Feds, China etc

http://www.bloomberg.com/apps/news?pid=20601039&sid=aKLGZEc7qoqA#

July 10 (Bloomberg) -- Returning from China last month, U.S. Congressman Mark Kirk had a bearish take on a high-level visit by American officials.

Treasury Secretary Timothy Geithner claimed the U.S.’s biggest creditor voiced great confidence in its debt. Kirk, an Illinois Republican, came back with the opposite impression.

“China is beginning to cancel Congress’s credit card,” he told Fox News on June 10. It “doesn’t want to lend much more money to the United States and especially is worried about the Fed’s policy of printing money to buy new debt.”

A month later, there’s no doubt about whose assessment was more accurate. Chinese leaders are clearly very concerned about the dollar. How they will react is a key question hanging over markets, and it’s time to take the discussion to the next level.

Everyone knows China wants to reduce its dollar holdings. Little is known about how that process may unfold and how much work and preparation needs to go into it. Lots, in fact.

Think of China and the U.S. in history’s most expensive divorce. The two economies total $17 trillion of output, and polls in China show little support for adding to almost $800 billion of U.S. Treasuries.

This argument can be broadened to the rest of Asia. The idea that China or Japan -- with $686 billion of Treasuries -- can just start selling massive blocks of dollars is ridiculous. It would devastate markets the world over and the fallout would boomerang back on Asia. If you think markets are shaky now, just wait until word of a central-bank fire sale gets around.

Copycat Selling

Sure, Singapore (with $40 billion of Treasuries), India ($39 billion) or South Korea ($35 billion) could try to dump dollars on the stealth. Good luck in this highly connected, around-the-clock world. News that a key economy seeks a first- mover advantage over peers would inspire copycat selling. Expect investors and traders to respond with massive sell orders.
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http://www.alternet.org/politics/141373/a_dark_hole_of_democracy:_how_the_fed_prints_money_out_of_thin_air/?cID=1264218#c1264218

.....During the past year, the Fed has flooded the streets with money -- distributing trillions of dollars to banks, financial markets and commercial interests -- in an attempt to revive the credit system and get the economy growing again. As a result, the awesome authority of this cloistered institution is visible to many ordinary Americans for the first time. People and politicians are shocked and confused, and also angered, by what they see. They are beginning to ask some hard questions for which Federal Reserve governors do not have satisfactory answers.


Where did the central bank get all the money it is handing out? Basically, the Fed printed it, out of thin air. That is what central banks do. Who told the Fed governors they could do this? Nobody, really -- not Congress or the president. The Federal Reserve Board, alone among government agencies, does not submit its budgets to Congress for authorization and appropriation. It raises its own money, sets its own priorities......

..... The antiquated quality of this institution is reflected in the map of the Fed's twelve regional banks. Five of them are located in the Midwest (better known today as the industrial Rust Belt). Missouri has two Federal Reserve banks (St. Louis and Kansas City), while the entire West Coast has only one (located in San Francisco, not Los Angeles or Seattle). Virginia has one; Florida does not. Among its functions, the Federal Reserve directly regulates the largest banks, but it also looks out for their well-being -- providing regular liquidity loans for those caught short and bailing out endangered banks it deems "too big to fail." Critics look askance at these peculiar arrangements and see "conspiracy." But it's not really secret. This duck was created by an act of Congress. The Fed's favoritism toward bankers is embedded in its DNA. ......

....... Six reasons why granting the Fed even more power is a really bad idea:



1. It would reward failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction. During the past twenty-five years, it failed to protect the country against reckless banking and finance adventures. It also failed in its most basic function -- moderating the expansion of credit to keep it in balance with economic growth. The Fed instead allowed, even encouraged, the explosion of debt and inflation of financial assets that have now collapsed. The central bank was derelict in enforcing regulations and led cheers for dismantling them. Above all, the Fed did not see this disaster coming, or so it claims. It certainly did nothing to warn people.



2. Cumulatively, Fed policy was a central force in destabilizing the US economy. Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations. Abandoning its role as neutral arbitrator, the Fed tilted in favor of capital over labor. The institution was remolded to conform with the right-wing market doctrine of chairman Alan Greenspan, and it was blinded to reality by his ideology (see my Nation article "The One-Eyed Chairman," September 19, 2005).



3. The Fed cannot possibly examine "systemic risk" objectively because it helped to create the very structural flaws that led to breakdown. The Fed served as midwife to Citigroup, the failed conglomerate now on government life support. Greenspan unilaterally authorized this new financial/banking combine in the 1990s -- even before Congress had repealed the Glass-Steagall Act, which prohibited such mergers. Now the Fed keeps Citigroup alive with a $300 billion loan guarantee. The central bank, in other words, is deeply invested in protecting the banking behemoths that it promoted, if only to cover its own mistakes.



4. The Fed can't be trusted to defend the public in its private deal-making with bank executives. The numerous revelations of collusion have shocked the public, and more scandals are certain if Congress conducts a thorough investigation. When Treasury Secretary Timothy Geithner was president of the New York Fed, he supervised the demise of Bear Stearns with a sweet deal for JPMorgan Chase, which took over the failed brokerage -- $30 billion to cover any losses. Geithner was negotiating with Morgan Chase CEO and New York Fed board member Jamie Dimon. Goldman Sachs CEO Lloyd Blankfein got similar solicitude when the Fed bailed out insurance giant AIG, a Goldman counterparty: a side-door payout of $13 billion. The new president at the New York Fed, William Dudley, is another Goldman man.



5. Instead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator. A new superclass of forty or fifty financial giants will emerge as the born-again "money trust" that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington. The Fed, having restored and consolidated the battered Wall Street club, will doubtless also shield a few of the largest industrial-financial corporations, like General Electric (whose CEO also sits on the New York Fed board). Whatever officials may claim, financial-market investors will understand that these mammoth institutions are insured against failure. Everyone else gets to experience capitalism in the raw.



6. This road leads to the corporate state -- a fusion of private and public power, a privileged club that dominates everything else from the top down. This will likely foster even greater concentration of financial power, since any large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify. Most enterprises in banking and commerce will compete with the big boys at greater disadvantage, vulnerable to predatory power plays the Fed has implicitly blessed. .......