Reforming the Federal Reserve

Posted on November 16, 2015 by Martin Armstrong

QUESTION: In your Nov. 15 blog you said about the Fed “ I do not think in its present form it should be owned by banks collecting 6%. I would advocate a public float as is the case in Switzerland. Can you explain what that means, and how that works. Thank you

 

I sincerely hope you continue your blog. I have been trying to get a handle on how the markets work. It really requires a lot of thought until one can feel comfortable.

There is a ring of truth to what you say.

Thank you.

ANSWER: The Fed is far more independent than many portray. Its decisions to raise or lower interest rates are not at the direction of bankers, but its understanding that it must steer a realistic path. Yellen has inherited a nightmare. Raised were lowered and the Fed became trapped, They stopped buying 30 year bonds and moved to mortgage securities. It cannot sell anything it now holds. Yellen realized that the pension funds will go belly up and keeps saying the rates must rise to be “normalized”.

The Fed is far too much influenced by politics. We cannot afford a central bank controlled by politicians. Likewise, bankers should not control the Fed if they no longer retain loans on their books and sell them becoming transactional bankers.

The only solution would be that the Fed is floated publicly so anyone can buy shares. The influence of politicians and bankers must come to an end. Banks should NOT be qualified for any bailout on their trading – PERIOD. If they do not retain loans, they are not entitle to use elastic money. Floating the Fed makes it a private corporation that must report its balance sheet like everyone else. Congress MUST be forbidden to order the Fed to do anything. That has been the problem all along. Stimulation should be returned to buying corporate paper, not hand banks cash and hope they lend it out. Enough is enough.

Fed v Congress v Bankers

Posted on November 15, 2015 by Martin Armstrong

QUESTION: Don’t you think it is wrong that the private banks own the institution that administers them.

ANSWER: You have to understand what was intended. It was originally a bailout entity for banks so they had to fund it. That made sense initially, Then with time and circumstances, the Fed has morphed into something that is now some quasi-political-governmental-agency that nobody would have created from the outset.

I do not think the Fed should be owned by the Treasury since then politicians will control it for political purposes. I can hear it now: “Vote for me and I will give free interest on credit cards!” I do not think in its present form it should be owned by banks collecting 6%. I would advocate a public float as is the case in Switzerland.

My point is the politicians keep changing the Fed and relieve themselves of ALL fiscal responsibility for economic booms and busts and blame the Fed, which is wrong, since they are the primary cause of aggravating the business cycle.

I do not advocate conspiracy theories against the Fed or criticism of exclusively the Fed ignoring the role of Congress. To solve the problem we MUST look at the whole. You need a central bank to clear. Bank failures were because of relationship banking where they borrow short-term and lend long-term. Elastic money made sense under the idea you did not have to liquidate loans to repay depositors in a panic. The elastic money would expand during a panic and then contract when over.

Now that banks are doing transactional banking and not holding long-term loans on their books, then they no longer need elastic money or bailouts and should collapse when they screw up. They should be held for CRIMINAL prosecution if they are trading with other people’s money. You cannot have it both ways. If the Fed is to stimulate, then they should buy corporate paper, not government, and then the money is directly injected into the economy whereas currently the banks still refuse to lend money long-term.

The Fed is caught between politicians and bankers. That is not a very nice place to be these days. We will have to REFORM this position after the crash, but eliminating the Fed will create chaos and it will not solve the problem as long as Congress has any power to create debt and the big banks moved to transactional banking abandoning relationship banking.