The Federal Reserve System (Fed) must work for the government and the people of the United States of America.
As this web site goes up, the United States, and likely the entire world is in the midst of the deleveraging of a gigantic financial derivatives bubble. These derivatives are largely financial bets placed by investment banks, and other types of banks and financial institutions. Though, what we see now is largely tied to the real estate crash in the United States, the bubble goes beyond real estate, and the United States; though it is clear that real estate is a big part of it. The derivatives bubble required more paper to create more conduits, and add more leveraging. The mortgage dealers supplied the needed paper. The investment community bought pretty much any paper they produced, especially in 2006 and 2007. The unfortunate part of all this is that the Fed allowed and even encouraged the growth of the derivatives bubble. Now the Fed is bailing out institutions which are not even under its jurisdiction (such as Bear Stearns/JP Morgan). While this may be necessary at this point, and perhaps the Fed should be commended for its quick action, it is still the case that the Fed allowed and encouraged the problem to start with.
Regardless of what the Fed is doing and what its proposed new expanded role may be, it needs to be done under the direction and supervision of Congress. We have to stop allowing one man to make all the decisions (look where Greenspan's led us). Under the current Federal Reserve System, the Fed chairman has much too much power and influence. Benanke may or may not be on the right path, but Congress needs to have oversight of the process, and to a much greater degree than the current arrangement.
We need to fully nationalize the Fed. Initially at least, we should allow continuity of operation of the Fed, but then Congress, and thus the people (through their congressional representatives) can have more involvement in the directions we move. We may need to initiate bankruptcy type operations for some financial institutions. The Fed is currently sitting in the offices of some of the major investment banks. Likely they are overseeing the myriad of highly leveraged derivatives investments, waiting for the next shoe to start dropping. Congress needs to have this oversight, also. Not just the Fed. The Fed needs to be reigned in by Congress. If necassary, Congress has the authority to non-voluntarily step in and take over what basically amount to financial bets affecting the nation of the United States, and frankly much of the world.
In short, we also need to contact our allies, nationalize the Fed, hopefully followed by other nations taking similar actions as is appropriate. Next we need to unravel, perhaps in bankruptcy style proceedings the massively leveraged web of bets on the books. Many of the bets can likely be put on hold and diffused in a reasonable manner. Many of them can probably be legitimately canceled by decree. Once this process is started, and the scope and magnitude of the problem is understood, then Congress can decide what to do next. There are many options, and hopefully with a vigorous national debate considering many options the best strategy for going forward can be developed.
For the moment we must act fast, and take back control over the currency and credit system of the United States of America before we are caught by another surprise. If we take action now, solve this crisis, then implement a financial system that serves the economy (rather than vice-versa), we will give our nation and its future generations the best chance it has.
April 14th, 2008