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FRBNY President And Former Goldman Partner Dudley Discusses Politicization Of The Fed

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The former Goldmanite discusses why the Fed will keep printing, printing, printing when the next leg of the Deferred DepressionTM hits, until such time as the ink runs out. And now, in addition to the usual Mutual Assured Destruction observations on why an audit of the Fed will cripple the world, Dudley adds his perspective on why the Fed should become a uber-regulator:

There are clear synergies between the supervisory process and
the Federal Reserve's monetary policy and financial stability missions.
The information we collect as part of the supervisory process gives us
a front-line, real-time view of the state of the financial industry and
broader economy. Monetary policy is more informed as a result. Only
with this knowledge can a central bank understand how the monetary
policy impulse will be propagated through the financial system and
affect the real economy...
Information sharing with other
agencies is simply not as good as the intimate knowledge and
understanding of markets and institutions that is gathered from
first-hand supervision. Indeed, many institutions at the center of the
crisis and arguably the most troubled—Bear Stearns, Lehman Brothers,
Merrill Lynch, AIG and the GSEs—were not supervised by the Federal
Reserve. Consequently, when those institutions came under stress, the
Federal Reserve had poorer quality and far less timely information
about the condition of these institutions than would have been the case
if we had had the benefit of direct supervisory oversight.

So in essence without having discrete knowledge over just how non-performing loans have taken over bank balance sheets, the Fed's monetary policy will be "blind." Is that an admission that all the prior bubbles the Fed managed to blow with such facility could have been avoided? But yes, otherwise it is simple a brilliant idea to give the bubble maker supreme oversight and regulation over all banks - this time it will be different: so promises the Goldman affiliate.

And speaking of Goldman, the monopolist bank is now supposed to be equated with god's true representative on earth, but as the equivalent of "public interest":

What is fundamentally at issue here is not “turf,” but
rather how we as a nation can best ensure that we never again re-live
the events of the past few years—that the legitimate public interests
associated with a safe, efficient and impartial banking and financial
system are well served.

If by "public interests" Mr. Dudley refers to the P&L risk of his former employer if and when mission-critical counterparties are not bailed out by taxpayers (while Fixed Income trading competitors are happily allowed to swallowed by bankruptcy courts after a surge in collateral calls), and AIG-type make whole arrangements continue in perpetuity, then we fervently agree.

Lastly, speaking of GSE's, just when will the Fed propose some regulatory framework with which to handle this stealthy multi-billion add-on to the taxpayer's balance sheet? Or should extend and pretend with housing continue until such time as the Fede is renamed to the New Century Reserve.

 


Remarks at the Partnership for New York City Discussion, New York City

It
is a pleasure to have the opportunity to speak here today. I will focus
on the important lessons of the recent crisis and how those lessons
should inform the regulatory reform effort. As always, what I have to
say reflects my own views and not necessarily those of the Federal Open
Market Committee or the Federal Reserve System.

In my opinion, this crisis demonstrated that a systemic risk
oversight framework is needed to foster financial stability. The
financial system is simply too complex for siloed regulators to see the
entire field of play, to prevent the movement of financial activity to
areas where there are regulatory gaps, and, when there are
difficulties, to communicate and coordinate all responses in a timely
and effective manner.

Effective systemic oversight requires two
elements. First, the financial system needs to be evaluated in its
entirety because, as we have seen, developments in one area can often
have devastating consequences elsewhere. In particular, three broad
areas of the financial system need to be continuously evaluated: large
systemically important financial institutions, payments and settlement
systems and the capital markets. The linkages between each must be
understood and monitored on a real-time basis. Second, effective
systemic risk oversight will require a broad range of expertise. This
requires the right people, with experience operating in all the
important areas of the financial system.

In this regard, I
believe that the Federal Reserve has an essential role to play. The
Federal Reserve has experience and expertise in all three areas—it now
oversees most of the largest U.S. financial institutions; it operates a
major payments system and oversees several others; and it operates in
the capital markets every day in managing its own portfolio and as an
agent conducting Treasury securities auctions. Also, as the central
bank, it backstops the financial system in its lender-of-last-resort
role.

Compared with where we were in late 2008 and early 2009,
financial markets have stabilized, and the prospect of a collapse of
the financial system and a second Great Depression now seems extremely
remote.
Even with this progress, however, credit remains tight,
especially for small businesses and households. Economic growth has
resumed, but unemployment has climbed to punishing levels. So while
circumstances have improved, they are still very far from where we want
them to be. We have no cause for celebration when the challenges facing
so many businesses and households remain so daunting.

Aggressive
and extraordinary official interventions were imperative to bring about
this nascent stabilization of our financial markets and economic
recovery. The Federal Reserve has been at the center of many of these
interventions. For example, its efforts over the past two years to
promote market functioning and minimize contagion were critical in
preventing the strains in our financial markets from resulting in even
more severe damage to the economy. These “lender of last resort”
interventions on the part of the Fed, including facilities such as the
Term Securities Lending Facility (TSLF) and the Primary Dealer Credit
Facility (PDCF), as well as programs such as the foreign exchange
reciprocal currency agreements, are examples of the rapid and
responsive application of basic central bank tenants to the unique
challenges we faced as this crisis evolved. Indeed, in many ways, the
crisis has underscored why the Federal Reserve was created almost a
century ago: to provide a backstop for a banking system prone to runs
and financial panics.

Where it proved necessary and feasible to
do so, the Fed also used its emergency lending authority to forestall
the disorderly failure of systemically important institutions. These
actions truly were extraordinary—well outside the scope of
our normal operations, but our judgment was that not taking those
actions would have risked a broader collapse of the financial system
and a significantly deeper and more protracted recession. Faced with
the choice between these otherwise unpalatable actions and a broader
systemic collapse, the Fed, with the full support of the Treasury,
invoked its emergency lending authority and prevented the collapse of
certain institutions previously considered to have been outside the
safety net.

The fact that the Fed needed to take those actions
provides a stark illustration of the significant gaps in our regulatory
structure, gaps that must be eliminated. Among those holes was the
absence of effective consolidated oversight of certain large and deeply
interconnected firms; the collective failure of regulators—including
the Federal Reserve—to appreciate the linkages and amplification
mechanisms embedded in our financial system; and the absence of a
resolution process that would allow even the largest and most complex
of financial institutions to fail without imperiling the flow of credit
to the economy more broadly. Addressing these shortcomings will require
important reforms in our country's regulatory architecture.

We
entered the crisis with an obsolete regulatory system. For one, our
regulatory system was not structured for a world in which an
increasingly large amount of credit intermediation was occurring in
nonbank financial institutions. As a result, little attention was paid
to the systemic implications of the actions of a large number of
increasingly important financial institutions—including securities
firms, insurance conglomerates and monolines. In addition, many large
financial organizations were funding themselves through market-based
mechanisms such as tri-party repo. This made the system as a whole much
more fragile and vulnerable to runs when confidence faltered.

With
the benefit of hindsight, it is clear that the Fed and other
regulators, here and abroad, did not sufficiently understand the
importance of some of these changes in our financial system. We did not
see some of the critical vulnerabilities these changes had created,
including the large number of self-amplifying mechanisms that were
embedded in the system. Nor were all the ramifications of the growth in
the intermediation of credit by the nonbank or “shadow banking” system
appreciated and their linkages back to regulated financial institutions
understood until after the crisis began.

With hindsight, the
regulatory community undoubtedly should have raised the alarm sooner
and done more to address the vulnerabilities facing our banks and our
entire financial system. But this was difficult because our country
didn’t have truly systemic oversight—oversight that would be better
suited to the new world in which markets and nonbank financial
institutions had become much more important in how credit was
intermediated. Without a truly systemic perspective, it was unlikely
that any regulator would have been able to understand how the risks
were building up in our contemporary, market-based system. The problem
was that both banking and nonbank organizations played an important
role in credit intermediation but were subject to differing degrees of
regulation and supervision by different regulatory authorities.

Although
these gaps had existed for years, their consequences were not apparent
until the crisis. Difficulties in one part of the system quickly
exposed hidden vulnerabilities in other parts of the system, in a way
that our patchwork regulatory system had not been designed to detect or
readily address. In the same way, the crisis revealed the critical
deficiencies in the toolkits available to the regulators to deal with
nonbank institutions in duress. Emergency lending by the Fed might be
enough to forestall the disorderly failure of a systemically important
institution and all the wider damage such a failure might cause, but it
was a blunt and messy solution, employed as a stopgap measure because
better alternatives were not available. What is needed—what our country
still lacks—is a large-firm resolution process that would allow for the
orderly failure even of a systemically important institution.

Thus,
in the fall of 2008, regulators and policymakers found themselves
facing the prospect of the total collapse of a complex and
interconnected system. It was these circumstances, and the
prospect they created for an even deeper and more protracted downturn
in real economic activity and employment, that required truly
extraordinary actions on the part of the Federal Reserve, as well as
the Treasury and many other agencies. This is a situation in which the
United States must never again find itself.

For its part, the
Federal Reserve is hard at work on developing and implementing new
regulations and policy guidance that take on broad lessons of the
recent crisis. We are working with other banking regulators in the
United States and overseas to strengthen bank capital standards, both
by raising the required level of capital where appropriate and
improving the risk capture of our standards. We are issuing new
guidelines on compensation practices so that financial sector employees
are rewarded for long-term performance and discouraged from excessive
risk-taking. And we are working with foreign regulators to develop more
robust international standards for bank liquidity. We are working to
make the tri-party repo system more robust and reducing settlement risk
by facilitating the settlement of over-the-counter derivatives trades
on central counterparties (CCPs). But more needs to be done and much of
this requires action by Congress.

Congress is now considering
several proposals for comprehensive regulatory reform, proposals that
merit careful study and debate. Let me offer some general thoughts on
the principles that should guide how we approach reform.

First,
it's important to take a clear-eyed and comprehensive view of the
financial system we have today. As I've already suggested, if there is
one overriding lesson to be drawn from the events of the past 18
months, it is that the financial system is just that: a system, and a very complex one at that.
The operational, liquidity and credit interdependencies that
characterize contemporary financial markets and institutions mean that
the well-being of any one segment of the system is inextricably linked
to the well-being of the system as a whole. Because of this, our
approach to reform must be guided by a coherent sense of the system as
a whole, not merely by a focus on some of its component parts, as
important as they may be.

We need a new regulatory structure that
provides for comprehensive and consistent oversight of all elements of
the financial system. This includes effective consolidated oversight of
all our largest and interconnected financial institutions and oversight
of payment and settlement systems. We must make sure that the people
doing the regulation have the power and expertise to ferret out and
bring to heel regulatory evasion as it occurs to prevent abuse and
excess from building up in the financial system. In the end, the gaps,
not the overlaps, have been the main shortcoming of our existing
regulatory framework.

A second fundamental point is that
regulatory reform has to ensure that the financial system will be
robust and resilient even when it comes under stress so that it will
not fail in its critical role in supporting economic activity. No
economy can prosper without a well-functioning financial system—one
that efficiently channels savings to the businesses that can make the
most productive use of those savings, and to consumers that need credit
to buy a home and support a family. The fact that our financial system
isn't functioning well right now is part and parcel of our current
economic difficulties. This critical link between the “real” and the
“financial” is why we care so much about the systemic risks inherent in
banking and finance.

One critical element of systemic risk is
what is known as the “too big to fail” problem. Without sufficiently
high capital and liquidity standards, and, as a backstop, a resolution
mechanism that is credible, regulators are faced with a Hobson’s Choice
when a large, systemically important financial firm encounters
difficulties. On the one hand, if authorities step in to respond to
prevent failure, contagion and collapse of the broader system, that
action rewards the imprudent and can create moral hazard—that is,
encouraging others to act irresponsibly or recklessly in the future in
the belief that they will also be rescued or “bailed out.” On the other
hand, if authorities do nothing and let market discipline run its
course, they run the risk that the problem will spread and unleash a
chain reaction of collapse, with severe and lasting damage to markets,
to households and to businesses.

So what can we do about the “too
big to fail” problem? It is clear that we must develop a truly robust
resolution mechanism that allows for the orderly wind-down of a failing
institution and that limits the contagion to the broader financial
system. This will require not only legislative action domestically but
intensive work internationally to address a range of legal issues
involved in winding down a major global firm. Second, we need to ensure
that the payments and settlement systems are robust and resilient. By
strengthening financial market infrastructures, we can reduce the risk
that shocks in one part of the system will spread elsewhere. Third, we
need to reduce the likelihood that systemically important institutions
will come close to failure in the first place. This can be done by
mandating more robust capital requirements and greater liquidity
buffers, as well as aligning compensation with the risks that are taken
by the firm’s employees. In addition, instruments such as contingent
capital–debt that would automatically convert to equity in adverse
environments–need to be considered. Such instruments would enable
equity capital to be replenished automatically during stress
environments, dampening shocks rather than exacerbating them.

I
would now like to take some time to discuss some of the proposals that
Congress is debating regarding regulatory reform. As Congress and the
Administration consider what legislative changes are warranted, the
Federal Reserve's actions before and during the crisis have been
getting close inspection. Given the Federal Reserve's key role in our
financial system, and the scale of the damage caused by the financial
crisis, this careful scrutiny is necessary, appropriate and welcome.

Not
surprisingly, there are legislative proposals that would significantly
alter the Federal Reserve's powers and responsibilities, particularly
with respect to supervision of bank holding companies. Again, that's
entirely within Congress's purview: the Federal Reserve only has the
powers and responsibilities that Congress has entrusted to us. But in
drawing up new legislation, it's important not to throw the baby out
with the bathwater—we should preserve what has worked and fix what
hasn’t. A dispassionate analysis of what is needed will almost
certainly lead to better decisions and a more effective regulatory
framework.

The legislative proposals concerning the Federal
Reserve are not limited to the Federal Reserve’s role in supervision.
Consider, for example, one proposal that calls for what it terms
"audits" of the Federal Reserve by the U.S. Government Accountability
Office (GAO), an arm of Congress. These wouldn't be audits at all in
the commonly understood sense of the term. The Federal Reserve's
financial books and transactions are already audited by wide
range of professionals internal and external to the institution.
Rather, these new audits would involve ex-post review of Federal
Reserve monetary policy decisions, a potential first step
toward the politicization of a process that Congress has carefully
sought to insulate from political pressures.

The notion that the
Federal Reserve's financial dealings are somehow kept hidden from the
public is a surprisingly widely held view—and it is simply incorrect.
An independent outside audit of the Federal Reserve's books is
conducted annually. You can find the results online, including a
detailed accounting of the Federal Reserve's income and operating
expenses in its annual report. The financial books of the regional
Federal Reserve Banks also undergo independent outside audits, also
available online. In addition, the GAO is empowered to review almost
all Federal Reserve activities other than the conduct of monetary
policy, including the Federal Reserve's financial operations, which the
GAO has done so frequently. The Federal Reserve's balance sheet is
posted online weekly, with considerable detail, in what's called the
H.4.1 report. Finally, an additional accounting of the Federal
Reserve's emergency lending programs created over the last two years is
available online in a monthly report.

But my objection that GAO
oversight would be broadened to include a review of monetary policy
decisions is not based just on the fact that the Fed is already subject
to considerable oversight. My principal concern is the damage that
could potentially result to the Fed’s ability to achieve its mandate of
price stability and maximum sustainable employment. The effectiveness
of monetary policy depends most of all on the Federal Reserve’s
credibility with market participants and investors. In particular, both
groups need to know that the Fed will always act to keep inflation in
check. That's why Fed Chairman William McChesney Martin famously joked
that the Fed would sometimes need "to take the punchbowl away just as
the party gets going." As you can well imagine, this may not always
enhance our popularity, especially among those who were enjoying the
party. But, the fact that markets know that the Federal Reserve will
tighten monetary policy when needed helps keep inflation expectations
in check. This, in turn, helps keep inflation low since inflation
expectations affect actual inflation. The consequence is credibility
with respect to the conduct of monetary policy. This gives the Fed more
latitude not to tighten when inflation rises for transient reasons—say,
due to a short-lived spike in oil prices—and more scope to ease credit
to support the economy during economic downturns.

Recognizing
these benefits, Congress wisely acted many years ago to exempt monetary
policy decisions from the GAO's wide powers to review Federal Reserve
activities. Congress' decision to bolster the Fed's monetary policy
independence has been followed by similar actions around the
world—substantial independence for the central bank in the conduct of
monetary policy is now widely regarded as international best practice.
Policy independence does not absolve the Federal Reserve from
accountability for its monetary policy decisions and the need to
clearly explain why they were taken. But it avoids the politicization
of monetary policy decision-making. And this is good because
politicized central banks generally do not have enviable records with
regard to inflation, economic growth or currency stability. Risk premia
on financial assets are typically much higher in countries with
politicized central banks.

Of course, a reversal of Congress's earlier decision would not amount to legislative control
over monetary policy decisions. That's not the issue. The issue is that
a reversal of Congress’ earlier decision could create the appearance
that the legislature seeks to influence monetary policy
decisions by establishing a mechanism to publicly second guess those
decisions. Such a move would blur what has been a careful separation of
monetary policy from politics. Market confidence here and abroad in the
Federal Reserve would be undermined. Asset prices could quickly build
in an added risk premium, which might lead to tighter credit
conditions. These unintended consequences would undermine the
legislation’s intent.

I’m also concerned about those proposals
under consideration that would move the regulatory and supervisory
functions now held by the Federal Reserve to other agencies, new or
existing. At present, the Federal Reserve is the consolidated
supervisor for bank holding companies, a group that has expanded
recently as investment banks and other companies formerly outside the
Federal Reserve's purview have been brought under Federal Reserve
oversight. In my view, further disaggregation or fragmentation
of regulatory oversight responsibility is not the appropriate response
to our increasingly interconnected, interdependent financial system.
Funneling information streams into diverse institutional silos leads to
communication breakdowns and too often to failure to "connect the dots."

In
addition, there are clear synergies between the supervisory process and
the Federal Reserve's monetary policy and financial stability missions.
The information we collect as part of the supervisory process gives us
a front-line, real-time view of the state of the financial industry and
broader economy. Monetary policy is more informed as a result. Only
with this knowledge can a central bank understand how the monetary
policy impulse will be propagated through the financial system and
affect the real economy.

Similarly, involvement in the
supervisory process gives us critical information in fulfilling our
lender-of-last-resort responsibilities. Information sharing with other
agencies is simply not as good as the intimate knowledge and
understanding of markets and institutions that is gathered from
first-hand supervision. Indeed, many institutions at the center of the
crisis and arguably the most troubled—Bear Stearns, Lehman Brothers,
Merrill Lynch, AIG and the GSEs—were not supervised by the Federal
Reserve. Consequently, when those institutions came under stress, the
Federal Reserve had poorer quality and far less timely information
about the condition of these institutions than would have been the case
if we had had the benefit of direct supervisory oversight.

In fact, some of the hardest choices the Federal Reserve had to make
during the most chaotic weeks of the crisis concerned systemically
important firms we did not regulate. It is not surprising
that, in the wake of the crisis, some countries that had separated bank
supervision from the central bank monetary policy role are now
reconsidering that division of labor. That is mainly because
coordination problems created difficulties in responding quickly and
effectively in the crisis. Separation made it more difficult to
communicate in a timely way and to understand the broader implications
of what was transpiring. It is critical that we not introduce new
inefficiencies and impediments. No matter what steps are taken to
improve our regulatory system and strengthen market discipline, history
tells us that there will inevitably be circumstances in which an
informed and effective lender of last resort will play a critical role
in preventing shocks and strains in financial markets and institutions
from generating a broader collapse of the financial system.

Of course, there are legitimate questions as to how broad the
Federal Reserve's regulatory and supervisory responsibilities should
be. That question is up to Congress, and should be decided on the
merits. What is fundamentally at issue here is not “turf,” but
rather how we as a nation can best ensure that we never again re-live
the events of the past few years—that the legitimate public interests
associated with a safe, efficient and impartial banking and financial
system are well served.

In the end, it is critical that financial
reform be decided on the basis of the merits. If objective and careful
policymaking prevails, we will all be the better off for it. In
contrast, if we fail in this endeavor, that would truly be tragic. We
must act informed by the important lessons that we have learned from
this crisis.

Thank you for your kind attention.

 

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Wed, 01/20/2010 - 11:16 | 199272 Miles Kendig
Miles Kendig's picture

The fact that the banks imploded under the feds watch does not bode well for their ability to regulate their member institutions.  Asking the fed to be a proactive regulator of banks is akin to asking Major League Baseball to constrain steroid use in the 1990's.

The fed = New Century Reserve.  Bwaaahaahaa

Wed, 01/20/2010 - 15:41 | 199643 Anonymous
Anonymous's picture

"Asking the fed to be a proactive regulator of banks is akin to asking Major League Baseball to constrain steroid use in the 1990's."

Ummm, that comparison makes no sense. MLB DID go about cracking down on steroids AFTER the 1990's and have done a good job of eliminating rampant usage.

Are you saying the Fed will similarly step up to the plate?

Wed, 01/20/2010 - 16:17 | 199690 Miles Kendig
Miles Kendig's picture

Did I mention MLB of the 2000's?  MLB did all it could in the attempt to win back fans and boost revenues in the 1990's by not only turning a blind eye to the issue, but in many ways fostering it as a means to their desired ends.  Hence my comparison.

Wed, 01/20/2010 - 11:13 | 199276 GoldmanBaggins
GoldmanBaggins's picture

I am so sick of these assholes robbing us blind then telling us how wonderful they are for the country. Fact of the matter is these clowns are on borrowed time. "Truth is the daughter of time" as the old saying goes. The fools should do themselves a favor and bow out now before the pitchforks get sharpened. They won't and that is what has my attention. What event will start the revolt? Hunger? Homelessness, theft. Can't wait to see it go down.

Wed, 01/20/2010 - 12:17 | 199338 Anonymous
Anonymous's picture

I don't know, but I can tell you one thing--when this blows, it's going to be a total collapse.

Wed, 01/20/2010 - 11:24 | 199289 Hephasteus
Hephasteus's picture

"So what can we do about the “too big to fail” problem? It is clear that we must develop a truly robust resolution mechanism that allows for the orderly wind-down of a failing institution and that limits the contagion to the broader financial system."

By limit the contagion you mean expand the contagion to the entire economy and all tax payers alive or dead present tense or future tense. We must make failure and wrongness complete security and righteousness to avoid disruptions in the "wrong" areas while people are clearly suffering disruptions anyway.

Wed, 01/20/2010 - 12:24 | 199350 Assetman
Assetman's picture

My word...

Starting with Alan Greenspan, the Federal Reserve had over two decades to put in place a "truly robust resolution mechanism" for winding down financial institutions when they flited with failure.

What we got instead was an institution that fully embraced the concept of juicing up leverage and encouraging "financial innovation"-- and simply did not understand that the risk management tools their member banks were using were grossly inadequate.  Man, that's stupid personified.

With performance like that, the Federal Reserve needs to be on probation-- and that's putting things tactfully.  Instead, we have blowhards like William Dudley still making the case that his underperforming institution deserves more oversight power, not less.  As a taxpayer my intital thought is... "well, hell no".

And we haven't even discussed the transparency issue the Federal Reserve still has a hard time understanding.  When an institution develops a pattern of making egregious policy mistakes and not providing adequate oversight for the institutions for which it oversees-- then transparency of that instituition is a prerequisite.  Moreover, the Fed has really pushed the legal bounds on what should be considered "monetary policy" (i.e. the outright purchase of MBS), and they do not think the public has any right to know the details of those purchases.  That's simply stunning... and not in a good way.

I'm actually in favor of a central bank structure that performs its their duties within the letter of the law, and encourages prudent lending practices while protecting taxpayers interests.  Oh, and if that institution can respond positively to calls for greater transparency-- that's a big bonus.

The Federal Reserve as it exists today simply does come anywhere close to meeting that description.  The more I hear their sad pleas for relevance and positioning for more oversight powers, the more I believe that the institution should be scapped. 

All in favor, say "aye".

Wed, 01/20/2010 - 12:49 | 199397 Miles Kendig
Miles Kendig's picture

+!

Wed, 01/20/2010 - 14:25 | 199552 Stevm30
Stevm30's picture

"I'm actually in favor of a central bank structure that performs its their duties within the letter of the law"

If you were in charge, how would you design the institution to prevent it from doing what central banks have done throughout history.  In my perspective, the very idea of a central bank is flawed and carries the seeds of its own destruction?  Why does the government need to be involved in money at all?

Wed, 01/20/2010 - 15:17 | 199617 Assetman
Assetman's picture

If I were in charge... now that's a laugher...

To answer your question, you give the central bank very limited authority to achieve very basic objectives (i.e., price stability, full employment).  You structure the entity to serve the public versus serving member banks.  You leave the authority of regulatory oversight and enforcement to an outside body.  You strictly define what role banks play in the system, and what risks and leverage they are allowed to take (I'd prefer that banks operate more like public utilities than hedge funds).  You de-centralize the decisionmaking ability on monetary policy from the NY Fed to the other 13 Fed Reserve banks, and establish a structure than demands transparency and accountability... even if after the fact.  Hey... you asked. :)

As for your other question, if the government isn't involved as an intermediary in a medium of exchange among its populace-- who/what performs that function?  Would you like to outsource the role to JP Morgan?  Or do you think gold will magically provide that medium while keeping price levels and employment in check?  I'm at a loss to find any country that has succeeded in having no central bank, but having a stable economy, full employment, and successful currency for any length of time (more than a decade).  I'm open to suggestions, though...

The issue with the Federal Reserve (as it exists today) is that it's not really a government entity-- unless that suits their purpose.  The danger from that structure is that it has left the entity virtually unaccountable, while it serves two competing interests (member banks interests to be profitable and the public objectives of price stability and full employment).   For over two decades the Fed seems to have favored serving the former over the latter-- although both interests have been somewhat in synch until now.

I don't think the idea of a central bank is necessarily flawed (if structured differently), moreso than the reliance on non-backed fiat currency as its medium.  Once you crossed the rubicon of the "full faith and credit" to replace something real (gold/silver) to back your fiat, then the seeds of destruction can certainly be planted.  In that instance, currency devaluation is almost guaranteed.

Wed, 01/20/2010 - 19:36 | 200025 Hephasteus
Hephasteus's picture

You have to have a central bank with a fractional reserve currency because you have to have someplace to put the trash. All fractional reserve systems eventually over leverage on the banks. You don't run fictitional accounting systems with no concern for the underlying assets with price stability without turning the banks into the equivalant of the goldsmiths fake receipt trash basket. I have no way to understand how the switch to SDR and IMF World Bank is going to get around the paradox creation that a fractional reserve system causes with massive buttload lying over 60 years or so other than to hide it completely and internally readjust everything with massive amounts of offsheet accounting and simply limiting the number of fake rich people the system creates.

All I know is I'm sleeping hours and hours a day and my dreams are total fucking garbage. It's nonsense spit at me like it means a damn thing and Imma bout to shove my fist down thier throat and yank their tongues out and shove my other fist up their ass, claw thorough thier colon wall and yank their kidneyes out and then make them lick their own kidneys in a erotic organ porn display.

If our lovely fucking ascended masters are doing some sort of confusion illusion programing all I gotta say is watch out for 1q 2010. It's going to get stupid.

Central banks are supposed to get around the problem of regional relativism of currency and make everyone suffer the devalution costs across the board. With home prices running up constantly in new york, florida, etc etc its becoming glaringly obvious how the distribution of large population center sociopaths is affecting the system. Enforcing inflation on people by shoving armies of bobblehead real estate agents parroting "Buy now or be priced out forever" is not really working well enough to inflate assets enough to keep it from being shoved back down the banks throat in the form of stupid scary unsustainable leverage. Even massive amounts of mortgage and security fraud through freddie fannie isn't keeping this from getting  turned back onto the banks and wrapped into a tight little unvomitable ball of shit.

Fri, 01/22/2010 - 00:06 | 201828 Anonymous
Anonymous's picture

Theoretically it would be possible to grow debt at a slightly higher rate than productivity and then readjust leverage every so many years by means of a small recession. That of course is hard to implement as a central bank because:
a) you have to be able to time the market correctly
b) you have to have the political will to have a recession
c) Why would you have fractional reserve banking in the first place if you did this?

They WANT to have the bubble machine at their bidding, governments finance a lot of their spending this way. No fractional reserve banking would necessitate smaller government.

Wed, 01/20/2010 - 11:26 | 199290 Anonymous
Anonymous's picture

"financial markets have stabilized, and the prospect of a collapse of the financial system and a second Great Depression now seems extremely remote"

What a self-serving comment, coming from a Fed President. The so-called stability we have is based entirely on accounting gimmicks; I wouldn't bet a second Great Depression is "extremely remote."

Wed, 01/20/2010 - 17:31 | 199814 greased up deaf guy
greased up deaf guy's picture

nassim taleb has most certainly bitten his lip off and broken both of his hands punching the wall after reading that quote.

Wed, 01/20/2010 - 11:33 | 199294 Anonymous
Anonymous's picture

Why Scott Brown won

Over-played the traditional role of the Democratic Party as better representing the interests of the middle class than the Republican Party. If that is true, then why did Obama administration hire Goldman Sachs executives to rescue Wall Street and run the economy? The hypocrisy is not lost on voters.

If you are currently registered as either Republican or Democrat, re-register as an Independent. Why? This keeps the political machines on both parties guessing and forces the debate away from party lines and onto the issues that matter to you. It worked here in Massachusetts by accident. Maybe it can be made to work on purpose on a national scale.

http://tinyurl.com/y8kug2h

Wed, 01/20/2010 - 11:39 | 199301 Anonymous
Anonymous's picture

Good morning, you stupid bulls. Within the past two weeks the equity of North America's largest trucking company and Asia's biggest airline was discovered to be virtually worthless. Here's a head's up: No matter how many shares the criminal Federal Reserve secretly buys, the equity of the banks is worthless. Just wait and see.

Wed, 01/20/2010 - 11:40 | 199303 Anonymous
Anonymous's picture

Dudley is just another self serving hypocrite. The fed and central bankers have been secretly manipulating politics for hundreds of years. Time to drag them out in to the light of day.

Abolish the Fed
Abolish the IRS
Demand debt free money

Wed, 01/20/2010 - 11:42 | 199305 Cistercian
Cistercian's picture

 Evil speaks.They just want to continue the ponzi is what I take from this.

 The scumbags.

Wed, 01/20/2010 - 11:44 | 199306 pros
pros's picture

Fed=GS=

Blood-sucking vampires

 

Lock them all up until they give us the $13trillion back...

In Guantanamo...

each with an adequate with a supply of rags and the CIA to care for them...

http://attackerman.firedoglake.com/2010/01/18/these-were-not-suicides-at...

 

Wed, 01/20/2010 - 12:08 | 199326 Circumspice
Circumspice's picture

So bottom line, a Goldmanite is advocating strengthening the ties between Wall Street and the Fed.

I don't see how any harm can come of that.

Wed, 01/20/2010 - 12:21 | 199346 buzzsaw99
buzzsaw99's picture

All GS operatives rot in hell.

Wed, 01/20/2010 - 12:24 | 199351 Anonymous
Anonymous's picture

Told ya'. The banks will be relegated to the status of utilities, and commercial interest rate will be below 1% for quite some time.

Wed, 01/20/2010 - 12:30 | 199362 Tic tock
Tic tock's picture

Certainly a perspective on the role of the Federal Reserve system. 

I suppose it's worth pointing out that there are some Federal Reserve Banks which have a divergent opinion on the current direction that US Central Bank policy is taking the so-called 'real' economy.

It is an international system, dominated by multinational banks, with New York as their central pit. I am not certain that the Federal Reserve has the correct financial structure so to act as a Lender of last resort to these top tier institutions. For instance, there appears to be no particularly rigorous procedure for indicating available monies in this regard. Nor has information been disseminated as to the scope, size or aims of the aforementioned portfolio, without which then forms a policy that is non-conducive for financial market stability, unless trading is performed by HFT or, and not mentioned without cause, insider knowledge. 

Which leads to the vaunted conflict of interest in hiring policy by the Federal Reserve system. Given that the Bank of International Settlements had been raising issue with Liquidity surplus, it does seem unavoidable to match the lack of prudence on the part of the Fed- by far the most responsible of the world's Central Banks- in contrast to the shorter term interests of the former employers.    

All-in-all, the question you have to answer Mr. Dudley is this,' in this system, who is at the top?'

 

Wed, 01/20/2010 - 12:32 | 199365 Anonymous
Anonymous's picture

THIS is soooooo simple....

Separate the banks from the securities business....

They both serve separate and vitally important functions....

Wed, 01/20/2010 - 16:45 | 199739 Ripped Chunk
Ripped Chunk's picture

And CDS's??????????????

Simple

Wed, 01/20/2010 - 12:36 | 199372 Anonymous
Anonymous's picture

Keiser could have directed his letter to multiple addresses especially those HQ'ed in NY:

Only Suckers Would Trust Business Today”
January 20th, 2010

Summary: Max’s letter to the editor published in today’s FT.

From Mr Max Keiser.

Sir, Richard Lambert’s critique of Sir David Hare’s play The Power of Yes is shrill and unconvincing (“Why David Hare is wrong about business”, January 18).

In fact, contrary to what Mr Lambert argues, business is absurdly easy due to the ease companies have in accessing credit at rates – engineered by banks engaging in cross-border “carry trades” in the currency market – of virtually zero. Furthermore, when these businesses lose money with their virtually free cash they lobby their respective governments for bail-outs.

Additionally, Mr Lambert states that the primary purpose of business is not to make money. This is one of those pathetic oxymorons you hear like “plausible deniability” or “jobless recovery” meant to obfuscate and protect the guilty from prosecution.

His solipsistic exercise also includes his notion that business is not a selfish pursuit. Clearly, the entire basis for free market capitalism since Adam Smith has been the pursuit of self-interest.

Finally, we are told that businesses are inherently seeking trust and that we should give them the benefit of the doubt. Sorry, but based on the litany of fraud, larceny and deceit practised by business, particularly in the City of London, it’s clear that only suckers would trust business today.

Max Keiser,
Paris, France

Wed, 01/20/2010 - 12:39 | 199382 Anonymous
Anonymous's picture

Alright, Every one says Greenspan was the father of the economic crisis. Let me be the only one in the room to defend him. At least he acknowledged the fact that he must raise rates because he didn't want inflation. He also feared irrational exuberance when it came to the stock market. The only problem is, he did everything in big gulps. His timing was also a little bit off. But at least he had emotions and fears. Bernanke , Well I won't say nothing.

Wed, 01/20/2010 - 12:58 | 199408 Ripped Chunk
Ripped Chunk's picture

One of the notable psychological effects of continuous long term criminal activity (like you would see in organized crime for instance) is the feeling of "normalcy" that the "routine" daily criminal activities has on the psyche of the perpetrators. A feeling of insulation and "business as usual" so to speak.

The difference between the organized crime they make movies about and the racketeers that run our financial system is that periodically someone in "regular" organized crime gets whacked or arrested with a very good chance of long term jail time. This has an effect on the rest of the organizations members to be more careful about personal safety and also to purge the organization of suspected moles.

Since it appears that none of the financial racketeers is going to be arrested, what do we think it is going to take to get the attention of the financial syndicate to show them that "business as usual" is over???????

 

 

 

Wed, 01/20/2010 - 13:45 | 199481 Anonymous
Anonymous's picture

"In a government of laws, the existence of the government will be imperiled if it fails to observe the law scrupulously. Our government is the potent, the omnipotent teacher. For good or ill, it teaches the whole people by its example. If government becomes a lawbreaker it breeds contempt for law: it invites every man to become a law unto himself. It invites anarchy."

Justice Louis Brandeis

Wed, 01/20/2010 - 16:39 | 199724 Ripped Chunk
Ripped Chunk's picture

And therfore a strong police and military presence is then required to maintain order and the power base of the fascist state.

When no one wants to buy your bonds anymore, you won't be able to pay your army and police.

 

Wed, 01/20/2010 - 13:07 | 199429 Anonymous
Anonymous's picture

Now here is a novel idea. Put people in jail for crimes rather than allowing them to buy their way out of it.

Top Chinese judge jailed for life for graft

http://www.google.com/hostednews/afp/article/ALeqM5hlZKnWHo87TXxW7TAydpu...

Wed, 01/20/2010 - 13:08 | 199436 Lndmvr
Lndmvr's picture

Even Buffet was spewing the verbal diareea this morning.

Wed, 01/20/2010 - 14:15 | 199536 Anonymous
Anonymous's picture

did you hear him...the worst of the housing crisis is behind us?

Not if this is true....
Even the affluent are having a hard time refinancing or getting loans:

They could always buy a $24 million condo on Utopia

One client of Benson's, with $8 million in assets, wanted to refinance the mortgage on his primary residence.

A self-made man, he had sold a business and put much of the proceeds in a charitable remainder unitrust that paid him $150,000 a year. He took paper losses in his stock portfolio against that income, however, which lowered his taxable income. The cash flow stayed intact but the income he showed was much lower.
$8 million in assets - and can't get a mortgage
"The loan officer didn't understand it," said Benson, "and the bank declined the loan."

http://money.cnn.com/2010/01/20/real_estate/mortgage_woes_for_wealthy/in...

Wed, 01/20/2010 - 16:42 | 199733 Ripped Chunk
Ripped Chunk's picture

The Andy Griffith of Wall Street?

Give me a fucking break.

Wed, 01/20/2010 - 13:29 | 199457 Anonymous
Anonymous's picture

Shorter Dudley: "Regulatory capture FTW!"

Wed, 01/20/2010 - 13:43 | 199476 Anonymous
Anonymous's picture

The Sun Could Shine Again on the Sunshine State

There is an alternative to that dark future, and perhaps it is to keep the public from waking up to it that arms are being twisted to accept the new burdens quickly. If Wall Street and the Feds won’t extend credit to California on reasonable terms, the State could simply walk away and create its own credit machine. California could put its revenues in its own state-owned bank and fan these “reserves” into many times their face value in loans, using the same “fractional reserve” system that private banks use. Many authorities have attested that banks simply create the money they lend on their books. Congressman Jerry Voorhis, writing in 1973, explained it like this:

“[F]or every $1 or $1.50 which people, or the government, deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up.”

President Obama himself has acknowledged this “multiplier effect.” In a speech at Georgetown University on April 14, 2009, he said:

“[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks; where’s our bailout?,’ they ask, the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”

If private banks can leverage deposits into multiple amounts of “credit” on their books, a state-owned bank could do the same thing, and return the profits to the public purse. One State already does this. North Dakota boasts the only state-owned bank in the nation. It is also one of only two states (along with Montana) that are currently able to meet their budgets. The Bank of North Dakota was established by the legislature in 1919 to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. By law, the State must deposit all its funds in the bank, and the State guarantees its deposits. The bank’s surplus profits are returned to the State’s coffers. The bank operates as a bankers’ bank, partnering with private banks to lend money to farmers, real estate developers, schools and small businesses. It makes 1% loans to startup farms, has a thriving student loan business, and purchases municipal bonds from public institutions.

North Dakota is not suffering from unemployment or feeling the pinch of the economic downturn. Rather, it sports the largest surplus it has ever had. If this isolated farming State can escape Wall Street’s credit crisis, the world’s eighth largest economy can do it too!

Wed, 01/20/2010 - 13:59 | 199506 Anonymous
Anonymous's picture

william dudley is the largest whore in the world

Wed, 01/20/2010 - 14:26 | 199556 crosey
crosey's picture

What is fundamentally at issue here is not “turf,”

WTF!  Hey asswipe, it's all about turf!....soooo easy for you to say now that you and your ilk are in possession of trillions of new acres that you took, FROM US!

Would someone please bitch-slap the fool.

Wed, 01/20/2010 - 16:03 | 199669 Anonymous
Anonymous's picture

Maybe he can write another essay on transparency, integrity, and mark to market.

It starts with the headline: “Fed makes ‘a killing’ on AIG contracts“. Huh? That says the Fed made money, a lot of money. But read the article, and the claim is patently ridiculous:

The Federal Reserve is sitting on billions of dollars in paper profits from its controversial effort to unwind credit insurance contracts that AIG provided to banks such as Goldman Sachs, people familiar with the matter said….

Yves here. So who are these people? Presumably at the Fed, or BlackRock, the asset manager. Hardly independent, in other words. But when you dig, the representation is vastly worse than even this lame bit of cheerleading suggests.

Wednesday, January 20, 2010
FT As Shameless Fed-Booster, Runs Incredible Claims re Results on AIG Assets
http://tinyurl.com/ykfezce

Wed, 01/20/2010 - 17:02 | 199757 MrPalladium
MrPalladium's picture

"Consider, for example, one proposal that calls for what it terms "audits" of the Federal Reserve by the U.S. Government Accountability Office (GAO), an arm of Congress. These wouldn't be audits at all in the commonly understood sense of the term. The Federal Reserve's financial books and transactions are already audited by wide range of professionals internal and external to the institution. Rather, these new audits would involve ex-post review of Federal Reserve monetary policy decisions, a potential first step toward the politicization of a process that Congress has carefully sought to insulate from political pressures."

It is critical that we grasp the meaning of this allegation that the audit bills aim to "review Federal Reserve monetary policy decisions." This oft repeated canard operates on two levels.

The most obvious and least dangerous level is the attempt exploit the low level of average intelligence and economic literacy in Congress by reducing the issue to one of competing names and labels, thereby avoiding debate and understanding of the subtstance of the issue.

But on a second and much more important level, the Fed is using this allegation of reviewing "monetary policy decisions" as a means of foreclosing debate on which recent Fed actions are appropriate "monetary policy tools" and which are the illegal assumptions of Congress' appropriation authority - actions which are tainted with corruption through the Feds own revolving door.

Many years ago when I studied monetary economics as an undergraduate, monetary policy tools consisted of their ability to manipulate short term rates by setting the discount rate and manipulating the fed funds rate by purchasing or selling treasury securities. Those were the tools of monetary policy, and no one in Congress has suggested that the Fed's decisions concerning use of those traditional and accepted tools should be "audited."

The lengthening of the duration of Federal debt through the purchase of long term Treasury bonds with newly printed money, while novel and doubtless alarming to China, could also be considered a "traditional" tool of monetary policy.

However, the purchase of defaulted debt of various types at par from privately owned financial businesses - essentially printing money and giving it to those private corporations - is a usurpation of Congress' appropriation authority.

Since when is printing money to make good AIG's defaulted CDS a monetary policy tool?

Since when is printing money to purchase CMO's worth pennies on the dollar at par a monetary policy tool?

Since when is allowing insolvent banks to mark assets to model, and then printing money to inject reserves into those insolvent banks a monetary policy tool?

The Fed's opposition to a Congressional Audit is an attempt to arrogate unto itself the extra-statutory power to define as "monetary policy tools" actions which quite clearly encroach on Congress' exclusive appropriation powers - actions which pick and choose between and among insolvent private companies those that survive and those that fail.

Sadly, no Congress critter that I know of seems able to articulate the issue that is at stake in this debate.

Wed, 01/20/2010 - 19:32 | 200019 bruiserND
bruiserND's picture

"The issue is that a reversal of Congress’ earlier decision could create the appearance that the legislature seeks to influence monetary policy decisions by establishing a mechanism to publicly second guess those decisions."

Bottom line, "you can't audit us with the GAO because it won't look good so instead reward our regulatory failure that brought a systemic collapse with more power and secrecy"

  All the pond scum is floating to the surface at the same time folks.
Please call in. 406 586-2845 studio line 406 522-8255 backup studio line
listen and call in  to Bozeman radio KMMS 1450 am .....nationwide due to the
miracle of live stream internet radio http://www.kmmsam.com/main.php

I will be dedicating this Saturday's 90  minute show to the Federal Reserve starting at 3 pm MST
"From 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made political contributions totaling $1.725 billion and spent another $3.4 billion on lobbyists -- a financial juggernaut aimed at undercutting federal regulation." ...that's one million $, per year, per politician in bribes from this sector ALONE.

http://www.albionmonitor.com/0902a/copyright/wallstderegulation.html

http://www.takeitbackday.org/

 

Do NOT follow this link or you will be banned from the site!