News & Analysis
Fed Official Claims Simple, Powerful Regulation Is Needed – Is it Too Late for That?
The Fed discovers chicanery: James Saft ... Acknowledging that sometimes banks chisel clients and bank employees chisel banks may sound obvious to you, but for the Federal Reserve this is a pretty big step forward. Jeremy Stein, a member of the Board of Governors of the Fed, gave a speech last week in which he said that sometimes it may be necessary for the fed to raise interest rates to control overheating in credit markets. While a lot was made about him being Wall Street's new bubble cop, I'd argue that actually the big step here was that he specifically and convincingly argued that you can't understand markets without understanding the way participants game the system to their own advantage. This is a huge change from the old Greenspan – and Bernanke – assumption, which was that the market was self-policing. – Reuters Opinion, James Saft
Dominant Social Theme: Federal Reserve officials come in from the cold and realize that free markets need a modicum of regulation.
Free-Market Analysis: According to this Reuters opinion article, Federal Reserve officials have finally realized that markets need common sense regulation – including bubble moderation when things seem to be getting out of hand. This is hailed as a positive first step to returning the West's financial market s to full functionality.
In this article, Saft, the editorialist, writes that "it makes good sense to make regulation as simple as possible, which in turn would lead to simplicity in financial products and minimize the potential for the abuse of clients by their advisers."
Saft points to Glass-Steagall as a good example of powerful, simple legislation that did "a good job."
In fact, the libertarian analysis of Glass-Steagall is that it was an attack launched by the Rockefellers at the Rothschild controlled JP Morgan, which had the most to lose by being split up into component banking and trading parts.
This little analysis – which probably has some truth to it – only goes to show how complex regulatory rationales really are. The bottom-line truth is that regulations are price fixes and price fixes never work out the way they are intended.
Not only that, but regulations are created by people with various agendas and competitive strategies. For many industry leaders, regulation is just competition via other means. They want the government to do to their competition what they have not been able to accomplish in the marketplace.
Perhaps Saft's point makes some sense: A few, overarching rules are better than a plethora of niggling ones. But either approach is probably going to distort the market and create other problems down the road. Here's more from the article:
Fear of the commercial consequences of bad actions would serve as an effective brake on fraud and abuse. That naïve view allowed the Fed to assume that markets would behave predictably and rationally. It helped to set the intellectual underpinnings that led to too-easy rates, further easings when things went bad and the rolling series of bubbles and panics we've seen over the last decade and a half. The truth, as we've seen, is that you can't understand financial markets without taking into account the fact that agents, like banks and fund managers, often put clients in bad but profitable products and that those same bankers and managers often do the same thing to their own institutions.
"The premise here is that since credit decisions are almost always delegated to agents inside banks, mutual funds, insurance companies, pension funds, hedge funds, and so forth, any effort to analyze the pricing of credit has to take into account not only household preferences and beliefs, but also the incentives facing the agents actually making the decisions," Stein said in a speech at a symposium sponsored by the St. Louis Fed. "And these incentives are in turn shaped by the rules of the game, which include regulations, accounting standards, and a range of performance measurement, governance, and compensation structures."
This, if accepted, could be a kind of Copernican revolution in Federal Reserve thinking, except that, rather than accepting that the earth revolves around the sun, the Fed would at last be acknowledging that banks do the dirty to their clients and bank employees do the same to their banks.
Accepting that human beings act in their own best interests, not those of their clients, is a crucial ingredient not only to running regulatory enforcement and policy but also to managing monetary policy. My guess is that Federal Reserve officials and other economists tended to ignore these issues because they make analysis so messy and difficult.
For academic purposes it is far easier, when trying to prove a theorem, to assume that markets are efficient and that people within them act in what they see as their own best interests. It is also true that this reflects a kind of market fundamentalism born out of a suspicion of the effectiveness of regulation and government intervention.
Okay, sure ... Fed officials in years past held that competition would moderate the markets' behavior and that therefore the Fed did not have to intercede when it came to investment bubbles, etc. But this was always a flawed argument because of what Austrian business cycle analysis shows us – that it is central banking overprinting of monopoly fiat money that stimulated bubbles to begin with.
Simple, broad regulation is not what is needed to make markets more productive and efficient.
What is needed is to remove the function of monetary production from an entity that has a monopoly franchise granted to it by government.
That is the issue that Stein should be dealing with – and Saft should be analyzing, in our humble opinion. But, alas, it is an issue that as usual goes undiscussed.
It is not discussed because both Reuters and the Federal Reserve are mechanisms of elite control. One creates money and the other attempts to adjust public sentiment on the matter – but both are designed to promote the manufacture of currency under the watchful control of a designated few.
This is a power elite that is dedicated to world government and uses the awesome power of central banking to fund its gambits. It also uses dominant social themes to control the conversation about money creation and the privileges that it currently enjoys.
We can see in both Stein's speech and Saft's subsequent analysis that the conversation is indeed adequately controlled. There is no mention of the suitability of a single entity and a handful of men controlling trillions of dollars – as regards both value and price.
Instead, the concern is whether the Fed is doing an adequate job of regulating member banks and keeping them from abusing their powerful positions as sole distributors of the money created by the Fed.
Saft approves of the idea of a more active and powerful central bank. In fact, in an article just yesterday, we discussed how this seemed to be an expanding elite meme ... that central banks, having failed to control various excesses in the past, now need to become more aggressive in terms of monetary policy and regulation.
This doesn't make much sense to us. Central banking simply doesn't work – on purpose, no doubt, as the elites need chaos to formulate world government. But purely from an intellectual standpoint one can easily argue that if a system is constantly failing it doesn't need yet more power.
A more important point when it comes to discussing these issues is that Saft does not mention the proverbial elephant in the room. What happens when central banks begin to raise rates because of increased economic activity?
Stein is arguing that the Fed needs to be more proactive to control bubble finance. But central banks around the world have dumped some US$50-100 trillion into the markets in the past five years to try to stimulate global economies.
This is actually unheard of and occurred only because the dollar reserve system basically died in 2007-2008.
When all this money does finally begin to move out of bank coffers and into the general economy, central banks will have to raise rates fast and hard, choking off the recovery once again.
In fact, it will likely prove impossible to control the surge of money that has already been printed. On the heels of this inflation will come terrible price inflation – inflation that can hardly be imagined now.
This is the real issue that Stein and Saft should be grappling with. Saft can comment approvingly about the idea that central banks need to regulate more proactively but, even assuming such an argument were accurate, it is too late for that remedy now.
Conclusion: Fifty to a hundred trillion dollars too late.
Posted by Bischoff on 02/17/13 07:07 PM
DB: "What is needed is to remove the function of monetary production from an entity that has a monopoly franchise granted to it by government.
That is the issue that Stein should be dealing with - and Saft should be analyzing, in our humble opinion. But, alas, it is an issue that as usual goes undiscussed."
BISCHOFF: Ah, yes... the "entity". The "entity" before 1935 was an association of membership reserve banks which did in fact have a franchise to create a national currency subject to the rules set out in Section 14 of the Federal Reserve Act of 1913.
This entity since 1935 has not been an association of private reserve banks, but a government agency headquartered in Washington, DC operating through a dozen of district banks throughout the country. It markets the federal government's debt created by congressional budget deficit spending in secondary markets.
It is the function of setting the "prime" interest rate by the FOMC which should be the focus of Saft's article. By concentrating on the creation of irredeemable currency through monetization of government debt, the attention is diverted from the real issue.
Until 1933, the "prime" interest rate was a market phenomenon brought on by the willingness of savers to invest their gold savings for an annual return.
With the NBA of 1933 and 1935 the "prime" interest rate became an amalgamation of the federal funds rate and foreign exchange rate determined by twelve members of the FOMC. How the judgment of twelve mere mortals on the FOMC can be substituted for a market decision made up of the decision of a universe of individual savers is a total puzzle to me. Yet, Saft and Stone, Greenspan and Bernanke talk about "self-policing" markets. "What markets... ???"
The FOMC by law is composed of bankers and other individuals nominated by the U.S. President and confirmed by the U.S. Senate, a U.S. legislative chamber elected under the 17th Amendment with major contributions from the big banks.
The interest rate policy of the FOMC is entirely geared to keeping the banking system alive. Yet, a banking system which exists under a debt monitization system must fall apart sooner or later. Through the constant lowering of the "prime" interest rate, the FOMC causes the balance sheets of the banks from going into the "red". This policy of constantly lowering the "prime" interest rate on the other hand brings capital heavy businesses to ruin, because it increases their liqudation values.
Knowing that the FOMC sooner or later will have to lower interest rates to keep the banks from going bankrupt, the bond speculators will "front-run" the "government entity" by buying Treasury bonds which they will sell back to the "entity" for a capital gain, once the FOMC has raised the interest rate. The present rate set by the FOMC is not advertised, but I assume it is somewhere around 1/64 % or 1/128%.
To assume that such a low interest rate isw actually so close to zero as to actually call it ZERO, is failing to understand something very fundamental. It is not the actual percentage rate which helps out the banks. It is the percentage of the reduction of the interest rate that is of importance. For example, if the "prime" interest rate is lowered from 10% to 5% for a 50% reduction, it doubles the value of the assets on the books of the banks. Yet, a 50% reduction of the interest rate by lowering it from 1/64% to 1/128% does likewise double the value of the assets on the books of the banks.
Therefore, the FOMC set interest rate will never be ZERO.
Since 2008, the bond speculators of been faced with a slightly different situation. TARP in 2008 scooped up all the bad mortgages and credit card debt which could be found in the banking system, and which could be monetized by TARP.
However, this onlysolved the problem temporarily. The explosion of the interest expense brought on by the compounding of interest through repeated monetization of interest expenses has left the "entity" with only the Quantitative Easing option. Quantitative Easing is the end game.
For Governor Stone to talk about the FOMC possibly raising the interest rates, is talk which comes much too late to be taken seriously.
Posted by amanfromMars on 02/17/13 04:19 AM
For all gold fiends and friends on, and of, the Daily Bell, what is the answer to the following ... ... . or was the great expectation and current ponzi planning, that physical possession of one's gold "property" is never likely to occur or be granted because of the scam in operation, with ever increasing crazy amounts of fiat [like for example, a present day $1642.60 an oz] being on offer to tempt non-transfer/non-possession.
And they are not difficult questions to answer, although they may be uncomfortably disruptive and most inconvenient and will remain ever growing in size and loudness until definitively answered, for such is nature of the beasts that are unleashed today in the search for knowledge and truth, which you definitely can handle, for otherwise would you be living in a fantasy world and virtual reality led buy a series of fabulous fabless lies confirming beyond a question of reasonable doubt that IT's a Mad, Mad, Mad, Mad World out there and you aint in the club ... .. http://youtu.be/i5dBZDSSky0
[blockquote]Sat, 02/16/2013 - 21:05 amanfromMars ….. commenting on fools' gold? on ….. Click to view link with the following request for information
I have a question. Well, a couple of questions, actually, which may probably cause a few more to be asked.
If one deposits/purchases a weight of gold …. and is furnished with a paper value note/fiat currency advice note for that gold, and let us imagine a holding deposited/purchased a number of decades ago, does one today, on redemption of that furnished invoice, receive the original weight of gold or just a fraction of that gold to the fiat currency paper value on the original invoice.
Should the latter be the case, is the vault full of gold which has no owners, although with possession being nine-tenths of the law*, is someone doing very nicely, thank you very much, for practically/virtually nothing.
And if one were to purchase gold today, because of the seriously inflated price of the bubbling commodity, a correspondingly much smaller/lighter weight of gold, and receive a paper value note/fiat currency advice note for that vaulted gold in a deposit, does the reverse happen on a crashing of the gold price, with one receiving a greater weight of gold to the value of the original fiat currency invoice should one wish to take possession?
* ... "Possession is nine-tenths of the law is an expression meaning that ownership is easier to maintain if one has possession of something, and much more difficult to enforce if one does not. The expression is also stated as "possession is nine points of the law", which is credited as derived from the Scottish expression "possession is eleven points in the law, and they say there are but twelve"" ….. Click to view link [/blockquote]
"These are the final days." ... . Reply from The Daily Bell
It certainly seems that way, DB, although really, it just means the beginning of something else, doesn't it, even if that really be virtual reality applications and internet reprogramming of humanity ... ... which is the reality of the future present perfect imperfect?
It certainly is in the CyberSpace Domain with IT and Media Command and Control of Computers and Communications.
Posted by Danny B on 02/16/13 08:05 PM
"Copernican revolution in Federal Reserve thinking"
Great Bell, you also did an article "Cash to the People".
Then, there's the "massive infrastructure new deal".
The FED admitted that they were doing things that they would have considered unthinkable 10 years ago.
ALL of this spells DESPERATION to me.
This article makes a good case that there will never be a recovery as long as oil is expensive.
Click to view link
The free-money FEDS have inflated the price of the master-resource and they wonder why the economy is just sputtering. They drove down interest rates to preserve the debt but, killed the economy in he process.
Reply from The Daily Bell
These are the final days.
Posted by 1776 on 02/16/13 06:41 PM
Here is the reason why gold sank last week. Market manipulation at it's finest, and yet the silence from Democrats is a very profound statement without a word spoken.
Soros dumps gold as prices sink By Ben Rooney February 16, 2013
Click to view link
Posted by amanfromMars on 02/16/13 09:20 AM
Common sense regulation without punitive personal sanction and penal servitude for transgression is a joke and a set of rules which will render all who agree that it be necessary and effective as deluded fools and useless tools?
I hope that question is not ambiguous.
Leave the markets alone, and let the best man and/or greatest crook, win win. They always will. It is only natural in a world of primitive beings with not much upstairs to engage with for intelligence. …… is another crazy option and much more exciting derivative for the enterprising master entrepreneur, methinks.
Posted by 1776 on 02/15/13 02:33 PM
So, we are to believe the bureaucrats who know nothing about banking or the economy are going to fix our problems? We have been here and done this a multiple of times. Until we go back on the gold standard by allowing individual states to legalize gold and silver for trading and or exchange bubbles are all we will ever get!
Here is how we got where we are today!
How The Democrats Caused The Financial Crisis: Starring Bill Clinton's HUD Secretary Andrew Cuomo And Barack Obama; With Special Guest Appearances By Bill Clinton And Jimmy Carter
Click to view link
Posted by 1776 on 02/15/13 02:09 PM
The Real New World Order Bankers Taking over the World By John Kozy Global Research, February 06, 2013
Click to view link
Posted by jdwheeler42 on 02/15/13 01:09 PM
Gee, they're thinking simpler is better when it come's to regulation... they may be on to something. Here's my suggestion for some overarching regulations:
1. Don't lie.
2. Don't steal.
Posted by 1776 on 02/15/13 12:39 PM
The Real State of the Union - 2013
Published on Feb 14, 2013 Listen to the Peter Schiff Show
Click to view link