Begin forwarded message:
From: "Sardar" <[EMAIL PROTECTED]>
Date: July 4, 2008 5:29:39 PM PDT
To: "Sardar" <[EMAIL PROTECTED]>
Subject: The Federal Reserve may go belly up
----- Original Message -----
Sent: Friday, July 04, 2008 3:23 PM
Subject: The Federal Reserve may go belly up
Source:
SPIEGEL ONLINE
http://www.spiegel.de/
The Shrinking Influence of the US Federal Reserve
http://www.spiegel.de/international/world/0,1518,druck-562291,00.html
06/26/2008
By Gabor Steingart in Washington
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.
No Fed chief in US history has been forced to submit to the kind of
humiliation that Ben Bernanke is facing.
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.
US Federal Reserve chairman Ben Bernanke. The entire US financial
system is to come under the scrutiny of the IMF
Embarrassing Investigation
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 responsibility today will
still be in office.
Translated from the German by Christopher Sultan
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