accusing Schneiderman of “grandstanding”, which suggests seeking media attention. It’s meant to imply Schneiderman is another Spitzer in the making (Spitzer was big on trying his cases in the press) when Schneiderman has done the opposite. He’s studiously avoided press appearances even when he is filing big cases.
And no, Bank of New York was not entitled to “consultation” when it is about to be accused of fraud, particular when the facts and law are as clear as they are in this instance. Her argument indicates either abject ignorance or deliberate deceit.
But what is even more disturbing than her disregard for the most basic facts is the underlying logic: that it’s perfectly OK to break the law if you make enough money at it to create employment. As David Dayen notes incredulously:
[S]he is actually arguing that Schneiderman, by defending the rights of investors and seeking the truth on out and out securitization fraud, is threatening the existence of the financial sector in New York City. No, really…
The banks must continue looting, the story goes, or they’ll stop creating jobs in Manhattan.
If you accept that logic, it takes you some interesting places. Andrew Haldane of the Bank of England has already told us what inefficient looters the bank really are. His analysis concluded that the cost that the big banks imposed on the global economy in th financial crisis was so great that even if you spread a low estimate of the costs out over 20 years, the first year charge would wipe them out. Since I believe members of the Mafia make less money on average than Wall Street employees, they are more efficient looters, and Wylde ought to be promoting them too.
Of course, what Wylde blithely ignores that this looting is a wealth transfer. Those jobs created on the back of fraud are at the expense of mortgage bond investors, who are in the end ordinary citizens, and homeowners, who are certain to suffer from an overshoot of housing to the downside thanks to chain of title issues deterring buyers of foreclosed homes, and vacancies depressing prices of neighboring properties. The destruction of consumer balance sheets is having a far greater impact on employment in the New York area and nationwide than can even remotely be justified by the comparatively few jobs created in the mortgage finance and RMBS trustee businesses of the too big to fail banks.
That brings us to the most interesting question: who is this Kathryn Wylde? The organization she heads, the Partnership for New York City, is an influential group. She ranked 11 on a 2009 list of New York City’s most powerful women.
But the defense of BoNY is sheer cronyism. This isn’t even subtle. Bank of New York is one of the “partner companies” of the New York Partnership, which is its biggest ticket donor group. That tier also includes other parties who want the BofA settlement to go through: BofA itself, Blackrock, Goldman Sachs, ING. If you look at the various partner lists, you can see it is full of other firms that would like the mortgage mess to go away, such as securitization law firm SNR Denton (whose white paper last November trying to defend industry practices is looking like more and more of an embarrassment) and Wells Fargo Conveniently, the BoNY in-house flack R. Jeep Bryant is a Rockefeller Fellow at the Partnership , which no doubt made it even easier for him to make the call to Wylde.
Finally, Wylde is closely allied with governor Andrew Cuomo, who protected the banks when he was attorney general. The Wall Street Journal today describes the friction between Schneiderman and Cuomo. Schneiderman was opposed by a lot of the banking industry, including Bloomberg, whose firm is yet another major sponsor of the New York City Partnership.
Wylde was appointed to fill ex Goldman Sachs co-chairman Steve Friedman’s unexpired term as a Class C director of the New York Fed and was reappointed at the end of 2010. Class A directors represent the banking industry, Class B directors represent consumers. Class C directors, per the Federal Reserve Act, are tasked to consider the interests of the public at large, to give “due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers.”
Not only does Wylde appear to be derelict in her duties as a Class C director in shilling publicly for her paymasters at the Partnership for New York City, but one has to wonder if her appointment was properly vetted. Class C directors have had a nasty history of acting as banking industry stooges, when the Federal Reserve Act is also explicit that Class C directors may not be a “officer, director, employee, or stockholder of any bank.” If she has any meaningful net worth, it is highly doubtful that she does not own bank shares.
In one sense, the fact that Bank of New York could trot out only a near-captive mouthpiece who gave a pathetic defense of its position is confirmation of how serious its woes are. But this incident also serves as a case study of how quick the elites are to circle the wagons when their conduct is subject to well deserved scrutiny.
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Go Yves!!!
“…this looting is a wealth transfer. Those jobs created on the back of fraud are at the expense of mortgage bond investors, who are in the end ordinary citizens, and homeowners, who are certain to suffer from an overshoot of housing to the downside thanks to chain of title issues deterring buyers of foreclosed homes, and vacancies depressing prices of neighboring properties.”
Why haven’t Americans reacted more violently to the ownership society scam? Instead of praising Social Security lots and lots of us are seriously considering voting for Michele Bachman. The banks will truly regret shovelling millions over to her. I’d rather see BAchman in there than Obama. At least you know from the start she’s going to take the money and run.
Because the scam gave them shiny things.
http://www.theonion.com/articles/visa-exposed-as-massive-credit-card-scam,21136/
when the bankers go to jail my friends
when the bankers go to jail
we’ll finally see justice done
when the bankers go to jail
http://thepeakoilpoet.blogspot.com/2011/07/when-bankers-go-to-jail.html
Presumably the ‘C’ in Class C stands for ‘cunt’.
Not really. We’re equal opportunity around here.
Perhaps ‘captured’ is the word you want.
Much better than Jo’s proposal, but ‘captured’ is still a bit milquetoast. May I suggest crony, corrupt or crooked?
This message brought to you by the Jimmy Breslin and Harry Truman Institute of Plain Speaking.
Dear alex;
I had been wondering where all those bucks had been stopping at.
Where the bucks stop at… Breslin and Truman’s Mafia connections. Since the mid 30’s Kansas City was the way station in the Mafia’s national distribution system. Truman was handpicked by the Pendergast machine. Truman despised the Federal Bureau of Narcotics.
Funny, I thought “cock” was more likely.
There ya go.
Kathryn Wylde is a cunt, an old crony, corrupt and crooked like an old mans cock.
For “without any consultation with the institution” read: without giving us a chance to bring in our bought-and-paid-for lawmakers and prepare an obfuscating rebuttal.
But as for why the potential ‘loss’ of new jobs in Manhattan gets attention from policy people when the undermining of expenditure by millions doesn’t, I rather believe it’s the counter-factual issue.
You can more readily prove that ‘x’ provision caused a single bank to move ‘y’ people elsewhere (or to report that it failed to expand by ‘z’ in NYC) than you can prove that many thousands of families didn’t spend as much as they might have and caused hundreds of small businesses to fold. It’s all about the easy story from a ‘trusted source’, and not the hard data (much of which falls under the radar already) coming from month to month.
Very informative article. Thanks. Schneiderman must be quite an interesting guy to take on the New York City financial elite.
“Schneiderman must be quite an interesting guy to take on the New York City financial elite.”
And, another step closer to a sex scandal…bud-ump-bump
Dear gs;
Not so much the sex part of the latest scandals, but the hypocritical parts. If you want to see how to do it right, just check out Barney Franks’ career. He appears to have made what would be a major political impediment anywhere in our homophobic culture a positive. His integrity, on this issue at least, ‘shines’ through.
I have more hope for Schneiderman. He doesn’t, from the remove of the Deep South, appear to be anywhere near as great a ‘grandstander’ as his predecessors. Let’s give him all the support we can!
“Schneiderman. He doesn’t … appear to be anywhere near as great a ‘grandstander’ as his predecessors.”
Which (devoutly to be wished) makes him even more dangerous.
When the shooting starts, the Guillotines appear, that’s when the idiots will discover the “Law”, but by that time, all bets will be off. I wonder, what would Wall Street’s attitude be to see the Street burn like the London Riots?
Dear Norman;
You’ll notice, I hope, that nowhere in the UK coverage did we see any shots of The City going up in flames. Like leaderles mobs in all times and places, this bunch burned their own, or neigbhoring areas. “If they knew what they were doing, they’d be dangerous.”
Look to see Harlem, or Flatbush sending up smake signals when rioting erupts in New York. There’ll be plenty of ‘riot suppresion forces’ available if any ‘uppity’ rioters get the idea to trash Lower Manhattan. (How long would it take to deploy ‘civil insurrection’ Stryker Batallions from Ft. Drum to Lower Manhatan anyway?) This could be Americas Reichstag Fire for real when it happens. Obama would be the perfect person to suspend the Constitution ‘temporarily’ for the duration of the ‘War on Domestic Terrorism.’ It worked for Bush the Younger. We’re still saddled with the (anti)Patriot Act.
The banksters probably have provided adequate security for themselves already. I’m sure the sidewalks can be lowered, flooded with saltwater, then the crocodiles released into the moat. Surely there are vats of napalm stored on the skyscraper roofs and these are lit on fire and poured down on the hapless peasants brandishing their pitchforks.
If the siege lasts longer than a day, troop transport helicopters will ferry execs from the rooftop helipads back to the Hamptons in time for dinner, then back again to work by 10:00AM for Day Two of the The Siege.
Electrons of price need not a home address, they roam the tubes, checking out one black box after another, imprinting themselves as they go, would death await around the corner, their last position saved a copy…muhahahaha!
Skippy…laying siege to empty fortresses, is a bad tactical move…methinks.
Dear post birthday skippy;
That would be a sort of ‘Credit Maginot,’ wouldn’t it. And, just like before, the Huns would start it all exploding by moving through Belgium. (And to think, I used to believe Bourse was a creamy vegetable soup. Silly me.)
@ambrit, commiserations post acknowledged along with pcyho. Now…if…bad was to rain down upon the earth, one of these rooms / floors would be a good place to hunker down in, if you could get in.
Skippy…would they had such, the Germans would have been more troubled. Some of best reinforcement, shielding, backup power, redundant systems, humans can build.
Mr Regula;
Throw in the London financial district and you’d have a true “Tale of Two ‘Cities.'”
Friends;
The phrase that jumps out at me in the description of Mz Wylies ‘position’ is “business development non profit.” My stars! What a wonderful oxymoron! I’m learning slowly but surely to distrust any organization that touts itself as “non profit.” That phrase immediately sets me off on a search for said ‘non profits” “backers.” Then I at least can take a guess at whos’ interests are involved.
Thanks again for sponsering this ‘educational institution’ for the Masses.
A modest proposal:
For the next five years, each of us no longer uses the term “non profit” without affixing “corporation” to the end of it.
They are corporations. Somehow that gets left out, and leaves only “non profit,” which sounds so fluffy bunny and chock full o’ rainbow-farting unicorns.
Whatever happened all that corporate talk of personal responsibility? Oh, wait I get it corporations are not people, so it does not apply to them. No, wait the U.S. Supreme court said they were persons under the 14th Amendment. So, confusing… NOT.
Wait, wait, b-b-but how can anyone criticize those folks doin’ God’s work?
nowhereman;
Yer right mate. If I remember Genesis rightly, wasn’t God all about creating things? Quite a leap from that to ‘Financial Speculation.’ Oh, and didn’t his son throw those moneychangers out of the temple too?
It always seemed to me that the afterlife was a real estate scam. Hand your freedom, mind, body, and soul over to a power cabal now. Good stuff to come later in this other place!
The connection between the mainstream religious traditions and the rise of capitalism is examined by economic Sumeriologists. Michael Hudson is a good place to start. That stuff is so intermixed in our psyches by 6,000 years of agricultural civilization that it’s hard to sort out from where we stand, without a pretty big effort.
The secular cathedral of Wall Street operates with its roots in that terrane. But what we are sensing is the need for a new emergent model, one more ecological than PermaGrowth exploitive. I’m not convinced we can make the leap, since even the way we write and count originates in “the worst mistake in the history of the human race.”
http://www.ditext.com/diamond/mistake.html
Thanks Yves for the reference to the rule of law. It is my opinion that without fully and unconditionally implementing the rule of law, we are doomed. Once you start down that road, it never end and produces a sense of insecurity. The Western society is based on strict implementation of the rule of law (including the spirit of the rule of law) as otherwise we have chaos and the right of power over those without means (in other words, slavery). We unfortunately are close to that situation already but the debt slaves have not realized yet who is really responsible for their plight.
Right. When the rule of law and its spirit is breached, its initially gradual abandonment can swiftly accelerate to mob rule. That’s what Charles Dickens chronicled in A Tale of Two Cities and what he feared for England in the mid-19th century (as history rhymes in the 21st). He wrote about stirring discontent to a parliamentarian in 1855:
Dickens was sickened by the blind abusive arrogance of the aristocracy but was equally disgusted and horrified by the undifferentiated mob of vengeance and retribution that it spawned — “its passion directly proportional to its stupidity”. (torching and looting its own neighborhoods). Let’s hope some spark of enlightened self-interest begins to dawn in today’s power elites before mob terror inevitably replaces state terror.
I’ve always adored the Chuck Heston version of the Moses story. It’s such a fascinating myth: the moment that humans are pushed to evolve into an understanding that there is more than their own whims as an organizing principle for life. And the idea there is a natural law larger than our momentary whims.
Even more fascinating to me is how this story shows that view as coming out of a rebellion against an agricultural civilization, Egypt’s, extremely grounded in social stratification and misery of its laboring classes.
Moses got his wisdom not as a prince or slave within that system, but as a hunter gatherer–wandering in the desert. I’m not romanticizing hunter-gatherer life by any means. But as we look at stories from the past, there are often fossils in them of just what we gave up when we decided to chain ourselves to the temple, granary, and plow.
“Even the uber bank friendly Office of the Comptroller of the Currency was more aggressive in going after subprime abuses, for instance” Dugan sat on his hands and did nothing when it came time to regulate. Subprime abuses? What were those in 2005?
Forgot to add – even at this stage of the game, John Dugan is a goddamn liar. Speaking of God, I hope one day this son of a bitch is held responsible for the damage he has done:
“In 2004, the OCC asserted sweeping powers to preempt state authority over these big banks. By aggressively pushing this agenda, the OCC prevented states from cracking down on abusive national banks. The OCC even joined a bank lobby group to sue state regulators who tried to prevent predatory lending”
Do you realize people, that the USA has probably killed more than 250K people in Iraq? It’s a staggering, mindblowing disaster. It’s the gift that keeps on giving, just like mortgages from that era. Gotta pay for all that warfare somehow. Maybe we should be happy we aren’t dead, who needs a place to live anyway.
“Fannie Mae promises to keep families in homes, but instead pressures banks to foreclose” – Jennifer Dixon
Alan White, a law professor at Valparaiso University and a leading national expert on the foreclosure crisis, reviewed the records for the Free Press and said they show Fannie Mae — which is regulated by the Federal Housing Finance Agency — is sabotaging the nation’s foreclosure prevention efforts and helping drive down home values.
This is actually a matter of record. The OCC being more aggressive than the Fed does NOT mean it was aggressive. The OCC at least made an effort to enforce the Home Owners Equity Protection Act, which imposed certain standards on banks regarding subprime lending. And in fact, OCC regulated banks did originate less awful subprime than the other channels.
And both have a defense of sorts: more than half the subprime originations took place outside channels either of them regulated (as in bank, more than half was originated by non-banks such as mortgage brokers).
ANYONE NOTICE THIS fromt he Partnership list of FELLOWS?
David Geithner
Senior Vice President & Group General Manager, Time Inc.
David Geithner is Senior Vice President and Group General Manager of Time Inc.’s Style & Entertainment Group, where he oversees finance and operations for six of Time Inc.’s leading brands, including PEOPLE, In Style, Entertainment Weekly, ESSENCE, People en Español and PEOPLE StyleWatch. He was previously vice president and group general manager, and prior to that he served as vice president and general manager of the PEOPLE Group. He joined Time Inc. in 1993. Mr. Geithner received a B.A. in government from Dartmouth and an M.B.A. from the Kellogg Graduate School of Management at Northwestern University.
Just wondering if this guy is related to Timmy G
Yep…his brother.
Andrew G. Haldane (Director of Financial Stability at the Bank of England) in his “The $100 Billion Question” paper estimates the cost to world of the Sub-Prime Mortgage Fraud to be in the region of $200 trillion of lost GDP. How big a loss does society need to have to convince itself that minority controlled capitalism needs to go?
Sorry, but those estimates are meaningless. Had the leveraged bubbles of the past decade not occurred, the growth patterns would’ve been entirely, and fairly unpredictably, different. So there’s no way to know how much wealth has been ‘lost’ or whatever.
I beg to differ. Trendline growth has fallen since the 1980s when the prevailing economic model changed from rising worker wages being the engine of growth to rising consumer borrowing fueling consumption. The latter is an inherently self-limiting model, as we found out.
So you have no reason to assume growth would have been lower ex financialization. It is likely to have been higher.
Strictly speaking I wasn’t trying to say that it would necessarily have been lower, just that it would’ve probably been so different as to be very difficult to compare.
I can’t really answer this properly in the amount of space available here, so I hope you’ll forgive me for lots of hand waving, but the reason why worker wages stopped being the motor of sustainable growth was because globalization had started to catch up with the US (think stagflation), and the first to experience this pressure, and the ones who will by necessity experience this most intensely, were the assembly/blue collar workers. (Because their work is easiest to compete on.)
Slower growth in the US meant that investors would have fewer opportunities to invest their money profitably (likely encouraging them to start investing in the RE and the dotcom bubble out of desperation) and it also meant that politicians hungry for GDP growth figures would become receptive to bankers whining for deregulation so they could “grow the economy” or however they sold it. Then when the housing bubble started to inflate back in the early nineties already (see Warren’s book; part of the reason why this could happen sort of sustainably was because dual income households allowed for price inflation), this allowed for the borrowing-led growth period to start. (I know I’m ignoring the S&L issue here, but I’m not really familiar with it apart from what Black has written about it.)
So, should prosecutors have consulted Bernie Madoff before charging him with fraud? Wylde is nothing but a shill.
Yet another excellent post, Yves. It’s enough to yield a paralyzing case of fraud fatigue, but you are indefatigable. The web of deceit is so tangled and sticky that spiders like Kathryn Wylde are getting stuck in it.
Question from flyover country about the tangled web: is BoNY a Criminal Reserve cartel branch, a Federal Home Loan Bank, BoNY Mellon or are they one and the same?
Sounds to me like a good generic name for “bank of new york”. Shouldn’t be able to copywrite it.
You two made my brain spit out:
Bank of the NorthEast Reserve
For sure C knew she was the goat. She peeked out, said her piece, got whacked, and I bet she ducks away for good now. But she really didn’t say Schneiderman was wrong. Because all of NYC knows he is right. She said his “careless” action hurts NY’s financial center. And she danced around the charge of fraud with “BNY was blindsided by the charges.”
So does the Partnership for NYC promote non profit businesses or is the Partnership itself a non profit that promotes businesses? Either way it sounds like a progressive bunch of people who rely on a functioning financial center to fund them. Who wouldn’t.
The take away is carefully controlled: Please don’t hurt the banks too much because we need them.
Even though they just blew 200Tr? They should be contrite.
Schneiderman himself says his intention is to restore trust. We know that all the banks want this mortgage mess behind them. But only one of them actually says it like it is.
An article yesterday in the LA Times tried to gloss over the failure of an agreement between the 50 AGs and the banks and concluded that it was the intention of this group to state its conclusions by Labor Day and that the conclusions were something along the lines that each bank would be free to negotiate its own settlements! But no mention of indemnification. I betcha bank PR is in high gear right now.
ES must be truly about to get results for the lobbyists and PR folks to be attempting to smear him.
This bizarre editorial (in a paper that’s also pro-Cuomo)
It’s legal, but wrong, for Attorney General Eric Schneiderman to pocket campaign cash
http://www.nydailynews.com/opinions/2011/08/15/2011-08-15_erics_cashflow_problem.html
It’s very understandable why Bonnie Parker and Clyde Barrow were folk heros for the populace.
Reuter’s has a “saint” Buffett article, “Buffett calls for more taxes on ‘mega rich.’ Buffett may recognize that he and his buddies ‘mega rich’ life span may end as Louis IV and Marie Antoinette? Or the sociopath narcissist is seeking publicity as the megarichman who really wants to pay more taxes; really were caring humans, it’s the big bad government who won’t raise taxes on us.
“He said Washington legislators “feel compelled to protect us, much as if we were spotted owls or some other endangered species.”
The Megarichosaurus rex, a voracious species that thrives upon annihilation has entered its twilight on the path of total extinction.
I’m pretty new here. I’m wondering if it’s well-publicized that under New York trust law, a trust’s beneficiaries can go to court to remove the trustee for violating the terms of the trust. EPT § 7-2.6.
As part of such an action involving an express trust, a plaintiff has the right under NY’s civil procedure rules to interrogate the trustee regarding their administration of the trust. CVP § 7701. If these securitized trusts are express trusts, there’s the potential to bring lots of information into the light.
Strange shades of DSK in terms of entitlement to process beyond what everyone else gets. White collar defendants (including institutions) that they are entitled to a consultation before charges and a chance to settle everything quietly. No such luck for street crime defendants.
Notice that no one is really defending BNMY on substantive grounds?
The looting continues,I am amazed that there have not been more insurrections,more civil unrest at the widescale fraud perpetrated by the big banks. But it could happen any day……
Should any be surprised regarding our domestic “axis of evil” between the Federal reserve and the banking community, not to mention the Beltway political establishment? See below:
Ted Harwood interviews Ben Bernanke, Chairman of the Federal Reserve’d (for funding Wall Street speculators, foreign banks, and Washington, D.C. spendthrifts) Board of Governors
August 18, 2011 (Revised on August 21)
Ted:
Thanks, Ben, for making time available this morning. I know you’re very busy working to keep that federal reserve liquidity pump moving up and down, drawing more water out of the well to fertilize the economy’s parched earth. Be careful you don’t get a rotator cuff injury.
Ben:
You’re welcome. By the way, my arm is just fine. Others here do the heavy lifting. What you refer to as the “liquidity pump” we call the “server farm.” And mainly what’s involved is working the computer keyboard, to get funds flowing around and about the country. It’s basically digital dough-making. And if there’s any risk of bodily injury, it’s probably a carpal tunnel complaint.
Ted, we’re well past the days of printing those gold-green embossed bonds with etchings of Ms. Columbia with spear and shield, or the American bald eagle, arranged in a heroic pose amidst industrial factory gears, wheat threshing machines, or steam locomotives, to persuade the bondholder that their treasury bond is as good as gold. Getting away from paper bonds saves the taxpayers money.
Actually, getting away from paper altogether, whether bonds or cash, is a big savings. It costs banks money to handle cash, and so they’d rather you use plastic or the computer, and they will reward you for making the switch.
Ted:
Aha, I get it. The vanishing of “cash.” So, what you’re saying is that money is….well, not at all the tangible thing it once was, like the 90% silver Walking Liberty half dollar coin that I carry in my wallet, to remind me of when money was…well, something tangible. Kind of makes you wonder what money is. I can imagine that many of my fellow Americans can get confused when they use a debit card to buy groceries or gas. Is that money, or debt? And if there’s no real money, like gold and silver coins, how do you repay your debt, when a bill for the gas and groceries arrives?
Ben:
You can pay by computer, or by writing a check, or you can use a federal reserve tender note, called “cash,” with pictures of long-deceased Presidents and a former Treasury Secretary, to pay your bills, although, as I said above, using paper instruments is less convenient than going through a server farm.
Ted:
Well, I guess I’m a bit confused about what money really is nowadays. Is a $20 bill with Jackson’s mug simply a paper-printout of something stored on a computer? And who or what stands behind Jackson? Where does the buck, or the $20 buck, finally stop?
Ben:
We can back it up with another liquidity infusion, or other policy support.
Ted:
Policy support? Liquidity infusion? You mean, more keyboard strokes to get the server farm ramped up with a new series of “0’s” and “1’s”? That strikes me as very different from the pre-1971 era, when your staffers would have checked the ledgers to determine if enough gold bullion was available to back up redemptions of paper dollars coming back from Europe.
Ben, somebody recently asked you what a dollar was worth. It’s value was set down in the U.S. Constitution as a set amount of silver (approx. 0.77 ounces by weight). Your answer, as I recall, was that a dollar is worth whatever a dollar will buy. By the way, does anybody still read the Constitution for guidance on how to govern in America?
It appears, Ben, that the dollar buys many fewer Swiss Francs as we speak today than it bought a couple of years ago, not to mention Japanese Yen.
Now let’s see if I got this right: isn’t price stability a key function of the Federal Reserve? If dollars, whatever in fact “dollars” really are, swing up and down against the Yen, the SFranc, the Euro or whatever – other fiat currencies that, like our dollar, exist mainly in cyberspace (excepting the fiat-paper printouts that circulate around) — would you score that as a failure of Fed policy?
And what about the big swings in the prices for gas, groceries or, Ben, the cost to taxpayers of having U.S. Treasury officials and Fed staffers fly business class to meetings in Davos, Switzerland or Jackson Hole, Wyoming where they hobnob with other financial industry heavy weights?
Ben:
Agreed. Price stability is one of the Fed’s key responsibilities, and we monitor price signals for signs of rising inflation. I was asked recently at a briefing how we would handle a sudden increase in inflation. I explained that we can boost interest rates in 15 to 30 minutes, to put a brake on inflation.
Ted:
Right. You did say that, but that was before you decided you would hold interest rates at near Zero for two more years. How can you commit to holding interest rates constant and also guarantee that you will put the brakes on rising inflation?
Ben:
Ted, don’t worry about that. The price increases over the past couple of years that you have witnessed have been and will continue to be transitory. They will have to be transitory because of our policy decision to keep interest rates at Zero for two more years.
Ted:
That’s your forecast? Sounds like Alice-in-Wonderland Mad-Hatter logic to me.
Are you using the same crystal ball that you used back in 2007, the crystal ball that led you to assert that the sub-prime real estate crisis was well contained?
You don’t have to answer that. We all make mistakes, right Ben? But another item of interest: you’ve leveraged the FED’s balance sheet up to 50+ to one. How does that behavior by the FED set a good example for the investment banking community, which got into trouble with just 30-to-1 balance sheet leverage?
And just one more final question: your decision to keep interest rates at Zero for two more years was made very shortly after your meeting with President Obama. Did Obama tell you: “Ben, I can’t get Congress to free up more funds to get stimulus spending going again. Sorry, but you’re going to have to do more heavy lifting over there at the Fed. Oh, and by the way, with these deficits that are building up, it would sure help to keep the government’s interest costs as low as possible. I’m sure you’ve been in touch with Tim over at the Treasury about that.”
Is that how your conversation with the President went?
Ben:
This is outrageous. Are you suggesting that the Fed is not independent….that we coordinate closely with U.S. Treasury officials and the Oval Office to make sure cheap money continues to flow to the federal government, including Fannie Mae and Freddy Mac?
Ted:
Yes, Ben. I am suggesting that. And, guess what? Many other Americans have the same feeling about you and your digital-server-farm-money-creating operation….”money” that is created out of thin air, backed by the “full faith and credit of the U.S. Government.” Call it “cloud” computing currency.
Geez, Geithner must be red in the face flying to China to persuade them that their Treasury bills and bonds are “safe.” Good as…..um, gold?
One last item: out there on the campaign trail, there’s a former boy scout who doesn’t like the way you’ve been mucking around with our “money” (or what’s left of it, whatever it is; saying that a dollar is “worth whatever it will buy” is a kind of squishy definition of the thing).
If this former boy scout succeeds in chasing that erstwhile community organizer from the Oval Office, I guess you’ll soon be singing a different song.
Or maybe not. Maybe you’ll continue debasing the dollar, transferring money from our senior citizens, via the “financial repression” of negative interest rates, over to the banks and the federal government, and screaming while you engage in this dollar debasement, “Hey, we’re the Fed. We’re INDEPENDENT and we deeply resent any effort to influence our actions.”
Independent? Yeah, right. Ben, you and I, along with a growing number of Americans, know that’s just a bunch of bullsh….(think sun-baked Texas Longhorn rump pancakes!)