Fed keeps key interest rates steady despite board member’s disapproval
Interesting they are still keeping interest rates low for an “extended period” even though we are in a recovery. They must know something we don’t. They called the recovery moderate for sometime and that tells me that the earnings will not keep up with where the market is priced so we should see a correction.
LA Times - Washington D.C. - Reporting from Washington - Amid the political rancor over Federal Reserve Chairman Ben S. Bernanke’s bid for a second term, central bank officials encountered some dissension in their first policy-setting meeting of the year, even as they affirmed their pledge to keep interest rates at near zero for “an extended period.”
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The Federal Reserve Made $52 Billion In 2009
The Federal Reserve reaped quite a nice reward for its rescue efforts during the financial crisis. According to its preliminary unaudited 2009 results, the central bank made a whopping $52.1 billion in profit. Somewhere, Ron Paul’s blood is boiling. But before populist outrage at these profits take hold, let’s consider a few things.
First, the vast, vast majority of these profits are going back to taxpayers — $46.1 billion. As the release says:
Under the Board’s policy, the Reserve Banks are required to transfer their net income to the U.S. Treasury after providing for the payment of statutory dividends to member banks and equating surplus to paid-in capital.
Those statutory dividends were $1.4 billion, while the surplus capital was $4.6 billion. Taxpayers get the rest.
So the first point is that taxpayers actually benefit from the Fed’s profits. A lot. They got 89% of its net income. As a taxpayer, I’m pretty happy about that.
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Video: DeMint amendment to audit Federal Reserve blocked by Senate leadership
Editor’s Note: Watch this video if you would like to see what is happening to the “Audit the Fed” bill that has been co-sponsored by over 50% of the U.S. House of Representatives. It looks like the Senate is using “Rule 16″ to stop this amendment to the bill even when the same Senate has language in the same bill that violates the same rule they are using to stop this amendment. Oh the hypocrisy.
Video:
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Fed’s Kohn warns less independence & autonomy may cause higher interest rates
As you know in this previous post, I was in agreement on the technical basis, that an perceived erosion in the Federal Reserve’s independence would be back in the short-term. The reasoning was on the basis that foreign investors would become scared that the money printing would accelerate and that would devalue all dollars so to compensate for this, the investors would demand higher yields on new treasury issues.
BUT, I do take issue with the statement farther down in the article that quotes Donald Kohn as saying this about the bill in audit the Federal Reserve via the GAO (General Accounting Office), “Such legislation is “contrary to the public interest” because investors may see it as “undermining monetary independence,” Kohn said. “Such an action would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.””
What this tells me is that the books for Fed are so messed up, that a full audit would send the market into a panic. If that is the case then the audit is what is really needed to restore confidence. I don’t buy the argument that somethings are better to not be known for our own good. That is an area that is ripe for abuse because of the opaqueness.
News (Bloomberg):
Federal Reserve Board Vice Chairman Donald Kohn said any “substantial erosion” of the central bank’s independence in setting interest rates may fuel investor fears of inflation and provoke higher long-term borrowing costs.
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Fed’s Bullard says must shield Federal Reserve’s independence
This pains me to say but at the moment, Bullard is correct on this point. With the Fed pursuing their policy of quantitative easing (print money), there is a real concern with foreign investors that hold significant U.S. bond holdings that an erosion of the Fed’s independence could be a sign that a more populist approach to this stage of the economic recession. If the investors think the amount of money printing will increase to pay for more stimulus and bailouts then they will demand much higher yields and will increase the cost of imported goods which in turn will import inflation into the U.S. Long term I do think the independence on the Federal Reserve will be eroded because they are not maintaining the normal policy central bankers use of “price stability”.
News (Reuters):
St. Louis Federal Reserve Bank President James Bullard said on Tuesday that public anger over the U.S. financial crisis and subsequent bailouts could cause big problems if this escalated into a political challenge to the independence of the U.S. central bank.
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Bernanke Grilling May Weaken Case for Expanded Fed Oversight Powers
Editor’s Note: After the report of the internal Fed email about disclosure of losses at Merrill Lynch being delayed, it does possibly impact the credibility of the Federal Reserve. My biggest reservation is with the Fed who dictates monetary policy, having the ability to deal with systematic risk. The Fed has a track record with financial crisis es come along, to lower interest rates to artificially low levels, bailout the bad actors and then pump money into the system to stimulate through the crisis.
Yes it does get us through the tough times but I see it as the us collective wanting to treat the symptoms and not the cause. The easy way out is usually not the best way, especially in the long run. With this track record in place, we are now talking about giving the authority who practices lose monetary policy the ability to selectively pick the winners and losers when they usually create the problem from the initial monetary policy. I hope others understand this and agree that more concentrated power is not better.
News (Bloomberg):
Chairman Ben S. Bernanke’s grilling by legislators over Federal Reserve conduct in Bank of America Corp.’s takeover of Merrill Lynch & Co. may reduce the odds the central bank will win new powers in a regulatory overhaul.
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Federal Reserve Possibly Delayed Merrill Lynch Loss Disclosures According to Internal Email
This just shows more of the opaqueness in our U.S. financial system. When we are looking to gain back trust and confidence, these types of findings are counter-productive but needed to put light on the issue of transparency and doing what is right now what is politically convenient. We still do not know where $2 trillion in loan agreements or where most the money from A.I.G went. These are important questions that should be asked and answered no matter how damaging it is. We have totally bailout out and propped up a bunch of actors that have been liquidated and sold to the highest bidder. Once the truth is known, then and only then will we have the information in hand to make the hard choices and put in place or enforce rules and regulations that will protect the investor and punish the overly greedy.
News (Bloomberg):
House Republican staffers said the Federal Reserve tried to control the timing of disclosures of rising losses at Merrill Lynch & Co. in the weeks leading up to its takeover by Bank of America Corp., according to a memo obtained by Bloomberg.
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