Federal Reserve considering Unconstitutional measures

By now everyone should be familiar with the fact that the Federal Reserve bailed out Wall Street investment bank Bear Stearns. You are probably aware that your taxes are now underwriting $380 Billion in subprime, mortgage-backed securities (that's $1,251 for every man, woman, and child in America).

But it wasn't until I read this article did I realize just how much trouble we are in.

"The U.S. dollar is a 'faith-based currency' dependent on the credibility of a central bank"
-- Dallas Federal Reserve Bank President Richard Fisher

The world's faith in the U.S. Dollar is based on not just on the credibility of our central bank (aka the Federal Reserve), but reflected in how they manage their own portfolio.
It is this portfolio that is coming into question.

Notice the sudden and dramatic change in the Federal Reserves holdings starting last December.
Normally central banks only hold the safest, most dependable assets in their vaults. Historically that was gold and silver. In today's fiat world, it is treasuries.
At least it was treasuries, until the Federal Reserve started to bail out Wall Street investment banks by swapping out those safe treasuries with subprime, mortgage-backed securities.

Now there is a problem with the chart above - it only goes to February 2008.
Look what has happened as of last week.

Treasuries now constitute only 53% of the Federal Reserves' holdings. This has all happened since last August, with the lion's share happening in just the last four months.
What will the Federal Reserves' holdings look like in another four months? I shudder to think.

Despite that, what really made me scared was the news article today.

The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

Each idea is terrifying in its own way, but its the highlighted one that should scare everyone here.
This is what it means:

Congress turning over borrowing power to a cartel of private banks.

You heard that correctly. Congress already turned over control of monetary policy to the Federal Reserve back in 1913. Now the Fed is coming back for borrowing policy as well.
Of course all of this borrowing will be backed by the U.S. Taxpayer. The difference is that we can vote our representatives out of office. The Federal Reserve we can't.

Without the power of the purse, the legislative branch is pretty useless.
They gave up war making and law enforcement powers to the executive branch many years ago. In a true empire the legislative branch is only for show anyway.
Once the Fed can borrow from itself and leave the taxpayer on the hook, then Congress is powerless and the Constitution is a dead piece of paper.

Now I shouldn't overlook that the Federal Reserve has other tools at its disposal already.

The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise.

This is typical Wall Street Journal rubbish. So the only problem is too low of interest rates, huh?
How about the fact that printing unlimited amounts of money would create inflation rates that would rival Zimbabwe? Did the editors of the WSJ ever think of that?

Now the Fed is only "considering" these measures because they still have $490 Billion in Treasuries to play with, so there is nothing to worry about. Plenty of room left.
At least that is how the WSJ portrays it. The fact is that foreign investors would panic long before the Fed gets down to $1, or even $100 Billion.
The fact that the Fed is "floating" these radical ideas through their mouthpiece at the WSJ shows that they don't have confidence that their current methods are working, and that they don't know when the current crisis will end.

The simple fact of the matter is that at the current rate, the Fed is destroying its credibility, and the dollar's credibility, at a staggering rate. If it continues down this road for just a couple more months we will see a full-scale currency crisis.
Now maybe you don't know what that means because America has never before had a full-scale currency crisis. So I have to refer you to Argentina circa 2001, Russia circa 1998, south-East Asia circa 1997, and Mexico circa 1994.
Please do your homework soon, because you might need to know the details.



Just because you are paranoid

doesn't mean they are not out to get you.

I feel like some super elites are just hell bent on destroying the United States. Seriously. Now it looks like they are plain creating yet another crisis to rob the national treasury.

Am I just bitter, paranoid, oh it's not that bad?

Why is it we see this stuff and think about the lines of a complete economic collapse yet on Wall street, they are all trading like tomorrow is just another Sunday day? It seems like everything is rewarded as long as some company announces some more offshore outsourcing, VC investment in China and axes a few thousand fellow Americans out of their jobs.

Federal Reserve considering

G, good to see you've gotten a lot of attention for this elsewhere, and thanks for crossposting here.

At bottom, the culprit here is the complete abandonment of Congressional oversight. Why bother obeying the law when its clear that the lawmaker could care less?

And the Fed has of course IMMEDIATELY generated the worst kind of moral hazard, as investment banks know that gains are theirs, losses are for the Fed/public. Courtesy of Bloomberg:

Wall Street firms may be bundling high-yield, high-risk corporate loans into securities to use as collateral to borrow from the U.S. government, according to a report by Morgan Stanley analysts.

Securities firms can borrow against collateralized loan obligations at the Federal Reserve's Primary Dealer Credit Facility, the analysts said. The Fed set up the facility last month, its first extension of credit to non-banks since the Great Depression.

... ``At least one'' recent CLO was probably done to take advantage of the Fed's new facility, it said.

``It's not cheap to finance loans today in the market,'' Vishwanath Tirupattur, a Morgan Stanley analyst in New York, said in a telephone interview.


cross post

I just saw the recommended on dailykos (the Obama mania is dying down to get a word in edgewise?).


Can I suggest this to bring awareness there is an overall economics community site for those who are gravely concerned on just what is going on in the US from an economics, trade labor view?


Can I suggest posting the below in other posts in order to get more people aware of EP?  You can just cut and paste this or put in your own definition of this site.  ;)

<sup><em>Cross posted on <a href="http://www.economicpopulist.org">
The Economic Populist</a> -
A Community Site for Economics Freaks and Geeks</em></sup>

That will look like this:

Cross posted on The Economic Populist - A Community Site for Economics Freaks and Geeks