My Latest Huffington Post Column: 'How Long Before the Fed's Days Are Numbered?'

Below is my latest column for the Huffington Post, entitled "How Long Before the Fed's Days Are Numbered?":

It's no stretch to say the Federal Reserve is garnering a lot of attention these days.

On Wall Street, there's a big debate over whether the Fed's next big move will come too soon or too late. In Washington, the Administration is promoting a plan to give the central bank new powers to oversee systemic risks. Over in the House of Representatives, maverick Republican Ron Paul has gathered more than 245 co-sponsors for a bill requiring an audit of the Fed. In the media, there are questions about whether President Obama will allow Fed Chairman Ben Bernanke to keep his job when his term ends in January. And finally, some commentators are wondering whether this allegedly autonomous institution will retain its independence in a post-crisis world.

But few seem to be asking what I believe is the key question: how long before the Fed's days are numbered?

Before you dismiss my words as a rant, hear me out. Why, for example, is the power to commit substantial resources on taxpayers' behalf, to influence many of the most important commitments and relationships of businesses, individuals, and governments, and to initiate economic and regulatory policies with far-reaching consequences, in the hands of unelected officials with unexceptional abilities and no real accountability?

And even assuming the current arrangement has been the default choice up until now, does that mean things are destined to stay that way? The financial crisis has forced many people to rethink all sorts of assumptions, structures, and approaches. Against this backdrop, there are many reasons to believe that the broader question of why we have a Federal Reserve at all will gain traction in the period ahead.

For one thing, we have a group of individuals, entrusted with the job of reading the economic tea leaves and enacting policies in response, which not only failed to anticipate the worst financial crisis this century, but has yet to make a usefully accurate forecast since the disaster started. Remember, Chairman Bernanke is the individual who maintained that the subprime meltdown would remain "contained." He also said in March that he could see the now elusive "green shoots" sprouting throughout the economy.

And once the crisis began to unfold in earnest, what was the response of those charged with looking after our nation's economic and financial interests? Cynica might describe it as Keystone Cops-like chaos. On the one hand, we've had a reactive whirlwind of aggressive monetary measures that, while creating the semblance of stability, have resolved little and stymied desperately-needed restructuring. Worse still, a broad swath of corporate America is now dependent on government support for its continued existence.

Add that to the alphabet soup of Fed-devised bailouts and rescue plans, nearly all of which seem to have been designed to reward failure, subsidize mostly insolvent but politically powerful businesses, and obscure the reality of how bad things are, and you have a system that could be characterized as even more dysfunctional than it was before the bubble burst. While it might seem like tranquility, it is more likely the calm before the (next) storm.

Then there is all the damage the Federal Reserve caused before now. Most of those who've analyzed the facts and thought about how we got this point -- I don't mean the clowns on Wall Street or the commentators spouting nonsense from both sides of the aisle -- lay a great deal of the blame on the bubble-blowing policies initiated during the Greenspan era.

And if you want to go back even further, ask yourself how is it that an institution charged with maintaining stability has overseen so many crises through the years and allowed our nation's currency to lose more than 95 percent of its purchasing power since the Fed's creation in 1913?

America's central bank hasn't just failed in its economic mission. It's track record as a regulator also leaves a lot to be desired. Among the many questions people should -- and will -- be asking is: how come the Fed was ignorant of, and did little to rein in, the leverage and lending misadventures of America's banks, many of which have long had Federal Reserve examiners ensconced in their offices? Moreover, how is it that an institution that should have known about the intricacies of derivatives was so oblivious to the threats posed by these "weapons of financial mass destruction"?

The truth is that, aside from those periods when conditions and markets have set out a relatively easy path for central bankers to follow, the Federal Reserve has not lived up to its mission or its promise.

Pretty soon, a growing number of people are going to be wondering why we need this institution at all.

Comments

[roger]

I agree the Fed should be abolished.
But the question remains what happens next?
Theory's on market philosophy ala Ludwig Von Mises
come 50 to a dozen they all deal in the abstract &
and in the Idealist dreamland. But they never ever
touch the subject of human behavior IE: the lust for
power and wealth witch is really the basic problem.
FED or no FED this problem won't go away.

[Dave]

I'm way beyond "do we need the Fed?"

http://i29.photobucket.com/albums/c264/dnarby/Nuke_The_Federal_Reserve.jpg

Even got me a blog myself now...

http://thetaildoesnotwagthedog.blogspot.com

Check out why these id10ts were gunning the SPY and futures to prop the market... You won't believe it.

[RueTheDay]

Agree with Roger. If we abolish the Fed, what do we replace it with? A banking system such as ours simply cannot survive without deposit insurance and a central bank to act as lender of last resort. We tried free banking in the mid-1800's, it was a miserable failure.

[Vijay]

Fantastic! Bravo Michael!

[Gold IRA]

Your blog is really very informative and motivated me a lot.
Watch a free video on Gold IRA.
http://www.youtube.com/watch?v=3P5oEnKMysQ

[Ancient Brit]

You have got guts Mr. Panzner and have raised a good subject.
The next visible part of this collapse is not far away now that the springtime rally appears to be over. The current "apparant" quietude is masking the ongoing deteriorating fundmantals. The tail cannot wag the dog forever.
You could import an old style Bundesbank! We could do with one in my country.

[Mike]

Great article. I believe however the questions that are posed are answered by the fact that the Fed is a non- accountable private institution owned to some extent by the very bankers it is supposed to monitor. When congress gave the authority to the Fed the ability to print money they gave away their control of the economy.

[Alexandra]

#roger: good catch. I have been wondering for a while about Wall Street's view of the world. They seemed to think that if they just mark a traded paper 10% higher, than the value of the underlying asset somehow would increase 10% in value as well.
Now I am sure that they actually believe this to be true. They think they are 'creating' value that way.
I can do the same here with my spreadsheet and my printer.

How is what Greenspan has in mind different from market manipulation?
His approach is the same as a government setting the prices for, say IBM or BofA. As of tomorrow, shares of IBM will be valued at USD 1000.00, BofA at USD 2500.00, etc. Problem solved.
Don't pay attention to the GS-man behind the curtain.

[boqueronman]

"When congress gave the authority to the Fed the ability to print money they gave away their control of the economy." So the politicians should have control of the economy. Yeah, that should work! As someone who has spent most of his adult life in the "developing world" a statement such as that brings out a wry smile.

As for the "abolition" of the Fed. The first step is to admit you have a problem. We are only just crossing that border now. The recent youtube video of the humiliating performance of the Fed IG before Cong. Grayson's questioning and the effort to mandate an audit of the Fed reflects the public and Congress' growing concern that the institution has too much power and is too closed to effective independent oversight.

Once the concensus is reached that the Fed is broken and a structural transformation is required, almost surely the "experts" will flood us with their suggestions.

[Joe Sixpack]

Proclamation on the Federal Reserve System of the United States of America
www.RevokeTheFed.com
March 2008

WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";

WHEREAS, on December 13th, 1913 the US Congress enacted the Federal Reserve System;

WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;

WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;

WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;

WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;

WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;

WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;

WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);

WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;

WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;

WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;

WHEREAS, it is recognized that the current time is such a time of great difficulty;

WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;

WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;

WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;

WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;

IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;

WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.

NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.

IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;

FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;

WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.

SO HELP US GOD!

[Moopheus]

"allowed our nation's currency to lose more than 95 percent of its purchasing power since the Fed's creation in 1913"

When I read statements like this, part of me wonders, so what? Most of us have not been around since 1913, and most Americans live at a far higher standard of living than average folks did in 1913. So nominal prices are higher. So are my wages. Do I have to work more hours to afford my house than my great-grandfather did? Probably not. Yes, indeed, inflation is a problem, and only one or two Fed chairman have really had the balls to do anything about it. But comparisons to 1913 don't really mean very much. Why not do the comparison to 1813 or 1713? Was the value of the dollar perfectly stable before 1913? No.

[Michael Panzner]

Actually, comparisons to 1913 mean a lot, in my view. Follow the link below to the chart (at Bob's Gold Price Column) that shows the purchasing power of the dollar since the Mint Act was passed in 1792 and you'll see what I mean:
http://goldprice.org/bob/2007/02/us-dollar-purchasing-power.html

[roger]

No institution anywhere in the world can maintain
stability of it's currency,second ,what is more
important:purchasing power of a piece of paper called
dollar OR the purchasing power of the public.As for
the Fed is no more nor less than a political tool of the
party sitting in the white house
How many hours does the average person have to labor
for buying his/hers daily bread?this is the real world
it's a little different than the world of the average
economist.

[tnick]

Here is how the Fed will end:

http://www.youtube.com/watch?v=-VZNSA9PJQg

[DocG]

In the immortal words of movie tycoon Samuel Goldwyn: "No one ever lost money underestimating the intelligence of the American public."

[Frank]

Lender of last resort? Where do I apply? After the Fed's ruinous policies, I need a BIG loan.

[Jr Deputy Accountant]

Michael,

I think you know how I feel about this issue. Audit the Fed? You must be kidding me: http://www.jrdeputyaccountant.com/2009/07/you-want-to-audit-fed-but-why.html

I am overjoyed to see this much attention focused on what they are doing. But in a strange way, I am frightened at the Obama administration balking at appointing the Fed regulator of all regulators - it's almost worse that they are going back on the initial decision, exposing further weaknesses in the administration to gauge economic terrorism when they see it.

Who knows what will happen. At least the pressure is on.

p.s. when are you writing another book??

[Michael Panzner]

Thanks for asking! Still trying to recover from the last one, as it happens. Otherwise, I'm wondering if there will be any point to writing a new book if no one will be able to afford it after Washington gets through "rescuing" us.

[Web Design Services UK]

Just think that you remove the central banking system from the United States. But how there will be survival?