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Issue 284 • Wednesday, May 13, 2009

"Politicians are the same all over: they promise to build a bridge even where there is no river."
- - Nikita Khrushchev

Beginning of the end? Fed cannot account for $9 trillion

Win McNamee/Getty Images

The Federal Reserve apparently can't account for $9 trillion in off-balance sheet transactions. When Rep. Alan Grayson (D-Orlando) asked Inspector General Elizabeth Coleman of the Federal Reserve some very basic questions about where the trillions of dollars that have come from the Fed's expanded balance sheet, the IG didn't know. Worse, nobody at the Fed seems to have any idea what the losses on its $2 trillion portfolio really are. "I am shocked to find out that nobody at the Federal Reserve is keeping track of anything," Grayson says. Grayson asked Coleman if her agency had done any research into the decision not to save Lehman Brothers, which "sent shockwaves through the entire financial system," Coleman said it had not. "What about the $1 trillion plus expansion of the Federal reserve's balance sheet since last September?" Grayson asked. "We have different connotations," Coleman replied. "We're actually conducting a fairly high-level review of the various lending facilities collectively." Translation: Nobody at the Fed knows where the money went. - Money News

Dominant Social Theme: Some troubles need to be resolved.

Free-Market Analysis: We saw the interview with Elizabeth Coleman on TV and then again and again and again on It is entitled "Is Anyone Minding the Store at the Federal Reserve?" and it is one of the single most astonishing moments (or minutes) ever manifested or preserved in this already-amazing digital era. A century ago, when the powers-that-be pushed through the act that set up the American Federal Reserve - which basically kicked off the central banking era in America and abroad - the kind of technological ubiquity offered by the Internet would certainly have been seen as a major and alarming challenge. Well, it is.

The Grayson/Coleman confrontation has to be seen to be believed, and even then it may not seem quite believable. How could the Fed, in all its monied majesty, offer up someone so unprepared to answer the questions of a single quiet and persevering congressman. Grayson is a liberal, socialist-oriented legislator - a good government type who is fast making a reputation for taking on government corruption. He is pro-regulation, but has not been shy about confronting high profile institutions. He may not want to shut down The Federal Reserve but he certainly wants to make it operate under additional scrutiny. And he makes it clear he believes the Fed needs it. And now Coleman knows it.

During the questioning of Coleman, Grayson asks her over and over if there is a formal accounting available for the trillions in off-book balance sheet activity for the Fed. He asks patiently, and he repeats the question many times. Coleman stutters, makes statements that are obviously evasive and finally all-but-admits that she actually has no authority even to examine the Fed's off-balance sheet activities. She admits this in a frazzled manner, but only after losing her way so badly that she has to ask Grayson to repeat the question (which he has already asked about ten times.)

What the scenario seems to shows us - and this has already been suggested by the increasingly querulous appearances of Ben Bernanke - is that the huge monetary and organizational powers of the Fed are a thousand miles wide and an inch deep. True, the corporation can create tens of trillions of dollars out of thin air, but such power is not easily shared. Even the heads of large, money center banks are not necessarily part of the very small inner circle of the Fed. It is a group that seems to function almost on a need-to-know basis and its public resources (PR, etc.) are seemingly a great deal less massive than its monetary leverage.

The result is that the Fed is having lots of trouble during this most recent meltdown. First of all this is a most terrible financial crisis and a long way from over - and the longer it goes on, the more the blame is apportioned beyond financial centers and banks, eventually spilling (unlike, say, the 1930s) over to central banks themselves. Second, the available technology means every part of the crisis is playing out in real time with tens of millions watching and commenting. Third, the Fed is not set up as a public entity and its corporate culture is not one that easily provides insight or is amenable to a much-needed advertising campaign. To illustrate how far the Fed is from organizing a public-relations effort, just try to visualize advertising that would help turn the Fed's image around. It is pretty difficult. ("We print money so you don't have to ...?")

Western governments can easily be conceived of as damaged brands - but brands that are refreshed and renewed by elections. The Fed has no elections, or no public ones anyway. Thus there is no substantive, regularized way for the Fed to recover from the battering it is taking in hearings, in blogs and on Youtube every day. True, the Fed has enormous power and could in some manner intimidate or shut down its most prominent critics, but it is likely too late for that. The anti-banking sentiment that is sweeping America (and Europe to a lesser extent) is almost convulsive. It can be seen in on-line comments; from a legislative standpoint it is evident in twin congressional bills to audit the Fed. Here is a Campaign for Liberty update on the bill:

Congressman Paul's Audit the Fed bill (H.R. 1207) [was recently] introduced ... As it stands right now, there are already nearly 150 cosponsors of Ron Paul's AUDIT THE FED Bill -- and the companion Senate Bill (S. 604) has also been introduced.

The Fed has survived numerous challenges, but always these were fairly restricted to legislators and others that traveled in the Fed's ambit. There was no chance that the Fed's inner-most workings would be broadcast to the world, and that the world would see and comment. The Internet has changed all that. The basic trouble with the Fed - and with all central banks - is that the work they do is not defensible within the broader context of democratic rhetoric.

The political idea that carries the most weight in this day and age, in Western societies, is that groups have rights and rights to be codified and implemented by governmental authority to make things fair. Billions and trillions have been spent to create and impose the current democratic meme of fairness in the West - in part to ensure that the mechanism of central banking is left strictly alone - but now in this era of the Internet, the same mechanisms are coming back to haunt those who helped create them. There is just no way to rationalize the actions of the Fed within this context. It is not a fair organization; it has no obvious entry point and no clear relationship to the electorate.

Just as the removal of Dan Rather was a watershed moment for the rising power of the Internet from a media standpoint, the confrontation between Grayson and Coleman will come to be seen (in our humble opinion) as a watershed moment. Last week, the American Federal Reserve - and thus all central banking - was stripped like the Emperor not only of clothes but of credibility. It was revealed as naked and even shamed. (Take a look at the two individuals behind Coleman and watch as they literally writhe during her grilling.)

But here is the real issue. By putting Coleman up in front of Congress in such an unprepared manner, the behind-the-scenes leaders of the Federal Reserve have provided an unimpeachable metaphor. Coleman's testimony punctured the veil of secrecy and her lack of preparedness lance whatever aura of competence Ben Bernanke and others have been able to conjure. Metaphors can NEVER be undone. They can be covered up over a great deal of time, perhaps, but they cannot be explained away or rationalized. They exist. That's why they're metaphors.

The economic ramifications of what is going on couldn't be more obvious either (well, to us, anyway). Post Coleman, the Fed is suddenly, inconceivably, an institution fighting for its political life. (Perhaps you read it here first ...) This financial behemoth, the most powerful single entity in the world, has likely already begun to topple. But as it is with any figure of titanic proportions, the fall is still silent to begin with for contact with the ground has not yet been made.

Central banking will likely survive in one form or another. No institution of such authority simply vanishes. The money and power of central banking guarantee that the mechanism will be perpetuated somehow - even expanded from sheer momentum. But a regrouping will have to take place. Even if central bankers are able to maintain the outward manifestation of the economic mechanism, it has begun to rot from the inside as it topples. It may take a month, a year, a decade but changes are coming.

Several years ago, American news announcer Dan Rather was exposed and stepped down from one of the most powerful posts in broadcast journalism. Today mainstream newspapers are dying in droves and the mainstream media itself, especially television, has seen an aggressive contraction of viewers. The ramifications of the Coleman grilling will spread like ripples in a pond and central banking will not be same in several years and neither will the societies it served.

As the Fed loses credibility, as central banks continue to come under fire, it will become less and less feasible to blame the market itself. True, there are levers of government to pull and central bankers have been extraordinarily skilled at putting the blame on everyone else and thus accumulating even more power for their governmental and regulatory allies. But there comes a time when the power of the leaders begins to be questioned by the masses of the led. And there are a hell of a lot more who are led than lead.

A lot of socially dominant themes are in the process of collapsing as the Internet continues its merry path of destruction. Global warming, peak oil, big pharma - all these memes are under heavy attack. The monetary elite can seek to sustain them, but credibility is central to promotion. If themes cannot be promoted because they are not believable anymore, than all the money and government power in the world cannot purchase their acceptance. This is what is going on today, in our opinion. Central banking was the biggest meme of all, and one we believed would be the last to fall. But this great financial crisis has stressed the banking elite nearly to the breaking point. Those are not just words. Go see it on Youtube for yourself.

Conclusion: The erosion of the implicit authority of central banking corresponds to the single biggest bout of money creation since the 1970s. If central banks, and the Fed in particular, are so wounded by a loss of credibility that their competence becomes questionable in the public mind, then it will be a great deal more difficult for it to continue the kinds of money manipulations that have sustained Western paper money economies.

The ramifications are massive and obvious. If the Fed is audited and its actions restricted (by public opinion not legislation - which may soon seek to expand Fed powers), then much of what it does in secrecy may not be accomplished. The prices of gold and silver could rise massively along with price inflation. The dollar could indeed lose its place as a reserve currency and its survival might even be in doubt. There would certainly be more efforts at centralization of financial affairs, but we speak here of confidence and trust. It will be increasingly difficult to impose further concentrations of power as a solution for incompetence. The ramifications are a good deal closer today than yesterday.

To watch the Grayson/Coleman confrontation, click here.

UK economic think-tank says government, central banks 'to blame' for financial crisis

Getty Images

Governments and central bankers must take the blame for the financial crisis - not bankers, investors and others in the market, according to a new study. In a comprehensive analysis of the causes for the financial and economic crisis, the Institute of Economic Affairs (IEA) has concluded that the disaster was caused by authorities' mistakes rather than market failures. In an associated letter to The Daily Telegraph, the IEA, supported by a number of leading economists, including Tim Congdon and John Kay, said that despite these failures regulators were being rewarded with more responsibilities. The study suggests that hedge funds and tax havens should not be unduly punished, and that in the future central banks and regulators should pay greater attention to imbalances building up in the economy. The detailed analysis, Verdict on the Crash, will come as a further blow for Gordon Brown (pictured left), claiming that the system he created to monitor the financial and economic system was found entirely wanting and is in need of a major overhaul. - UK Telegraph

Dominant Social Theme: A different point of view.

Free-Market Analysis: While the IEA may be something of a free-market think tank (whatever that means in Britain these days) the publication of this analysis supports the point we are making in the other article in today's Bell. The study, written about in an on-line version of the Daily Telegraph, has likely garnered hundreds of thousands of views - and will receive millions more from links and from being published elsewhere on the web. Over time, it will be cited and receive still more views and links. A study that 20 years ago would have received a few quick mentions in the back pages of prestigious newspapers is now capable of generating a virtual tidal wave of readers.

Of course it is not the technology alone that matters; it is what's being written that counts. Viewpoints, especially economic ones, that haven't seen the light of day for the past 50 years are receiving wide prominence. Hayek, Mises, Rothbard and other free-market Austrian economists are regularly quoted in publications that even a decade ago referred only to the socialist Keynes when it came to economics and economists.

The IEA analysis, in its blunt statements that central banking policy and government regulations were to blame for the meltdown, is swimming against Prime Minister Gordon Brown's tide, but its point of view will be heard in the 21st, unlike the 20th century. The results will come from twin impacts. First, there will be an impact because studies such as these are factually correct. There is no rational way to defend a central banking monopoly on money creation. Second, readers are being introduced to classical liberal concepts that were well known a hundred years ago but have been so garbled by academic pedantry that they virtually need to be reintroduced to interested readers as if from scratch.

This reconnection with the reality of economic philosophy is massively important. It is, in fact, an urgent but little noted point (so we note it) that one can read literally thousands of 20th century texts about Hume, Kant, etc. without ever figuring out these eminent thinkers were engaged in an inter-generational quarrel about free-markets and how they operated and how effective they were. This dialogue has virtually been purged from the philosophical canon, but it is returning. The cat is out of the proverbial bag.

Conclusion: The effectiveness of the current monetary structure never depended on its efficacy so much as upon the silence from the other side. There was no way to make an effective counter-argument because there was no venue in which to make it and no readership to gather together to review it. The Internet has made the difference, and the implacable nature of the current communication technologies make it impossible to return. The arguments about money and power at all levels of society are not over but have just begun.

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