The Shrinking Influence of the US Federal Reserve

[sullivan]

By Gabor Steingart in Washington  (Spiegel Online)

Humiliation for Mr. Dollar: Ben Bernanke, the chairman of the United States Federal Reserve Bank, faces a general investigation by the International Monetary Fund. Just one more example of the Fed losing its power.

The United States Federal Reserve Bank, or Fed, seems as much a part of America as Coca-Cola or Pizza Hut. But at least one difference has become apparent in recent days. While the pizza chain and soft-drink maker are likely to expand their scope of influence in the age of globalization, the US central bank is finding that its power is shrinking.

This is partly down to circumstances. Inflation is going up and up, and this year's average will likely top 4 percent. But this time Mr. Dollar is also Mr. Powerless. He can raise interest rates in the fall, or he can pray, which would probably be the better choice. At least prayer would not prevent the US economy from growing, a highly likely outcome if interest rates go up.

After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy. Investments will automatically become more expensive, consumer spending will be curbed and economic growth will slow down, immediately affecting unemployment figures and wages.

The textbook conclusion is that this will stabilize the value of money, because no one will dare demand higher wages or higher prices. But the macroeconomics textbooks are no longer worth much in the age of globalization. Modern inflation is driven by the global scarcity of resources. Nowadays purchasing power exceeds purchasing opportunity. Most of all, there is not enough oil, and too few raw materials and food products. These increasingly scarce resources are becoming the focus of disputes among many people and billions of dollars are at stake.

This is why the price of a barrel of crude oil (159 liters) has increased from $25 (€16) in 2002 to $135 (€87) in 2008. And it is also why the price of corn has tripled in the same time period, while that of copper has almost quintupled.

If the inflation introduced in the United States is excluded, a small miracle is revealed, namely something approaching price stability. Adjusted for inflation, prices are in fact rising by only 2.3 percent. If this were the extent of it, the Fed chief could simply blink like an old watchdog and go back to sleep. Instead, he is barking loudly, which is his job. But he has lost his bite, because the Fed's interest rate policy can do nothing about the scarcity of goods.

Some of Bernanke's personal adversaries are also contributing significantly to his current humiliation. In the past, the chairman of the Federal Reserve was a pope among the priests of the financial elite. But unlike his predecessor Alan Greenspan, Bernanke is finding that his policies are not universally accepted, even within the Fed.

The last seven decisions reached by the Federal Open Market Committee, which sets monetary policy, were accompanied by a growing number of dissenting votes. Bernanke's critics say that with his policy of cheap money -- in other words, recurring rate reductions -- he in fact helped fuel the inflation problem he is now trying to combat.

Another problem for Mr. Dollar is that it will be several months before his actions take effect. Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.

As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests -- worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar.

Under its bylaws, the IMF is charged with the supervision of the international monetary system. Roughly two-thirds of IMF members -- but never the United States -- have already endured this painful procedure.

For seven years, US President George W. Bush refused to allow the IMF to conduct its assessment. Even now, he has only given the IMF board his consent under one important condition. The review can begin in Bush's last year in office, but it may not be completed until he has left the White House. This is bad news for the Fed chairman.

When the final report on the risks of the US financial system is released in 2010 -- and it is likely to cause a stir internationally -- only one of the people in positions of responsiblity today will still be in office: Ben Bernanke.

Translated from the German by Christopher Sultan

[Ben23]

It's great the way the economy works.  It always balances out.  In this case of the Fed, the IMF will check the Fed's power.  I hope that those in the IMF are competent and that they do their job responsibly. Nice article, thanks for sharing.

[joeblow]

But it was the American debt-cow taxpayer who fed and clothed this future bank of the NWO! This is nothing but the Alien worm jumping out the chest of the astronaut. The IMF is completely and utterly evil, see their history of forcing the 3rd World to take usury loans and then destroy their own peoples.

[sullivan]

It's great the way the economy works.  It always balances out.  In this case of the Fed, the IMF will check the Fed's power.  I hope that those in the IMF are competent and that they do their job responsibly. Nice article, thanks for sharing.

Actually, the way the economy works stinks. You seem to think the IMF and the Fed are fundamentally different beasts, when in fact they are just two heads of the hydra that is international banking.

[high_treason]

Ben32 were you being sarcastic or are you new to the whole "conspiracy" thing?

[Ben23]

The way the economy works is beautiful.  It will always balance itself out.  If history has taught us anything, it is that.  What is happening now in the United States with the dollar, oil, mortgages, and gold happened in the 1980's.  Then, things worked themselves out.  Here we are now, it is 2008 and things will again work themselves out again.

    It is interesting that you say the Fed and IMF are all part of the same beast (the hydra).  That means the beast is hierarchical.  In this case the IMF is checking the Federal reserve.  The Federal Reserve has not been doing its job properly, so the IMF had to step in and correct the Fed's mistakes. Once the Fed and the IMF begin to fail, then, another higher power will come in to play.  Every time this happens another head of the hydra will present itself and this will be exciting to watch.

[joeblow]

Though I fundamentally disagree with your appreciation of the Anglo-American Neo-Colonial World Debt System, I find your train of thought and command of the written word exciting. The conspiratorial deduction and the analysis of future disclosures was something that had not even crossed my mind. You are a great addition to this research forum!