Whatever can be said for and against Barclays and Bob Diamond, the story is in
danger of exhausting itself at the wrong link in the chain. It has sidelined
BubbleTV's around-the-clock coverage of Facebook. Mark Zuckerberg's dog walker
has been waiting in a studio sound booth for a week now.
The populace has been so successfully coached and beaten to a pulp that the
source of interest-rate price fixing is not mentioned. That source is the
Federal Reserve.
Upon its invention, the Fed had no such authority. In
1923, New York Federal Reserve President Benjamin Strong wrote a letter to
friend, which says about all that needs to be said about the Federal Reserve's
open market operations: "What I can't understand is the willingness of
thoughtful, studious men who presumably have been brought up in the spirit of
American institutions and should be imbued with their principles, proposing a
scheme to Congress which in effect delegates avowedly and consciously this vast
power for price fixing to a small group of men who, in an economic
sense, might come to be regarded as nothing short of a super-government. It is
undemocratic, absolutely contrary to the spirit of America institutions, and so
dangerous in its possible ultimate developments that I cannot see the slightest
merits for its proposal." [My underlining - FJS]
It should be noted that Strong was a Morgan man (Bankers Trust). He headed the
New York Fed upon its birth in 1914. It is also of note that "Fed
policy" was run by Strong, not by the Chairman of the Federal Reserve
System in Washington. Power moved to Washington in the 1930s.
(Today, this appearance of power in the
capital may be more form than substance. The current chairman of the board of
the New York Fed is a Morgan man, in fact, he is the Morgan man: J.P.
Morgan Chairman and CEO Jamie Dimon. The board of directors of the Federal
Reserve Bank of New York chooses its own president: currently William C.
Dudley, formerly, chief economist of Goldman Sachs. Dudley was hired by
then-New York Fed president Timothy Geithner in 2007 to run the Federal
Reserve's open market operations (buying and selling Treasury securities
through his primary dealer network), which still operate from 33 Liberty Street
in Lower Manhattan. The neo-Florentine palazzo has been home to the New York
Fed since its construction was completed in 1924. As president of the New York
Fed, Dudley's top responsibility is to find buyers of Treasury securities
to plug Treasury Secretary Timothy Geithner's $1-trillion-plus annual gap
between revenues and spending.)
Despite his Morgan interests, and his
power, Benjamin Strong saw no good in the Federal Reserve setting market
interest rates. This was soon to change. The New York Fed contorted interest
rates in 1922, 1924, and in 1927. (The 1922 operation was benign. In the words
of Lester Chandler, author of Benjamin Strong: Central Banker: The
"prime motivation was to assure themselves [the Federal Reserve district
banks] of enough earnings to cover expenses and dividend requirements.")
Strong's change of heart might be chalked
up to "absolute power corrupts absolutely." Strong was human. Senator
Elihu Root of New York attempted to kill the 1913 Federal Reserve Act. He
understood its inevitable folly: "[W]ith the exhaustless reservoir of the
government of the United States furnishing easy money, the sales increase, the
businesses enlarge, more new enterprises are started, the spirit of optimism
pervades the community. Bankers are not free of it. They are human...when
credit exceeds the legitimate demands of the currency and the currency becomes
suspected and gold leaves the country...it is the United States that is
discredited by the inflation of its demand obligations which it cannot
pay."
The Morgan man at Banker's Trust helped
Senator Root prepare that speech.
Strong's decision to drive down interest
rates in 1927 had the greatest consequence. Adolph Miller, a member of the
Federal Reserve Board at the time, testified before the Senate in 1931. He
described the explosive nature of the Fed's open market operations: "In
the year 1927, you will note the pronounced increases in these [Federal Reserve
holdings of Government securities] in the second half of the year. Coupled with
the purchases of acceptances, it was the greatest and boldest operation ever
undertaken by the Federal Reserve System, and, in my judgment, resulted in one
of the most costly errors committed by it or any other banking system in the
last 75 years.... [T]he Federal Reserve [put] money into the markets, not
because member banks asked for it by offering paper for rediscount, but in
pursuance of a policy of our own which in effect said, 'We shall not wait to be
asked to provide increased money through rediscounts; we will operate upon our
own responsibility....'"
Miller, unlike the fashionable economists
of the 1920s, including Irving Fisher and John Maynard Keynes, did not fall for
the New Era: "That was a time of business recession. Business could not
use and was not asking for increased money at that time. But the banks do not
want to and in fact do not carry uninvited moneys or idle reserves. Here then,
in 1927, came an accession to their reserves for which they had to find a
use."
Barclays and Bob Diamond, not free of the
spirit of optimism, acted as described in the speech written by Senator Elihu
Root and soon-to-be head of the New York Fed, Benjamin Strong.
"One of the most costly errors
committed by it or any other banking system in the last 75 years" led to
the Great Depression, during which, even third-rate pupils of the period
learned that over production of money through open market operations can in
fact lead banks to "carry uninvited moneys or idle reserves."
It would be better if Mark Zuckerberg's
dog walker were Federal Reserve chairman today.
Since Libor is the purported subject here,
the nagging question shall be raised: Why is an interest rate set in London
fundamental to the structure of mortgage rates on the North American continent?
Recidivist homage to the United States' former sovereign? This seems to be one
more practice that has gone on for so long that its dissonance is forgotten.
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