Just ahead of Ron Paul's Fed hearing, a Fed paper questions blanket bailouts

Reposted with permission from EconomicPolicyJournal.com

Is the Fed saying goodbye to moral hazard? Likely not. At least, not for the Fab Five (or is it the Turby Twenty), who will get their liquidity fixes until the Fed no longer presides over the POMO opium fields. For everyone else, though, a new NY Fed policy paper seems to float just this idea: that a resolution procedure (read--gasp--breakup) might be preferred to providing blanket liquidity to all takers. That is, Kalamazoo S&L might starve at the discount window (or similar) waiting for Zimbabwe Ben to drop some morsels, while JPM and Goldman dine at the table on lobster and tenderloin.

Though the NY Fed paper has undoubtedly been in the works for months, if not longer, the timing is interesting. Only [yesterday], the top lawyers of the NY Fed and the Board of Governors [got] grilled in front of Ron Paul's monetary committee in a hearing entitled "Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data Dump". Of particular interest [was] why certain (sometimes unexpected) names pop up so frequently in the thousands of pages of bailout docs released by the Fed.

The research paper is called, "A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets" and primarily focuses on rollover risk as a determinant of market stress and freezes. (Unfortunately, it is left to the reader to extrapolate to the logical extreme and wonder what happens when rollover risk of the US debt portfolio itself surfaces, concurrent with the last marginal buyer of Treasurys losing all credibility).

The interesting part is the Policy Conjectures on page 22, which we reproduce in full (emphasis and brackets ours):

4.3 Policy conjectures

It is important to consider cases where the lending banks' precautionary demand for liquidity may be excessive relative to its socially efficient level. In turn, this would suggest possible policy interventions to address excessive hoarding of liquidity by highly leveraged banks. Is it desirable to have an unconditional (traditional) lender of last resort (LOLR) in which a central bank provides liquidity to strong as well as weak banks? Or would it be better to have a solvency-contingent LOLR in which the central bank provides liquidity only to sufficiently strong banks? And should there instead (or in addition) be a resolution authority that forces weak banks to reduce their rollover risk? We conjecture that (i) a resolution authority to address weak banks' excess leverage and rollover risk, and (ii) a solvency-contingent LOLR by a central bank (that itself has lower credit and rollover risk than its banks), are likely to be more effective interventions than the traditional, unconditional LOLR. 

Such welfare analysis can also help understand the impact of interventions that were put in place during the crisis of 2007-09, such as the Term Auction Facility (TAF) by the Federal Reserve for 28-day and later 84-day loans. We conjecture that through these facilities, the Federal Reserve, acting as a relatively risk-free intermediary, intermediated liquidity hoardings (reserves) of riskier banks to banks that participated in the facilities. This intervention should have increased volumes of lending to the real sector by the participating banks. [Note, lending in the real sector did not pick up, so is this a tacit suggestion that the Fed exacerbated the problem with its bailouts?] Note that under the alternative view, that stress in inter-bank markets is caused purely by borrower credit-risk problems, lending by central bank to banks at lower than market rates would effectively constitute a "bail out" of these banks and engender severe moral hazard. However, a resolution authority to address weak banks' leverage and rollover risk would be a robust intervention also under this alternative view.

Though carefully couched in academic objectivity, this is probably the strongest internal rebuke we've read of Federal Reserve intervention during the crisis. That bank resolution is discussed at all might signal a shift in priorities at the Fed, or perhaps hint of the pressure it's come under. Or, maybe this is simply a prelude to a renewed turf battle between the lethargic FDIC and the profligate Fed. We might even entertain the notion that one or more token TBTF banks could go down. Watch out Blankfein.  [And, apparently Wells Fargo and Citi, as well]

Comments

[sasebo]

Lets face it -

The Fed exists to print free money to give to TBTF so TBTF can give a little of all that free money to all the two bit politicians so the two bit politicians can get reelected so the two bit politicians can keep the Fed in power so the fed can print free money ..............etc.

[JW n FL]

1) House and Senate Renew PATRIOT Act With No Modifications
2) National Security Letters Increasingly Used on Americans
3) Proposed Senate Bill Would Add Civil Liberties Protections
4) Senators Raise Concerns on DOJ's Interpretation of PATRIOT
 

1) House and Senate Renew PATRIOT Act With No Modifications

On May 26, the House and Senate renewed three controversial provisions of law related to the USA PATRIOT Act that were set to expire the next day.  The renewal was passed in the form of an amendment to an unrelated bill, S. 990, that itself temporarily extended authorities of the Small Business Administration.  Despite efforts by individual Senators to introduce modifications to the Act's intelligence authorities, the final bill simply renewed the expiring provisions until June 1, 2015 without changes.

http://cdt.org/policy/four-more-years-patriot-provisions-renewed

[Milestones]

I would contend (See my post above) That according to Marbury, The Patriot Act is also unconstitutional as it is a clear violation of the 4th Amendment at minimum.    Milestones

[JW n FL]

http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=242952

"Federal Reserve Lending Disclosure: FOIA, Dodd-Frank, and the Data Dump"
Wednesday, June 1, 2011 2:00 PM in 2128 Rayburn HOB
Domestic Monetary Policy and Technology

Click here for the Archived Webcast of this hearing.

WITNESS LIST

• Mr. Scott G. Alvarez, General Counsel, Board of Governors of the Federal Reserve System

• Mr. Thomas C. Baxter, Jr., General Counsel, Federal Reserve Bank of New York

Submit a Question for YourWitness.

[Dolemite]

Silver short term top in at 37.50

Equites and oil dont look too hot either...

http://deadcatbouncing.blogspot.com/2011/06/silver-to-have-significant-downside.html

[baby_BLYTHE]

the FED admitted during the hearings yesterday that they hold no gold

http://www.youtube.com/watch?v=_eExucI3IWs

[TruthInSunshine]

To the best of my knowledge, they have held gold on repository for the owners.

The Federal Reserve is not the U.S. Government (as you know), although the Federal Reserve Act of 1913 has essentially made them an agent of the United States Government for a period of time (hmmm, I wonder if their charter will be renewed?).

I am incredibly curious about the hows and whys of the Federal Reserve sometimes claiming it is, for practical and legal purposes, a "part" of the U.S. Government when it chooses to do so, yet denying this very same basic claim, at other times, such as when it is facing a FOIA or similar request for the release of information on its activities and internal workings and scheming.

United States Code: Title 12226. “Federal Reserve Act”

https://secure.wikimedia.org/wikipedia/en/wiki/Federal_Reserve_Act

- The Federal Reserve Act (ch. 6, 38 Stat. 251, enacted December 23, 1913, 12 U.S.C. ch.3) is the Act of Congress that created the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue legal tender. The Act was signed into law by President Woodrow Wilson.

*Controversy about the Federal Reserve Act and the establishment of the Federal Reserve System has existed since prior to its passage. Some of the questions raised include: whether Congress has the Constitutional power to delegate its power to coin money or issue paper money, whether the Federal Reserve is a public cartel of private banks (also called a banking cartel) established to protect powerful financial interests, and whether the Federal Reserve's actions increased the severity of the Great Depression in the 1930s (and/or the severity or frequency of other boom-bust economic cycles, such as the Late-2000s recession).

http://www.historycentral.com/documents/Federalreserve.html

[Milestones]

by Milestones 
on Sun, 11/21/2010 - 14:22
#

Mr. T., I addressed this issue a couple of times "The Trials and Tribulations of the Federal Reserve Act of 1913" on 6-15-10 and a couple of times later. In fine, let me answer you in brief.

My argument lies in Article 1, Section 8 (5)-Powers of Congress. The Congress SHALL have power: to coin money, REGULATE THE VALUE THEREOF,--". That power was apparently DELEGATED to the Federal Reserve Bank. That DELEGATION of authority to the Federal Reserve is my question. Did Congress have the authority to delegate that authority to "regulate the value thereof"?

Panama Refining Co. v Ryan 293 U.S. 388 1935

"The Constitution provides 'that all legislative powers herein GRANTED SHALL be vested in the Congress of the United States, which shall consist Senate and House of Representatives.'--The Congress MANIFESTLY IS NOT PERMITTED to abdicate or to TRANSFER TO OTHERS the essential legislative functions with which it is vested.---Cannot be allowed  to obscure the limitations of the authority to delegate, if our constitutional system is to be maintained."

Field v Clark 143 U.S. 649 1892

--"The legislative power must REMAIN in the organ where it is lodged by that instrument."

Sovereignty is granted to "We the People" in the first 3 words of the Preamble. As such, under the Constitution, we the people delegate our Sovereign authority to persons to REPRESENT us in day to day dealings. But it is the reserve of the Soverigns to delegate authority not our reperesentatives. John Locke came to the same conclusion.

I would contend that the Federal Reserve Act of 1913 is illegal under the Constitution. Further, if we consider Marbury v Madison of 1803, a decision has stood for over 200 years, the case can be stated in far starker terms:

Marbury v Madison 17 Wall 205 Cranch 2 1803

"Thus the particular phraseology of the Constitution of the United States confirms and strengthens the principal, supposedly to be essential to all written constitutions, that a law repugnant to the constitution is VOID; and the courts AS WELL AS ALL OTHER DEPARTMENTS ARE BOUND BY THAT INSTRUMENT."

Not only did Congress not have the authority to submit such a document as the Federal Reserve Act of 1913; likewise President Wilson had no authority to sign it. See the last sentence of the above.

Yes, I know, the Constitution has been turned into a roll of toilet paper to the 1%ers but that is still the document I still march to as do most others . If that not be the case then we would be far better served now to be comparing an AR-15 to an AK-47.

If those unhappy with the way things are want a change, we must state our concerns and grievances in a fashion that those who are totally uninformed can have a place, a handle so that a nightmare of a 2nd revolution can be avoided. 

June 2, 2011:

It should be noted I intentionally bracketed the Federal Reserve Act of 1913 with 2 Supreme Court decisions; one prior to 1913 and one subsequent to that Act. As you will note, in both cases the answer was NO Congress did not have the authority to delegate that authority and President Wilson did not have the Authority to sign it according to the 1803 Marbury v Madison decision. My initial posting of 6-15-10 is more complete.       Milestones

[Doubleguns]

Yep they only own gold plated titanium bars.