Category

Federal Reserve System

How Presidential Candidate Ron Paul's Campaign Could End the Fed

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

Led by presidential candidate Ron Paul's "end the Fed" mantra, Republicans have made their attacks on the U.S. Federal Reserve into an election year rallying cry.

It's one that could turn ugly in November if the GOP manages to score big.

Where Paul has been the lone voice in the wilderness criticizing the central bank for years, others in the GOP recently adopted the Fed as a scapegoat for the financial crisis of 2008.

Many of the Republican attacks include calls to fire Fed Chairman Ben S. Bernanke and to scale back the Fed's mandate – or in Paul's case, eradicate it altogether.

And while Paul – who actually wrote a book called "End the Fed" in 2008 – has little chance of becoming the nominee, his campaign does have a larger philosophical objective.

"It is Paul's goal to permanently establish within the Republican Party a group that is dead set on not having the Fed," Douglas Holtz-Eakin, chief economic adviser to Sen. John McCain, R-AZ, during his 2008 run for the presidency,told MarketWatch. "This is not going away."

Ron Paul Scores Big With Younger Voters

Although Paul's overall support generally hovers in the low double digits, his message is very popular among younger Republican voters.

Paul won 48% of the under-30 vote in Iowa, 47% of the under-30 vote in New Hampshire and 31% in South Carolina. It's a demographic every candidate covets.

Paul's resonance with young voters, combined with the public's dim view of the Fed has set off an all-out GOP assault on the central bank.

For added juice, Republicans in general have sought to tie their criticisms of the Fed to U.S. President Barack Obama and the Democrats.

"If you are a [Republican] running for Congress – those freshmen in the House – they thought that Bernanke was walking around talking about buying assets for Obama to make it easier for him to spend," Holtz-Eakin told MarketWatch. "It lit the fuse."

To continue reading, please click here...

What's Different About this Week's FOMC Meeting

By , Associate Editor, Money Morning - • Print | Email

The two-day Federal Open Market Committee (FOMC) meeting starting today (Tuesday) marks a historic shift in how the U.S. Federal Reserve communicates its policy decisions with the public. The changes center on disclosing individual FOMC members' interest-rate forecasts and economic projections. It may also release an agreed target for inflation. "It's a significant innovation," Jeremy […]

Read More…

Fed Lets Banks Off the Hook... Again

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

We've told you before that the U.S. Federal Reserve puts Wall Street's interest above that of the American public. And yesterday (Wednesday) the central bank proved it… again.

Confronted with the opportunity to enact meaningful change to the regulatory system, the Fed punted on its responsibility to protect the public from the very banks that brought down the global economy.

This once again proves that the Fed, far from being a guardian of public welfare, is actually on the side of big banks.

"The Fed is an agent of the banks and, as such, it continues to come up with new ways for them to make money, risk free," said Money MorningCapital Waves Strategist Shah Gilani.

This time, instead of proposing strong guidelines that would actually do something to avoid another crisis caused by too-big-to-fail banks, the Fed put forth a plan that lacks key details and leaves important decisions in the hands of international regulators in Basil, Switzerland.

Specifically, the Fed proposal is hazy on capital requirements and minimum liquidity levels, which are crucial to ensuring a bank survives a financial emergency.

Delay has been a common theme for agencies charged with creating the regulations set out in Dodd-Frank. As of the beginning of December – 18 months after Dodd-Frank was signed into law – fewer than 25% of its hundreds of new rules have been finalized.

On Tuesday, it was the Commodity Futures Trading Commission (CFTC)voting to delay until July of next year regulations governing derivatives – the financial instruments that were at the very heart of the 2008 financial crisis.

And by forfeiting its chance to effect change, the Fed left the United States even more vulnerable to another financial crisis.

Now, not only have these vital regulations been delayed, but the process gives well-connected Wall Street bankers three months to "comment" – read "influence" – on the proposals.

Following the Fed's announcement, the banking industry didn't seem particularly worried that the finished regulations, when they do arrive, will cause them much of a headache.

"While these rules will require considerable review and comment from the industry, we are pleased to see the Fed is taking a phased-in approach to a number of these measures," Ken Bentsen, an executive vice president the Securities Industry and Financial Markets Association trade group, told Bloomberg.

A headline on CNBC summed it up nicely: "Banks Breathe Sigh of Relief Over New Fed Rules."

Indeed, Wall Street isn't concerned because at the end of the day, it knows the Fed is its ally.

"The average American has no idea how protected the big banks in this country really are," said Money Morning's Gilani. "Maybe that's because the biggest bank in the world is the U.S. Federal Reserve. And it happens to be a creation of – and 100% beholden to – the banks that it is a master shill for. It also lies to us and covers up Wall Street's misdeeds."

To continue reading, please click here...

Out of Answers, Federal Reserve Can Only Offer Empty Rhetoric

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

The Federal Open Market Committee (FOMC) is scheduled to issue a statement at 2:15 pm. today (Tuesday), but don't expect anything other than more empty rhetoric.

Indeed, with few options remaining, the Fed is expected to produce little more than a statement designed to reassure the markets following today's meeting.

"If the Fed were smart, they would use this meeting to take decisive action," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Sadly, though, I think they'll lay low and issue yet more hollow statements filled with information that at this point constitutes less than fluff."

At this point, few bullets remain in the Fed's chamber; interest rates have been near-zero for almost three years, and two programs of "quantitative easing" over the past two years have pumped $2.3 trillion into the U.S. economy.

In an attempt to show it was doing something to help the economy, the central bank said last summer that it would maintain rates at that level until mid-2013.

And while the Federal Reserve is not expected to announce immediate plans for more quantitative easing – QE3 – many believe some sort of accommodation, probably directed at the housing market, is coming next year.

"There is a 75% chance the Fed will buy mortgage-backed securities in the first half of the year, possibly by January," Lou Crandall, chief economist at Wrightson ICAP LLC, told MarketWatch.

A series of relatively positive economic reports in recent weeks – unemployment recently dropped to 8.6%, while consumer spending and manufacturing have edged upward – has eased the pressure on the Fed to take any more action this year.

As part of its strategy to maintain optimism in the markets, the FOMC will likely promise to pump more money into the U.S. economy at some point next year.

"The numbers are getting better, but not enough to keep [the FOMC] complacent," Crandalltold MarketWatch.

Word Games

Recognizing that its options are limited, the Federal Reserve instead will focus today on the one thing it can provide in near-limitless supply – words. Today's meeting is expected to focus on a new communications strategy that will offer more details on the Fed's goals for inflation and unemployment – its dual mandate – and how it plans to meet them.

To continue reading, please click here...

Jim Rogers: "The Fed is Lying to Us"

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

Despite statements to the contrary, the U.S. Federal Reserve has continued to pump money into the economy, says investing legend Jim Rogers.

The resulting low interest rates and creeping inflation, he says, are destroying the wealth of millions.

"[Federal Reserve Chairman Ben] Bernanke said last August he was keeping interest rates artificially low," Rogers told Yahoo! Financeon Tuesday. "The only way you can do that is to go into the market."

As proof, Rogers pointed to the rise in the broad M2 measure of the U.S. money supply, which has increased more than 5% since the Fed's second quantitative easing program (QE2) ended on June 30, and 20% since November 2008.

"Since August – well, this whole year – the M2 has jumped up," Rogers said. "They're in the market. They're lying to us."

A well-known critic of the Fed who has called for it to be abolished, Rogers warned that the central bank's policies would lead to disaster.

"Right now what the Federal Reserve is doing is ruining an entire class of people in America," Rogers said. "The people who saved and invested for the past 10, 20, 30 years are now being ruined because interest rates are [too] low."

He added that if he were Fed chairman, he'd raise interest rates to slow down inflation.

In a separate interview with The Streetyesterday (Wednesday), Rogers said he considered the Fed to be the greatest risk to the U.S. economy in 2012.

"They don't seem to understand economics or finance or currencies or much of anything else except printing money," Rogers said.

Painful Remedies

The other major concern that Rogers has is the soaring federal debt, which recently passed $15 trillion.

"We are the largest debtor nation in the history of the world and the debts are going higher and higher by trillions, every two or three years," Rogers said. "We're all paying the price for it. And wait till 2013 – we're really going to pay the price."

To continue reading, please click here...

Why the Fed's Latest Rescue Effort is Doomed

By , Chief Investment Strategist, Money Map Report - • Print | Email

World markets got a nice tailwind yesterday (Wednesday) on news that the U.S. Federal Reserve is stepping into the fray along with other central banks to boost liquidity and support the global economy.

Of course it's nice to see stocks get a hefty boost, but to be honest I'd rather see them rising on real news.

Not that this isn't a good development in terms of stock values – but come on, guys. When things are so bad that the Fed has to step into global markets and bail out the other bankers in the world who can't wipe their own noses, we have serious problems.

Think about it.

The Fed is going to collaborate with the European Central Bank (ECB), the Bank of England (BOE), the Bank of Japan, the Swiss National Bank and the Bank of Canada (BOC) to lower interest rates on dollar liquidity swaps to make it cheaper for banks around the world to trade in dollars as a means of providing liquidity in their markets.

Put another way, now our government is directly involved in saving somebody else's bacon at a time when, arguably, we don't have our own house in order.

The Fed is cutting the amount that it charges for international access to dollars effectively in half from 100 basis points to 50 basis points over a basic rate.

The central bank says the move is designed to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credits to households and businesses and so help foster economic activity."

Who writes this stuff?

Businesses are flush with more cash than they've had in years. The banks are, too. But the problem is still putting that cash in motion — just as it has been since this crisis began.

From Bad to Worse

I've have written about this many times in Money Morning. You can stimulate all you want with low rates, but if businesses cannot see a reason to spend money to turn a profit, they won't. And there's going to be little the government can do to encourage them to spend the estimated $2 trillion a Federal Reserve report estimates they're sitting on.

Similarly, if banks cannot see a reason to lend with reasonable security that loans will be repaid, they won't. And there's nothing the central bank can do about it, either. Neither low interest rates nor low-cost debt swaps will change the fact that companies and individuals are shedding debt as fast as they can despite the cost of borrowing being almost zero.

If anything, the Fed's newest harebrained scheme is going to make things worse. Absent profitable lending, many banks are already turning to bank fees and – like the airlines that are widely perceived to be nickel-and-diming passengers – this is understandably irking customers. Many are changing banks as a result, further fueling a negative feedback loop.

To continue reading, please click here…

To continue reading, please click here...

Why Traders Booed the Fed's "Operation Twist' - And You Should, Too

By , Associate Editor, Money Morning - • Print | Email

With "Operation Twist," U.S. Federal Reserve policymakers are attempting to use an old strategy to launch a new attack on the wheezing U.S. economy.

But the assault, announced after the central bank's Federal Open Market Committee (FOMC) meeting concluded yesterday (Wednesday) afternoon, isn't expected to have much long-term success.

"The way [Fed policymakers] handled this proves that the Fed doesn't have much power left," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "It tried to use big sweeping statements, and careful language … and it still didn't work – the market sold off … and traders [on the trading floor in New York] actually booed. They don't want this … they know it's bad."

As many expected, the central bank will use a derivation of a 1960 s initiative that's designed to "twist" the interest-rate "yield curve" by flattening it out. Between now and the end of June, the Fed will buy $400 billion worth of bonds with six-year to 30-year maturities while selling an equal amount of shorter-term debt with three -year maturities.

The Fed intended to rally markets with a sign of reassurance, but stocks failed to reverse their declines. The Dow Jones Industrial Average nose-dived 284 points, or 2.49%, the Standard & Poor's 500 Index skidded 2.94%, and the tech-laden Nasdaq Composite Index slumped 2.01%.

The market consensus: "Team Bernanke" has again made a move that will do more long-term harm than good to the U.S. economy.

To continue reading, please click here...

The Insidious Truth About Federal Reserve Policy

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW - • Print | Email

So far, U.S. Federal Reserve policy has done nothing to help the economy. To the contrary, it's actually been quite destructive.

Yet Federal Reserve Chairman Ben S. Bernanke and his cohorts will likely expand upon their ineffective policies next week by announcing a new "Operation Twist."

That begs the question: Why?

If ultra-low rates and quantitative easing haven't put a dent in unemployment or spurred economic growth, then why expand on those programs?

The answer: Because the Fed doesn't work for the American public – it works for Wall Street .

That's right. It's not the economy the Fed has on life support – it's the banks.

America's banks are facing huge litigation costs. Worse, they've grown entirely dependent on the Fed's easy-money policy.

So the Fed is going to bail them out – again.

And we're going to be the ones who pay for it.

Federal Reserve Policy Follies

To really understand what's at play here, let's start by taking a closer look at the Fed's misguided policies.

There are two reasons why Federal Reserve policy hasn't worked: First, the Fed's artificially low interest rates are handicapping the economy. And second, Bernanke is telegraphing Fed policy decisions to the markets, giving speculators an edge over investors.

By keeping overnight lending rates between 0.00% and 0.25%, banks can borrow at next to nothing and buy risk-free U.S. T reasury securities that yield a lot more than their financing costs. The result is a "positive interest rate spread," which is the basis for banks' revenues and profits.

Additionally, banks can borrow more money by using their Treasury securities as collateral for overnight and "term" loans. Then they use the cash they borrow to buy more Treasuries. They do this over and over again to leverage themselves.

Essentially, banks have become giant hedge funds that finance their "trading books" with virtually free money, courtesy of the Fed's zero-interest-rate policy.

To continue reading, please click here...

Don't Get Duped by Derivatives

By , Money Morning - • Print | Email

It recently came out that a $1.2 billion derivatives portfolio that Goldman Sachs Group Inc. (NYSE: GS) managed for the Libyan government lost 98.5% of its value between 2004 and June 2010.

If a firm like Goldman will sit idly by while a client eats about $1 billion on a single investment, where do you think you and your portfolio land on Wall Street's list of priorities?

The message here is simple: You can't trust Wall Street – not with a $10,000 investment, a $100,000 investment, a $1 million investment, and especially not with $1 billion investment.

Goldman Sachs claims that the Libyans were picking the derivatives trades themselves. But that's exactly what they would say.

After all, if it got around that Goldman's ace traders were capable of losing virtually all of their clients' money, bonuses would fly out of the window along with most of the business. I'm sure the Libyan government would have offered a rebuttal if it weren't being toppled in a civil war.

The Libyans no doubt did much of the investment decision-making themselves, but the real problem is that there was no basis of comparison for the prices of the derivatives products they were being given.

And that's where there's a lesson to be learned. As a retail investor, you have to be able to determine a two-way price quote for whatever investment you buy.

The investment landscape is littered with the wreckage of failed structured investments.

Between 2008 and 2010 already-strapped cities and states had to pay Wall Street $4 billion in termination fees to get out of various interest rate products that had gone wrong.

For example, there's the exciting 2007 "Abacus" deal by Goldman Sachs trader "Fabulous Fab" Tourre, which lost European banks a total of $1 billion.

The investors in Fabulous Fab's Abacus deal had no independent means of assessing the value of the subprime mortgages in the pool. These were large, "sophisticated" banks, but they deluded themselves with the risk/reward tradeoff they were taking on.

Losses are not confined to the notoriously murky derivatives investments, either. I would bet that the special Goldman clients who earlier this year bought privately offered shares of Facebook Inc. at a $60 billion valuation will end up losing big on their investment as well.

As investors, most of us are not rich enough to get Wall Street's attention, but we should stay informed about how these firms are luring their clients into spectacularly bad deals.

That way we'll all know what to avoid.

To continue reading, please click here...

S&P's Ill-Advised Downgrade Ushers in Buying Opportunities

By , Global Energy Strategist, Oil & Energy Investor • @KentMoors_OEI - • Print | Email

A number of years ago, Standard & Poor's (S&P) gave me a desk in one of their offices on Wall Street. In those days, I was providing energy analysis for a short-lived S&P publication called Emerging Global Markets.

I never felt comfortable in that office. Actually, whenever possible, I avoided going there.

What happened this past weekend reminded me why.

S&P's horrendous decision Friday afternoon to lower the U.S. credit rating has rattled global markets, pushing Wall Street deeper into negative territory.

Jack Bogle, the legendary founder and former-CEO of the Vanguard Group, calls S&P "the gang that can't shoot straight." I think this is an apt way to label a disgrace masquerading as a ratings agency.

You see, these are the same guys whose "advice" was regularly dismissed as almost laughable during the subprime mortgage debacle. The same greedy goons who made considerable money slapping triple-A ratings on collateralized mortgage obligations, directly contributing to a worldwide credit crisis.

Seems the opportunity to make 400% or more in fees over regular ratings decisions was too much for them to pass up. Forget that they barely reviewed the packages, never rated the underlying paper, and never understood them anyway.

Ratings agencies do not make money by downgrading countries. They make money by rating paper issued by companies. And for that, they need to be visible.

Well, judging by the fact that nobody of consequence at the 55 Water Street headquarters is answering the phone this morning, S&P got the visibility it so badly wants.

The downgrade is essentially a political lecture to Congress.

It's just hard to appreciate when it's delivered by the clowns who cavalierly missed the single biggest credit mess in memory… one in which their ratings activities were centrally complicit.

To continue reading, please click here...