Central Planning at the Federal Reserve

Ben Bernanke takes the U.S. further down the road to serfdom.

While it is understandable that inflation hawks keep a close watch on the Federal Reserve’s money-creation activities, an equally worrisome Fed activity is taking place right under their noses. Whether or not the Fed is expanding the money supply, it has undoubtedly moved into a new activity under cover of addressing the financial crisis and recession: central planner of the allocation of credit.

As San Jose State University economics professor Jeffrey Rogers Hummel points out in The Independent Review (Spring 2011), Fed chairman Ben Bernanke “has so expanded the Fed’s discretionary actions beyond merely controlling the money stock that it has become a gigantic, financial central planner…. [The] Fed that emerged from the crisis is no longer the same as the Fed before the crisis.” It did not even have to expand the money supply to assume its new role.

It is standard operating procedure (though of course illegitimate by free-market standards) for a Fed chairman to inflate the money supply supposedly to provide increased liquidity during an economic crisis. It is then left to the market (distorted, to be sure) to “allocate” the money. What’s new is that under the Bernanke Fed’s self-expanded powers, the central bank is allocating credit to chosen financial institutions, including insolvent rather than merely illiquid ones. That is apparently unprecedented in the United States.

Just as central planning of the economy in general, besides violating individual freedom, can’t serve the general interest because the planner necessarily lacks the required information, so it is with the central planning of the allocation of credit. Bernanke cannot know better than the collective intelligence of the market which firms should get capital and which shouldn’t. Creating credit out of thin air in order to allocate it according to a central plan is an assault on the market. But it is also an assault if Bernanke “merely” moves existing capital from one part of the market to another. The new powers are independent of the Fed’s power to inflate.

According to Hummel, until September 2008 the Fed’s “borrowings would simply pull money out of the economy on one end of its balance sheet, and then it would put that money back in on the other end through loans to favored firms and purchases of favored instruments.” The Fed also acquired capital by cashing in matured bonds or selling securities, then allocating the proceeds. In another method Hummel describes, “the Treasury was borrowing money from the general public and lending it to the Fed, which then relent it to foreign central banks.” Also, since 2008 the Fed has paid banks interest on reserves left in their Fed accounts:

Bernanke in effect created money and then borrowed it back from the banks by paying them interest. The banks in turn partly financed their implicit loans to the Fed by reducing loans to the public by almost $500 billion as of the last quarter of 2009. Thus, the result is partly a net wash, with a shuffling of assets from the private sector to the Fed.

The first direct allocation of credit came when the New York Federal Reserve Bank set up a company called Maiden Lane, which directly bailed out Bear Stearns in March 2008. Other similar facilities were established to perform other bailouts. “The Fed, however, provided the bulk (if not all) of the money to these subsidiaries, whose other sources of funds never amounted to more than a few billion dollars,” Hummel writes.

He quotes economic historian Michael Bordo, who warned that such powers “exposed the Fed to the temptation to politicize its selection of recipients of its credit.”

The Road to Corporate Statism

Who got the money? Hummel says it primarily went to depository institutions, the U.S. Treasury, federal agencies such as the mortgage guarantors Fannie Mae and Freddie Mac, and finally, holders of mortgage-backed securities, one of the culprit financial instruments in the housing and financial bust. It was the first time the Fed had bought those kinds of securities.

As late as last year, the Fed was devising new ways to borrow and allocate credit by setting up various “term deposit” facilities. “[Term] deposits make the Fed’s borrowing more explicit,” Hummel writes. “With this barrage of sometimes seemingly incremental steps when viewed individually,” he continues,

an amped-up Fed was bailing out such firms as Bear Stearns and AIG, assisting the Treasury with its TARP subventions, lending extensively to a new array of institutions including investment banks and money-market funds, and purchasing large amounts of such new financial instruments as commercial paper and mortgage-backed securities. More than half of that activity was financed not by issuing true base money, but by directly or indirectly borrowing from the private sector in one way or another. In this way, phase two of Bernanke’s policies transformed the Federal Reserve from a central bank confined primarily to managing the money supply into an institution that is also a giant, government intermediary that borrows large sums in order to allocate credit. In that respect, it has become similar to Fannie or Freddie, with the important distinction that the Fed has greater discretion in subsidizing a wider variety of assets.

Bernanke has been dubbed “Helicopter Ben” because of his so-called “quantitative easing,” which people assume distributes fiat money evenly across the economy, as if from a helicopter. But for Hummel, “A better moniker would therefore be ‘Bailout Ben.’” He adds, “Helicopter Ben talks a good line about being ready to unleash quantitative easing, but this talk only imparts an aura of justification for the Fed’s incredibly expanded role in allocating the country’s scarce supply of savings.”

One can hardly overstate the extent to which Bernanke’s new powers move the U.S. economy further down the corporate-statist road. In his 1936 General Theory, John Maynard Keynes called for “a somewhat comprehensive socialisation of investment” as the “only means” of driving the interest rate on capital to zero and to secure full employment. He welcomed the “euthanasia of the rentier, of the functionless investor.” I doubt that’s Bernanke’s precise intention, but in a society that calls itself free, no one should have such power at his disposal. A free economy leaves savings and investment to the uncoerced choices of individual persons, just as it leaves money and banking to the market.

Bernanke, an admirer of Franklin Roosevelt and his experimental response to the Great Depression, promises to give up his extraordinary powers once the economy is well. But those words are small comfort to anyone familiar with the dynamics of government. As Hummel writes, “Bernanke may be sincere about his intention, but when in the history of the Fed—or of most other government agencies, for that matter—have newly acquired authority and reach been easily, entirely, and voluntarily relinquished?”

Sheldon Richman is senior fellow at The Future of Freedom Foundation, author of Tethered Citizens: Time to Repeal the Welfare State, and editor of The Freeman magazine. This article originally appeared at The Future of Freedom Foundation.

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  • Suki||

    Central planning. Just like the Nazis and just like the Commies. How were they different and which one is Obama?

  • lily||

    Bi or want to find people having the same sexual orientation?---datebi*cO'm--- is a safe and free site for you.

  • Il Douchey||

    Neither. There are other ideologies featuring central planning.

  • HermanLame||

    Maybe Obama is bi. He goes both ways. Communazi!

  • Ben Bernanke||

    Ben Bernanke simply cannot know better than the collective intelligence of the market which firms should get capital and which shouldn’t.

    Fuck you! Donuts are awesome!

  • Dollars to Doughnuts||

  • Prolific Idiot||

    Ben Bernanke is such a historian on the great depression, he is making our little recession great indeed.

  • ||

    So, he will "give up his powers as soon as the economy is well!!". That's like the doctor saying, "I'll quit treating the patient as soon as he is well" but then the patient dies.

  • Paul||

    Didn't Augustus promise the exact same thing?

  • ||

    What's scary about that example is that he officially "restored the Republic." Yep, no one-man rule here. Nothing to see here folks, go home. Or we'll execute you.

  • New John||

    Stating this just makes it easier for him to continue his criminal ways. I'm not sure such a positive end is in sight if the FED continues to exist.

  • Rich||

  • ||

    Please provice an example in which the Fed bought securities that lost value?

    When you do I will take this criticsim seriously. QE1/2 both purchased US guaranteed instruments.

    The crazies won't infiltrate the Fed, however. 14-yr Fed BoG terms will prevent that (unless four terms of crazies are elected).

  • ||

    "Please provid[sic]e an example in which the Fed bought securities that lost value?"

    Try GM for one. Citibank for another. You need more?

  • ||

    Garbage. The Fed has never owned Citi or GM securities.

    The Treasury did however. They are two totally different entities.

  • ||

    Be more specific because the Treasury is attached at the hip to the Federal Reserve. It takes those losses you are looking for..

  • ||

    They are not attached at all.

    Treasury is a wholly run function of the administration. The Fed is independently operated.

    If the Fed were ever overtaken by dollar hawks or goldbugs they could tell the executive and legislative branches to go to hell.

    Right now the Fed is controlled by dollar doves (Keynesians) appointed by both Bush and Obama.

  • Old Mexican||

    Re: Shrike,

    Treasury is a wholly run function of the administration. The Fed is independently operated.


    The Eiffel tower is for sale for scrap. Name your price, shrike.

    If the Fed were ever overtaken by dollar hawks or goldbugs they could tell the executive and legislative branches to go to hell.


    And if my grandmother had wheels, she would be a bicycle.

  • Daniel||

    Right, that's why the market forecasts say inflation's a-comin', because they're a bunch of "doves ...

  • ||

    The Market does not say inflation is a comin' in - you stupid fuck.

    Treasuries say inflation is dead.

  • Daniel||

    Either I'm a "stupid fuck" ... or your sarcasm-o-meter is out of order.

    But moving on ... we have the following facts.

    a) the market says there IS NO INFLATION coming

    b) you claim that the Fed has not been overtaken by "hawks", but by "doves"

    Now I don't know about you, but I, for one, can't really reconcile those two statements.

    The way I see it

    a) you are "the stupid fuck"

    or

    b) the markets are stupid

    Wanna argue with the markets ?

  • ||

    It's a pretty safe bet that shrike is the "stupid fuck"*

    *Just based off the fact that he calls himself a classical liberal and then votes and supports Obama.

  • ||

    Ever hear of deflation?

    Look it up.

  • CatoTheElder||

    Gold and the ten-year TIPS, which were recently auctioned with a negative yield, are saying just the opposite.

  • Derivative||

    Wrong the market says inflation AND deflation are coming. Just depends on your reference asset or basket of goods.

    Housing- deflation
    Food and energy - inflation

  • Colonel_Angus||

    Stop pretending that you know anything about federal monetary policy.

  • NotSure||

    Please explain why anyone who says that the Christian Taliban is after him should be taken seriously ?

  • ||

    The Wahhabi Christians want us Jeffersonian secularists out of government. Leave it for another time though. I won't shit on this topic for you fundies.

  • NotSure||

    I prove my point, you are a rambling lunatic. You are not some yacht owning financial wiz, you are a pathetic little loser with crazed paranoid delusions.

  • Mr. FIFY||

    To shrike, not liberal = "fundies".

  • ||

    jeffersonian secularists?
    That gives me a good belly laugh

  • ||

    Ever hear of the Jefferson Bible? For you idiots TJ cut all the miracles and dead raising out of it.

  • Mr. FIFY||

    Yeah, we know already, shrike... you hate religion.

    But get over yourself anyway. You're not the only atheist on the fucking planet.

  • ||

    He also was suspicious of government.

    Thanks for playing!

  • Raston Bot||

    All the shitty MBSs and worthless CDOs that the Fed bought from BOA et al.

    Your question would be real easy to answer if the Fed's useful idiots didn't prevent a full audit.

  • ||

    The Fed has never bought MBS/CDO from Bank of America.

    You are ignorant.

    The MBS the Fed did buy were GSE MBS which are 100% guaranteed by the US Treasury.

    (Maiden Lane the sole exception - about $30 billion from Bear Stearns)

  • Old Mexican||

    Re: Shrike,

    The MBS the Fed did buy were GSE MBS which are 100% guaranteed by the US Treasury.


    The same Treasury whose bonds the FedRes bought... yeah, quite the guarantee.

  • Mr. Jefferson||

    They're ignorant!

  • Raston Bot||

    http://www.nytimes.com/2011/04.....ss&emc=rss

    The Fed had 111 banks fail on it. At least 8 still owed it money when they failed including WaMu. So the Fed sells whatever collateral it held to whom? For what?

    This claim about the Fed never taking a loss means nothing under an opaque system.

  • ||

    That is a good link. I like it.

    The central bank took little risk in making the loans, protecting itself by demanding large amounts of collateral.

    From your link.

  • Raston Bot||

    The Fed never disclosed collateral quality so I don't care how much they discounted it.

    Audit.

  • Derivative||

    Dude the Fed was accepting DEFAULTED bonds as collateral. That is a loss before you even get going. You would need to record a charge to reflect lower asset value.

  • Suki||

    After you show one recession or depression that the Fed avoided. Bonus for one flood that TVA prevented.

  • Daniel||

    Dude, you're confusing the chain of causation.

    ALL (and I do mean ALL) recession have been caused by the Fed - when they tightened money TOO MUCH.

  • Britt||

    Look, people who actually like the Fed have a religious faith in the ability of Top Men to manage things.

    That's all there is to it. It's not a logical position, because they did not arrive to it by logic or reason. It is simply faith that the King loves the peasants, and will do the right thing by them.

  • ||

    Congress created and owns the Fed. We arrived at the Fed via legislation and nothing else. Take it up with them.

  • CatoTheElder||

    "Congress created ... the Fed." The track record of Congressional creations is abysmal. The Fed is no exception.

    "Congress ... owns the Fed." Not really. Member banks own the twelve regional Federal Reserve Banks. The Federal Reserve System isn't really owned at all, though the Treasury receives any surplus above the 6% annual dividend paid to the member banks that own the regional FRBs.

  • NotSure||

    I don't know what will happen in the short term, but I am 100% certain that in 10 years time the prices of virtually everything will be more, and 10 years after that even more and so on. There will be ever more economic turmoil and sudden market crashes as the markets and attempts by central banks to stabilise things gets ever harder to do. I also predict with 100% it will be blamed on the free market.

  • ||

    It's interesting that you say that because, originally, the Feds only job was to keep inflation at bay, and that's it. Now they do so much it's scary.

  • NotSure||

    I doubt you could find a single government agency that did not go beyond its original mandate anywhere in the world.

  • ||

    The market is saying that prices will be 1.87% higher in ten years.

    Hardly "hyperinflation" territory.

  • NotSure||

    Hey loser, did I mention hyperinflation ? Now get back to hiding in moms basement the Taliban could find you.

  • Old Mexican||

    Re: shrike,

    The market is saying that prices will be 1.87% higher in ten years.


    Linkey link, please?

    And it the link does not say "the market" but mentions that some economist from some Federal Reserve bank said it, then be prepared to be called a goddamned liar, shriek.

  • ||

    Link? The 10 yr auction price on US Treasuries.

    US Treasuries are the most fluid securities market on Earth.

  • Old Mexican||

    Re: Shrike,

    Link? The 10 yr auction price on US Treasuries.


    Are you insane, shrike?

  • ||

    No, you must be calling the market insane. Which may well be true.

    Soros would pounce on this (if he bought into the insanity).

  • Old Mexican||

    Re: shrike,

    No, you must be calling the market insane. Which may well be true.


    NO, I'm asking if you're seriously using the 10yr yield as a measure of what the market says is inflation?

  • ||

    Because the free market will never overpay for US Treasuries relative to inflation.

  • Observer||

    It would if it knew that the destruction of value was coming, and was simply trying to mitigate damage.

  • Colonel_Angus||

    Government paper is the most retarded "security" on earth.

  • ||

    'prices' of what? Who is 'the market'?
    I dont know when the last time you bought gas or groceries but they are up a hell of a lot more than that in the last two years. I am betting they will be up more than that in another year.

  • ||

    But much lower than in 2008.

    Don't cherry pick with me, dumbfuck, I know it when you do.

  • Bill||

    Those don't count in inflation cuz who needs to eat or use energy? Plus it may make it harder for politicians to get re-elected.

  • ||

    The market is saying the Fed will probably push down interest rates on government securities even further.

    That's really all it's saying.

  • Daniel||

    You do know there actually exists a market forecast on future inflation, right ? It's called the "TIPS spread".

    Oh wait, you didn't ? Then maybe you shouldn't comment on things you are not qualified to do.

  • NotSure||

    ? Hey idiot, if you want to prove me wrong you would have to state the opposite, the only thing you are doing is proving me right. Perhaps I am not qualified, but all those years working in financial institutions and being paid for it, it must mean all those people clearly were not qualified either.

  • BigT||

    The best measure of inflation expectations is the price of gold. It's flying, and has been for a decade.

  • Old Mexican||

    Creating credit out of thin air in order to allocate it according to a central plan is an assault on the market.


    Besides the distorsions created by the manipulation of the interest rate (the dislocation between consumers and investors) you have Bernanke playing Monopoly with the ecomomy, probably because that is how he gets off.

  • ||

    The market sets interest rates - not the Fed.

    The Fed only establishes the Fed Funds rate which you or I cannot obtain.

  • Old Mexican||

    Re: shrike,

    The market sets interest rates - not the Fed.


    I didn't say "The Fed sets the rate," I said that the Fed manipulates it. Learn to read, shrike.

  • ||

    OK, you did not say that. Yes, the Fed does try to influence interest rates. The latest example is Operation Twist.

    We agree for once.

  • annonymous commenter some guy||

    Monopoly teaches such horrible lessons to kids. It should be banned!

    -One does not earn money. One is given money simply for not going to jail (ie. making it around the board).

    -There is a fixed amount of money in the world. For you to win, someone else must lose.

    -You are better off in jail, where room and board are free.

    -You have often no choice of who you do business with.

    -You only get to be Chairman of the Board by bribing your rivals.

    -Without property you are screwed.

  • ||

    "Creating credit out of thin air in order to allocate it according to a central plan is an assault on sanity, logic and sound reasoning."

    That was easy to fix.

  • Old Mexican||

    A free economy leaves savings and investment to the uncoerced choices of individual persons, just as it leaves money and banking to the market.


    This is very true, and you clearly see why leftists feel behooved to defend the Fed despite the supposed hatred for anything capitalistic. The fact is that the Federal Reserve has nothing to do with markets and capitalism and totally to do with economic central planning. Marx prescribed a central bank as the mechanism to bring down capitalism. This in fact is exactly what the Fed is doing as we speak.

    For a good presentation on money and the Federal Reserve, you can download Vic Lockman's great booklet The Official Counterfeiter.

  • ||

    Shrike

    You would concede that the Fed can lend money at 0% correct? And those that borrow it, could be conceivably pressured into buying certain paper with the borrowed funds, or some portion thereof? And that would mean that Citi could have bought large amounts of GM paper, using funds borrowed from the Fed, as a conduit?

    If not, you're a pretty trusting, perhaps willfully naive individual.

  • Daniel||

    Thing is, the Fed actually did screw up big time in 2008 - and never actually corrected their mistake - and that's why things are still in the crapper.

    But your irrational fetish for "tight money" (and/or utter ignorance on economic subjects) is keeping you from realizing that they erred by TIGHTENING TOO MUCH !

  • ||

    And on top of that the Federal Reserve also left interest rates too low during boom times (think housing bubble)...

  • Daniel||

    A bust does not follow a boom unless the monetary authorities decide so.

    And the housing bubble had already burst by 2006 ...

  • ||

    Yes, we could have a forever boom if the Fed would just loosen more and more every year. Just ask anyone from Zimbabwe, where their GDP was growing at a record trillion percent per year!

  • Shorter Daniel||

    It failed because it wasn't big enough, I am an expert because I read Paul Krugman.

  • Mouth Breathing Oregonian ||

    And Jeff Sachs and that other noble prize winning dummy - stiglitz. DOPES!

  • Derivative||

    Check out the Stiglitz - Ortzag paper to Congress in 2004. They said Freddie couldnt fail and only needed 150,000 of capital. Yup. 150 grand. Not billion. Thousand.

  • first||

    Mirabell has got her very own recipe for her perfect figure. The only thing she eats is soup. It works just fine for her.

    Her diet is only thing that she is sparing about. With everything else she goes all out for maximum pleasure. She adores being in what she sees as a man’s world. And what kind of a world would that be without gorgeous women? For her it means fast cars and sports of all kinds.

    Mirabell studies Economics in Slovakia. It’s a very practical subject for this 22 year old with a mature outlook. Her dream is that one day she will have her own fashion business. She is preparing for that by gathering ideas while she travels. India is her special favourite. It’s an inspiration to her.

    Take this economist’s word for it. The upturn has begun.

  • Prolific Idiot||

    Are you looking into importing a bride?

  • first||

    Yes

  • Prolific Idiot||

    i think you've found a winner with this one. But how do you know she won't cheat on you, leave you, or cut off your balls when your sleeping?

  • first||

    You don't, the danger is part of the fun.

  • The Fat Man||

    Reminds me of an ex who gave me the clap.

  • first||

    Indeed ;)

  • HermanLame||

    You knew telling us she was an economics student would make her irresistable, didn't you?

  • Mr. FIFY||

    Notice how much shrike is posting in a thread about "central planning"?

    And he's typing one-handed the whole time. Wizard!

  • Leo Kottke, Coors, &a slim jim||

    Bring back Alan Greenspan.
    No, seriously.

  • The Fat Man||

    Leo Kottke is a god damned genius. Man ravages a guitar like a horny central park thug hangin' out in the heat of summer watchin' joggers.

  • Richard Simmon's Long Pants||

    Dude, you're sick in the head.

  • Mouth Breathing Oregonian||

    Actually that would be: "Richard Simmons' Long Pants", bra. Hope this helps!

  • Richard Simmons' Long Pants||

    god, how I hate Oregonians. Shouldn't you be watching the trail blazers or working on your indie ballad?

  • The Fat Man||

    Shouldn't you be watching the trail blazers or working on your indie ballad or knitting some socks?

  • Grammar Police||

    Actually, that would be, "Richard Simmons's Long Pants," despite how funny that sounds, unless Richard has been cloning himself and can now be considered plural.

  • Bunkerbuilder Goldbug||

    New definition of what it means to be well-connected.

  • Prolific Idiot||

    Bring back tar and feathering

  • Prolific Idiot||

    Bernanke has been good for the price of gold, oil, and necessities. He's absolutely grunge fucked the rest of the economy with his easy-peezy credit and slutty interest rates.

  • The Fat Man||

    I have something to say. This may should be fired. All his little friends should be fired, too. They are living high on the hog and the rest are eating pigs feet

  • Derivative||

    Rothbard would have puked

  • DDavis||

    Helicopter Ben Adds Smart Bombs to His Arsenal

  • Alice||

    Central planning is just a tool to help the economy grow healthy. Tool is neither bad nor good, it is the choice that which tool should be used maybe good or bad.
    Alice,Taobao Agent

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