The Insightful Trader


by on Apr.14, 2011, under Editorials

Matt Taibbi’s Rolling Stone piece proves that the Fed hasn’t just fallen down on its job as a regulator because it has come to worship the banks it is supposed to regulate. It is now nothing less than bagman to the world, an agent for siphoning off the wealth that America earned the hard way over the centuries.

Before Greenspan’s 1987 appointment the Federal Reserve, for all its faults, was renowned for its rectitude, and for the prestige of the large cadre of economists who work there. It was the kind of institution that was an honor and (pun intended) credit to the United States. It was the kind of place that few countries could imitate, and added to the aura of the US as an “exceptional” country.

Some of us remember how economists used to debate Fed policy. Was the Fed able to damp the violence of economic cycles as it intended, or was it actually exaggerating them, being “pro cyclical?” Should the Fed use discretion in creating money or should it follow a rigid rule when it added money to the economy? During recession, how much stimulus should the Government apply through fiscal means (say,  creating temporary jobs through public works programs, remember that?) and how much through the monetary system at the Fed? We cared about whether the Fed was right or wrong, but no one doubted that the Fed was a serious place. Ph.D. candidates looked forward to the opportunity to work there.

Then Greenspan instituted his “put” and took the Fed down several notches, but its status was still redeemable. Until, as Taibbi shows, 2008. The Fed usurped the FDIC’s job then; it lent incalculable sums to keep insolvent banks running when the FDIC should have shut those banks down. But not only that: the Fed became an agent of petty corruption. Through the Fed institutions like Goldman Sachs and Morgan Stanley became America’s dukedoms, their partners’ wives the Eva Perons of our time.

Now the Fed has become a mechanism by which the country’s treasure is plundered for the benefit of oligarchs around the world and by which the dollar is being debased. In 1987 under Volcker the Fed was custodian of the world’s unquestioned reserve currency; now the Fed destroys that currency’s value and the wealth of anyone foolish enough to hold it.

Read the excerpts and weep, but the whole thing is worthwhile.

“In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting life decision. Despite the fact that he was earning the comparatively low salary of just $800,000, and had refused to give himself a bonus in the midst of the financial crisis, Mack decided to buy himself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper East Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close the deal, or he got some help from his wife, Christy, who apparently bought the house with him.”


“It’s hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that’s exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan’s penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.”


“The impetus for this sudden manic expansion of the bailouts was a masterful bluff by Wall Street executives. Once the money started flowing from the Federal Reserve, the executives began moaning to their buddies at the Fed, claiming that they were suddenly afraid of investing in anything — student loans, car notes, you name it — unless their profits were guaranteed by the state.”

In short, between 1987 and 2008 the Fed went from paragon to a joke, along with America. I’ve long agreed with Ron Paul that when the Fed took its extraordinary actions in 2008 it needed to be accountable, to be audited. But only now am I beginning to wonder if we do need to abolish it and start over.


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