Abstract
This article asserts that, in dealing with the 2007–2009 financial crisis, the Federal Reserve Bank (Fed) has placed its role as monetary agency and de facto steward of the market for U.S. Treasury debt ahead of its statutory responsibility for ensuring the soundness of the private banks. This is not to say that the Fed supplies whatever credit the government wants—at least not yet—but in terms of both the provision of credit to the private financial system and the price of this credit, the growing fiscal imbalances of the U.S. government seem to be playing an increasing role in Fed policy decisions. This chapter explores some of the issues involved in recent Fed policy decisions and draws some preliminary conclusions as to the conflicts between the Fed’s role as central bank and also as prudential supervisor.
I am I am I am Superman and I know what’s happening.
I am I am I am Superman and I can do anything.
“I am Superman” R.E.M. (1986)
This chapter also appeared as Networks Financial Institute Policy Brief 2010-PB-03. This essay reflects research by the author for an upcoming book, Inflated: How Money and Debt Built the American Dream, scheduled for release by John Wiley & Sons in December 2010, and is used with permission.
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Notes
- 1.
The average maturity of the $11 trillion in U.S. federal debt is only about 5 years, meaning that the entire corpus of debt must be refinanced each decade or so, this in addition to the new incremental debt issued each year. This precarious position for the Treasury was created by Undersecretary Peter Fisher, who in October of 2001 announced that the Treasury would suspend issuing 30-year Treasury bonds. Fisher’s decision, made at a time when receipts to the Social Security system were masking the overall federal deficit, has gradually shortened the duration of the outstanding public debt of the United States.
- 2.
The Fed’s quantitative easing policy and various bank rescues since 2007 amount to direct monetization of what are arguably fiscal expenditures. As in the 1930s, Congress has ratified many actions by the Fed and Treasury in 2008 and 2009 after the fact.
- 3.
Whalen (1993).
- 4.
Mayer (1993).
- 5.
The author has worked as a bank analyst and investment banker for almost three decades. He was a management trainee at the Federal Reserve Bank of New York and worked in the bank supervision and foreign currency functions of that institution. His firm, Institutional Risk Analytics, is a rating agency and consulting firm that publishes quarterly performance benchmarks and stress indicators for all U.S. banks.
- 6.
Lahart (2009).
- 7.
Adrian et al. (2008).
- 8.
Whalen (2008).
- 9.
Unpublished June 2010 interview with the author.
- 10.
Federal Open Market Committee (2003).
- 11.
Kaufman (2009).
- 12.
The maintenance of low inflation and sound money, even of a fiat variety, are certainly necessary conditions for bank safety and soundness. Banks which hold worthless fiat currency as assets obviously have no economic or social utility, no matter how well run.
- 13.
Benink et al. eds. (2007).
- 14.
Whalen (2008).
- 15.
Meltzer (2010).
- 16.
Wallison (2010).
- 17.
Woodward (2001).
- 18.
Hetzel et al. (2001).
- 19.
Soros (2010).
- 20.
Taylor (2010).
- 21.
Morgenson (2010).
- 22.
Checki (2009).
- 23.
Morgenson et al. (2010).
- 24.
Ibid. See also Morgenson et al. (2010), “In U.S. Bailout of A.I.G., Forgiveness for Big Banks,” New York Times, June 29, 2010 A1
- 25.
Colander (2009).
- 26.
Bernanke (2010).
- 27.
Sethi (2010).
- 28.
Taleb (1997).
- 29.
For an excellent discussion of the misuse of mathematics and other quantitative tools expropriated from the physical sciences by economists, regulators, and investment professionals, see Whalen (2008).
- 30.
See Taylor (2010).
- 31.
Benjamin Graham and David Dodd, Security Analysis: The Classic 1940 Edition, McGraw-Hill Professional (2002), Pg 343
- 32.
- 33.
Board of Governors of the Federal Reserve (1999).
- 34.
Board of Governors of the Federal Reserve (2005).
- 35.
Board of Governors of the Federal Reserve (2008).
- 36.
I recommend Martin Mayer’s 2001 book, The Fed: The Inside Story of How the World’s Most Powerful Financial Institution Drives the Markets, particularly Chapter 13, “Supervisions,” on the Fed’s role in bank regulation.
- 37.
When the amendment to Section 13 of the FRA was adopted by the Senate, Fed Vice Chairman Don Kohn, then a senior Federal Reserve Board staffer, reportedly was present and approved the amendment for the Fed, with the knowledge and support of Gerry Corrigan, who was then President of the Federal Reserve Bank of New York and Vice Chairman of the FOMC. See also Whalen (2009).
- 38.
During the past three months, the author has been contacted by no less than three agencies in the U.S. intelligence community under the pretext of studying risks in the U.S. financial system.
- 39.
Dawn Kopecki, “U.S. Bank Profits May Suffer on Senate Bill, JPMorgan Says,” Bloomberg News, May 27, 2010.
- 40.
Friedman (2007).
- 41.
Alford (2009).
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Whalen, C. (2011). I Am Superman: The Federal Reserve Board and the Neverending Crisis. In: Tatom, J. (eds) Financial Market Regulation. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-6637-7_9
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