Sunday, May 8, 2011

Barney Frank's Turn at Bat

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

Congressman Barney Frank from Massachusetts is not worth a blog. That goes for his recent proposal, too. It is worth a moment to understand the inconsequentiality of Frank's mischief and, more importantly, the amount of time that can be saved by ignoring Fed pronouncements. To come to the point: there is not one word flushed from the Federal Reserve machinery that bears on monetary policy other than the Fed chairman's propaganda.

Frank advertised his disordered mind on May 3, 2011, by proposing that Federal Reserve bank presidents not be allowed a vote on the Federal Open Market Committee (FOMC). Why he hoisted this bludgeon, and why now, are matters for speculation. Here goes: The obnoxious butterball is up to his eyeballs in misdeeds including Fannie, Freddie, and favors - and threats - offered in return for contributions that are a central feature of the Dodd-Frank bill. He therefore cannot refuse a request from more powerful parties.

Federal Reserve Chairman Ben Bernanke wants the FOMC to report unanimous decisions, unanimous decisions that are identical to past decisions: zero-interest rates and full authorization for his open spigot. Regional Federal Reserve presidents have been giving speeches suggesting that Chairman Bernanke is impoverishing the 99% of Americans suffocating in the ninth circle. The Powers have decided bank presidents need to be shut up. Barney got the call: "It's your turn, sport. Whip up some legislation that will break their kneecaps with a baseball bat."

There is no reality to this. Bernanke faces no opposition. We will come to that. Frank's proposed legislation stands little chance of passing. Over the years, neutering the Fed presidents or abolishing the FOMC has been proposed several times, at a point when vested interests want the Federal Reserve to cut interest rates. Congressmen Wright Patman, Henry Reuss, and Henry Gonzales threatened the Fed with dismemberment. In those cases, the politicians walloped the Fed chairman. Subsequently, the FOMC loosened monetary policy. Inflation followed. In the present case, the Fed chairman is already goose-stepping to the cartel's drumbeat. It is FOMC members' voices that are being silenced.

A succinct example is that of Senator Robert Byrd, addressing Federal Reserve Chairman Paul Volcker on December 18, 1982: "To whom are you accountable?" Volcker: "Well, the Congress created us and the Congress can uncreate us." Byrd then drafted a "reform legislation that would give Congress genuine leverage on monetary policy." (Greider, Secrets of the Temple)

MarketWatch reports Barney Frank defended his motion by claiming Fed presidents are "totally inconsistent with any kind of theory of democracy." Stalin had a better appreciation for democracy.

From the Federal Reserve website: "The Federal Open Market Committee (FOMC) consists of twelve members - the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis." The seven governors (by statute: there are currently five) work at the Eccles building on Constitution Avenue in Washington in offices "with a wall of bookshelves and a fireplace handsomely faced in black marble, usually a sofa and chairs around it." (Greider) They are nominated by the President and approved by the Senate. The politicians do not vote for the regional presidents. This offers hope of independence given their distance from the City of Central Planning.

The presidents represent and live in the 12 Federal Reserve districts around the country (Richmond, Kansas City, Minneapolis, etc.). Thomas Hoenig, president of the Kansas City branch recently warned a bubble in farm prices may be building. (See: Kansas City Fed Chief Sees Farmland Bubble.) As reported at on April 7, 2011, he is urging the Fed (FOMC) to raise interest rates to save farmers from the same fate as former homeowners in Las Vegas.

Frank had no idea what he was talking about: "It undermines legitimacy when you have literally people [sic] who are in the financial industry picking people to vote on setting interest rates." Thomas Hoenig started working for the Federal Reserve Bank of Kansas City in 1973, upon graduating from college.

If Frank's proposal were passed, not much would change. The Federal Reserve presidents are showpieces on the FOMC, other than the New York president, who, by tradition, behaves like an overweight, bench-warming, third-string, junior-high-school catcher who yells at the first-stringers for not hustling.

Dallas Federal Reserve President Richard Fisher was quoted in Sidelights to 1994. Refreshing as it is to read his denouncement of Ben Bernanke's kleptomania, he does not influence FOMC votes.

During the Greenspan years, the Greenspan Fed was just that. The only renegade governor was Larry Lindsay. Yet, even Lindsay, who, at every meeting, tenaciously instructed other FOMC members of how the Fed was disemboweling the middle class, and who really did understand economics, had no influence when it came to a vote.

Maybe the Bernanke FOMC is different. (We cannot read FOMC transcripts until five years after the event. Bernanke has been chairman since January, 2006.) This is difficult to imagine, since the governors' public statements mimic Bernanke's calcified dogma - not a word out of place. When dissident presidents such as Thomas Hoenig (who is not even a voting member of the FOMC) or Charles Plosser (Philadelphia, who does vote) give speeches that offer hope of sanity, it is safe to assume their positions are of no consequence to FOMC policy.

Now we come to the real reason Bernanke is the FOMC. Reading dozens of FOMC transcripts is tedious, but revealing. In the end, it saves time since one then understands the meaninglessness of the FOMC. (The call comes in: "You have to watch Laurence Meyer [former Fed governor] debating David Einhorn on CNBC. You won't believe how stupid Meyer is." Oh no, I know how stupid Meyer is. But, the temptation to watch the clip is great: Wow, I had forgotten he was that stupid.)

For those who have not read the transcripts (come on, admit it), it is difficult to imagine how little is discussed that could influence current policy. The meetings follow unvarying rituals, as carefully scripted as the Tridentine Mass.

It is also difficult to convey the most striking observation that comes from reading thousands of pages from transcripts. That is, the FOMC's lassitude. The rousing warnings by Fed presidents reverberate within the Cone of Silence. (In addition to those mentioned above; a round of applause, please, for Jerry Jordan, Cleveland President; Cathy Minehan, Boston; and Michael Moscow, Chicago; who badgered Greenspan in the 1990s about the stock market bubble.)

Readers may remember the television show Get Smart, in which the glass Cone-of-Silence was lowered from the ceiling to prevent Kaos agents (the enemy) hearing conversations of Control's (our side) secret agents. The Cone-of-Silence never worked. Control agents couldn't hear each other because their voices echoed so violently inside the Cone. Likewise, none of the members of the FOMC syndicate acknowledged the dissidents existence. If the troublemakers had not shown up, not one word from these Stepford Wives would have changed.

Each FOMC member has a chance to talk at meetings. Greenspan (also a voting member) would then talk, just before a vote was taken. Usually a vote (on interest rates or protocol) was taken at each FOMC meeting. Greenspan led the discussants to his preferred choice, which might be "Alternative A" or "Alternative B."

This understates the irrelevance of the Federal Open Market Committee. Before each meeting, Greenspan met privately with voting member of the FOMC to ensure a unanimous vote. (Laurence Meyer, A Term at the Fed).

After Greenspan finished talking, and before the vote, the Vice Chairman of the FOMC - always the president of the New York Federal Reserve branch - would speak. William J. McDonough was the New York president and vice chairman of the FOMC in the late 1990s. Following are the first words out McDonough's mouth at a succession of meetings, a period when the Greenspan FOMC set a super-loose policy that led to the finale of the Nasdaq bubble. Yet, their desiccated minds and faces, the color and texture of a gray, cardboard box after a basement flood, sat and gathered mildew.

Vice-Chairman McDonough:

August 18, 1998: "Thank you Mr. Chairman. I think your analysis was exactly right in regard to where we should be with the federal funds rate; that is Alternative "B."

September 29, 1998: "Mr. Chairman, I want to agree with your proposal to cut the fed funds rate by 25 basis points."

November 17, 1998: "Thank you, Mr. Chairman. I agree fully and rather enthusiastically with your recommendation."

December 22, 1998: "Mr. Chairman, I interpret that, as I'm sure you intended, as a recommendation for "B," symmetric, which I heartily endorse...."

February 2-3, 1999: "Mr. Chairman, I fully support your recommendation."

March 30, 1999: "Mr. Chairman, I not only support but applaud your recommendation."

May 18, 1999: "Mr. Chairman, I fully support your recommendation."

June 29, 1999: On page 64 of the transcript: "Mr. Chairman, I fully support your conclusions." On page 91 of the transcript: "Mr. Chairman, I fully support your conclusions."

August 30, 1999: "Mr. Chairman, I fully support your recommendation."

November 16, 1999: "Mr. Chairman, I fully agree with both the reasoning behind your recommendations and with the recommendation itself."

The vote followed. The Greenspan Alternative almost always received a unanimous vote. The same is true of Bernanke. Policy set during the reign of Charles the Simple was more animated.