18
Oct

On and On – The Fed Keeps On Failing

Whether it’s Bernanke and Geithner, today or Greenspan and Snow of years  past, the Fed will always do what they do best, interfere in the markets. But how effective are they?

Author’s Note: Seeking Alpha, a financial website, did not allow this article to be posted on their site. They claim they are not biased against gold, but their editors compared gold to “wine, stamps, rare coins and baseball cards.” I have lost all respect for Seeking Alpha and their editors and will not be posting there any longer.

The Federal Reserves mandates are “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” This is a directive to the Fed by Congress as part of the Federal Reserve Act of 1913 and further clarified by an amendment to the Federal Reserve Act in 1977.

But there was a third mandate that came out of the “Dodd-Frank Wall Street Reform and Consumer Protection Act’’ signed into law July 20, 2010 by President Obama.

Dodd-Frank instituted a third official mandate for the Fed, empowering it
to regulate systemic risk and preserve financial stability. The Fed is now
required to present its findings on risky, non-bank financial firms to the
Financial Stability Oversight Council, which instructs the Fed on how to
sanction those institutions.

FED MANDATE FACT CHECK

How Has the Fed Done With the Mandate of Sustainable Unemployment?

Fed Governor Frederic S. Miskin gave a speech in April of 2007 called Monetary Policy and the Dual Mandate.

The best way to achieve the mandate is for the Federal Reserve to have a
strong commitment to a nominal anchor to promote price stability, but with a
focus on keeping employment as close as possible to its maximum sustainable
level.

It is clear to anyone that the Fed has failed the mandate of maximum sustainable employment. The government statistic has the unemployment rate today at 9.1% while if the unemployed who are no longer actively looking for work were actually counted in that statistic, we are well into the mid teens for the real number of unemployed.

Does the chart below look like sustainable unemployment to you? Even according to the National Association for Business Economics (NABE), the recession ended in 2009, something I told readers not to believe. Bernanke and the Fed were claiming the recession was over even a month earlier. You can recall CNBC commentators at the time talking about “green shoots.” Well, the green shoots have come and gone and quantitative easing has come and failed and the unemployment picture has not improved but gotten worse.

(click on graph for full image)

How Has The Fed Done With the Mandate of Stable Prices?

Are you paying more for gas, electricity, food, or less than 10 years ago? How about 5 years ago? Prices have been rising and unfortunately so has poverty while the last three years we’ve seen incomes fall. Look no further than oil and gas and the extra burden these rising prices have put on the consumer.

The good news is, oil prices have come down, but why are gas prices still so high almost everywhere I go?

Yes, interest rates have fallen in the Fed’s attempt to try and stimulate the economy with bouts of quantitative easing, but is this policy working? Is the economy growing? How do seniors like the lower income they are receiving on their CD’s and Social Security payments? At least an investment in gold would have helped them maintain some purchasing power the last 10 years.

Yes, that’s right, the one investment; “gold,” that most financial advisors and media have been mocking over the years, including journalists at CNBC, would have helped buoy one’s portfolio from the Fed’s failed attempts at “stabilizing.”

How Has the Fed Done With the Mandate of Regulating Systemic Risk and
Preserving Financial Stability?

Let’s look at Title VI of the Dodd-Frank Act that was supposed to bring us financial stability;

Title VI of the Dodd-Frank Act states;

TITLE VI—IMPROVEMENTS TO REGULATION OF BANK AND SAVINGS ASSOCIATION HOLDING
COMPANIES AND DEPOSITORY INSTITUTIONS

It was assumed that the lack of regulations of these banks and other financial institutions is what led the the 2008 financial crisis that gave us TARP which over $200 million was sidetracked to the banks (not original intent of TARP when both sides of Congress passed it under the Bush administration).

So has the 848 page Dodd-Frank Act actually saved us? Are the banks playing the game the right way now? The answer is NO!

To start with, there is not one mention of the sub-investment grade derivatives in the act except doing away with the term ‘‘NOT OF INVESTMENT GRADE’’ in the FEDERAL DEPOSIT INSURANCE ACT replacing it with the words; ‘‘that does not meet standards of credit-worthiness as established by the Corporation.’’ Rather subjective wording isn’t it?

The fact of the matter is, these sub-investment grade derivatives are still listed on the Comptroller of the Currencies reports.

As I pointed out in Increase In Bank Sub-investment Grade Derivatives Reveal A Need For Gold Insurance, the more risky sub-investment derivatives are more now than at the height of the 2008 financial crisis. Where the heck is the oversight of these banks? What
exactly is the Dodd-Frank bill accomplishing? How is it that Dodd, who, among others, gave us banking deregulation in 1999 and Frank, who refused to let anyone reform Freddie and Fannie back in 1992, would be allowed to author such a reform bill to begin with? Are we Americans that gullible?

Below you will see the most recent OCC’s Quarterly Report on Bank Trading and Derivatives Activities showing how the total sub-investment grade derivatives have grown from 2009 figure of $4,651,146,000,000 when the Dodd-Frank bill was passed to $6,076,250 where they are today. How is this reform? The bad news is, the maturity dates are moving closer and closer. Who will be the counterparty to these sub-investment grade derivatives?

Overall, the Fed has failed miserably in all of three if their mandates. In fact, they have just made things worse and will continue to do so with their bouts of future quantitative easing. See; 4 Reasons There Will Be Future QE And A Higher Price For Gold and Silver.

What confidence do you have moving forward that the same group of folks who got us into this mess in the first place, and have declared the “recession is over,” will get us out of this mess? If a Fed tree falls in the forest, will anyone know it was used for printing more money? If the Fed just says the recession is over, the facts speak otherwise. Don’t believe them.

Do you really think the unemployment picture will improve in the future when we don’t produce anything at a reasonable cost any longer thanks to NAFTA, GATT, CAFTA, the WTO, and too many regulations? It’s no wonder our companies have gone off shore.

Counteract the Fed With An Investment In Gold and Silver

Many are waking up to the game the Fed is playing by investing in physical gold and silver. It is the insurance needed that of course, like fire, auto and health insurance policies, you hope is never collected upon. But what are the odds you put on the gold and silver insurance being needed? It all depends on how much you understand the economics, math and the banking system and how the Fed works which is why I write these articles.

Investments in quasi gold and silver like the various gold and silver Exchange Traded Funds (ETFs) like GLD or SLV are good “trading” vehicles. But when push comes to shove, you can’t take delivery of the metal unless your account is over $100,000. Even then, I
just don’t trust ETFs that have the names of one of the sub-investment grade dealing banks mentioned above listed as a custodian. Besides, the gold and silver held in ETFs are not insured.

The Fed Talks a Good Game…But…

I like to include lyrics to songs with my articles sometimes. Usually I just let the lyrics speak for themselves, but this time I decided to change the lyrics of a song called “On and On” by Stephen Bishop. Below you will see his version for a couple verses, and below my updated version. Enjoy (sort of)!

Down in Jamaica
They got lots of pretty
women

Steal your money
Then they break your
heart

Lonesome Sue, she’s in love with ol’ Sam
Take him
from the fire into the frying pan

On and on
She just keeps on trying
And she smiles
when she feels like crying

On and on, on and on, on and on

My version:

Down in the U.S.
They got lots of Wall Street Bankers
Steal your money
Then they foreclose your property
Lonesome Bernanke, he’s in love with ol’ Greenspan
Take us from the fire into the frying pan

On and on
The Fed just keeps on failing
And they smile while the rest of us crying
On and on, on and on, on and on…


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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534

Disclosure:

Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.

All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.

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