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Thursday, December 13, 2012

Former Reagan Officials all agree: The Fed has rigged all the markets

David Alan Stockman: former director of the Office of Budget and Management in the Reagan administration:

The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.

 The budget deficit isn't going to be addressed, and we have not had a two-way market of supply and demand. We now have what I call a "monetary roach motel," where the bonds come in and never come out.  I think we're at the last days of the artificial interlude and we're going to be entering the real days.

We're basically following the same path as the Greeks and the rest of Europe, and there's going to be a great day of reckoning, of reawakening. Once that starts, there could be a rapid, severe and even violent adjustment.

Dr. Paul Craig Roberts, former assistant U.S. treasury secretary in the Reagan administration

All markets, not only bonds, but also equity and bullion markets, are rigged in order to maintain the Fed’s low interest policy.   

Consider, for example, the bullion market. If gold and silver prices had been permitted to continue their 2011 rise, the corresponding decline in the value of the dollar would have affected the price of debt instruments, and the Fed would not have been able to keep bond prices high in the face of dollar decline. All indications of moves away from the dollar, whether stock market declines or rise in gold and silver prices, are offset by purchases of stock index futures or by shorts of bullion.
  George Shultz, former secretary of the Treasury in the Reagan Administration:
The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.
The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?
The Fed's policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.

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