Saturday, November 13, 2010

The End of the Fed

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
       -  Winston Churchill, 1942

Winston Churchill's famous words might well apply to the US Federal Reserve.  Or at least the Tea Party, contrarian traders, libertarians and gold bugs would have us believe this is the case.

There is a lot of chatter on blogs and in trading rooms in New York about the imminent appointment of Ron Paul to the House Committee on Domestic Monetary Policy.  For those who are not au fait with Ron Paul, a recent article in Vanity Fair provides a good summary of Paul's political history.  The mere existence of such an article in Vanity Fair however, says even more about how mainstream Paul's ideas about fiat money, libertarianism and constitutional interpretation have become.

The irony of the author of "End the Fed" becoming one of the major legislative overseers of the Fed has not been lost on the mainstream media either.  See this recent story in CNN for example.

Paul has been coy in talking about how he will use leadership of this committee to push his agenda, but it is clear that he will at a minimum make life tough for the Fed (and Bernanke in particular) and uncover a range of practices that are currently poorly understood by the markets and the general public (for example the international swap lines the Fed has in place with Central Banks of other nations).   It is widely thought that Bernanke's testimony to the same House Committee in 2009 will be raised again (at least for rhetorical purposes).  In this testimony Bernanke provided an answer to another member of Congress from Texas in which he said "the Fed will not monetize the debt" (which of course is exactly what many critics claim QE2 is now doing).  Look at 48mins on the video below at this link on c-spam.

This blogger thinks developments in this area are of paramount importance to how 2011 will play out - probably even more important than the fiscal compromises arrived at in Congress.   There are a handful of 'triggers' one could see causing things to take an unexpected turn next year - this is one of them.  At a minimum it is going to make QE3 harder than some might currently be assuming is the case.

1 comment:

  1. I agree this is something to keep a close eye on. Whatever your thoughts of Bernanke and QE1/QE2,I think the ascension of the Tea Party and current anti-Fed/anti-intervention climate is potentially quite dangerous. If the US economy takes another downturn next year we could be in a situation where policymakers' hands are completely tied. ie zero appetite for further fiscal stimulus, and a discredited Fed which is unable to take bold action either for fear of attacks on its independence.