A Stern Opponent Of Funding The FDIC's Depleted Deposit Insurance Fund, And Monetization Is... Alan Greenspan?
What a difference twenty years makes. The man whose actions basically lead to the eradication of the American middle class in its aspirational pursuit of buying massive SUVs, Prada bags, and 3rd investment properties, compliments of cheap credit, in order to appear ever so much like the upper class yet ultimately drowning itself in debt, Alan Greenspan, is probably the most critical reason why America's debt service will be nearly 90% of GDP within several decades. The adoption of his actions by the current deranged operator of the reserve currency printing press, is merely a continuation of a multiple decade long process of keeping inflation contained at the expense of devaluing the US currency, as the global liquidity pyramid recently hit one quadrillion, and continues to grow exponentially, yet pair by an ever-moderating increase (read flatline) in global GDP (Zero Hedge will discuss the topic of disappearing marginal utility of debt in depth soon).
In the meantime, as we are one bank away from 100 bank failures for 2009, while the FDIC is now insolvent and any incremental bank failure could prompt the much-dreaded terminal run on the bank, yet as Congress and the Fed have no problems with pumping billions more into yet another failed government enterprise, taking a trip back in time to 1991 reveals some curious facts. In that year, it was none other than then-Chairman Greenspan warning that funding not just the Treasury's, but specifically the FDIC's DIF obligations directly would be a bad diea. The below excerpt is taken from a Greenspan address to the Bush Administration's early 1991 proposal, with which some members of Congress seemed sympathetic, to have the Reserve Banks lend up to $25 billion directly to the FDIC's Bank Insurance Fund (BIF):
[A]n element of the Treasury's proposal that has troubled the Board is the use of the Federal Reserve Banks as the source of these loans. To prevent such loans from affecting monetary policy, the loans would need to be matched by sales from the Federal Reserve's portfolio of Treasury securities.... Not only would use of the Reserve Banks for funding the BIF [ZH: Bank Insurance Fund, the DIF's parent] serve no apparent economic purpose, it could create potential problems of precedent and perception for the Federal Reserve. In particular, the proposal involves the Federal Reserve directly funding the government. The Congress has always severely limited and, more recently, has forbidden the direct placement ol Treasury debt with the Federal Reserve, apparently out of concern that such a practice could compromise the independent conduct of monetary policy and would allow the Treasury to escape the discipline of selling its debt directly to the market. Implementation of the proposal could create perceptions, both in the United States and abroad, that the nature or function of our central bank had been altered. In addition, if implementation of the proposal created a precedent for further loans to the BIF or to other entities, the liquidity of the Federal Reserve's portfolio could be reduced sufficiently to create concerns about the ability of the Federal Reserve to control the supply of reserves and, thereby, to achieve its monetary policy objectives.
How is it that Alan Greenspan was so objective and prudent 18 years ago, yet his successor is so careless when it comes to where the tentacles of monetary policy reach (or, as the case is these days, do not). Ironically, these days, Bernanke has threatened the independence of monetary policy only in the context of increased transparency of the Fed: should HR 1207 pass, the Chairman claims, inflation pressures will grow, and Spengler and Venkman will inevtiably cross the streams, leading to the anihilation of everything we know. Well of course inflation will grow: the one quadrillion in excess liquidity (10x world GDP) will cause not inflation but massive, unprecedented hyperinflation, if there is no reserve currency to moderate the impact of all this "money" hitting global markets without a devaluation buffer. The dollar is and has always been fiat banking's and excess liquidity's punching bag.
Yet what do we have now: 18 years after Greenspan's statement - a condition where the Fed, and the Treasury are both considered to be next in line to subsidize a bankrupt FDIC. The proposal to collect special assessments with the hope that these will plug the upcomign $100 billion hole, is as ludicrious as it is naive. One wonders: what is more dangerous to the Fed's "independent conduct of monetary policy" - the FDIC bailout threat as Greenspan foretold, or the danger of actually understanding how many bankrupt companies' equities the Fed is willing to accept in its discount window when dealing with even worse financial organizations (not too many out there, but see Lehman Brothers).
And while we are on the topic of the Central Bank, we would like to present a paper by the Cleveland Fed from 1992, which in addition to discussing the RFC, has a very intereting analysis of what the true role of a Central Bank should be.
A tendency to use central bank resources to fund a bailout increasingly politicizes the bank's monetary policy functions, which risks causing it to resemble the way in which national development agencies are used and often abused in developing countries (providing assistance from public funds to the most powerful and politically well-connected entities in the state). [How can this have been obvious in 1992 yet nobody is willing to acknowledge it today???] Generally, industrial-economy central banks are somewhat insulated from political requests to fund specific rescue operations. For example, during 1992, Sweden, Norway, and Finland, all industrial economies, decided to bail out their banking systems, but they established new governmental agencies outside their central banks (RFC analogues) to do so. Some industrial-economy nations, however, do use their central banks to fund rescue operations. The French bankers' association has officially asked the French government for assistance with about $15 billion of nonperforming property loans on the books of the nation's banks, including "one option proposed ... for cheap refinancing of troubled loans through the Bank of France" (Dawkins [1992a, b]). Japan also has been studying methods for relieving its banking system of nonperforming real estate loans without using taxpayers' funds but has not yet settled upon a final plan (Chandler ). Some Japanese bankers have requested central bank assistance in this plan, but the government has not yet committed such resources to the effort. In the case of the Federal Reserve Banks, it is official Federal Reserve policy that Reserve Banks' advances should not be used to substitute for the capital of depository institutions and that Federal Reserve resources should not be used so as to enable the Treasury to avoid the discipline of selling its debt instruments into the open market.
Mark those words, as they are a disappearing breed: "the discipline of selling debt instrument into the open market." One wonders: just how much such discipline is left these days, as Primary Brokers, who get their funding to purchase bonds from the Fed courtesy of a vertical yield curve, are the market. In other words, monetization and Fed-backed bailouts are a very bad thing. Yet what Fed apologists can't get enough of, is "explaining" day after day why the Fed is in fact doing us all a favor and how QE is so, so, so very different from monetizing, and it really is all just semantics, and, after all, just how does one define "is." Because "is" makes it so very clear that announcing the repurchase of an Agency Security 30 minutes after its auction, is one of the most expected things in a normal (banana) economy.