The Immoral Fed

During the financial implosion of 2008-2009, the Fed was faced with the insolvency of most if not all of the large institutions it exists to service. Recall that the creation of the Fed grew out of the experiences of bank runs in the late 1800s and early 1900s, specifically the Panic of 1907. During that panic, as with some earlier panics and bank runs, a private individual, J.P. Morgan, personally came to the rescue, stemmed the tide and restored confidence in the system. With the knowledge that old J.P. would not always be there due to his mortality, various powers resolved to instantiate an institution that had been quashed by Jackson in the first half of the 19th century, a national bank. This resulted in the creation of the Fed in 1913.

With mortgage defaults spreading in 2008, and a FASB rule that required marking these assets to market, insolvency threatened the whole system.  The primary objective of the Fed since then (one could argue that the primary objective is an anti-mercantilist fusillade against Asia, and specifically China, to pressure their currency, but restoring the domestic banking system is within their legal remit so that must be seen as the primary objective) has been to restore the balance sheets of the banks to health, a task which the Fed has pursued with single-minded determination but perverse consequences.

To really understand the mindset that allows for the perversities that have flowed from Washington the last few years it will be instructive to rewind history a bit and review the birth of the Tea Party.   Recall that one of the fixes contemplated early in the crisis was to use taxpayer money to fund a program that would help only those mortgage holders who were in trouble.  It was called the Homeowner Stability Initiative and was the proposal to which Rick Santelli responded that created the Tea Party movement.  You can see my contemporaneous description of the issue here and you can see the genesis of the Tea Party in the video below.


Ben Bernanke then responded to the Santelli Tea Party rant on at least 2 separate occasions.  In his February 2009 Humphrey-Hawkins Senate testimony and in a CBS 60 minutes interview, both of which occurred within a few days to a few weeks respectively of the Santelli Tea Party episode, Bernanke laid out the Liberal worldview – in which nobody and nothing is allowed to fail – when he said

“Let me give you an analogy, if I might,” Bernanke said. “If you have a neighbor, who smokes in bed. And he’s a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, ‘I’m not gonna call the fire department. Let his house burn down. It’s fine with me.’ But then, of course, but what if your house is made of wood? And it’s right next door to his house? What if the whole town is made of wood? Well, I think we’d all agree that the right thing to do is put out that fire first, and then say, ‘What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn’t happen in the future? How can we fire proof our houses?’ That’s where we are now. We have a fire going on.”

In other words, we must not allow the foolish and irresponsible to fail because it would cause damage to parties that were not foolish and irresponsible, collateral damage.  There is a name for this and that name is Moral Hazard.  If anyone innocent would be harmed, then you must not punish the guilty.  This is why terrorists use human shields.  If you fail to punish the guilty, you send a signal and create an incentive to engage in the reprehensible or irresponsible conduct.  Bernanke, Obama and Keynesians generally come down on the side of doing no harm to the innocent which means that the moral basis of society founders and erodes.  In the end that will cause the downfall of our culture.  Bernanke has been asked about moral hazard in subsequent interviews and either changed the subject or otherwise brushed it off.  This is why more than 5 years since the bottom in the markets, with stocks at all time nominal highs, the Fed is still engaged in unconventional emergency easing measures.  They cannot ever let anything bad happen to anyone.

That would seem nice except for one thing.  There are those who know that under a system where the irresponsible are rewarded and the wise and prudent are penalized, which is the situation today as an intentional result of policy, then those who can profit from this state of affairs will do so in spades.  Who are these entities?  Why the banks of course.  And how do the banks fare under the Feds expert guidance?  Well the Fed tells them that they are never going to raise short term rates so the banks have an all clear to hold a massive portfolio of Treasury Securities without fear of being long and wrong.  But it gets better.  The Fed cannot buy the US Treasuries securities directly from the Treasury because that would be direct monetization of the debt which would be outright money printing a la Weimar.  No they have to pretend they are not doing that so what they do is they have the primary dealers (banks) buy all the treasuries not purchased by foreign central banks and private investors and then they buy these same bonds from the primary dealers a week or two later.  Now does anyone think the primary dealers flip these securities back to the Fed at a loss?  Or without charging a fee or spread?  No me either.

This is all part of helping the banks repair their balance sheets to facilitate the smooth functioning of the economy.Then on top of all that, after the Fed bailed out the banks directly and also by paying all the AIG counterparties at 100 cents on the dollar when ANYONE with a brain would have insisted on a substantial discount, the bankers who are earning all this money on the back of the taxpayer have the balls to pay themselves record bonuses for doing god’s work.  And the worst thing is that not one in a million Americans understands or cares about these outrages.  Nor do they understand or care that the prudent are being stiffed by ZIRP while the banks and corporations have free money to speculate in commodities and to buy back shares.  Its all good.  As long as everyone can do the carry trade using the USD as the funding currency its all good.  For more on how the Fed and Washington rape the taxpayer to pay off supporters read this.

So just to make things clear the Fed has decided that if you are someone who did something wrong, stupid and possibly immoral and this resulted in financial problems for you, then we are going to help you because otherwise your demise might hurt others, but if you did the right thing, if you spend less than you make, you save, you are prudent, well then, you are just plain screwed, as a matter of our official government policy.  Have a nice day.

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