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?