Since its inception almost a century ago, the Federal Reserve has enjoyed a cloak of secrecy that has grown more opaque over the years. When the economy imploded in 2008, Bernanke’s Fed swung into action behind the scenes, handing out immense sums in bailouts to a host of ailing financials, through direct loans to the very biggest banks — what Robert Litan, a former Justice Department official, called “the aristocracy of American finance.” The exact figures, however, have been a closely guarded secret, until now.
It took a Freedom of Information Act request, months of litigation, and even an act of Congress, but dogged investigators at Bloomberg News finally gained access to the figures, and, after crunching the numbers, concluded that the Fed — unilaterally and with zero congressional oversight — had doled out as much as $1.2 trillion in taxpayer monies. That's about $500 billion more than the separate, hotly contested, and widely publicized $700 billion bailout pushed through Congress at the same time.
In 1941, the United States was first assigned the so-called “triple A” or AAA rating, a reflection of the widespread belief, at least in the free world, that the United States government could be relied upon absolutely to pay its debts. At the time, the United States had recently grown into the world’s largest economy. The dollar, after the end of the Second World War, became the world’s reserve currency under the terms of the Bretton Woods agreement. Other hard currencies were to be convertible to U.S. dollars, which were in turn convertible (for international investors, at least) into gold (the so-called “gold exchange standard”).
The general perception of the dollar as the world’s backstop currency and of U.S. government debt as being as good as gold survived President Nixon’s closing of the “gold window” in 1971 and the decade of economic malaise — which included significant inflation — that followed. This is surprising in hindsight because Nixon’s action certainly fulfilled the criteria for a partial default, being motivated by the inability of the United States to service debts incurred in the Vietnam War.
Wall Street professionals' expectations are modest over Federal Reserve Chairman Ben Bernanke’s highly anticipated remarks at the Jackson Hole symposium this Friday. Unlike last year when the chairman announced the start of his program to purchase government securities in order to keep the economy from slipping into a recession and possibly deflation, known as Quantitative Easing II (QE2), his options now are much more limited. The anticipated bounce in the economy has fizzled, inflation is increasing, the banks are stuffed full of reserves but few are borrowing, and interest rates are already at zero and are expected to remain there well into 2013.
What can he say and, more importantly, what can he do? Jim O’Sullivan with MF Global suggested: “We are not forecasting more easing,” while Tom Porcelli of RBC Capital Markets confirmed, “We expect news out of Jackson Hole will be more about getting a feel for the Fed’s opinion on its easing options.” Analysts at Barclays Capital are expecting Bernanke to “reiterate that the Fed predicts growth to accelerate,” while Capital Economics thinks that he “will probably emphasize that the Fed has the tools to boost the economy if deemed appropriate.” In other words, there will be a lot of words, but little expected in the way of change.
Which is probably very smart in light of the hole the Fed has dug itself in trying to stimulate the economy. As noted in Barrons magazine, Alan Abelson wrote,
In today’s extremely unsettled financial climate, one can hardly blame Venezuela or its erratic leader, Hugo Chavez, for deciding to bring home the gold.
Oil-rich Venezuela also has the world’s 15th largest gold reserves, most of them squirreled away in Bank of England vaults. Now, Chavez has authorized the return of Venezuela’s gold to Venezuelan soil, fearing that, at some juncture, any overseas assets could be frozen and seized by foreign authorities, as has been done with those of Libyan dictator Muammar Gaddafi. The clownishly villainous Hugo Chavez has long worn the mantle, once borne by Cuba’s Castro, of America’s official enemy south of the border. His country and regime are now embroiled in a series of international litigations for Venezuela’s nationalizing of certain foreign assets — a Canadian gold mine at Las Cristinas and an American mining operation at Las Brisas, for example. Chavez is obviously worried that Venezuelan gold and liquid assets abroad could be seized and held as collateral.
Like the clichéd stopped clock that twice a day reads the correct time, Chavez’ militantly socialist regime appears to be doing a prudent thing, albeit for the wrong motives.
Ron Paul wants to make it quite clear that he has never accused Federal Reserve Chairman Ben Bernanke of treason. He has merely accused him of counterfeiting, which is a different crime altogether.
The Texas Congressman and Republican presidential candidate poked fun at the controversial comment his home state rival, Governor Rick Perry, made in Iowa this past week, just a few days after he jumped into the presidential campaign. Paul said Perry “makes me sound like a moderate” by the way the Texas Governor warned Iowans that the Fed chairman might resort to expanding the money supply between now and the 2012 election to help President Obama.
"If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas," Perry said. "Printing more money to play politics at this particular time in history is almost treasonous in my opinion."
It is strangely apt that the stock market this week has been experiencing turbulence, in the wake of Standard & Poor’s downgrade of U.S credit and fears of a double-dip recession. After all, this week marks the 40th anniversary of Nixon’s removal of the United States from the last vestiges of the gold standard, an action that ushered in 40 years of fiat monetary instability. For four decades we’ve been in a state of almost constant financial crisis, from the stagflationary ‘70s through the savings and loan debacle and stock market crash of the ‘80s to the more recent dot-com and real estate bubbles and their messy aftermaths.
And now this. After 40 years of a “new normal,” the nations of the West are exhausted and bankrupt. Debt in Europe and the United States is spiraling out of control while economies stagnate, and all central bankers can think of is what they’ve been doing since the Nixon years (and, in truth, a lot longer than that): print more money.
Against the backdrop of price inflation reaching six percent, the unemployment rate touching five percent, the increasingly large holdings by foreign governments of dollars (that at the time were convertible into gold upon demand) and his desperate need to get reelected, in August, 1971 President Nixon conferred with his economic advisers about how to solve the inflation problem without taking any blame for it.
The meeting was precipitated by the demand from the British ambassador “who showed up at the Treasury Department to request that $3 billion [of paper dollars] be converted into gold. At that moment in time, the amount of “cover” — the amount of gold held in Fort Knox as a percentage of outstanding paper dollar claims against it — had declined from 55% to 22% — leaving the Treasury desperately close to default. The economic advisers surrounding Nixon knew that “shutting the gold window would weaken the dollar against other currencies, thus adding to inflation by driving up the price of imported goods,” but they moved ahead anyway. And so was born the Nixon lie, delivered just as the Asian markets were opening on Sunday night, August 15, 1971. Here are the relevant parts of the lie:
The latest report from the Board of Governors of the Federal Reserve System confirms what every sentient being already knows: The economy is in the dumper, with little improvement expected. The report used words like “considerably slower,” “deterioration,” “flattened out,” “weak,” and “depressed” to describe current conditions, and it even noted that excuses such as bad weather and the earthquake in Japan “appear[ed] to account for only some of the current weakness in economic activity.” (Emphasis added.)
In other words, the Board had a BFO (blinding flash of the obvious) and finally had to come clean and admit that after two years of trying to stimulate the patient back to health, nothing has worked, and the patient is getting sicker.
The stock market is in freefall once again, evoking specters of 2008. As one fund manager told the Wall Street Journal on Monday, “the sense of déjà vu is almost sickening.” The storied Dow lost more than 600 points Monday following huge declines late last week, appeared to get its footing yesterday, then plunged more than 500 points today. All over the world, markets are taking stock, so to speak, of the burgeoning debt crisis in the United States and Europe, and fearing the worst.
Despite the parallels with the autumn of 2008, the Wall Street Journal views the two crises as stemming from entirely different causes. Wrote the Journal’s Franceso Guerrera on Tuesday:
"The Fed spoke and financial markets rallied," began the Associated Press report on how the stock market responded after the policy-making panel of the Federal Reserve Board issued a statement Tuesday, saying the federal funds rate (the interest banks charge other banks for borrowed money) would be held to 0 to 1/4 percent through the middle of 2013. The Dow Jones industrial average surged more than 429 points, just one day after its biggest decline since 2008.
But the Fed's influence over the volatile stock market is of short duration and its ability to bolster a sagging economy is illusory. The Federal Open Market Committee's promise of low interest rates was accompanied by an assessment of current market conditions that look anything but promising. "Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed," the committee reported. On the plus side, "business investment in equipment and software continues to expand."