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12/07/2009

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Jim

It seems to me that there was so much liquidity and potential liquidity lost when the housing and derivative market went bust that the Fed replacing bank funds and assets simply replaced what was lost and that therefore the risk of inflation is fairly low. It also seems to me that the Fed simply savethe politcal bacon of a derelict Congress. Removing the Fed independece will also remove any possibility of the Fed ability to bail Congress out the next time.

Joseph

Ron Paul's goal for auditing the FED is make the public aware of who the FED has been helping; He's counting on the public's outcry after finding this out, to help him "end the fed" by repealing all legal tender laws. Federal Reserve Notes would quickly lose their value without a police force to back them up. Without legal tender laws, the free market will choose 100% commodity backed currencies to buy and sell with. Fractional reserve banking for on-demand accounts wouldn't be tolerated by the free market either.

Chicago School and a Denier of MMGW

We welcome back the voice of the traditional or so-called "intellectual" conservative, BUT...

1) the theory that man's output of carbon is causing the globe to warm is still unsettled science with many differing opinions.

2) carte blanche abortion is still bad policy and forcing people of faith to pay for others to have abortions while cutting medicare benefits on the elderly (Obama/Pelosi-Care) is a form of tyranny.

3) voters still don't want gay marriage - see every election they tried.

Isn't it nice to talk about economics again with such vivid examples of how government is terrible at promoting real growth...? It is nice and everything, but facts are facts, and conservatism is conservatism.

EKS

What does the above comment have to do with the post? Probably not even worth taking seriously.

Ted H

Becker, I think you are overplaying the inflation angle. Most analysts are expecting inflation to be below 2% well into 2011, to me this actually suggests the Fed should be engaging in greater monetary expansion. Until expected target inflation is nearing 2.5% I'm not even particularly concerned, I think we should actually be buying a lot more long-term treasury bonds, I've thought that for some time. I basically think the plan outlined in the recent paper getting buzz by Gagnon seems spot-on to me ($2 trillion worth of buys in long-term treasury bonds with an average 7 years maturity). Furthermore, once we do begin to see a real recovery and inflation begins to see projections at unacceptable levels, the Fed can simply reduce volume requirements, but pay higher reserve rate to encourage holding of money to keep it at that target 2.5%. Plus, the banks need stronger reserves going into the future anyway. I'm not concerned about inflation if our Fed isn't stupid in that regard. I suppose you may just have a different opinion though.

Also, I think you are entirely wrong about the CRA. What evidence can you point to the CRA even remotely contributed to this crisis? The Federal Reserve blatantly disagrees and presents compelling evidence to make their claim. For example, they found that only 6% of all higher-priced loans were CRA-covered to lower-income borrowers or low-income neighborhoods. Only 2% of higher-priced CRA-eligible mortgages were covered by CRA institutions. They also discovered that delinquency rates for all subprime and alt-A mortgages were very high even when accounting for income, once again questioning the CRA's applicability. Also, consider this Mr. Becker. 50% of subprime loans were made by companies who were not regulated by the CRA, and an additional 25% were only covered by subsidiaries of CRA regulated institutions. I mean CRA-regulated institutions were LESS LIKELY to make subprime loans than banks not CRA regulated.

Mr. Becker, there is mounds of evidence that the CRA had absolutely nothing to do with the crisis. The Federal Reserve and the FDIC both say that claim is nonsense, after doing rigorous analysis, and their is no evidence your counterclaim is correct, why bother pushing it?

I believe the act is an unnecessary manipulation of the mortgage market, but it did not contribute to the financial crisis in any substantial way.

Finally, to get to your main argument. This I actually agree with. The Fed made mistakes, nobody disputes that. I also believe, for Bernanke, there was a bit of "new kid on the block" timidity. He's a brilliant monetary scholar so he surely knew the rates were too low when he entered in 2006, but perhaps new-kid timidity made him more cautious in his actions. However, Congress obviously was just as bad, if not worse, in allowing the crisis to go forward considering their flawed laissez-faire "bankers are perfect" approach to regulation, so to entrust regulatory powers to Congress seems, at best, ironic; at worst, pathetic. I'm very uncomfortable with giving the Congress too great of authority over the Federal Reserve. These guys aren't monetary policy experts, giving them too much authority seems counterproductive. The last thing we need it short-term political influences affecting monetary policy. I think we need to find a "medium ground" between transparency at the Fed and semi-autonomy, I'm not exactly sure where that is right now; but giving Congress greater authority of them isn't the correct approach.

Also, to quickly comment on the creation of a super-regulator. There is this idea that by creating a super-regulator they would do so much better than the Fed as a regulator. My view is, the Federal Reserve likely hired the same type of people to regulate banks that some new super-regulator would hire. There is nothing special about the Fed that makes their regulatory supervision worse. There needs to be a formal review of what went wrong in the regulatory department and then modify it through statues, department shuffling, modification of the regulatory framework etc; but a new agency seems pointless to me.

But yeah, Congress doing a better job at managing the financial system than the Fed (no matter how bad their performance was) is just laughable.

Jack

Put me down with Jim and Ted. In the near future, where could inflation possibly come from? Leaving out for now the, most likely manipulated "oil market", price gouging which is simply an external price increase that must be absorbed by folks doing w/o something else, (if we aren't willing to do something about the scam) I see no sector likely to cause demand driven inflation.

Consider; even during the lowest rates of unemployment in post WWII of the late 90's there was little inflation of prices or wages, due, in my view, to the nearly infinite supply of labor abroad and uncontrolled immigration at home.

Indeed! Dumping on CRA is but a partisan attempt divert attention from a financial sector completely taken over by greed, spotting a huge hole in regulation and running amok with the aid of bond rating firms selling off century old reputations for short term gain.

Congress? Yes! If Phil Gramm was able to sneak the repeal of GlassSteagal past a sleepy Congress headed home for the holidays, what excuse do they have for not looking around at the obvious signs of a world gone mad beginning in 2000? If Steagal was "outdated" would it not be replaced by a modernized version instead of being tossed and the excesses we've seen and are paying for not noticed?????

I don't think Bernanke was far off track to leave rates low in 2006 as job creation had been soft since the early 2000 recession and he must have had a housing chart that looked something like this:

http://mysite.verizon.net/vzeqrguz/housingbubble/

If Fed rates had tightened a bit would it have done anything to slow the trillions being shoveled out banker's doors on the flakiest of applications? No, they'd have simply gone to more "teaser rates" irrational ballooners and the like.

As for regulation of banks I don't see this being "rocket science". Were the housing chart above extended back to the 50's we've done well by lending something on the order of 2.5 times median income on median homes. That's not by accident but by that history including bankers lending on reasonable ratios and verifiable incomes. Just this graph alone should have rung bells all over the financial sector AND the regulators since 2002 or so.

Going forward? I can't think of a sector that isn't suffering from 20 - 40% over capacity with skilled labor at the ready on the sidelines. With an "internet Christmas" coming we'll see more retailers pulling the plug and triggering the next crisis of building owners defaulting with commercial banks being next? Or just after a batch of "private equity" vultures stuck with the companies they've been selling back and forth and sucking the guts out of them heading for the long lines at bankruptcy court.

In addition to the Fed buying those $2 trillion and hoping we'll not crash into the next mountain Congress should pass the jobs bill being discussed with a strong emphasis on the conservation of energy, alternative energy and beginning to address some trillion plus of delayed infrastructure maintenance and upgrading. We'll come out of this mess far better if our people are working and creating assets for the future than if we lose our nerve and leave them home collecting unemployment, losing homes purchased a decade or more ago and ending up on welfare, even if that means a pile of debt. Inflation? Ha!

strainer3

In my view the programs developed and put in place by the US government (and other governments that have followed in their footsteps) in their attempts to "improve" the global economic system are quite irresponsible and wreckless. They have used terrible Keynesian policies and wasted trillions of dollars bailing out creditors and shareholders of failed institutions with broken business models rather than addressing the structural flaws in the system of too much debt. And these actions are going to lead to massive problems down the road with regard to our currency and interest rates, in my opinion. Furthermore, I think that the gold price breaking out to a new high is a strong indication of the reduction in faith and confidence that people have in governments and their fiat currencies. I recently read a good article called Gold Price Wobbles Under $1,130 But U.S. Dollar Future Bleak at that discusses the Federal Reserve's easy monetary policies in order to try to prevent any sort of deflation from occurring and to try to reflate assets prices. There are also many more articles here that I think are very helpful for any investor to read because they help to explain the investment implications for the dollar, the gold price, and gold mining companies who I believe will continue to benefit from central banks' inflationary programs.

Dr, CliffordJohnson

Congress would at least do a better job than the Fed in that there would be no national debt attached to the money it orders be printed. That's such a huge advantage, it's difficult to conceive that its performance on behalf the people could be so much worse as to outweigh this advantage. In fact,it's difficult for me to conceive how Congress could be any worse than the Fed, given the moronic recent levels of Fed performance, and the transparent conduct of monetary policy that would result.

James Wong

I'd love to hear your opinion on whether Wall Street needs reform. Do you like the Volcker rule? What to do with "Too big to fail"?

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Congress would at least do a better job than the Fed in that there would be no national debt attached to the money it orders be printed. That's such a huge advantage, it's difficult to conceive that its performance on behalf the people could be so much worse as to outweigh this advantage. In fact,it's difficult for me to conceive how Congress could be any worse than the Fed, given the moronic recent levels of Fed performance, and the transparent conduct of monetary policy that would result.

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There is this idea that by creating a super-regulator they would do so much better than the Fed as a regulator. My view is, the Federal Reserve likely hired the same type of people to regulate banks that some new super-regulator would hire. There is nothing special about the Fed that makes their regulatory supervision worse. There needs to be a formal review of what went wrong in the regulatory department and then modify it through statues, department shuffling, modification of the regulatory framework etc; but a new agency seems pointless to me.

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This post was a clear reminder of the evil acts that lurk and may jump out in the most unpredictable ways. Evil acts that could be called "something big." A sobering moment of pain. I am sorry that you lost a friend this way.

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This was wonderful. I saw him, heard him, and knew him after reading this. Well done, and congratulations on the EP.What a great tale of shaky friendships, and lending a face, and a past to a victim of such apathy and cruelty. The monstrous idiots ate chicken before or after they killed.

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Such random deadly evil is shocking especially when you are a mere degree away from it. Who knows what would've happened had your friend been armed, but I suspect the outcome would've been quite different...

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All my carefully thought out comment disappeared before I could hit the post button, but what can say to do justice to your piece anyway? I was very moved both by the subject and your writing, Matt.

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uch random deadly evil is shocking especially when you are a mere degree away from it and knew the victims. Who knows what would've happened had your friend been armed, but I suspect the outcome would've been quite different...

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