This morning we learn via Bloomberg that the Chairman of the Federal Reserve, Ben Bernanke has through recent actions including an announced $600 billion effort claimed executive power over the presidents of the regional federal reserve banks rendering these presidents nearly powerless over his policy decisions in a serious and wide ranging departure from established norms.
http://www.bloomberg.com/...
For those that do not keep up with the working of the federal reserve what Bernanke is doing is essentially forcing the regional bank presidents to approve of his actions or risk serious consequences in national & global financial markets if they attempt to curb his power grab since disharmony at the federal reserve would signal uncertainty in federal monetary policy.
The Federal Reserve’s interest-rate target is getting close to zero, and so is the power of the Fed’s regional bank presidents.
The district chiefs’ authority over borrowing costs has been marginalized in the past two months as Chairman Ben S. Bernanke and the Fed Board of Governors in Washington made their own decisions on emergency measures to flood the economy with cash.
Earlier in the ongoing upheaval in the financial services sector Bernanke would seek the counsel and vote of the Federal Open Market Committee or FOMC which is made up of the regional federal reserve bank presidents and Bernanke when making decisions regarding what specific action to take as in the case of the sale of Bear Stearns to JP Margan/Chase in March. What we are learning now is that Bernanke is more and more acting without the including of the regional bank presidents in the decision making process which is a significant departure from normal operating procedure at the fed.
The regional bank chiefs were invited to listen as officials in Washington outlined their decision on a new $600 billion program to help the housing market. The presidents weren’t asked to vote on the initiative, even though it aimed at cutting borrowing costs, something they vote on in regular FOMC meetings.
"If I am a regional Fed bank president, I have had my power diminished a lot," said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York, who used to work at the New York Fed. "I think of it as war powers for the Board of Governors."
In this money quote former Saint Louis regional fed bank president, William Poole he essentially calls the actions by Bernanke dictatorial and brings to the light of day the fact that Bernanke's recent actions have been done in secret.
"The Board has usurped authority," said William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington. "This dramatic change in policy direction has not been announced or even acknowledged."
We also learn that Bernanke has been operating under the premise that "emergency" measures do not need the usual approval process and that many of these emergency measures have been developed with the assistance of the new Secretary of the Treasury nominee Timothy Geithner. Mr. Geithner is the primary intermediary between Wall Street executives and the federal reserve and it is now clear that Wall Street has been able to directly and seriously impact the actions of the federal reserve during this financial crisis through his office.
Many of the new facilities have been studied and recommended by the New York Fed, whose president, Timothy Geithner, is the vice chairman of the FOMC. Geithner, President- elect Barack Obama’s nominee to be Treasury secretary, is leaving the FOMC and will be replaced at the Dec. 15-16 meeting by Christine Cumming, the New York Fed’s first vice president.
Regional bank presidents don’t have a vote when the Board uses emergency powers to lend to firms other than banks in "unusual and exigent circumstances," as it’s done repeatedly this year.
The regional bank president at the federal reserve are there to provide a counterbalance and have done so repeatedly in the past. Many suspect that Bernanke and others are pursuing this course of action in order to weaken these regional bank presidents and their responsibility to the federal reserve bank system. The power of this system is premised upon the ability of the regional presidents to reflect disharmony and it appears that Bernanke's actions are an attempt to put the shoe on the other foot so to speak.
The district-bank chiefs by design are supposed to offer a counterbalance to the Board, and in the past haven’t been shy about challenging chairmen. In February 1994, former chairman Alan Greenspan had to argue against four presidents who wanted to raise rates at least a half percentage point, compared with his own preference for a quarter-point move.
Greenspan worried about the effect on markets of an abrupt move, transcripts of FOMC discussions showed. He said he "also would be concerned if this committee were not in concert. If we are perceived to be split on an issue as significant as this, I think we’re risking some very serious problems in this organization."
It is now clear that the federal reserve is using a dual track in approach to the financial services crisis. Using the FOMC to lower interest rates charged to banks and the Board of Governors to deploy emergency actions.
The federal reserve's traditional role has been to set interest rates and to provide an emergency funding backstop to troubled banks. It has been the policy of the federal reserve to provide the capital to the financial system but allow market forces to allocate where the capital flows. What we are witnessing is a major departure from this traditional role into the realm of attempting to directly allocate credit to specific areas of the economy. In essence this is akin to the president of the United States accepting the budget but allocating the funds appropriated by congress for whatever purpose he or she decided upon regardless of congressional action or intent.
Regardless, some of the regional bank presidents have begun speaking out regarding Bernanke's plan to purchase US Treasury Bills directly from the US Treasury in an effort to keep interest rates low as more and more traditional purchasers grow concerned with the stability of the US currency and the ability of the US to meet its long term debt obligations.
"Central bank lending policies should avoid straying into the realm of allocating credit across firms or sectors of the economy," Philadelphia Fed President Charles Plosser said Dec. 2.
So, what we are witnessing is an ongoing effort by the chairman of the federal reserve, Ben Bernanke to take unilateral action under the guise of emergency circumstances then present them as a feat accompli to the FOMC for a rubber stamp approval process.
At next week’s meeting, Board officials will likely propose ways to lower longer-term interest rates so mortgage and corporate borrowers can borrow more cheaply. Bernanke said in a Dec. 1 speech the Fed could purchase Treasury or agency securities in "substantial quantities." District presidents may simply be asked to support and expand on what the Board has already done.
So now we have provided the Secretary of the Treasury nearly unlimited and unaccountable power over executive branch operations with respect to operating emergency funding programs like the T.A.R.P., better known as the bail out while the Chairman of the Federal Reserve is doing the same thing at the federal reserve while the two are acting in concert, in secret. This my dear Kossacks is a recepie for disaster.
In case any of you have missed it, to date the federal reserve has allocated nearly 7.5 trillion dollars of the 8.5 trillion dollars so far committed to the financial crisis in the past 8 months. In comparison, the Iraq war has cost us about $800 billion so far, after nearly 6 years and the total output of the American economy each year is about 13 or 14 trillion dollars.
http://www.bloomberg.com/...