Bitcoins and gold standard dollars -- was Re: Anyone want to make a housecall?

Levi Pearson levipearson at gmail.com
Tue Jun 4 01:15:01 MDT 2013


On Mon, Jun 3, 2013 at 10:16 PM, Joshua Marsh <joshua at themarshians.com> wrote:
> On Sun, Jun 2, 2013 at 3:18 PM, Levi Pearson <levipearson at gmail.com> wrote:
>
>> No, the law does not allow shares to be sold to the public.  There was
>> a provision that allowed it *at the time the Fed was created*, but
>> only *if* the regional banks did not meet their funding goals through
>> sale of shares to the banks as I described.  They did meet their
>> funding goals, so no public shares.
>
>
> Do you have somewhere I could read more about this? My google-foo wasn't
> sufficient. The only thing I've read about it was from the original law.
>

See the 'Notes' tab here: http://www.law.cornell.edu/uscode/text/12/284

Apparently, if you look at the previous section, there is some
provision for non-member entities to hold no more than $25,000 of
stock in a regional Fed bank. But obviously that wouldn't confer
"member bank" status and would not allow any influence over the
operations of the bank.

>> By 'these people' I assume you mean the FOMC, because they're the ones
>> that control the open market operations of the Fed.  When have you
>> ever seen 12 elected or appointed people work together that closely on
>> something that requires that kind of subtle manipulation?
>
> It's happened enough that sociologists have studied it and coined a term
> for it: oligarchy. These people weren't 7-11 cashiers in their previous
> position. Powerful and rich people like to keep their power and money. In a
> political system where you have to solicit $1 billion dollars to become the
> president, it's can't be too far fetched to assume some of that money comes
> with strings attached. It doesn't seem like a stretch to me to have
> financial savvy people conspire to make money.

I'm sure people with money have tried to "stack the deck" with Board
positions when they come up for re-appointment, just like they can try
to stack the Supreme Court seats when they come up.  Do you see the
Supreme Court justices aligning perfectly with the agendas of the
Presidents that appointed them?  Anyway, if you were a
financially-savvy rich person trying to conspire to make money, I'll
bet trying to manipulate the Fed for your gain would be one of the
more difficult ways to do it.

Of course, I believe that there have almost certainly been decisions
made at the Fed that were clouded by conflicts of interest.  But those
kinds of decisions exist everywhere.

>
>
>>  And where are you getting the 'government gets a large kickback on those
>> profits' thing?  Are you referring to the Fed returning the majority
>> of the interest it collects on Treasury securities to the Treasury?
>> This means that somewhere around 7% of the national debt is actually
>> interest-free.  Not really a kick-back.
>>
>
> Congress passed a law that gives power to an organization that gave the
> government $90 billion dollars last year. Is it financially smart? Sure. Is
> it a kick-back? I think so.

Kick-backs are private deals to individuals in charge of purchasing
decisions, basically a form of bribery.  The Fed giving money back to
the government is a refund to offset the interest paid on the Treasury
bonds the Fed holds.  Why should the government be paying interest to
the Fed?  That money just gets subtracted from the federal budget
deficit, it's not like it goes into someone's pocket.

>> So, what this comes down to-- do you trust the idea of having elected
>> officials appointing people to make decisions for the governance of
>> the Federal Reserve?  Or do you think the people should have a more
>> direct say in what's happening via a more democratic process?
>
> I'm actually OK in general with the system. My biggest complaint is
> transparency. I may not be able to wade through the details if they were
> released, but there are professors of economics who would. Much like
> open-source software, it could lead to more eyes squashing bugs and
> preventing tampering.

The Fed has to strike a balance between accountability and unwanted
side-effects from making the low-level details of their transactions
transparent.  The point of being a lender of last resort is to keep
the banking system running smoothly when there are unexpected
liquidity demands when the inter-bank loan market is out of liquidity.
 If those transactions are made public, it can cause a panic and make
the stresses *worse* instead of better.  You can see an example of
what tends to happen if you look back to the media reporting of the
2011 audit where the GAO was able to look into the open market
transactions.  There were all sorts of laments about "16 trillion in
no-interest loans to foreign governments!" and alarmist crap like that
which bear very little resemblance to what actually happened.  I
actually looked through the GAO report on it, which is quite clear and
readable (it's designed for members of Congress, so I guess it has to
be!)  The 16 trillion number was never related to outstanding loan
balances; it was a sum of total transaction amounts for a year's worth
of transactions, and many of those were overnight loans!  It included
both foreign and domestic bank transactions. You can imagine how those
could add up.  And the bit about foreign loans... those were dollar
swaps to central banks of other countries that were short on dollars
in order to preserve liquidity for the dollar there, primarily in the
Euro market.  Dollars were swapped for very short terms (probably
mostly overnight) for foreign currency *at the cost and financial
risk* of the foreign bank.  They paid us interest, in other words, and
would be on the hook if they lost any of the dollar value.  In return,
we promised to hold their currency without further investing it.  The
no interest part was that *we* paid no interest on the foreign
currency, since we couldn't do anything but sit on it.  Anyway,
outstanding balances for those swaps were always less than $300
billion, and they were really only used to anywhere near that extent
for a very short time.

The Fed is regularly audited (including the open market transactions)
by outside financial auditing companies who ensure that proper records
are kept according to standard accounting practices.  The Fed
publishes the minutes of the FOMC meetings where they decide the
direction they're going to take with open market operations.  The GAO
(an office directed by Congress) can audit all the operations of the
Fed *except* the open market operations and transactions with foreign
central banks, which again need to be kept private in order to do what
they're meant to do.  There's plenty of oversight and people looking
to make sure there's no outright fraud going on, and there is a *lot*
of published information in the public domain and public discussion of
the general plans for the open market transactions.  None of their
actual transactions ought to be a surprise to anyone, but you can bet
that you'd get a bunch of congress members *acting* surprised and
grandstanding as they're wont to do in order to milk things for their
political benefit.

So, like all things related to the government, there's a balance
that's been struck.  There's good reason for it, and it bears
considering *why* it's set up the way it is before you go and advocate
rearranging everything.

        --Levi


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