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The Federal Reserve’s True Agenda and how to deal with it

By : Ziad K. Abdelnour| 15 November 2010
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Following up on my blog of July 15, 2010 entitled “Why Reshaping the Federal Reserve is today an Absolute Must”  I thought I’d share these thoughts with you, demonstrating the Federal Reserve’s true agenda in the economy today, and why reshaping the Fed is again needed more than ever at this juncture of our country’s economic history.

In fact, contrary to popular belief, I frankly believe that the Fed has spent the last two decades creating the illusory “wealth effect” in people’s minds; knowing very well that what they do has no direct effect on the economy. If you can drive the market up 50 percent, people feel richer…and happier.

The Fed basically wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive. So, we’re being forced to choose between two overpriced assets. Plain and simple.

Our boys at the Fed are trying to make cash so ugly that they will force us to take it out and basically speculate. And in that, their actions have been obviously very successful with the hedge funds who are out there speculating like idiots….and the dumber ordinary individuals are beginning to get so fed up with having no return on their cash that they’re beginning to do a little bit more purchasing of equities. Precisely what the Fed wants.

They want to have the stocks go up, to make you feel a bit richer, happier and smarter so that you’ll spend a little more and give a short-term kick to the economy. But, it’s a pretty circular argument. For every dollar of wealth effect you get here, as stocks go from overpriced to worse, you will give back in a year or two. And you’ll give it back like it— like it happened in— in ’08 at the very worse time.

All of the kicker that Greenspan had engineered for the ’02, ’03, ’04 recovery and so on was all given back with interest. The market overcorrected through fair value. The housing market that was a huge driver of economic strength actually masked structural unemployment with all those extra, unnecessary houses being built. All of that was given back similarly at the same time. It couldn’t have been worse.

Bottom Line:

It is clear to everyone by now that the Fed is blowing bubbles and encouraging moral hazard and that’s very problematic though they are in a very strong position to move against bubbles. Asset class bubbles are the most dangerous things to investors. They’re also the most dangerous to the economy as we have seen in Japan, in 1929 and now today. You’ve got to stop them.

The Fed has enormous power to move markets. And it unfortunately is not. It could have headed off the great tech bubble. It could have headed off the housing bubble. It could have interfered with the quantity and quality of the sub-prime event. It chose not to do any of the above.

In fact, Greenspan led the charge to deregulate everything for which we have paid an enormous price. So, he could have stopped bubbles, and he should have but never did …. and Bernanke is no better.

The Fed should have never allowed the situation to get into this shape. Digging out from a great bubble that has broken is so much harder than preventing it in the first place.

I am afraid unless we’re lucky, we will have yet another crisis without being able to lower the rates ’cause they’ll still be low, without being able to issue too much moral hazard promises from the Fed because people will begin to find it pretty hollow. Cycle after cycle, the Fed is unfortunately flagging the same intention. Don’t worry, guys. Speculate. We’ll help you if something goes wrong. And each time something does go wrong, it gets more and more painful.

On the same note, the Fed’s actions are taking money away from retirees. They’re the guys, and near retirees, who want to part their money on something safe as they near retirement. And they’re offered minus after-inflation adjustment. There’s no return at all. And where does that money go? It goes to relate the banks so that they’re well capitalized again. Even though they were the people who exacerbated our problems.

Notwithstanding the fact that under these conditions that low rates is actually hurting the economy. It’s taking more money away from people who would have spent it —retirees — than are being spent by passing it on to financial enterprises and being distributed as bonuses to people who are rich and, therefore, save more.

I really don’t know where Greenspan and Bernanke are coming from, or how smart or rather stupid they really are, but their actions are all real bad ideas at any time and particularly bad ideas now.

Trust is essential for a stable economy; Trust is currently at an all-time low;

Launching criminal prosecutions and real investigations is one of the main prerequisites for an economic recovery.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. RioRio

    Good post Ziad! This book exposes who the Federal Reserve really is: http://rioguzman.com/2010/08/16/the-federal-reserve-system-scam-g-edward-griffin-murray-n-rothbard/

  2. Neil KillionNeil Killion

    Really enjoyed and agreed with your article, even though I’m an Australian citizen. I also was a near-retiree, who was burnt by the ’08 sub-prime mess. It had ramifications in my country, where Propety Trusts that did not invest in the US market, were totally destroyed anyway. I’m rightly suspicious of the US economy and you have spelled out just why I should be. Thank you for speaking plainly, it’s an attribute in short supply.

  3. Craig MeadCraig Mead

    I just finished an online book for my Vice Presidents. I publish (over 15,000 pages worldwide thus far) and both the civil rights violations (one leg of this crash) and the financial crisis (my specialty for 30 years as an auditor and systems designer) – with the passing of Chalmers Johnson – former CIA who tried to warn us all – I had to remind my VPs that there are many things worse than living in a bankrupt oppressive nation – starvation is one of them – tent cities are just a warm up. So to get a perspective of what is ahead I reviewed the 12 part series of Argentina’s Economic Collapse. Rather than “talking” about what is coming or “wondering” about what is coming, watch that and “SEE” exactly what is coming. The Federal Reserve and IMF, BIS and other intl. agencies WILL (not maybe) be wiped off the map in the near future, however it won’t happen until AFTER you see your children dying and you all get your pots and pans out on the street. See the youtube 12 part series on Argentina’s collapse if you want an accurate predictor: we are trended and heading that way like a freight train.

  4. RiyadRiyad

    As usual , very useful article I think Ron Paul book “End the Fed” need to be re read again. Yes , back to Mises and may be highering economists from teh Austrian School is the right thing to start with. Best Regards Riyad

  5. MikeMike

    I would like to see us get back to a gold standard and de-fang the Fed. Bernanke’s approach reminds me of Dr. Deming’s funnel experiment where a person mistakes action for improvement. This is a scary time.

  6. Jeffrey L. NelsonJeffrey L. Nelson

    Since the Fortune Magazine published the article about the Buffet/Gates request to our many billionaires to put half of their wealth back into the economy at a point where it immediately helps/empowers people, I have been waiting for the first article to tell who is the first to jump, and the impact of that gesture. Investing that money with many individuals would likely allow them to make purchases (without credit cards) that bring more income to small and large businesses, and allows those business’s to invest in increasing jobs. The main benefit of investing in people is to increase economic activity. Without adequate sales of goods and services, economic gains become suppressed. I often wonder if I look at economic stability as not being all that complicated. Your blog writings, and the many comments, are of great value. Thanks!

  7. Dave KingDave King

    I am not willing to give the fed the godlike powers that you seem to ascribe to them. They are after all like a one armed drummer or the little boy keeping his finger in the dike. They only have one control really: more money – less money. They certainly have no regulatory authority – that power goes the congress. Unfortunately the FED is clearly the tool of the governmnet though we like to enjoy the fiction that there is a chinese wall of separation. The latest actions taken seem to shatter this illusion pretty well. Unfortunately for us, the government continues to be elected by an undereducated and unsophisticated electorate that is basically willing to sell their soul for a crust of bread. How else to explain the election of a one term senator, ex-community organizer, ex legal student full time left wingnut to the highest office in the land? Not that other parties and other presidents have been so great and noble though in retrospect they certainly seem much moreso now. It is a strange fact of life that my needs have not been met. I need a pool in the backyard. My home needs remodeled bathrooms. We need a new dining set. I was going to buy the dining set a couple years ago but thought better of it to save some money in case we might need it. Good call. How does our government get away with saying ‘I need more money’ and get the fed to print it for them? I have to wait until I actually earn the money. My needs are waiting – my family is waiting – my home is waiting. I wait and wait. Meanwhile the governmnet keeps spending and spending. It makes me furious. Keep my social insecurity – balance the budget and stop spending what you don’t have.

  8. S. Hojgaard SorensenS. Hojgaard Sorensen

    Great article as per usual! We have discussed this area on numerous occasions – I find it is often an useful exercise to take a step back and turn down all the “noise” when looking at the big picture. So looking at the FED’s actions/behaviors over the last 20 to 30 years and not what they have been saying you come to the realization that they have not been looking for stable prices or a strong USD – this is clear by the fact that they have increased the US Money Supply (M2) by 1,314% between 1970 and 2008, from $624 Billion to $8.2 Trillion. So what has they been doing and what has been their motivation (lets assume that they are not as stupid and incompetent as they appear) 1. They have created a false sense of prosperity AKA “The Wealth Effect”, Through Cheap Money and by creating bubbles in pretty much all forms of assets. 2. They have made everyone into equity investors by forcing even conservative investors such as pension funds into riskier assets in the search of yields. 3. They have made US assets appear very attractive to overseas investors plus flooded the global system with hot money. 4. They have allowed the Financial Industry to mushroom into the proverbial 800kg Gorilla in the room through de-regulation and backstopping them every step of the way – this resulted in them gaining an unwarranted position in society – Greenspan’s “pollenating bees” ended up eating a larger and larger slice of the harvest every year! 5. They subsequently financed the US Governments deficits through various indirect channels until recently where they are doing so directly and in the full light of day! What have they achieved with these behaviors? They have through the Wealth Effect and the access to easy credit managed to make the average worker feel wealthier when in fact the average US wage level has been unchanged in real terms for the last 30/40 years. This has allowed the US corporations to become increasingly profitable (Even this favor has not been enough for some who have moved their manufacturing to Asia INC.). They have provided the world largest Ponzi Scheme(s) with new players on a regular basis by turning the savers of the world into debtors and aggressive risk takers. They have enriched the Financial Industry and the 1 or 2% of the population who own most of the assets. They have applied the “grease” which has created the largest globalization since the 1920s. With the obvious benefits for the same concentrated group of rentiers. Through the Reserve Status of the USD they have enabled the purchasing of real tangible assets around the world with fiat paper money backed by nothing. They have financed the establishment of the largest military machine in human history along with several institutions of so called “soft power”. When you take a look at the FED behaviors from 30,000 feet up and turn out the “noise” it would appear that Alan and Ben have been very able puppets and/or that their puppeteers had a plan and stuck to it! In the sense of the Grand Game you have to say kudos and well played! What next?

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