Northern Trust's Paul Kasriel says the real reason the Fed doesn't want us to see its books is not that it fears hampering competition but that The Fed is scared to death that the revelation will trigger another run on some of those banks. "If the Fed is required to publish the names of financial institutions to which it has extended credit and this publication induces financial institutions to refrain from borrowing from the Fed, one can only speculate if this would be the tinder for another liquidity conflagration in the coming months," Kasriel observes. He notes that in 1932, when the Reconstruction Finance Corporation (RFC) made public the names of banks that had borrowed from it, current borrowers quit borrowing and prospective borrowers quit coming. Kasriel points out that because we now have the Federal Deposit Insurance Corporation, the probabilities and magnitude of depositor runs on banks are far less today than they were in 1933. But, he says, there could well be runs on banks if fears of financial problems within those banks arise. The central bank on Monday won a court delay of an order that it reveal banks that have participated in its emergency lending programs and how much money those banks received. Also, the FDIC said this week it has no plans to borrow money despite the chance that it could soon go broke. – MoneyNews
Dominant Social Theme: Leave the Fed alone.
Free-Market Analysis: We would like t o give the Federal Reserve the doubt here, but we have considerable trouble doing so. In fact, in our opinion, the Fed is under attack because it comes up with apologists that Paul Kasriel that defend the institution in ways that many people might find unbelievable in this day and age. The Fed is really struggling with three separate trends that undermine its credibility in our opinion.
Its track record is discouraging: First, it has been around nearly a century now, long enough to create a track record of recessions and depressions that rival anything that came before. Trouble was that the Fed was mainly supposed to even out the economic downturns that were occurring prior to its creation. In fact, the Fed probably was not created just as a national financial "reserve" but also as a way for a handful of wealthy industrialists and entrepreneurs to influence the direction of the economy, especially the banking sector. It's proved admirable at accruing power for the monetary elite, less so at securing the economy.
Its mechanisms have been shockingly revealed during this crisis: Second, the Fed has literally pumped trillions into the economy in a fairly short period of time to secure it and get it growing again – and these actions have been minutely observed by an increasingly irate public via the Internet. Used to be that such massive monetary moves were accomplished secretly and without sunlight. But no more.
In fact, the Fed's drastic actions, when comingled with those of other central banks, have likely given the body populace a headache that is ongoing. The Fed itself is said to have provided up to US$8 trillion to financial entities at home and abroad. These may be short term loans at extraordinarily low interest rates – but who couldn't use an extra billion at a low rate. That's exactly the point. Most people, struggling to get by, had no idea of how the financial system worked. Thanks to central banking propaganda, most in the West looked on paper bills as money, real money. Of course it is not. It is fiat money, backed by nothing, and the ability of central banks to print as much of the stuff as they wanted without constraint provided the kind of example that wonderfully concentrated citizens' minds.
Its lack of justification for its own actions is increasingly obvious: Third, the Fed and other central banks have been lamentable at combating the growing exasperation with the money system as it is and with central banking's role in it. One could postulate, really, that there has been no committed defense of central banking by those with the most to lose. There have been press conferences, announcements and forays throughout the West to committees that ask questions and receive bland, unimaginative and confusing answers.
But this is business as usual at a time when circumstances are determinedly unusual. The impression therefore lingers that banks are severe about how much money individuals can gain access to while big banks – which regularly threaten to sink the economy – somehow have access to as much money as they want. That this is a likely true conclusion only exacerbates the whole mess. It will have a lingering impact not only on the larger morality of society, but also on how central banks are regarded going forward – whether or not they are a fair institution. We believe increasingly the verdict will not be a happy one for this institution.
Yet on top of these negative trends, come central banking's apologists, maintaining that this banker's actions and that banker's criticism is proof positive that the system is working as it should work. It is a noisy system, so the logic goes, that can stand a great deal of shoving and pushing – and that it will be all the better for the rough treatment.
Of course, it is also noted, the rough treatment should stop short of a serious investigation of the books. This should not take place, wise heads explain, because it might panic the market all over again. Apparently, the market is so fragile that the release of the names of certain potentially troubled banks will prove such a blow to confidence as to set back the progress that has been made.
This is Keynesian logic at its finest. It is basically the idea that what drives the economy is confidence, nothing else. Absent confidence, the system itself will cease to create prosperity. To put this into context, think of a normal economic system. People buy and sell as they choose. Confidence is not the primary factor, the invisible hand is. Using this logic, one might be tempted to stand by as banks fail one after the other. They are failing anyway, and if bigger ones are to fail, then let them.
The world is fairly over-banked thanks to central banks. Banks are really, historically, nothing but money warehouses; however, the modern system of central banking has imbued banks, especially money center banks with great power and mystique. This is necessary to prop up and enhance the mystique of the dominant social theme of central banking itself.
This time, we think, it is not going to work especially well – not for the Federal Reserve. The three factors we have cited above are providing a fairly strong headwind against which various central banking apologies and prevarications are not likely to work. Central banks manufacture money, fix prices and are the proximate cause of modern booms and busts. Because millions are educated as to this in the modern, Internet age, the idea that central bank officials are concerned about financial stability takes on a certain ironic tinge. If central banks help cause financial stability, then it would be a good idea to look at their books to see how and why this occurring.
What central bankers are afraid of, especially Fed bankers, is not destabilization in our opinion, but the revelation that central banking is nothing more or less than crony capitalism of the most concentrated and powerful kind. The loans, the electronic money printed out of thin air, the outright giveaways – these, if analyzed closely, will show conflicts of interest that influenced the giveaway of trillions. It will show that the monetary elite directs money – fiat funds based on the faith and credit of the body populace – to those whom it wishes to enrich for purposes of generating further control and additional wealth for those who control the levers of money power. It will show, in other words, that Bernard Madoff was merely a piker who did it the hard way.