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XMFSinchiruna (26.58)

Wow!! Former Fed Chairman Volcker Questions Fed Actions - even legality!



April 08, 2008 – Comments (5)


April 8 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker questioned the central bank's decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at ``the very edge'' of its legal authority.

``The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,'' Volcker said in a speech to the Economic Club of New York.

Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent ``severe'' damage to financial markets.

Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed ``excesses of subprime mortgages'' to spread into ``the mother of all crises.'' The Fed's Bear Stearns loan was unusual, he said.

``What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,'' he said.

Wall Street Subsidy

Lawmakers, while praising the Fed and Treasury for averting a financial collapse, have also questioned the plan to subsidize Wall Street while the Bush administration resists using government funds to assist homeowners cope with the worst housing crisis in 25 years.

Volcker said the Fed's loan may send investors the wrong message.

``The extension of lending directly to non-banking financial institutions -- while under the authority of nominally `temporary' emergency powers -- will surely be interpreted as an implied promise of similar action in times of future turmoil,'' he said.

Volcker said the modern financial system has ``failed the test'' of the marketplace. When asked whether he predicts a ``dollar crisis,'' he said, ``you don't have to predict it, you're in it.''

The dollar has dropped 15 percent against the euro and 14 percent versus the yen in the past year.

$945 Billion in Losses

``What Chairman Volcker said in his remarks is that we need to make sure we are taking a look at the implications of the Fed decision,'' Glenn Hubbard, former chairman of President George W. Bush's Council of Economic Advisers, said in an interview. ``The question is: How do we then redesign regulation around a decision that bold?''

Volcker's critique comes as policy markers struggle to prevent the world's largest economy from contracting, a prospect Bernanke himself raised last week. The International Monetary Fund today said the global losses from securities tied to commercial real estate and loans to consumers and companies may reach $945 billion.

``The bright new financial system, with all its talented participants, with all its rich rewards, has failed the test of the marketplace,'' Volcker said.

As credit markets seized up, the Fed gave the 20 primary dealers in U.S. government bonds the same access to discount- window loans that had previously been reserved for banks. The central bank now auctions as much as $100 billion to lenders a month, and has cut the cost on direct loans to just a quarter- point above the overnight rate on loans between banks.

``The implications of these decisions, and the lessons from the unfolding crisis itself, surely deserve full debate and legislative review in the period ahead,'' Volcker said.

Fed's Response

The Fed has also lowered its benchmark rate six times since September to 2.25 percent from 5.25 percent, and traders anticipate it will cut by at least another quarter point this month to cushion the economy's downturn.

Volcker, 80, said the problems stemmed in part from trading of increasing complicated securities including derivatives that ``have taking on a trading life of their own,'' and said the turmoil ``adds up to a clarion call for an effective response.''

`There was no pressure for change, not in Washington which was spending money and keeping taxes low, not on Wall Street which was wallowing in money, not on Main Street with individuals enjoying easy credit and rising house prices,'' Volcker said.

To contact the reporter on this story: John Brinsley in Washington at

5 Comments – Post Your Own

#1) On April 08, 2008 at 11:31 PM, dwot (29.33) wrote:

Too bad Volcker's term was so short compared to Greendork.

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#2) On April 09, 2008 at 12:30 AM, wm052 (35.40) wrote:

Excellent post - thanks

For those who don't remember, Mr. Volker broke the high inflation monster of the Carter era through high interest rates. There was pain but we enjoyed a long bull market afterwards.

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#3) On April 09, 2008 at 9:45 AM, XMFSinchiruna (26.58) wrote:

I was not fiscally aware at that time.  :)  But the more I hear and learn about Volcker, the more I admire the man... or about as close as I can come to admiring someone who headed an unconstitutional consortium of private banks whose main purpose is to make money for themselves, literaly MAKING the money for themselves, while spinning to the public that they're some quasi-public agency with our best interest at heart.

That subtle bias I have against the Fed aside, I really like a lot of what Volcker was saying here.  I have also heard some very interesting things come out of Greenspan's mouth over the past couple of years.  It seems these guys start doling out the truth after they leave office... perhaps disgusted by their own participation in an entity which thrives in the absence of truth.

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#4) On April 09, 2008 at 9:46 AM, XMFSinchiruna (26.58) wrote:

Fed Weighs Its Options in Easing Crunch
April 9, 2008

WASHINGTON -- The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed, which would issue debt under its own name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

• The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more.
• The News: The Fed is considering several contingency plans for getting more lending capacity so that won't happen.
• The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies.No moves are imminent because the Fed has plenty of maneuvering room. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the plans largely eliminate the risk that the Fed will exhaust its stockpile of Treasury bonds and thus lose its ability to backstop the financial system, as some on Wall Street fear.

British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools.

The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.

The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally.

Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. Since then, it has sold or lent about $300 billion. Its remaining uncommitted supply of Treasurys is $488 billion, 53% of its total assets, sparking warnings from Wall Street that the Fed could run out of ammunition.

The Fed holds assets to manage the nation's money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasurys or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks' reserve accounts at the Fed.

Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such "quantitative easing" only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.

Weighing the Possibilities

So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop. The likeliest option, one the Fed and Treasury have discussed, is for the Treasury to issue more debt than it needs to fund government operations. The extra cash would be left on deposit at the Fed, where they would be separate from bank reserves on deposit and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasurys in the open market; for legal reasons, it generally cannot buy them directly from Treasury.

Treasury's principal constraint is the statutory limit debt. Treasury debt was $459 billion below the limit last Friday. In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics.

Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear. Some foreign central banks, such as the Bank of Japan, do so.

Another possibility is seeking congressional approval to pay interest on banks' reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level.

Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over the Treasury each year, widening the budget deficit. Although preliminary conversations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress.

There are other possibilities. The Fed is lending Treasurys from its portfolios to securities dealers and accepting mortgage-backed securities, or MBS, as collateral. The Fed could do the reverse: take those mortgage-backed securities and use them to borrow Treasurys, which it could lend out again. Dealers would be more willing to accept mortgage-backed securities from the Fed in such trades because the fed is at less risk of going bankrupt than is a private counterparty. The operation would be technically difficult. The Fed could issue credit derivatives on MBS, though that raises many of the same problems as buying the MBS.

The Fed is inclined to use any additional maneuvering room to lend through its existing and recently expanded avenues. Officials are reluctant to buy mortgage-backed securities directly. They worry that such purchases would hurt the market for MBS that the Fed is not permitted to buy: those backed by jumbo and subprime and alt-A mortgages, which are under the greatest strain. Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management. Such holdings wouldn't help avert foreclosures much, since the Fed would have little control over the mortgages on which the MBS are built.

Write to Greg Ip at

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#5) On April 10, 2008 at 9:50 AM, XMFSinchiruna (26.58) wrote:

April 09, 2008

Who Will Bail Out the FED?
by Alex Wallenwein

Whoever believes that the most recent Fed/JP Morgan heist to acquire Bear Stearns, along with other simultaneous and preceding Fed actions, were "successful" had better check again.

The current crisis is so severe, and it has already forced the Fed to reach into its own balance sheet grab-bag so deeply, that a very legitimate question arises, and the question is this: when the Fed ploughs all the way through its own balance sheet and gets to the bottom of the barrel, who will bail it out?

Before boring you to tears with the gory details, I can give you the answer right now:

You will.

And so will I, and every other American. Isn't that nice of us?

And how will we do that?

Not by choice, mind you. Oh no! No one would be this altruistic. Americans may hold some vague notions of emotional attachment to the Fed. They might even see some actual benefit to their economy, which they have long since turned over to be ruled by sort of a softer, more socially acceptable form of tyranny, but foreigners? Fat chance.

So, how will you bail out the Fed, then?

(I wish I had published this article earlier, because I have been playing around with a draft for over a week now. Had I done so, could have bragged about my "prescience." However, when it comes to the Fed and other corrupt power centers in today's world (or that of ant day and age), all you have to do is assume the worst case scenario, and you'll be pretty much on target.)

The point: You will bail out the Fed because, once the Fed burns through its balance sheet of US treasuries with its current Term Securities Lending Facility (TSLF), it can only get more treasuries onto its balance sheet by having Congress allow the Treasury to borrow more money from the Fed than the Treasury really needs.

We are talking monetization of the debt on steroids, here! Mega-steroids, that is.

So what about my "prescience"? An article just came out in the Wall Street Journal an hour ago at the time of this writing (actually, make that a "notice" since it has all but two very short paragraphs) that states the following, verbatim:

WASHINGTON -- The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

No moves are imminent because the Fed still has plenty of balance sheet.

Actually, I wasn't prescient enough. I take that back. I did not come up with the idea that the Fed would ask Congress for authority to issue debt UNDER ITS OWN NAME rather than under the name of the Treasury!!

Just take that in for a second.

The Fed bankers, whose progenitors have already bribed our Congress to un-constitutionally turn over Congress' exclusive power to "coin money" back in 1913, are now trying to persuade Congress to turn over its borrowing power to them as well, thus allowing the Fed to virtually borrow money from itself and issue itself IOUs for that debt.

It is difficult for me to do the gravity of this new idea justice, so as to correctly and adequately imprint upon your conscious mind the sheer and absolute fiscal insanity of such a proposal. Congress might as well turn its entire legislative function over to the Fed, because that's pretty much what it amounts to.

Once The Fed has the power to borrow from itself and leave Americans on the hook for the loan, it can literally dictate to Congress what laws to pass. (Not that it doesn't have that power already, but it will be far more obvious then - and it will be too late for you and I to do anything about it.)

Naturally, Congress, lying prostrate and with its members as ignorant as they are in matters of economic significance, will bend way over forward, drop its trousers down to its ankles, and tell the Fed, "Sure, Sir. Any time, Sir. Go ahead, master."

In case you don't know, when Congress via the Treasury borrows money from the Fed, that money is literally loaned into existence by virtue of the Fed's ability to simply type a "credit" into the government's account at the Fed, just like your commercial bank does when you borrow money from it. The new account balance is then counted as part of the money supply.

And here we have the perfect way to bring the gravity of what the Fed proposes here back home to the ordinary investor and bank depositor: It's as if you gave your bank the power to put you in debt at its own, free will, without even asking you for permission!

Naturally, when your bank does that, you will be on the hook financially to pay that balance back - with interest.

Now, let's translate this example back into the upper echelons of ueber-corrupt government power. When Congress allows the Fed to thus put Congress into its debt, where do you think Congress gets the money to pay the Fed "back" what the Fed has thus decreed as necessary to have Congress "borrow" from it?

From you.

This entire farce would represent perfect, divine justice if Congress told the Fed, "Yeah, sure. You borrow money from yourself - so go ahead and pay yourself back, as well. Don't ask us to pay you for what you 'borrow' from yourself!"

But, you already know that Congress doesn't have enough grits in its collectiv(ist?) brain to come up with an idea like that. No, Congress will simply lie down and tell the Fed bankers to have their way with it - and via Congress, with you and me. Only two or three congressmen will stand alongside Ron Paul and protest this latest move - utterly to no avail.

The proverbial 'fleecing of the flock' has just gone into overdrive, except that now, you will not only be fleeced, but the 'shepherd' has suddenly discovered a newfound fondness for bestiality. You know what I mean.

This is the utter and complete raping of the American public - and guess what? Americans by and large are going to go along with it.

And, just in case a significant number of Americans should find it in their hearts to resist this effort, we will have a simultaneous outbreak of a full-scale war with Iran to divert our attention - the same diversionary tactic that occurred when the Dow got into really hot water back in 2002-2003 (and when Clinton got into hot water with Monica Lewinski in 1998).

And, oh yeah, lest I forget: Hyperinflation isn't just "on its way" anymore. It is here. The floodgates have already been open for a while, now. When Congress approves this insanity (probably sooner rather than later) it will not just blow off the gates, but will blow the entire dam that has kept the fiat-flood at bay so far, sky-high.

Financially speaking, this will wash the United States economy off the world map. Russia and China will take up the slack, both economically and militarily. Russia will take defenseless Europe, and China will take the rest of Asia and America. They already own us, anyway - because we owe them, just like the Federal Reserve Bankers own you and me. Congress owes the Fed, so the Fed owns Congress.

Nothing new. It will only get worse.

Even owning gold will not protect you from this.

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

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