How the Fed Sees Itself Is Not Pretty

Talk about putting your foot in your mouth. This would be funny if it wasn't sickening.

During congressional questioning on Nov. 21, Sen. Elizabeth Warren (D-Mass.) commented that the Fed's job is like that of "a cop on the beat."

And that's when New York Federal Reserve President William Dudley inserted a foot in his big mouth.

He responded, "I don't think our primary purpose as supervisors is a cop on the beat, it's more like a fire warden; make sure that the institution is well run so that, you know, it's not going to catch on fire and burn down. And managed in a way that if the institution is stressed that it doesn't collapse and threaten the rest of the financial system."

In other words, there's no "policing" going on.

Dudley said it - not me.

But today I'll share with you what I do have to say - and I'll show how the close relations between Wall Street and Washington could lead to yet another financial conflagration...

The Fed and Big Banks: Too Close for Comfort

According to Dudley, then, the Fed's job - its reason for existence - is to protect banks from burning themselves down when their greedy schemes ignite depositors' ample piles of kindling.

The FedThe New York Fed president was testifying before the Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection on the subject of the Fed being too close to the banks it's supposed to police.

Now we know why banks and the Fed are so close. When the banks' crack pipes break from excessive heat, the Fed is there with liquidity beer bongs to dampen their highs so they don't OD and send the whole economy on a bad trip.

And here's even more evidence that lawmakers failed to jam the revolving door between the big banks and their so-called regulatory agencies following the 2007-2008 financial crisis: Dudley is the former chief economist of Goldman Sachs Group Inc. (NYSE: GS).

And after that statement, he wasn't done - and what came next was even worse.

[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]

Dudley stuck another foot in his mouth by explaining why the Fed is not the cops.

"Our main goal is to ensure the safety and soundness of the institutions that we supervise," he told Sen. Warren. "If in the process of doing that we see behavior that we think is illegal, then our job is to refer it to the enforcement agencies."

A stunned and angry Sen. Warren replied, "But you don't think you should be doing any investigation? You should wait to see if it jumps in front of you?"

Yep, that's what the Fed's job is. It's not an arson investigator or fire inspector, just a fire department putting out pesky conflagrations by pumping more flammable liquids into their basements.

How else are banks going to survive and thrive?

When it comes to foot and mouth disease, the Fed is Patient Zero.

More from Shah Gilani: There's only one surefire investing move guaranteed to cost you money. More than 52% of Americans have made this fatal trading mistake. Here's how to avoid making it yourself.  

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

Read full bio