Sunday, November 14, 2010

Quantitative Easing Explained

I hope this video goes viral.

John Hussman -- in his November 8 essay "Bubble, Crash, Bubble, Crash, Bubble..." -- has a more serious take on the actions of the Federal Reserve. The Fed has completely outstripped its authority and its charter, usurping the role of the legislature, just as our activist courts have been doing.

Hussman writes:

[Federal Reserve Chairman Ben] Bernanke's 1999 speech included a very disturbing paragraph, particularly in light of what the Fed did by purchasing $1.5 trillion of these agency securities [Fannie Mae and Freddie Mac debt securities].

“In thinking about nonstandard open-market operations, it is useful to separate those that have some fiscal component from those that do not. By a fiscal component I mean some implicit subsidy, which would arise, for example, if the BOJ purchased nonperforming bank loans at face value (this is of course equivalent to a fiscal bailout of the banks, financed by the central bank). This sort of money-financed “gift” to the private sector would expand aggregate demand for the same reasons that any money-financed transfer does. Although such operations are perfectly sensible from the standpoint of economic theory, I doubt very much that we will see anything like this in Japan, if only because it is more straightforward for the Diet to vote subsidies or tax cuts directly. Nonstandard open-market operations with a fiscal component, even if legal, would be correctly viewed as an end run around the authority of the legislature, and so are better left in the realm of theoretical curiosities.”

Yet this is precisely what the Fed did with Fannie Mae and Freddie Mac a year ago. Bernanke understands this. He simply does not want the public or Congress to recognize it.

Given that fiscal authority is enumerated by the Constitution as the sole right of Congress, and spending is prohibited by the Constitution without explicit appropriation, it seems clear - regardless of how the Federal Reserve Act is written - that monetary operations involving anything but Treasury securities contain unconstitutional “fiscal component,” unless they involve repurchase agreements that would make the Fed whole even if the underlying securities were to fail. It is doubtful that when Congress drafted the Federal Reserve Act to allow the use of mortgage-backed securities, it ever dreamed that the Fed would purchase these securities outright when the issuer was insolvent. Until this issue is clarified in legislation, Bernanke will continue to see it as “perfectly sensible” for the Fed to make “money financed gifts” that substitute his own personal discretion for those of a democracy.

Today, in addition to the tyranny of the executive order, we are under the threat of the tyranny of judges, and now the tyranny of fiscal policy conducted by the unelected head of the Federal Reserve. Our wimpy Congress does not take responsibility for its enumerated powers, and will not forcefully object to the usurpation of those powers by the judiciary and the central bank. We need to stiffen their spines.