Omnipotent

Omnipotent

Question:  Do you have presidential aspirations?

Answer:  No, I want to be the most powerful man on the earth.  I want to be Chairman of the Federal Reserve.

- Jack Kemp, U.S. Congressman, HUD Secretary (Bush I), and NFL Quarterback- Buffalo Bills

By J.M. Hamilton (12-15-12)

Don’t ask me to cite the above quote… I remember reading it in my youth, and being floored by Mr. Kemp’s revelation.  In retrospect, it all makes sense: bankers control the known world, have tremendous economic and political power, and apparently are immune from prosecution (no matter how heinous the crime or the cost of their nefarious acts to the economy and society).  Taking it up a notch further, central bankers, today, have unprecedented power and can print trillions of dollars, seemingly, without repercussion.  Why Mario Draghi, Goldman Sachs alum, was just named TIME’s person of the year; and the new head of the Bank of England, Mr. Carney, is also a Goldman alum, and, pssst (whispered tone)……don’t tell anyone…. but he’s a Canadian, too.

J.M.H. prides itself on getting many things right, but our call over the last couple of years on pending inflation, was incorrect.  Cost-push inflation has not arrived due to chronic unemployment, and demand-pull has not arrived for the very same reason.  Head-line inflation, that is commodity inflation, has been with us since the crisis began, generated largely by banking and shadow banking speculation, and a geyser of Fed liquidity.  The personages, who appeared to have forecast inflation correctly, or the lack thereof, are two eminent economist, Messrs. Krugman and Galbraith -the former of Princeton, and the latter of the University of Texas.

How could this be?  After all, the textbook case for hyper-inflation was the Weimar Republic, where the German government printed gobs of Reichmarks in an attempt to pay off European war reparations, Post – WWI.  In this classic example, Germans and Europeans fled the currency, exchanging German marks for more stable alternatives, as the German printing presses worked over time.  Soon the German mark wasn’t worth the very paper it was printed upon.  So why not here in America… after all paper currency holds no real value, in and of itself, but is based purely on the faith that its value today will hold for the foreseeable future.

The answer, as far as this writer can tell, is that there are few alternatives to the U.S. dollar. In essence, the Fed chairman has a near monopoly on global fiat currency.  Its only real competitors are the Euro and the Renminbi.  As for the Euro, some question whether this currency will even survive, although the pressure for it to do so has never been greater.  And the Chinese Yuan is as manipulated as the U.S. dollar, so that China can continue to sell inexpensive exports.  Sure there are other world currencies, but there are only two alternative currencies with the depth, size and liquidity to compete with the dollar.  As the Euro and Renimbi have significant issues of their own, this gives the Fed nearly unlimited power to print money, monetize debt, and purchase mortgage back securities.

Just this week, the Fed announced it would produce out of thin air $45 billion in added liquidity monthly, until such time as unemployment is driven down below seven percent.  This is in addition to $45 billion in MBS the Fed purchases monthly.  To date the effect of the Federal Reserves policies (various quantitative easings and twist) has been questionable, particularly for the 99%.  What is not in doubt is that the Fed’s policies have saved the banking cartel – the architects of our on-going crisis, and helped pump up asset prices for the wealthy.  Hence, my recent piece making the case that the Fed’s policies are essentially “trickle down monetary policy.”

Central Bank actions have also provided cover for reckless global government fiscal policies, or appeared to have purchased time for governments to get their fiscal house in order, depending upon one’s perspective.  (Albeit one wonders, if Messrs. Krugman and Galbraith are correct on inflation, and they appear to be highly prescient at the moment – might these two economist also be right on their calls for nearly unlimited fiscal stimulus, given the crisis and the awesome powers of the Federal Reserve to finance same, as described in this editorial?  If so, the political and economic implications of these two eminentos recommendations are staggering!  We could literally put the intangible asset of Fed policy on the asset side of the ledger to offset the abyss of the Federal deficit.  In the short run, these two are likely right.  Longer term, the key seems to be will the world continue to have faith in the dollar?  Then again, as Keynes famously said, “In the long run we are all dead.”)

When the Germans inflated their currency to unsustainable levels, German citizens and europeans were able to hold that behavior in check because there were fungible alternatives; but with European currencies consolidated under an abused Euro, and with the Renminbi not ready for prime time, and not even traded on open exchanges (but for a few test cases), this makes the dollar the only game in town.  Moreover, since the Fed Chairman is buying up U.S. debt this makes it impossible for the market place, and the so-called bond vigilantes (banks, hedge funds, institutional investors, and private equity) to rein in Fed activities.

How long can this continue?  It most likely will continue until such time as there is a viable alternative currency, or a global boycott of the dollar because the world has lost faith.  Whether one agrees with the Fed’s policy on interest rate suppression or not, one has to acknowledge the Fed’s omnipotent power.

Like most things in this world, the Fed has the potential to do good, as well as bad.  J.M.H. has written at some length about monopolies and the Wall Street cartel (as have many others), and the economic and political blessing to this nation and the world if this cartel were to be broken up and forced to compete.  Here, the Fed has the regulatory powers to do just that.  By increasing the reserve requirement of the Wall Street cartel, the Fed could make it very costly for Wall Street to do business.  Bank stockholders already faced with poor returns on equity – would more than likely demand the breakup of these institutions, if this were to happen.  If Wall Street refused to adhere to stockholder demands, the Fed could also sell back to the banks all the impaired assets it had purchased from same (disgorge the Fed and the GSEs of MBS, CDOs and the like) at the list price, audit these institutions at “mark to market accounting,” and foreclose and nationalize the cartel, when they failed the audit.

This would allow the Fed to do what oligarchy management won’t do, break up the cartel for the good of stockholders and mankind.  Once broken up, the banks could be handed back to the private sector.

At the present, arguably, Fed policies have served, and enabled, to make the cartel larger, more powerful, less safe, and far less beneficial to ordinary Americans.

The bottom line, there are no checks and balances on Fed policy (but for the chairman’s quadrennial appointment) and that makes the Fed Chairman, as Mr. Kemp so eloquently stated, the most powerful man on the planet.

P.S.

Is America finally ready to take up legislation on gun control?

With every innocents murder, we all bear indirect responsibility, by not insisting that our politicians take up the gun control debate, and act upon the obvious.  Write you congress person today.

To hell with the fiscal cliff, I want guns off the streets!

 Copyright JM Hamilton Publishing 2012

Correction:  Mr. Draghi was not Time’s man of the year, however, he had been acknowledged by Business journalism and received honorary degrees from Academy.