Total assets of each Federal Reserve Bank

Look at 2009. Interesting.

http://www.federalreserve.gov/releases/h41/

Ben Bernanke: Firefighter or Arsonist?

Ben Bernanke is crediting the Federal Reserve for lessening the impact of the financial “crisis”. Here are some excerpts from his recent Washington Post op-ed:

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

Alex Epstein of the Voices for Reason blog gives a very critical response:

Thus, the Fed is a financial firefighter that simply needs more resources to put out fires set by financial arsonists in the free market—and Bernanke is Financial Firefighter in Chief.

Hardly.

The Fed is the arsonist. The Fed has command-and-control powers to dictate the money supply and baseline interest rates in our economy—fundamental factors shaping market decisions about where to invest money. As Yaron Brook explains in his thorough course on the financial crisis, the Fed’s artificially low interest rates (under the regime of Alan Greenspan and deputy Ben Bernanke) were the primary cause of the housing bubble, which combined with other government-induced phenomena (such as Fannie Mae and Freddie Mac) effectively paid people to make reckless investments in real estate. Brook explains how similar factors were at work in the dot-com boom.

In other words, the problem is not that government policies and institutions didn’t do enough to stop the fire, it is that they poured the gasoline and lit the matches.

Spot the difference?

On November 12, the New York Times reported:

The Federal Reserve announced new rules on Thursday that would sharply restrict banks and others that issue debit cards from charging overdraft fees without the express permission of the cardholder.

On November 25, Jurist reported:

The UK Supreme Court on Wednesday ruled that the Office of Fair Trading (OFT) may not challenge the fairness of bank overdraft fee charges as a matter of law. The Court ruled in favor of seven major banks and one building society appealing a lower court decision, holding:

“[T]he bank charges levied on personal current account customers in respect of unauthorized overdrafts…constitute part of the price of remuneration for the banking services provided and, in so far as the terms giving rise to the charges are in plain intelligible language, no assessment under the [Regulations] of the fairness of those terms may relate to their adequacy as against services provided.”

The British get it. The Americans don’t.

The Profitable Fed

According to a report released yesterday on economic growth and corporate profits by the Bureau of Economic Analysis, the Federal Reserve seems to boast impressive profits:

(Click to enlarge)

The Commerce Depart report shows the Fed earned money at a $46 billion annual rate in the second quarter. That figure is up 48% from this point last year. Jon Hilsenrath of the Wall Street Journal attributes this to the Feds ability to “borrow money for next to nothing-– from mortgage backed securities purchases to commercial paper loans to emergency loans to banks.”

70% of Americans Don’t Like the Fed

According to Gallup,

At a time when Americans are discouraged about the direction of the country and hesitant about the scope of President Barack Obama’s federal budget plans, the U.S. Centers for Disease Control and Prevention, NASA, and the FBI earn credit for a job well done from a majority of Americans. The 61% who say the CDC is doing an excellent or good job can be contrasted with the 30% who say this of the Federal Reserve Board, making the latter the worst reviewed of nine agencies and departments rated in the July 10-12 Gallup Poll.

Bernanke’s Wisdom?

Larry Kudlow asks the very important question “Is Bernanke Wise Enough to Exit?” A quick excerpt:

As chronicled in the Wall Street Journal editorial pages, these Bernanke-sponsored monetary errors weren’t the result of stupidity, but of using the wrong targets — such as the unemployment rate, resource-capacity underutilization, or the difference between actual and potential GDP. These statistical measures are highly suspect, whereas market prices are the real McCoy.

So right now, if the Fed targets the unemployment rate and the recessionary underutilization of economic resources — as Bernanke suggested it might in his congressional hearing — it is quite possible the central bank will repeat the very same mistakes it made in the early part of this decade.

Complicating matters, President Obama’s massive spending-and-borrowing policies — and the tax hikes to pay for them — will significantly reduce the economy’s ability to grow. This means that each dollar of Fed-created money becomes potentially more inflationary, just as it means unemployment will stay higher than usual.

I have no doubt that Mr. Bernanke and the Fed have the right tools to protect the consumer dollar. The question is: Do they have the wisdom?

This expands some on yesterday’s post concerning Bernanke and his inflationary tendencies. Inflation is, quite possibly, the biggest threat to our economy. The general population typically concerns themselves with the unemployment rate, but inflation is a far more destructive force. Inflation is also attractive to politicians and other public officials. Expansionary monetary policies, which create inflation, also boost investment and jobs in the short-run. But inflation erodes the value of our money. It destroys the savings of those upon whom we rely on to invest and it eats away at the buying-power of our dollars. History is full of cautionary tales against populist governments who destroyed their economy because they lacked long-term thinking. As to the source of inflation, I look to the father of my personal political beliefs:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

- Milton Friedman

More Bad News For Inflation Hawks

The Wall Street Journal has produced an excellent op-ed on Bernanke’s Assurances. For me, the following excerpt is the most forboding piece of the article:

The problem is that Mr. Bernanke has long dismissed both the value of the dollar and commodity prices as guides to monetary policy. Like the Fed staff, he focuses on unemployment and the “output gap,” which is the difference between actual and potential economic growth. Both are lagging economic indicators, which is why the Fed so frequently is behind the curve with its monetary decisions.

Ignoring economic theory and empirical data, logic alone dictates that unemployment and output must necessarily be lagging indicators. The economy will enter a recovery period well before actual growth appears and firms begin to hire again. In the meantime, the Fed will have time to create another inflationary bubble. And, for my own part, I’m not sure the U.S. can take another recession following on the heels of the once we’ve already experienced. That is, of course, assuming that our economy can recover under the socialist and Keynesian policies under which it labors.