Congress' creature breaks free: Mission creep at the Fed
Wall St. socialism: a brave new Federal Reserve
The author, a conservative and 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide, penned this 2008 article of various titles, the above by the New York Post, April 20. Our addendum shows how to avoid predicaments begging for bailouts.
by George F. WillSome say the world will end in fire / Some say in ice . . . - Robert Frost
And some say it will end because of subprime mortgages. But for those who cultivate fear of catastrophe as an excuse for expanding government supervision of othersí lives, the bad news is that the world is not going to end. This untethered Federal Reserve will, however, make the muddle-through interesting.
The late Sen. William Proxmire wanted all members of Congress to write on their bathroom mirrors, so it is the first thing they read each day, this: "The Fed is a creature of Congress." Congress created the Federal Reserve pursuant to its constitutional power "to coin money" and "regulate the value thereof."
But the Fed is undergoing "mission creep." The description of the Fed is the "lender of last resort". Lender to whom? For what? Last resort before what? Did the bank "lend" $29 billion to Bear Stearns, or did it, in effect, buy some of the most problematic securities owned by Bear? If so, was this faux "loan" actually to JP Morgan Chase, the buyer of Bear?
In 1979, when the government undertook to rescue Chrysler, conservatives worried not that the bailout would fail but that it would work, thereby inflaming government's interventionist proclivities and lowering public resistance to future flights of Wall Street socialism. It "worked": Chrysler has survived to endure its current crisis.
The argument then was that Chrysler was "too big to be allowed to fail." The argument now is that Bear Stearns was so enmeshed in the financial system that no one could guess the radiating consequences of its failure. But how can the Fed or Washington determine a distressed firmís crucial role or vital size?
The Fed's mission is to preserve the currency as a store of value by preventing inflation. The Fed has no mandate to be the dealmaker for Wall Street socialism. Its duty is not to avoid a recession at all costs; engaging in frenzied improvisations because a small recession, aka a correction, is deemed intolerable, is how to get a big recession.
After the tech bubble burst in 2000, the Fed opened the money spigot to lower interest rates and keep the economy humming. And since the bursting of the housing bubble, which was partly caused by that opened spigot, the Fed has again lowered interest rates, which for now are lower than the inflation rate, which the open spigot will aggravate.
A surge of inflation might mean the end of the world as we have known it. Twenty-six percent of the $9.4 trillion of US debt is held by foreigners. Suppose they construe Fed policy as intentionally increasing inflation, meaning devaluation -- partial repudiation -- of the US debt. If foreign holders of Treasury notes start to sell them, and if government hopes to keep living off borrowing, it will have to raise the return on it bonds to attract foreign money. But can the US keep devoting an ever growing share of its budget to servicing its debt?
Can taxpayers pay higher taxes while sinking deeper into debt? Having maxed out many of their 1.4 billion credit cards, between 2001 and 2006 Americans tapped $1.2 trillion of their housing equity. The middle-class debt-to-income ratio is now 141%, double that of 1983.
If Congress cannot suppress its itch to "do something" while markets are correcting the prices of housing and money, Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of a federal civil servant ($124,010). That would dampen Wall Street's enthusiasm for measures that socialize losses while keeping profits private.
JJS: If the rationale for bailing out the bigs is to protect the littles, then why not just protect the littles directly, since the bigs donít need any help? A rich guy losing vaults of mullah yet remaining a millionaire is not a social problem. Anybody else losing their home and ending up on the street or in a relativeís basement, that is a social problem.
So lose the Fed, handcuff discretionary spending by politicians, and pay citizens a dividend from surplus public revenue. Government would have lots of surplus if itíd do two things: One, cut the waste -- the militarism, the drug war, the free infrastructure for sprawl. And two, donít tax labor or capital but recover the values of land, resources, and EM spectrum.
Heck, nature is our common heritage, and her economic value is a socially-generated value, so for government to recover and disburse social surplus makes sense for moral reasons, too.
Jeffery J. Smith runs the Forum on Geonomics.
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