Robert Auerbach, an economist to the Committee on Banking and Financial Services during the Arthur Burns, Paul Volcker, and Alan Greenspan chairmanships at the Fed, as well as being a Fed economist and now a professor at the University of Texas (Austin) has a bombshell revelation in his recent book Deception and Abuse at the Fed. He recounts how the struggle to make the Fed more transparent and accountable has much deeper roots than the mainstream media has let on, and those earlier fights revealed that the central bank hid the existence of original documents, namely FOMC transcripts, then destroyed them, and continues the practice of destroying the original records.
This chicanery means that what the GAO is auditing is not what the Fed does, but a simulacrum the Fed has served up, and a prettied-up one to boot.
In a Huffington Post article recapping some of the material in his book, Auerbach describes how the Democrats tried to make the Fed more accountable in the 1970s:
The Democrats tried to pass similar audit bills in the 1970s. The House Banking Committee (now called the Financial Services Committee) Chairman Henry Reuss, (1975 -1981, Democrat, Wisconsin) could not pass a GAO audit bill through his committee. That bill was then passed by the Government Reform Committee and became law in 1978 with substantial limitations…
In the 1970s, the Fed organized a massive lobbying campaign in the Congress against a GAO Fed audit, using officials from private banks they regulated Evidence of the Fed’s orchestration of the lobbying campaign came into public view after Reuss negotiated with Fed Chairman Arthur Burns for six months. Reuss obtained three years of transcripts from secret meetings of all twelve district Federal Reserve Banks in December 1976….
One example was: “On February 19, 1974, President Frank E. Morris of the Boston Federal Reserve Bank called on his board of directors to contact the members of Congress to promote the Federal Reserve’s position on an earlier version of the GAO audit bill.”
So the central bank is pressing executives from entities it regulates to lobby on its behalf. Charming. But here is where things get sordid:
Source FOMC transcripts should not be destroyed. The Fed lied when they notified Congress that there were no transcripts. The “17-Year Lie” is a chapter in my book republished on The Huffington Post.)
The seventeen-year lie began. Fed chairman Arthur Burns notified House Banking chairman Wright Patman in 1974 that he could not give Congress the FOMC transcripts because ‘they are routinely disposed of after the Committee has formally accepted the memorandum of discussion for the meeting in question,’ …” (Auerbach, page 89)
House Banking Chairman Henry B. Gonzalez called a hearing in 1993 to question the Fed District Bank presidents and the Board of Governors They did not explain the existence of 17 years of FOMC transcripts even though they had been informed about them at a secret Fed meeting four days before. Later, one district Fed bank broke ranks and notified Gonzalez about the transcripts. Gonzalez sent me to the Board of Governors with a committee lawyer and several staff members. They showed us the transcripts in a room right around the corner from Chairman Alan Greenspan’s office.
In 1995 a majority or more of the FOMC members voted to destroy the transcripts:
A subcommittee of the FOMC reported its deliberations. The subcommittee chair, Governor Alan Blinder, characterized the discussion at the FOMC meeting: “I did not hear any consensus–maybe someone else heard a consensus. Maybe we should just have a vote on whether there should be an ‘off the tape’ portion. Do you agree?” Greenspan replied: “I agree.” He later added: “I am not going to record these votes because we do not have to. There is no legal requirement.” The vote was taken without recording members’ names. Greenspan announced: “The ‘Ayes’ have it.” (Auerbach, page 104, reprinted from the FOMC transcript January 31-Februaqry 1,1995)
The central bank asserts, via a 2001 letter from Don Kohn, that this 1995 incident was the only time that automatic recording system was turned off during an FOMC meeting. Why should we believe that, particularly given how quickly the idea was mooted and accepted. If this instance was so exceptional, you’d expect to see more debate.
The letter also explains that the Fed’s practice is to redact FOMC minutes, and then send the redacted version to participants in the meeting for editing. That means that the version eventually released to the public has been well sanitized.
With this history, the requirement that the Fed be subject to further scrutiny by the GAO seems entirely reasonable. The central bank has not behaved in a forthcoming or even upstanding manner. Yet defenders, who all run the same Fed dictation talking points, contend that the GAO will somehow abuse the Fed. The site Free Banking, whose writers include former Fed attorneys, debunks that notion, using an article by Robert Samuelson as its point of departure:
True, the Fed is in some respects more transparent than it used to be. But it has also been doing things that it never used to do…Not for nothing did Dodd-Frank provide for a special, one-time audit of the Fed’s crisis-related undertakings. Among other things, that audit pointed to some serious conflicts of interest that might otherwise have escaped censure. Yet according to Mr. Samuelson’s supposedly up-to-date Fed history, it should have been just as unnecessary as the recurring audits Fed “bashers” have been calling for.
Would such recurring audits themselves be otiose? The Dodd-Frank audit covers the Fed’s actions up to July 21, 2010. Consequently the GAO isn’t allowed to look into any of the Fed’s unorthodox measures since then, including later rounds of Quantitative Easing, Operation Twist, and its enhanced overnight reverse repo program, not to mention its stress tests and other financial-regulatory measures. More importantly, under existing law it can’t be asked to look into any “emergency” steps the Fed might take in the future. Should we always have to rely on special legislation after the fact to allow Congress to scrutinize unusual Fed actions?
Mr. Samuelson complains about simplistic history. Allow me to complain instead about simplistic conjectures about the future–conjectures to the effect that the Fed will never again engage in the sorts of activities that warranted the Dodd-Frank audit. Such conjectures are after all implicit in claims, like his, to the effect that a permanent enhancement of the GAO’s Fed-auditing powers would only serve to “fulfill conservatives’ political agenda” by allowing Congress to “harass” the Fed and to otherwise undermine its ability to do its job.* Does Mr. Samuelson believe that the GAO “harasses” the other government departments and agencies over which it has unlimited auditing powers? If not, why does he worry that it would harass the Fed? Conservative agenda? Does he think that only conservatives (or conservatives and libertarians) distrust the Fed, and welcome GAO scrutiny of its unusual activities? If GAO officials themselves argue for relaxing present limits on their agency’s Fed-auditing powers, must they be part of a conservative plot?
This post omits that the Fed refused to provide some of the mandated information in the Dodd-Frank related audit. As we wrote in 2010:
Well, even under the compulsion of law, the Fed chooses not to comply. Should we be surprised that it continues to refuse to make mandated disclosures?
In this case, as reported by Bloomberg, the Fed has withheld information that was of the collateral posted by borrowers to secure $885 billion of loans. Without this information, it is impossible to ascertain the risks undertaken in various emergency facilities. Dodd Frank specifically requires this detail be released…
The terms of the various types of support extended are to be revealed by borrower, in particular the details of the various types of support extended, including the collateral posted. Instead, the Fed provided the data on an aggregated basis, by asset type and rating and then only for three of six facilities.So what is the Fed trying to hide?
A number of experts correctly pointed out that this is inadequate:
“This is a half-step,” said former Atlanta Fed research director Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. “If you were going to audit the facilities, then would this enable you to do an audit? The answer is ‘No,’ you would have to go in and look at the individual amounts of collateral and how it was broken down to do that. And that is the spirit of what the requirements were in Dodd-Frank.”…
It is “specifically impossible” to know how much risk taxpayers were taking by looking at pools of collateral grouped by asset class and rating, said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press.
The Fed made barmy excuses that it needed to withhold this information to prevent bank runs. Please. This was well after the crisis was past and major banks had all passed the stress tests. The only risk was to the Fed’s reputation and its secrecy. And that, and not the public interest, is why the central bank continues to fight tooth and nail against efforts to subject it to the sort of checks and balances that are essential to prevent abuse of power. The Fed has demonstrated repeatedly that it can’t be taken at its word. The time is long past due for more oversight.
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I was just reading a blog post yesterday about the Fed & its history:
https://criminalbankingmonopoly.wordpress.com/tag/criminal-history-of-banking/
It didn’t provide references – can someone verify the accuracy of the article? It seems that I have heard much of it in various places over time. It seems very plausible that it is accurate for the most part.
If so, then the activity in this NC post would be expected. Like any other privately owned company that is or considers itself to be TBTF, only many times greater than that.
@tim s,
No, it’s not. Yves has explained this multiple times here.
Incorrect.
They were federal reserve banks. This is descriptive of what it does: lends reserves to member banks.
More bullshit. The Federal Reserve district banks, of which there are 12, are “owned” by the banks in their districts. I don’t have time to go into how the shares work. This guy does a pretty good job of explaining it: http://www.publiceye.org/conspire/flaherty/Federal_Reserve.html
The National Debt is also known as Debt Held by the Public. Debt held by the public means MONEY held by the public. Or EQUITY held by the public. Or NET FINANCIAL ASSETS held by the public. Take your pick. Every single penny of the National Debt is in the banks accounts of pension funds, university trusts, corporate bank accounts, state and local government bank accounts, small business bank accounts, household bank accounts, and the degree to which they hold USD, in foreign government and foreign investor bank accounts (which by law must never leave the US banking system, so their USD are parked at the Fed).
The National Debt is what we own. At the federal level “debt” is money. At the non-federal level, “debt” is something you owe.
The word “debt” is like the word “sanction.” Sanction can mean a penalty for disobeying a law, or it can mean official permission or approval for an action. So go figure. The use of the word debt comes from double-entry accounting.The federal government has to account for the dough it creates. So it puts it in the liability column. That’s all. And they call it debt because they are lazy language mo-fos and talk in shorthand. Whenever you hear the term “government debt” think interest-free money; no one has to pay it back. In fact, in the case of treasury securities, the government pays you interest for exchanging your dollar bills for them!
The Federal Reserve district banks pay local property taxes. After annual dividends (around 1.56% per annum) and expenses, the Federal Reserve system returns every penny to the US Treasury. By law. Since 1947. The annual amount is in the Annual Report.
If the government owes the public $100, that’s the government’s problem.
If the government owes the public $100 billions or $100 trillions, that’s the public’s problem.
Unless the government is the public and the pubic is the government or, maybe the government doesn’t need to owe in the first place between it can print more money.
Or maybe the government is special, exceptional….
”
Facts about the Federal Reserve.
The Federal Reserve is a privately owned for profit corporation.
No, it’s not. Yves has explained this multiple times here.” MRW
According to you’re URL the Fed is owned by local private banks which are for profit corporations.
The fed take a cut and the Owners’ of the fed are paid interest on all money created.
There has never been a debt created money system which did not eventually bankrupt the nation where it was created.
Lordie.
Member banks own preferred stock. Preferred stock does NOT convey any ownership or governance rights. They get a fixed divided if the regional Fed makes enough money.
They most assuredly are NOT “paid interest on all money created”. The Fed’s profits are swept to the Treasury, as a matter of fact.
The fact that you mention “debt money” also indicates that you are out of your depth here.
If it was true that the Fed’s profits are swept to the Treasury; the Fed chairman when asked where he would get 800 billion, he said it was in the Fed’s account.
Yves, how would you define money that can only be created threw debt (sale of interest baring bonds or treasury notes),
This is incoherent. A simple Google will show that the Fed does indeed remit profits over its operating expenses to Treasury annually.
Making stuff up gets you troll points here.
A “note” is a debt instrument. Always. (Making it interest-free doesn’t change its fundamental nature; nor does calling it “money”.)
“The [Federal Reserve Notes] are then put into circulation by the Federal Reserve Banks,[3] at which point they become liabilities of the Federal Reserve Banks and obligations of the United States.” Federal Reserve Note.
@bh2: A “note” is a debt instrument. Always.
Yep. And a sovereign coin is not. A circulating Federal Reserve Note is shown as a liability on the books of the Federal Reserve Bank of issue. Pay it to the US Treasury and it becomes an asset of the USG, contra Kelton. Pay it to the Reserve Bank for bank services, and it’s extinguished from that balance sheet and every other. Whether shredded or vaulted, it’s neither asset nor liability on the bank’s books, like an unissued check.
By contrast, a sovereign coin is an asset to whoever lawfully possesses it. It’s not a promise to pay, like a note or a bond. The USG has the obligation to accept it for payments, but so do all others under US jurisdiction. And all obtain an asset thereby. Pay the coin to the Reserve Bank and it becomes an asset to the Reserve Bank. Pay it to USG, and it’s an asset to USG. It is an asset to anybody, a liability to nobody, by fiat. A sovereign coin is indeed debt-free money, and stock-flow consistent, unlike debt money.
A sovereign coin is a liability: to the Fed which must take the deposit and provide the reserves and to the Treasury which must accept those reserves for settlement of tax liabilities. There is no such thing as a financial asset with no corresponding liability. It can’t happen.
The Combined Financial Statements of the Federal Reserve Banks for 2013 are here:
http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2013.pdf
On Page 4, we see that vaulted coins are assets of the reserve banks, and (of course) that vaulted notes are not. Lower on the page, we see that circulating notes are liabilities of the reserve banks, and circulating coins are not.
So the reserve banks gain assets and issue their own liabilities when they accept USG coins in exchange for reserve notes or augmented reserve balances.
And cash is an asset to the US Government. See the first entry on P. 46 of the USG’s 2013 Financial Statement.
http://www.fms.treas.gov/fr/13frusg/Financial-Statement-2013.pdf
Good thing it isn’t actually shredded on receipt, but is instead deposited in Treasury Tax and Loan accounts at commercial banks, where it adds to USG’s checkwriting capacity.
Until someone can show the US’s sovereign coins as any entity’s balance sheet liability, the point stands, on the public record.
Note that, per your usual tactics, you’ve simply dodged the point. Firstly, your notion that a thing only exists if it’s written down on a document you choose is way out in crank territory. Secondly, you have just demonstrated you don’t know the difference between a financial liability and a legal liability. Issuance of reserves and acceptance of reserves for settlement of taxes are the latter and supercede any balance sheet (which can be altered with the proverbial stroke of the pen or eraser) you care to throw out.
This is basic stuff you clearly don’t understand.
Remarkably dogmatic sound to this.
Does that mean you don’t care for what he wrote?
MRW: “the Federal Reserve system returns every penny to the US Treasury. By law.”
Please show us that law, if you can.
You’ve misquoted. The full relevant quote from MRW is, “After annual dividends (around 1.56% per annum) and expenses, the Federal Reserve system returns every penny to the US Treasury. By law. Since 1947. The annual amount is in the Annual Report.”
Please don’t omit to manipulate someone’s words.
Furthermore, if you aren’t familiar with the relevant law, namely the Federal Reserve Act, then you really have no business lecturing others on the subject given how easily the relevant portion can be found.
I certainly can’t find the relevant passage in the FRA, nor has MRW given any indication as to where it might be.
Balance sheet responses still in mods, with full references. It’s about supporting one’s claims, and calling out those who can’t.
If you can’t visit the Act page at the Fed’s website and find the relevant section in less than thirty seconds, that’s on you.
As is, by the way, your deceptive editing of MRW’s words. Tells us what we need to know about you.
Hah. May I request the moderators weigh in on whether I deceptively edited MRW’s words, as I identified the passage for which I sought substantiation.
http://www.nakedcapitalism.com/2015/03/fed-impedes-gao-audits-destroying-source-documents.html#comment-2416961
With our friend, it’s any stick to prop a corpse.
Your remark is pure projection. You are the one who has repeatedly engaged in dishonest argumentation. You are rapidly accumulating troll points. I was already thinking of banning you. Don’t tempt me further.
Not clear how we can “audit the Fed” when the Fed destroyed the best record of its own intentions. Talk about central bank independence!
If congress had any guts they can get rid of the Fed overnight!
Remember the 5th plank of the communist manifesto is central banking!!
If congress had any guts they would stop trying to run the world, and take care of their domestic and fiscal responsibilities. They might even find the time to figure out how the monetary system works.
As for ditching the central bank, then those responsibilities would revert to Congress and the US Treasury and would provide no effective safeguards against abuse for political gain, or jungle-level abuse by the nation’s banks.
“…figure out how the monetary system works.”
And reform and improve it where needed.
MyLessThanPrimeBeef – “And reform and improve it where needed.” Like Dodd-Frank? See what happens when lobbyists and their lawyers get involved? See what happens when money buys politicians? They’re not interested in reforming or improving!!!!! Why would they be? Who’s pushing them? No one. They’re pocketing their stock market gains and campaign contributions, partaking in insider information, and are sitting pretty. If you were them, raking in the money, entering politics with minimal money and leaving it with millions, tell me again why you’d change that?
I say it in the spirit as hoping they find time to figure out how the monetary system works.
If they do, and you have given ample evidence they wont, but if they do, they might want to improve and reform it.
MRW – “They might even find the time to figure out how the monetary system works.” They already know how it works. The campaign contributions keep their mouths shut. Whenever you allow your politicians to be bought, don’t be surprised when they keep silent.
Important article. Thanks.
Yes Lambert, this does make a mockery of Congressional oversight. As regards the angry response to Fed policies which seem to favor the elite over we proles, that the Fed should be abolished – that’s not really what’s needed. The Fed performs important functions, particularly in the areas of providing a buffer to wide swings in interest rates and in providing liquidity to the banks. The problem with the Fed would appear to be more ideological than functional. They do dumb things. Personally, I believe the correct action by the Fed/Congress back in 08 would have been to nationalize the insolvent banks, at least temporarily rather than stuffing them with new money and eating a bunch of their liabilities. So, we’re all angry at the Fed because its actions enriched our financial miscreants – the banksters. Its taken me quite a while to control my anger to see that its not the Fed, but its entrenched laissez faire ideology that I detest – best summed up as “Let the Market Decide,” when in fact, we instituted the Fed precisely as a buffer to the wild ravenous dogs of the markets. Today, I don’t wish to kill the Fed – I merely wish to give it a kevlar leash and perhaps clear direction that its purpose is to prevent booms and busts, not promote them. Hell yes, audit the Fed – but even more importantly, openly criticise its willingness to encourage booms – booms that inevitably end in busts. And for God’s sake, get it through the FOMC’s skull that enriching banksters both harms the public and undermines its own credibility. (/rant)
steelhead23 – “Its taken me quite a while to control my anger to see that its not the Fed, but its entrenched laissez faire ideology that I detest – best summed up as “Let the Market Decide,” when in fact, we instituted the Fed precisely as a buffer to the wild ravenous dogs of the markets.” The Fed came into being in order to protect the banks; it’s not about protecting you.
And if we had have “let the market decide” back in 2008, it would have hammered the banks into bankruptcy, where they could have been nationalized and broken up into much smaller pieces. Instead, without the hammering from the market, the banks were bailed out, the bonuses kept flowing to the CEO’s, along with stock options.
Had we “let the market decide,” with no Fed QE intervention, the market would have crashed hard and it would have stayed there for a good long while. Instead, without the market, and with a good deal of assistance from the government and the Fed, bankers, hedge funds, private equity firms were able to borrow for next to nothing, only to turn around and plow a lot of that money back into the stock market, buy up thousands of homes on the cheap, of course securitizing them along the way. Corporations, borrowing for next to nothing, bought back their stock, further increasing CEO pay and bonuses and increasing stock prices. Wow, bet you were able to do that (sarc)!
Read Karl Denninger’s article below. Nobody lends at a loss, and yet the Fed has gone out of its way in order to keep interest rates low (which would never have happened – ever – after the 2008 crisis) without the Fed’s assistance. So, tell me, where has the market been involved in any of this? This has been artificially created by the Fed in order to bail out the banks, their owners.
If we had have “let the market decide,” we’d be looking at a very different picture. The Fed has been holding back gravity.
Karl Denninger often says that it is not the Federal Reserve that is the real bad man here; it’s fractional reserve banking. In the following article, he begins with a quote: “History shows it is government, not the private banking system, which has been the more responsible and least inflationary money-issuer.” He replies:
“Really? The Federal Government today (2014/Q3) has issued $12.845 trillion in “marketable” debt, which is incidentally all directly inflationary. Just seven years ago that stood at just over $5 trillion, which means it has well more than doubled over a seven year period.
That is a compound annualized increase of approximately 15%!
“Most-responsible” and “least inflationary”? That’s a knowing lie. Further and more-importantly, it is theft and fraud committed upon those without the franchise who have no obligation on a moral or ethical level to pay.
Finally, and perhaps of cardinal importance to this debate, absent deficit spending there is no political reason for the government or central bank to tamper with interest rates. As a result the positive cost of using debt naturally inhibits all such use for either speculation or consumption. Coupled with a One Dollar of Capital standard imposed on banks that are licensed to trade in said currency and its products, private tampering with the currency is also prohibited.
In other words absent deficit spending, there is no government caused inflation at all, nor any reason for the government to demand political tampering with interest rates. Add One Dollar of Capital to the mix and there is no longer private tampering either.
So why is it, once again, we’re talking about issuing debt-free money?
Does that argument proceed from ignorance or is it cover for a social agenda of unlimited uneconomic spending on various social pet projects, none of which are to be funded with current tax revenues?
Arithmetic is truth folks. It cannot be swayed by political argument nor by appeals to authority. All such attempts that fail the essential test of fundamental algebra must be challenged and exposed as unworkable. Further, those who proposed such fundamentally-disprovable theorems must be called out; we must insist that they either repudiate their position, disprove what appears to be an irrefutable mathematical fact that their claims are unworkable, or admit the actual motivational factor that was behind their attempted sales job.”
http://market-ticker.org/akcs-www?post=229893
The whole article is good, except I disagree with him on global warming.
If, I say, if, the government was the omnipotent Money God, then, the Fed would be the Money Papacy, its head money-priest, the chairperson, who would regularly give economic sermons in an indecipherable language, his/her back to the flock, of course, and with rumors of money-priests molesting newly born money in secrecy, refusing to cooperate with any investigation.
Some records would have to be burned (or concerned with carbon emission, destroyed mechanically or electronically), they being blasphemous or heretical.
The alternative would be Gnostic deft-free Money Creation within each of us.
*Sigh*
We DO NOT have a fractional reserve banking system!
Spending precedes taxation for a fiat currency issuer like the US.
I could go on, but it is too painful to debunk the article in detail. He also dignifies ideas like “debt free money” which are non-sequiturs.
We DO NOT have a fractional reserve banking system!
Really? When you state things like that without a link to an article that supports what you are saying, I start trying to fill in the blanks. Isn’t it true that a federally chartered bank only has to maintain reserves of around 8% of liabilities as something termed tier 1 assets (which I take to mean money or AAA securities)? I think that is what is meant by “fractional reserve banking”. Denninger argues for one dollar of capital for every dollar lent which he sees as ending fractional reserve banking, and as a mechanism to control excessive risk taking (a market oriented approach). While that might work, I tend to think it would take a massive level of regulatory supervision to ensure compliance and given the fairly low level of supervision the Fed is willing to impose, pretty much a non-starter.
And if government simply issued money as needed to meet its budget needs, rather than engaging in T-bill auctions, wouldn’t that be “debt free money?”
I guess that’s an issue with we laymen reading the Bible – we so easily misconstrue its words. Are you intending to only preach to the financial priests?
steelhead, banks NO NOT LEND their reserves. We have a fiat currency (Canada has a fiat currency too, but it doesn’t even have a reserve requirement). We haven’t had fractional reserve banking in this country for 82 years.
Loans create deposits. Literally. A loan creates a new deposit of bank credit money in the borrower’s account out of thin air.
Banks have to maintain reserves as a percentage of the loan. If a borrower changes banks, the reserves travel to the new bank’s reserve account to remain parked there.
Yves – my mistake, it is Mish who speaks about fractional reserve banking as the main problem. Karl believes that bank assets should be backed by adequate collateral, and he’s spoken often about his One Dollar of Capital idea.
http://market-ticker.org/akcs-www?post=209282
Perhaps you could write an article refuting his One Dollar of Capital, that’s if you want to educate us illiterates (Karl might be interested too). How does he dignify ideas like “debt-free” money? He may argue against them, but he certainly doesn’t dignify them. A heck of a lot of people actually do believe in debt-free money.
What is it that you disagree with in Karl’s One Dollar of Capital idea?
Here’s an earlier article on One Dollar of Capital from 2009:
“The solution is very simple, but you will notice that Jamie doesn’t bring it up. That’s because he finds it unacceptable.
What’s that solution?
Prohibit as a matter of Federal Law, and enforce it vigorously under pain of immediate dissolution, THE LENDING OF MONEY UNSECURED THAT EXCEEDS THE FIRM’S CAPITAL.
This is in fact the only way you can both end “too big to fail” and not constrain size or influence.
It is also the definition of sound lending.
It is also how lending was done prior to the banksters corrupting the government and literally usurping the sovereign credit of The United States.
JAMIE DIMON: ‘As we have seen clearly over the last several years, financial institutions, including those not considered “too big,” can pose serious risks for our markets because of their interconnectivity. A cap on the size of an institution will not prevent that risk. Properly structured resolution authority, however, can help halt the spread of one company’s failure to another and to the broader economy.’
A requirement that you hold one dollar of actual capital for each dollar of unsecured obligation you have, marked to market nightly, absolutely prevents this risk.
That actual excess capital can be lost but there can be no systemic bleed-through as your capital then backs your bets in each and every instance.
JAMIE DIMON: ‘While the strategy of artificial limits may sound simple, it would undermine the goals of economic stability, job creation and consumer service that lawmakers are trying to promote. Let’s be clear: Banks should not be big for the sake of being big. Moreover, regardless of a company’s size, it must be well managed. As we’ve seen in many industries, companies that grow for the sake of growth or that expand into areas outside their core business strategy often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time.’
Then prove it by putting your own capital at risk in each and every unsecured lending transaction. For each loan you write where the collateral is worth less than the outstanding amount of the loan, at any point in time, hold one dollar of your own capital as security against that loan’s default and the bleed-through effects on the economy.
JAMIE DIMON: ‘And it’s not just multinational corporations that rely on such a large scale. J.P. Morgan Chase and others supply capital to states and municipalities as well as to firms of all sizes. Smaller banks play a vital role in our nation’s economy, too — but a fragmented banking system cannot always provide the level of service, breadth of products and speed of execution that clients often need. Capping the size of American banks won’t eliminate the needs of big businesses; it will force them to turn to foreign banks that won’t face the same restrictions.’
Yes, and JP Morgan/Chase will allegedly bribe states and municipalities (aka Jefferson County Alabama) to “obtain” that business and earn a 400% profit beyond the market rate too. Yes, I know, you didn’t admit guilt in the “settlement”, but you did pay $75 million and forfeit another half-billion+ in termination fees. Is it “usual and customary” for your company to pay nearly three quarters of a billion dollars in forfeits and fines when you did nothing wrong? Our states and municipalities would be far better off without your firm’s “services.”
JAMIE DIMON: ‘Global economic growth requires the services of big financial firms. It also requires that big financial firms be allowed to fail.’
ONE DOLLAR OF CAPITAL FOR EACH DOLLAR OF UNSECURED LENDING, MARKED TO MARKET NIGHTLY.
A one-sentence Bill that, were it to become law, would instantly end “too big to fail” and yet let you grow as large as you’d like – provided you are gambling with your own money and not the sovereign credit of The United States.”
http://market-ticker.org/akcs-www?singlepost=2138677
When money is cheap, you will get bubbles. When bubbles start forming and everybody starts borrowing, interest rates begin to increase (unless someone like Greenspan holds them down). Again, this is Fed interference in the market. Had the market been in control, as prices continued to rise, along with interest rates, fewer and fewer people would have jumped in, thus allowing the bubble to contract before it reached the size of Jupiter. It is the interference by the government and Fed (stepping in to aid and abet or save the almighty banks – they could give a shit about citizens) that makes these things continue. The market would have pummuled anyone who stepped out too far on the “risk” branch, which is exactly what should happen. Put your hand on the hot stove top, and then tell me you’ll do that again!
Completely agree with the conclusion of this post. Thank you. Ongoing efforts to prevent operating and financial audits, together with the specific issues raised in this article about the Fed’s records, are all gigantic red flags.
@ timS and @MRW.
MRW is correct that the Federal Reserve is NOT DIRECTLY a for-profit bank in the sense it would be if the Fed distributed all of its profits to its shareholders (a.k.a. the “member” banks).
However, the Federal Reserve is an entity that indirectly enables and amplifies the profits of banks at direct the expense of taxpayers and depositors. The Fed does this by enabling horrendous risk-taking and short-term profiteering by banks, while shielding the banks from these mistakes/misdeeds and indeed transferring the eventual/later losses of banks onto taxpayers and depositors alike by forcing down depositor interest rates whenever member banks create a bubble and lose a lot of (depositor) money, as has happened so many times (2008, 2000, 1989, …..).
The STATED purpose of the Fed is to fight inflation and ensure full employment. What the Fed actually does is to fight higher WAGES and consumer inflation, while actively promoting and causing asset (house, stock, bonds, commodities, land) inflation trough (low) interest rate policy. Asset inflation in reality only benefits the member banks, Wall St, and the top 1% owners of wealth. Once the bubbles burst, the Fed forces down short-term (=depositor) interest rates, which increases the member bank profit margin on their remaining “good” loans, allowing the banks to earn themselves out of the hole (their losses) at the expense of the depositors (who now get very low interest payments) and the taxpayers (who get much lower Fed profits fed back to the US Treasury). And not only that, the Fed uniquely enable banks to profit from low markets prices for assets right after the bubble, by allowing banks to deposit their low-grade debt (in the form of asset -backed securities) and giving the US treasuries or outright cash in return. This is the so-called discount-winndow and Repurchase Program portion of the Fed, a.k.a. “providing liquidity”. Then member banks (or their Wall St branch) use said cash or US treasuries (as good as cash for most purposes) to buy stocks and foreclosed property at firesale prices, enabling wast profits once the Fed succeeds in inflating the prices again. Of course, the depositor or taxpayers get no such ability to borrow money/treasuriesfrom the Fed to buy cheap assets. March 2009, anyone?
Part of the game is also how bubbles bursting into recessions inevitably causes the Federal Government to issue more debt (to stimulate the economy with government spending). The new debt is in turn partially or fully monetized by the Fed (“printing money”), and provides the Fed with an increased inventory of US Treasury binds that the Fed can lend out to the member banks against their aforementioned bad asset-backed securities (ABS, CDO, alphabet soup), and which the member banks then use to purchase good assets at firesale prices, as mentioned above.
In summary, while MRW is correct that the Fed does not in a significant way distribute its profits directly to the meber/shareholder banks, what it does in practice is to create big profits for banks and forcing the losses of banks onto depositors and taxpayers. The machinations of the Fed are intentionally obscure and multi-layered so that this can be done with hardly anyone of the general public fully understanding what is really going on.
Theorem: The stated purpose of an institution is never the same as the REAL purpose.
Jus7tme – very well said! I love your Theorem: “The stated purpose of an institution is never the same as the REAL purpose.” Isn’t that the truth, and it’s everywhere! Thanks for such a great post.
backwardsevolution, thanks for the encouragement. I wonder if Yves herself disagrees or agrees with me? I was a bit late to the commenting party.
You completely misunderstand how the system actually works. Your penultimate paragraph is a wonder.
What you need to get clear in your head first of all is that the US dollar/monetary system is a closed system. Because only the USA can create a US dollar. Worldwide. No one else.
So imagine a circle. Split it in half.
One half is the US federal government with the US Treasury, Congress, and the Federal Reserve.
The other half has the private sector businesses, households, and commercial banks; and state and local governments, with foreign governments, foreign businesses, foreign households, and foreign banks.
The two halves represent the issuer of the currency, and the users of the currency.
Now rethink your post honoring those basic distinctions, because what you’ve described is a cat’s cradle that you’ve pitched in the air out of frustration and has no relation to everyday nuts-and-bolts reality.
Please understand I have no need or desire to appear rude or unkind, and if it comes across that way, I apologize. I fully understand how easy it is to mash the Federal Reserve in with the banks they’re supposed to be regulating given their lack of it, and their standoffishness with Congress (who they must answer to) and the American people. But you gotta start with the basics. You have to know how things work without all the politics involved, or being swayed by the damage they are doing. Then you’ll know ‘who to shoot’–I say Congress–and what must be fixed.
@MRW, Everyone (including US Gov, US congress, US Treasury, and Fed) are users of currency. Your tale of placing these institutions in one half of a circle and everyone/everything else in another half does not strike me as having any sort of significance.
My post is about WHAT the Fed DOES, HOW it does it (often through byzantine and fundamentally dishonest machinations and rationalizations), WHO benefits from the Fed’s such actions, and WHO pays the price. If you have any concrete quibbles about that, rather than halving circles and creating dichotomies, please write about that, and be specific.
Well, if I can’t convince you, call a US federal district Federal Reserve bank and ask. Because it’s obvious you think I’m an idiot. Get the authority you require.
I could suggest you ask Yves Smith. But you would probably dismiss her just as easily.
MWRW sez:
>>Well, if I can’t convince you, call a US federal district Federal Reserve bank and ask
Ask them what, exactly? Whether they consider themselves to be users of currency or not? Whether they consider themselves as occupying a half of a circle that is distinct from another half occupied by taxpayers? Both the questions and the possible answers are completely uninteresting if not meaningless. What matters is what actions the Fed actually take.