Federal Reserve System
What You Absolutely Need to Know About Money (Part 6)
Our last chapter was about how the U.S. Federal Reserve was created and why. But it ended with an extreme example of how the universal central banking model works today.
As another domino threatened the house of cards holding up European banks, more money had to be pumped into Cypriot banks so their doors didn't close and rapid contagion wouldn't implode all of Europe, and then the world.
Only this time was different.
The European Central Bank (ECB) reached straight into Cypriot bank depositors' pockets and stole about $6 billion from them. The "how" isn't important. It's a simple equation, as revealed in Part V. Governments are the backstoppers of central banks; that's where their authority ultimately comes from.
Why did the ECB steal depositors' money? So they could turn around and lend that and more to the insolvent banks to keep them alive. It's the latest twist in the old "extend and pretend" game.
The big question is, how did banks get so big and so dangerous in the first place?
Or, how did stodgy traditional banking morph into "casino banking" on a global scale?
Here's how it started…
FOMC Meeting Message: Don't Blame Us for Sluggish Economy
The Federal Open Market Committee (FOMC) meeting concluded today (Wednesday) with one clear message to Washington: Thanks for the lousy economy.
Central bank members cited only "moderate" expansion in economic activity and a slow improvement in the stubbornly high unemployment level.
Acknowledging the economy is moving at an unhurried pace, the FOMC members pointed an accusing finger at Capitol Hill.
"Fiscal policy is restraining economic growth," the statement read. That remark was in direct reference to a deadlocked Congress, sequestration and its far-reaching impact.
A spate of fresh economic reports back that sentiment:
Why We Can't Avoid Ben Bernanke's "Monetary Cliff"
When it comes to the Federal Reserve, an accurate "reading of the tea leaves" means paying attention to all of the fine print.
And while the markets cheered last week's FOMC meeting with yet another rally, a deeper look at Ben Bernanke's press conference left me with a slightly different take.
Sifting through the Fedspeak, it became obvious that the Fed is now lining up a "monetary cliff" that's bigger than the fiscal one we spent the last half of 2012 worrying about.
Let me explain…
Here's Where the Fine Print Gets Interesting
According to the release from last week's meeting, the Fed will continue to purchase $85 billion of Treasury and agency bonds every month. Doing so, Bernanke explained that at some point he does expect to reduce that amount. However, he also explained that the recent string of good unemployment data (five months above 200,000 new jobs) wasn't enough yet for him to make the change.
The Fed also stated that it expects a "considerable period" to elapse between the conclusion of the purchase program and raising rates.
Interestingly, that matched with the intentions of the 19 Federal Open Market Committee members. Only a few expect to raise rates before the end of 2014, compatible with the current Fed outlook.
But here's where the fine print gets really interesting: All but one of the members now expects to raise rates in 2015.
What's more, they said once they start, they won't be shy. In fact, the average opinion would put rates at 1.35% by the end of 2015. It may not seem like much at first glance but that's actually quite a big move from six-plus years at zero. And further on into the future, the consensus long-term goal was for rates to hit 4%.
Of course, with inflation around 2%, my goal for the Fed funds rate would be higher than 4% and a lot higher than 1.35% by the end of 2015. But alas, I'm not the Fed chief.
The point is that with the Fed expecting the economy to grow steadily between now and then, and no immediate sign of even a slackening in bond purchases, the turn by the Fed supertanker in late 2014 and 2015 is going to be pretty abrupt.
In fact, chances are it will cause a big wake, and drown quite a few people who have become used to current policies.
What You Absolutely Need to Know About Money (Part Three)
From Venetian goldsmiths issuing paper receipts, to America's first and second central banks – the Bank of North America in 1781, and the First Bank of the United States in 1791 – we arrive at the year 1836.
Chapter Two, on the beginnings of central banking, ended with: "The Second Bank (of the United States, chartered in 1817) was bitterly opposed by President Andrew Jackson, who made the existence of the Bank, and its power over the people, a central issue in his campaign… Jackson won, and in 1836 the Second Bank of the United States' charter expired, along with another central banking experiment."
So, why did Andrew Jackson, after a successful first term as President of the United States, bet a second term on breaking up the huge, monumentally successful bank?
John Meacham's biography of Andrew Jackson, American Lion, lays bare the General's very Jeffersonian fear of the power and influence of banking interests.
Jackson exercised his veto power when a bill for the Bank's recharter passed the Senate and (narrowly) the House, after a former recharter opponent, Samuel Pierce Carson, "had obtained a loan of $20,000 from the Bank, and had changed his opinion."
Jackson eventually overcame the Bank's arsenal of loans and favors by appealing directly to the voters.
What Every Investor Should Know About the End of QE
Equity markets around the world yesterday expressed their distaste for the possible end of the Federal Reserve's quantitative easing (QE) policy.
Share prices tumbled from New York to Tokyo. Even resource-rich Australia and emerging markets, including China, saw shares decline following the release of the minutes of last month's Federal Open Market Committee meeting.
What upset the markets was a discussion at the January FOMC meeting about when and, more importantly, how to end the current QE policy.
As someone put it on Bloomberg Radio yesterday, "Would the markets have been happier if the FOMC was ignoring the issue of how to end QE?"
To understand how ending the QE policy might affect the economy and markets, investors need to understand how QE operates.
Why Veteran Trader Says Inflation in 2013 Is Imminent
Is a spike in the monetary base – currency in circulation plus bank reserves at the Fed – the first sign of imminent inflation?
Art Cashin, the well-respected director of floor operations at the New York Stock Exchange for UBS, recently told King World News the increase in the monetary base may well be a sign of impending inflation.
Monetary base, sometimes called high-powered money, is the basis for the bank lending that drives our economy. When interest rates are normal, banks use their reserves for lending.
Unfortunately, these are not normal times. The U.S. Federal Reserve and other central banks around the world continue to hold interest rates at zero.
Zero interest rates mean zero returns. Investors don't get paid for investing. Banks don't get paid enough interest to compensate for the risk of lending money into the economy. Looking at it another way, there is no penalty for doing nothing with your money.
What You Absolutely Need to Know About "Their Paper Money"
Chapter One, on how money came into being, ended with, "Governments made legal tender laws to make it illegal not to use their paper money – backed by nothing but promises."
There's a partial truth in that sentence. Can you spot it?
Don't worry if you can't. You're not supposed to. It's part of an orchestrated deception.
It's the part about "their paper money." The truth is that governments, and by extension, the countries they govern, don't issue their own money.
The twist is, while government agencies print their currency's bills and stamp their coins, it's not always "their" money.
Countries throughout the free world don't actually own their money.
Guess who does?
Fed Hack Attack Highlights Growing Need for Cybersecurity
Not even the ultra-secretive U.S. Federal Reserve has been spared from aggressive cyberattacks – making cybersecurity an even bigger concern in 2013 than before.
The central bank acknowledged this week it was the victim of a "hack attack" after the group Anonymous claimed responsibility in a Tweet on Super Bowl Sunday.
"The Federal Reserve system is aware that information was obtained by exploiting a temporary vulnerability in a website vendor product," the Fed said in a statement. "Exposure was fixed shortly after discovery and is no longer an issue. The incident did not affect critical operations of the Federal Reserve system."
Anonymous claimed it had compromised 4,000 bankers' credentials on a private computer system the Fed uses to communicate with bankers in emergencies such as natural disasters and potential acts of terrorism.
Hackers also are believed to have accessed private information including data on banks the government agency oversees as well as Fed forecasts for future economic policy actions.
The Fed said all those affected by the breach had been contacted.
The cyberattack underscores the importance of cybersecurity at a time when high-profile attacks have grown more common.
Just a few days after the Super Bowl Sunday attack, Internet security company McAfee reported a hacking operation spanning at least five years had targeted 72 governments, corporations and organizations, 49 of them in the United States.
What McAfee dubbed "Operation Shady Rat" hit government agencies at the federal, state and county level and compromised classified government information.
Reuters reported organizations hacked in the attack included the United Nations, the Association of Southeast Asian Nations and the International Olympic Committee.
Other targeted organizations included those in defense, electronics, computer security, information technology, news media, and communications technology sectors.
Are You Prepared for What the End of QE Will Do to Bond Prices?
Equities rallied and bond prices fell through January as investors, relieved that Congress had avoided the fiscal cliff and postponed a fight over the debt ceiling, changed their stance to take on more risk.
With the immediate crisis over, the need for safe-haven instruments such as U.S. Treasury bonds has diminished, sending yield-starved investors scrambling for better returns.
Improving sentiment in the United States, Europe and even in Japan has sent U.S. Treasury bond prices lower. The yield on the 10-year Treasury bond is now over 2.0% for the first time since April of last year, having averaged 1.80% for 2012.
But it's not just improved sentiment that's going to push down bond prices.
The Fed Delivers Unmistakable Message After Two-Day Meeting
The Fed delivered a clear message Wednesday after its two-day meeting: Don't expect the easy monetary policies to end anytime soon.
The Central Bank's official policy statement, the first of 2013, said interest rates would remain near zero, at ¼%, and the aggressive $85 billion-a-month bond-buying program would continue for a "considerable time."
Word of the Fed's decision came just hours after a Commerce Department report showed gross domestic product had declined for the first time since the Great Recession, slipping 0.1% in the fourth quarter.
The GDP's first decline in 3 1/2 years had led economists to predict the Fed would stick to its easy money policies for the time being.
"There is no hint that they are giving any thought of backing off current policy and their current stance," Wells Fargo's senior economist Mark Vitner told Bloomberg.
"Growth has slowed and inflation is running below expectations. To the extent the Fed's decisions are data dependent, all the relevant data suggest they should continue to ease."