http://www.ft.com/…

The Federal Reserve has been hobbled by at least two major shortcomings that were primarily responsible for the current and several previous credit crises. Its failure to spot the importance of changing financial markets and its commitment to laisser faire economics were big mistakes and justify a fundamental overhaul of the Fed.

Bill Bonner puts it well over at FleetStreetInvest.co.uk:

How about that? America’s largest car company is going to be state-owned… nationalized… presided over by the federal bureaucrats.

It’s just a part of the shift away from the free market and towards an un-free market. Free market capitalism has failed, say the pundits. Let’s give the feds a chance.

Even Henry Kaufman, writing in today’s Financial Times, says that the Fed’s “libertarian dogma” prevented it from controlling the banks properly.

But the Fed is hardly a libertarian organization. It’s a banking cartel. As a cartel, it looks out for its member banks – and doesn’t hesitate to use state power to do so. There is nothing libertarian about it… and no dogma associated with it – except as Greenspan’s eyewash – that is even vaguely libertarian.

The Fed colluded with member banks to fix interest rates. In so doing, it helped create the biggest bubble in credit the world had ever seen. It was a terrible thing for the average fellow – who was lured deep into debt by rising house prices and cheap credit. But it was a great thing for the members of the Federal Reserve cartel. Profits in the financial sector – notably, the big Wall Street investment banks – soared.

But bankers are vulnerable to too much of a good thing – just like everyone else. Soon, they made the classic Wall Street mistake – they came to believe their own hype. Not only did they gin up trillions of dollars’ worth of preposterous financial instruments… they actually bought these debt bombs from each other.

This posed a grave danger to the nation’s economy… and to the banking system. Henry Kaufman claims the regulators dropped the ball because they put too much faith in the free market. But the regulators were little more than front men for the banks themselves. After Alan Greenspan came Henry Paulson as head of the Fed. He was probably still replying to messages at his old address when the crisis began. And the head of the New York Fed – now, US Treasury Secretary Tim Geithner – was elected to his post by the very institutions he was supposed to be overseeing.

Neither of them was about to stop the party; they and their friends were having too much fun.

I agree it was inconsistency which helped lead to this. You can’t supercharge an industry and remove the governors (regulations) and not expect shit to hit the fan eventually.

Let’s be consistent. Remove the supercharger. Remove the governors. Stop tweaking with a system you can’t possibly control and leave it be. Get rid of the Federal Reserve and it’s monoply on interest rates and money and credit creation. Remove it’s monopoly on legal tender. Treat fractional reserve banking as the fraud it is (in its current form anyway). Allow the bubble created “too big to fail” failures to fail and go into bankruptcy. Oh and stop handing out our grandchildren’s future tax dollars on failed institutions.

Speaking of which… yesterday Obama said that the government should spend as much on R&D as on the military. On Slashdot someone asked why when we are already in debt would we be spending money on something that would help us but costs would be placed on our children. A response was that it would more likely help them because the advancements would come out later.

My question is… what moral authority does this guy have spending future generations money (which will be forcefully taken from them) regardless of who it will directly effect? Is that not taxation without representation? They have had no say in the matter. Why not let the bureaucrat tyrants of their own time decide how best to steal from them?

Within minutes of the FED announcing the rescue of the crumbling insurer, I had the luck of being able to chat with an AIG employee about the Government’s repsonse and AIG’s current financial situation:

AIG employee looks like the Fed will be bailing us out. take THAT, taxpayers!

xyz ugh. this is really sickening.

AIG employee bwahahahaha!!

xyz you do realize that youre part of that “tax payer” category, right?

AIG employee yeah but the money this will bring me personally is probably more than Ipaid in taxes in the past year or so. finally the government does something right for a change. yay Fed!

xyz i disagree

AIG employee No, if AIG bit the dust then I just would’ve been canned with everyone else. Now we’ll be offered buyouts. That’s a lot of money for me.

xyz you should have been canned, just like lehman brothers. AIG was bankrupt and deserved to fail

AIG employee No, AIG is solvent and I did not deserve to be canned. There is a liquidity due to the Financial Services arm of the company. liquidity *issue*. Anyway, the insurance part of the company (where I work) is healthy and we have $1 trn in assets worldwide.

xyz an $85 billion rescue plan is solvent?

AIG employee You’re talking about something you don’t know anything about. it’s a bridge loan. AIG has more than enough assets to cover its credit default swaps, but not enough to to capitalize them. enough *time* to capitalize them

Read More…

http://www.bloomberg.com/…

Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation’s financial system, said the central bank may extend its emergency-loan program for investment banks into next year.

“The Federal Reserve is strongly committed” to financial stability and is “considering several options, including extending the duration of our facilities for primary dealers beyond year-end,” Bernanke said in a speech to a conference in Arlington, Virginia.

Woot! More inflation!

Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should “take a leading role in any such process” in consultation with regulators, he said. Such a resolution mechanism may help reduce concern that investors and dealers begin counting on Fed aid in case their bets go wrong.

So like enforcing the current bankruptcy laws? I somehow doubt it.

Fed officials are working with the Securities and Exchange Commission and securities dealers “to increase the firms’ capital and liquidity buffers,” Bernanke said.

More inflation!!

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the same conference that he supported Fed and Treasury proposals for “policies, because of what happened, to take proper action if a large investment bank goes bankrupt.”

Of course he does. He, and the rest of Wall St., directly benefit from this intervention and inflation.

Without any liquidation procedure in place, the Fed in March decided to make a bridge loan to keep Bear Stearns out of bankruptcy. The central bank then agreed to take on $30 billion of hard-to-trade Bear Stearns assets to help secure its takeover by JPMorgan.

“The Federal Reserve in essence bought $30 billion of mortgage product from Bear Stearns; I want to remind people we bought $350 billion,” Dimon said today. “We don’t really think” the deal will end up costing taxpayers money, he also said.

I do. Anyone with a cursory understanding of economics could see that taxpayers will be both directly and indirectly paying for this. The indirect in terms of all the likely new regulations and powers the Fed will get on top of the inflation that will continue to destroy the middle class and poor are likely the greatest costs.

Congress should legislate “consolidated supervision” of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, Bernanke also said today.

The Fed should also get “explicit oversight authority” over payment and settlement systems, putting the it on a par with counterparts from around the world, Bernanke said.

U.S. central bankers will already play a part in setting capital cushions at securities firms under an agreement yesterday with the SEC. The two agencies will collaborate in determining “guidelines or rules concerning the capital, liquidity and funding” arrangements of investment banks, the accord said.

Because obviously planned economies have worked so damn well. They function like clockwork everywhere they have greater control. Right Ben?

http://www.ft.com/…

Banks and investment banks whose health is crucial to the global financial system should operate under a unified regulatory framework with “appropriate requirements for capital and liquidity”, according to Timothy Geithner, president of the Federal Reserve Bank of New York.Writing in Monday’s Financial Times, Mr Geithner, a key US policymaker throughout the credit crisis and one of the main architects of the rescue of Bear Stearns, says that the US Federal Reserve should play a “central role” in the new regulatory framework, working closely with supervisors in the US and round the world.

In his speech, Mr Geithner will also say the Fed is examining whether to make “permanent” some of the new liquidity facilities put in place during the credit crisis, and called for central banks to establish a “standing network of currency swaps, collateral policies and account arrangements” to bolster liquidity during a future crisis.

So when they screwup, which is all the time, they directly instead of indirectly effect everyone on the planet. Wonderful…