This diary isn't just about Representative Grayson (D-FL) but about all the other Ron Paul retards in our Congress that seem to not understand the Federal Reserve System and economics/global finance in general. In the following clip Rep. Grayson questions Federal Reserve Chairman Ben Bernanke about $500 billion in currency swaps reported on the Fed's balance sheet and really shows how Grayson has absolutely no clue what he is talking about.
Listen very carefully to Ben Bernanke's response. We trade a central bank (say the EU) dollars for their euros. We are out no money. It is not a loan that we can lose money on. It is not money that the American public is out. It is simply a swap of currencies to provide liquidity to another market during the crisis (ie to stem a run on dollars). There is no conspiracy here and Grayson really shows his ignorance on the issue when he persists in questioning Bernanke about where "our dollars" went (ie to which specific banks). The answer from Bernanke is simply who cares. We have the euros from the central bank on the balance sheet and made the swap with the other central bank, not with other foreign banks directly. This is simply another one of Ron Paul's conspiracy theories that have been latched onto by some democrats for reasons unknown to me (other than a fear of what is not understood). Bernanke almost seems like he just wants to tell Representative Grayson to take an econ class and get back to him with the somewhat condescending nature of his answer.
For further evidence of Grayson's lack of understanding on issues related to the Federal Reserve, watch this video:
This line of questioning is pure conspiracy theory shit. This is right up there with the moon landing being filmed in a warehouse in Virginia or the Illuminati running the world. The only issue here is that the attorney (not being an economist) simply doesn't respond with enough force. The Fed does not manipulate the stock market other than through interest rate policy (ie lower rates tend to lead to growth, while higher rates constrain it). He also doesn't understand primary dealers (the banks that are forced to bid on auctions of treasuries to provide guaranteed liquidity) and clearly thinks that it is somehow linked to the stock market (hence the frontrunning comment attached to the question on primary dealers). This is so sophomoric that it should be insulting to Americans as a whole.
The question of whether the Federal Reserve possesses the gold it claims is in fact a conspiracy theory. This conspiracy theory is commonly touted by Ron Paul and his legion of worshippers and gold bugs and is so absurd I was loathe to even bring it up here, but since Representative Grayson seemed to have no problem bringing it up I felt like it needed to be rebutted.
Finally, I love Grayson's question of who got the increase in the balance sheet. The answer was not only simple, it was widely reported everywhere. Most of this increase was used to provide liquidity to the economy through the purchase of treasuries and various agency backed securities. What this means is that the Fed essentially bought bonds (broadly defined) in an effort to keep interest rates (especially mortgage rates) low in an effort to enable economic recovery. There simply is nothing nefarious going on here except for the conspiracy theories that Representative Grayson keeps postulating.
This showcases why we get into financial problems in this country, as the people who write the laws (or unwrite them in the case of Glass-Steagal) are simply ignorant about the issues but like to pretend otherwise. Don't count on Congress to fix the root causes of this mess anytime soon.
A Note from Bonddad:
I fully agree with SilverOz's statements here. The bottom line is Congress is full of economic incompetents who have absolutely no idea what they are talking about. Most are great at spouting talking points (government bad from the right or big banks bad from the left) but no one has the ability to address the extremely complex nuances of economic policy. And this whole "audit the Fed" crap that is going around -- despite the fact that all the Fed's finances are on their website -- is absurd on its face. And finally there is this point: like it or not, Bernanke and the Fed saved our collective economic asses with their "extraordinary measures. How do I know this? Read a Monetary History of the US -- especially the part about "The Great Contraction".
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3 comments:
It is no surprise that Alan Grayson has no idea how the Fed works - the majority of mainstream economists have no idea how the Fed works, and imagines that the Federal government actually has to issue bonds when it engages in deficit spending, rather than doing so by choice.
Indeed, when someone can suggest that availability of the FRB balance sheet statements on the web implies there is no need to audit the balance sheet, it shows that they do not understand basic accounting. A fundamental purpose of an audit is to examine whether there is anything in the reality of the balance sheet that is omitted from or obscured by the published accounts.
There is of course no systemic risk to the Fed from offering a fixed line credit default swap, provided it is of reasonable size. In the worst case the Fed is holding useless currency and must use some of the treasury security bond income that would normally be returned to the Fisc as revenue and instead use the funds to acquire Treasury securities, returning the same amount to the fisc as "borrowing". And the risk of that kind of meltdown is fairly low, so its an unlikely event that poses no serious problems if it occurs.
The balance sheet of the Fed simply cannot go sour as a result of secondary asset holdings, provided that the primary asset base for a sovereign reserve bank are treasury securities of the sovereign fiscal authority, which pose no default risk in the currency that is the liability of the sovereign reserve bank. And there is no clear dynamic under which the Fed would walk toward such large foreign exchange liquidity swaps that they would pose any serious conceivable threat.
Recall that the primary asset base of Treasury securities is, first, the default-free source of income which ensures the policy independence of the Fed from day to day political gamesmanship in Congress, second, the tool that is used to raise the underlying cash rate when it is the policy decision of the Fed to do so, and third, the source of the excess income normally handed back to the Fisc which provides FRB's immunity from losses in value in their secondary assets.
That's the way the Fed system has worked from the time it gained full sovereign reserve banking powers in the New Deal through to the current decade. Chairman Bernanke's experiment is to find out how small the primary asset base can be without jeopardizing the Fed's stability and, in particular, the Fed's reputation in foreign exchange markets.
Its certainly an interesting experiment from the perspective of monetary economics, since previously its only been soft currency central banks that have taken on that kind of risk, and even then the stress that they are under is in the external accounts, and they commonly seek to maintain their immunity to the effects of domestic financial panics.
Of course, there is the frog in the boiling water problem - even if Bernanke's dilution of the primary asset base with overvalued corporate junk does not extend to the point of directly jeopardizing the stability of the Fed ... as we have seen recently with Wall Street types, if you give them an inch, they think they are a ruler. If the benefit to Wall Street is from the acquisition of the junk, and if the Fed shows that it can hold a certain portion of junk without ill effects, it seems highly likely that the primary asset base will be progressively whittled down and the share of junk progressively increased until by trial and error we do, in fact, discover a primary asset base that is in fact too small to immunize the FRB's balance sheets from a domestic financial panic.
Don't forget the gold. The Fed balance sheet says it has $11 billion in gold, but since it values the gold at $42/ounce, the actual value is more like $300 billion, giving the fed some wiggle room with its assets.
Also, do not be so quick to assume that the $800+ billion in ABS the fed has purchased recently have no or little value.
Thanks for the comments. I agree to some extent, the Fed is trying everything possible to prevent a depression and some of those efforts have more risk than the fed usually takes. I don't think that is a bad thing.
I'm shocked by Grayson's brazen stupidity. Seriously, he went from Progressive champion to Don Quixote in the span of a month.
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