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Friday, November 02, 2007


the politicization of the federal reserve bank

the subject of the independence of the central bank is a touchy one particularly in the united states, a country that (often hypocritically and always amorally) lauds "free market" economics above all things. few care to notice that financial markets are in fact nothing more than regulatory constructs -- were they not, the only probable market would be the hobbesian one where i shoot you and take your stuff -- and that this is particularly true of the american (indeed, global) banking system. but rising above that on a cloud of hypocrisy, many feel that the american system is the "free-est" and symbolic of that is (ironically enough) its government-chartered federal reserve bank -- the socialist replacement of what really was a free market solution, j. pierpont morgan.

many would suggest that the fed operates independently of the political system, and moreover that this is how it must be in order to avoid the racketeering of party politics infecting the basis of the economy -- that is, the currency -- and debauching it.

it has been true from time to time in the century-long history of the fed that it has exercized its will more or less independently of the government. and i personally think its inarguable that keeping a firewall between monetary policy and the executive and legislative branches is beneficial in most cases, all cases in the longer term. but central bank independence in the united states is on the wane today. alan greenspan, from his nomination in 1987, was the most political fed chairman in history, cultivating a very close relationship to a series of cabinet officials, most famously clinton treasury secretary robert rubin. his visits to the white house -- a foreign concept to previous chairmen -- accelerated under george w. bush. greenspan further helped establish the white house working group on financial markets, acerbically known sometimes as the plunge protection team.

the loss of central bank independence was on remarkable display in the last few months, as new chairman ben bernanke consulted as the ongoing financial crisis precipitated with the representatives of major wall street banks and hedge funds -- including rubin, who is a former goldman sachs head and now works for citibank -- many of whom are in a highly-conflicted advisory role between their own private interests, a treasury department which is again headed by a set of goldman sachs men centered on secretary hank paulson, and apparently the fed itself. bernanke further had discussions with paulson himself, who presumably was in contact with the president as well.

moreover, it has been seen for many years that the markets loosely obey an election cycle, prospering disproportionately in the third and fourth presidential years prior to an election -- an effect often now attributed to politically-driven fiscal and monetary policy.

that trend of politicization has now further accelerated in the bush administration's appointments to the federal reserve board. the fed has previously been the domain of some of the most respected and talented economic minds in the nation, most often with academic pedigree to match.

bush's new nominees -- larry klane and elizabeth duke -- are of different stock.

klane is an exec vp of credit card monster capital one and a former exec at deutschebank. his career focus has been in strategy and marketing, and has no advanced academic degree (holding instead an mba). he has been connected to the white house for several years, sitting on the board of a charity founded by colin powell.

elizabeth duke is a yet more obscure pick, being a former minor exec at wachovia and the current ceo of something called townebank, a small virginia lender. she began her career in banking as a teller, eventually getting an mba.

are these really america's finest banking minds? obviously not.

it is an ancient political trick to ingratiate positions of power by picking insignificant and undeserving patsies to fill them, people who understand that they owe their entire situation not to their own merit but to your dispensation. it seems clear to me that this is exactly such a case, and it represents a startling and ominous departure.

one can hope that senate banking committee chairman does to these nominees what phil gramm did to late-term clinton nominees and keeps these people off the board altogether. but in the end the trend is clearly toward a continuing politicization of the federal reserve bank, a feature that should make politically-motivated manipulation of money supply and currency value an easier task for future presidents.

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