Friday, September 14, 2012

Is the Federal Reserve Evil?

We ask this question facetiously, but with the most recent actions of the Federal Reserve Bank, the argument for nefarious activity and hidden agendas certainly increases.  It has long been speculated throughout this economic recovery that the Fed's four year policy of zero interest rates (ZIRP) and Quantitative Easing (QE) is really designed to debase the dollar and, in so doing, lessen the burden of the Federal Government in paying off the mountain of Treasury indebtedness, growing larger each day.  Commonly referred to as "monetizing" the debt or a "soft default", the argument is that paying back the Treasury debt in dollars of lesser value, forces a "haircut" on holders of the debt.

The Fed, as you might expect, vehemently denies this charge.  And, of course, Treasury Secretary Geithner is a proud proponent of a strong dollar policy (at least in speech).  But it has long been known that a strong dollar favors creditors and a weak dollar, debtors.  It's the solution of choice in most third world debt crises:  devalue the currency, diminish the debt.

Yesterday's action by the Fed to purchase an "unlimited amount of mortgage bonds", however, ratchets up the QE stakes to new bounds.  With no evidence, academic or anecdotal, that QE has had any effect whatsoever on job creation, Bernanke's argument that this new policy is designed to meet the Fed's mandate of full employment, is suspect at best, diabolical, at worst.  In his statement, Chairman Bernanke said that the Fed will continue to purchase mortgage back securities each month until there is evidence of "substantial improvement" in the labor markets. How will we know?

We think it's time for Americans to stand up and question just what the heck the Fed is up to. This much we know: last fiscal year, the Fed purchased 80% of net new Treasury debt. It then rebated 100% of the debt service the Treasury paid on those securities back to the US Treasury. That means the Government only shouldered 20% of the burden of funding the Government's huge $1.3 billion budget deficit.  Not bad.  Can you imagine if your mortgage interest was not only deductible, but if you were given an 80% direct credit?

The Fed's new plan to purchase an unlimited amount of mortgage backed debt comes suspiciously close on the heels of a recent Treasury policy directive that forces 100% of all Fannie and Freddie profits to the US Treasury. In so doing, in one stroke of the pen, the Treasury jumped ahead of Fannie and Freddie's private sector creditors and effectively nationalized the two mortgage lenders. WIth the Fed now purchasing an unlimited amount of Agency mortgages, they will undoubtedly funnel these interest payments similarly back to the GSEs (to be remitted to Treasury) or to the UST directly. In substance, the Fed has just announced that it will be monetizing Fannie and Freddie debt, in addition to direct UST debt. Lucky us, the taxpayers.

But for the Fed to take these actions under the guise of lowering unemployment, or to not make public its plans to remit the interest expense on these mortgages back to the Treasury, it is an inescapable fact that the Fed is being deceitful.

So now we return to our original question:  is the Federal Reserve Evil?

Wednesday, September 5, 2012

A New Democratic Party Elite?

Last night like millions of Americans, we watched the opening speeches at the Democratic National Convention:  Julian Castro, Mayor of the City of San Antonio and Michelle Obama were undeniably eloquent.  Castro was introduced by his brother, also a rising star in the party and like Julian, also a graduate of Stanford University and Harvard Law School.  This fact was mentioned several times, both in introductions and then in Julian’s speech, as it was similarly mentioned by Michelle that she was Princeton undergrad and Harvard Law.  Barack, we know, is Columbia University and Harvard Law (as well as a graduate of the elite prep school, Ponahou School in Hawaii).

This all seems kind of odd.  On the one hand, each politician emphasizes their dire poverty in upbringing in an effort to connect with the mass constituencies that they are courting for votes:  blacks, Hispanics, the middle class and the poor.  Yet at the same time, it's hard for us to associate Princeton, Harvard and Stanford with anything but the most privileged elements of American society.  So which is it, are they poor or privileged, or both at the same time?

According to the Harvard Law School website, tuition and the estimated cost of living in today’s dollars is approximately $75,000 per year.  Adjusted for inflation, it wasn’t any bargain when Michelle, Barack, or the Castro brothers attended.  Not many people can afford to send their kids to Harvard Law School and most would consider a graduate, a person of great privilege in our society.

But this is the pedigree of the new Democratic Party elite.  We were compelled to do a bit of digging to see where and when this all started. We guess with Bill Clinton, a Georgetown, Oxford and Yale Law grad. Kennedy and Roosevelt were both Harvard men, but were privileged beyond modern imagination, so our sense is that this phenomena is more recent and best traces back to Bill Clinton.  

To confirm our suspicions, we were prompted to check on other recent Democrats to see if they too were members of the society of elite university graduates:  Jimmy Carter, Georgia Southwest College and the US Naval Academy;  Lyndon Johnson, Texas State University; Harry Truman, Spalding Commercial College (dropped out).  Now, this is the stuff of the party of the common man!

But watching the DNC last night, there's an undeniable shift in the Democratic elite these days.  How well this new elite will connect with the constituencies they most desire will remain to be seen.