Originally posted by me elsewhere on 11/19/2010
As you know, Ben Bernanke has arranged for the U.S. Federal Reserve to buy $600 billion dollars worth of U.S. debt. However I only recently learned that the Federal Reserve doesn’t buy these Treasury Bonds directly from the Treasury. As I understand it that behavior would alarm other creditors and they might lose confidence in the dollar. Instead all the bonds are sold at auction to Primary Dealers, such as Goldman Sachs. Then these Primary Dealers make a profit on the bonds by selling them at a higher price to someone else, such as the Fed. That’s right… there is a middle man who makes a profit whenever the U.S. Government sells its own debt to itself.
Fed Chairman Ben Bernanke has come under a lot of heat because of his decision to do another round of quantitative easing, so he’s been trying to defend his actions. Responding to an op-ed piece that Bernanke published in the Washington Post, Goldman-Sachs declared that the op-ed piece was:
“forceful justification” of the quantitative easing.
Now that I understand that Goldman-Sachs actually makes a profit when the U.S. engages in quantitative easing, I’m not finding their endorsement of Bernanke’s actions to be particularly comforting. Just to complete the circle, it is worth noting that William Dudley, the guy in the Fed who is responsible for buying U.S. debt from Primary Dealers, was himself a big shot at Goldman Sachs from 1986 to 2007.
If this wasn’t enough to make you a tad uncomfortable about what the Fed is doing, consider what this Fox News article reports Bernanke said in a recent speech on QE2:
… [Bernanke] warns the Fed’s program can’t succeed on its own.
Apparently he believes that QE2 won’t work unless Congress agrees to do more stimulus spending. So it’s kind of like Bernanke is saying to Congress:
You must vastly add to the debt that America’s children will inherit, or the huge debt that I’m putting on their shoulders will be for nothing.
If Bernanke knows that unilateral action on his part will be ineffective, why would he proceed unilaterally? The Fed and Congress can’t negotiate a course of action together because that would make the Fed appear too political when it’s not supposed to be political at all. But Congress is a political critter, and given how porktacular and unpopular the last round of stimulus was, there’s not a chance Congress will approve a second round of stimulus no matter what sage advice Bernanke offers.
If it’s true that the Fed can’t budge unemployment rates unilaterally and can’t work with Congress bilaterally, perhaps Congressman Mike Pence is right in introducing legislation to scale back the Fed’s mandate to just addressing inflation.