Posted on 05/30/2007 9:47:17 AM PDT by Tolerance Sucks Rocks
Today's Financial Times headline ("Spitzer to Streamline Rules for Wall Street") is an example of government allowing good old Yankee free enterprise to become more competitive with other international challengers.
The Financial Times also contains additional evidence of increasing inflationary pressures and of interest rates around the world, particularly in the European Union (E.U).
Meanwhile, in face of growing inflationary evidence and increasing interest rates among our key competitors, our Fed has kept our rates on hold.
While it warns of inflation as its main concern, our Fed appears "frightened" to compete either against inflation or with the rising interest rates of other competing currencies, most notably the Euro, against which it has depreciated by 12.24% in under a year and by about a third in the past two years.
There is a legislative reason why our Fed understandably feels "frightened" and seemingly unwilling to do more that utter warnings of inflation.
In the old days, our country was the undisputed master of the world's economy and our mighty dollar was keenly held, often in preference to gold, as the crucial reserve of other competing nations.
From this dominant position, our past Congress was tempted to give our Fed not just the single mandate, of its competing international central banks, of controlling inflation, but a second (often competing contra) mandate of encouraging economic growth.
This government action made our Fed and thereby our currency, inherently uncompetitive, over the long term. The problem was not evident when our economy remained not just highly competitive but overridingly dominant around the world.
America was so dominant then that it is now hard to relate to in today's world.
When I worked as an investment banker at Morgan Stanley & Co (in the late 1960"s), the market capitalization of just one major U.S. company (IBM) was greater then the total capitalization of all the European Stock exchanges (excluding London) added together!
Today, after a series of Democrat Presidents and the luxurious, almost hedonistic, spread of liberalism in the U.S., the situation is very, very different.
The end of World War II allowed the countries of Europe to compete with the U.S.
The end of the Cold War opened free competition to some 3 billion hard working, tough and hungry people around the world.
Meanwhile, our Congress felt it could carry on in the same hedonistic, high-spending, liberal manner.
The countries of Europe got together, sacrificing much of their individual cultures and sovereignty to compete, on equal terms, in the form of the European Union.
The E.U. is an increasingly competitive threat to the U.S. Today, its stock and government bond markets are larger that those of America, and its currency, the euro, has more units in circulation than the U.S. dollars.
This past January, Germany alone (facing high interest rates and a greatly appreciated currency) knocked us into second place as the world's largest exporter. A month later, China pushed us into third place.
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Yesterday's New York Times ran an article asserting that the E.U. had recently displaced the U.S. as the "economic engine" of the world economy.
Worse still, the Euro has increasingly displaced the U.S. dollar as the "reserve currency" of the world's central banks.
The fact that our dollar was the world's "reserve currency" was of great strategic and economic advantage to our country. Worldwide demand for U.S. dollars allowed the U.S. to have relatively lower interest rates than our main economic competitors. This helped our economic growth, to a crucial degree.
In the "oil shock" of 1973, our Secretary of State Henry Kissinger was able to pull off a major strategic coup by persuading OPEC to take U.S. dollars as the exclusive payment for their oil. This allowed America to inflate with impunity without doing serious damage to our dollar in the foreign exchange markets.
Despite this vastly changed world, our Congress continues to "interfere" and even to threaten far greater "controls" over our free enterprise system.
Worst of all, in the face of a plunging dollar (threatening its credibility as a currency, not just as a reserve currency) and the growing evidence of inflation (despite the "cooked" CPI figures), our Congress continues to leave our Fed in a fettered and highly uncooperative position.
Last week we witnessed the galling experience of delegations of our government facing two of our biggest strategic competitors (China and Iran). The saddest thing of all was to see our negotiators with no "Royal" cards in their hands.
As we said last week, we believe our government must quit bleating and start competing, by freeing up good some old Yankee free enterprise competition (Sarbanes-Oxley, etc).
One place it could start and have immediate effect upon our entire economy would be to free our Fed from its second debilitating mandate to encourage economic growth.
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Free of its government imposed second mandate, our Fed would be put on a level playing field with its competing central banks.
Our dollar would be allowed to compete and so allow American business to compete, not just on price (the downward slope to long term failure) but on the essential long-term success determents of the "Product Marketing Mix", just as Germany and Switzerland have done so successfully for years.
Of course, it will be tough, particularly as interest rates will rise, and our government will have to face their financial realty of the liberal profligate policies by actually paying a market rate for their debt and their social security promises.
We believe that, in order to become truly competitive, our government must face international realty by freeing our Fed. Thus allowing us, the people, to compete.
Regardless of Congressional inaction, we note that at long last, the long bond market is beginning to signal increased interest rates as the yield curve steepens slowly to become more normal and in our view more realistic!
In light of this, we continue to urge our readers to remain averse to accepting the great risks we see as inherent in the price of long bonds.
Each of the Federal Reserve banks is a quasi-public (part private, part government) institution owned by the private commercial banks in the district that are members of the Federal Reserve system.
Federal reserve banks are not federal instrumentalities for purposes of a Federal Torts Claims Act, but are independent, privately owned and locally controlled corporations.
According to the Federal Reserve Act, a Federal Reserve bank is a special type of corporation chartered by the Federal government. Shortly after the act was passed, the United States was divided into twelve districts and a Federal Reserve bank was organized in each district. National banks (private commercial banks chartered by the Federal government) were forced to join the Federal Reserve system. State chartered banks could join if they chose, though most did not. Any newly chartered national bank must still join the system and existing or new state chartered banks can still choose to join.
One requirement of membership was for a bank to purchase stock in its district Federal Reserve bank. The amount purchased was fixed by the Act. Each member bank must purchase stock equal to 3% of its capital.
Take a bank's total assets — vault cash, loans, investments, building, and equipment. Then subtract its liabilities — checking accounts, savings accounts, bonds. The difference is the bank's capital, which, in banking lingo, is another term for net worth. Multiply by 3% and that is the dollar value of the Federal Reserve stock a bank must hold.
The par value of the Federal Reserve stock was fixed by the Act at $100 per share. As a bank's net worth changes and deviates from the 3% requirement, its Federal Reserve bank issues it new shares or buys back excess shares — always at the $100 par value. If any bank joins the system, its district Federal Reserve bank issues new shares. If any member bank fails, its district Federal Reserve bank pays off the shares.
All member banks are U.S. chartered banks — chartered by the federal government as national banks, or by one of the states. However, the stockholders of the various banks can be U.S. citizens or foreigners.
So, private investors, including foreigners, own the member banks which in turn seem to own Federal Reserve banks.
Did you ever admit your previous error, you know, "we pay the Fed $1 trillion each year"?
Yes or no?
However, the stockholders of the various banks can be U.S. citizens or foreigners.
So, private investors, including foreigners, own the member banks which in turn seem to own Federal Reserve banks.
Excellent! I knew that Bank of America stock would come in handy.
It is a fable that governments interfered with banking in order to restrict the issue of fiduciary media and to prevent credit expansion. The idea that guided governments was, on the contrary, the lust for inflation and credit expansion. Ludwig von Mises, Human Action.
See post 95.
See Toddler, I can go back and look up old posts too. You said the market set interest rates today, but look at this old post of yours:
“The Fed “controls” short term rates. If they raise those rates, long term rates could drop.”
And boy did I have to wade through a lot of crap posts of yours to find this gem.
You found it, but do you understand it?
I’ll try a reply in your style, here goes:
“I understand that you love the federal reserve”.
How’d I do?
You've shown you don't understand. But that was already obvious from the other thread.
Any luck finding out where the government announces what all the new rates will be, minute-by-minute, every day?
“Any luck finding out where the government announces what all the new rates will be, minute-by-minute, every day?”
Since you now admit that the Fed DOES manage interest rates, then you know that they published rate changes after fed meetings. No one but you (straw man argument) said it was minute by minute.
I’ll now await your trademark non-sequitur reply!
Sorry, I never said that.
Do you admit that rates are set by the market or do you still believe the following?
Interest rates should be set by the free market, as they were before the Fed.
Which is it, market or Fed?
then you know that they published rate changes after fed meetings.
All the rate changes? Or only a few?
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