The Fed and The Level Playing Field

I read my Sunday New York Times and now I am more upset than before I read the articles in the Sunday Business Section. I am so upset, I do not even know where to begin. I am unhappy with the way our country carries on monetary policy, though I am always hoping for the best. But, like some one unhappy with his church, but always wanting the church to live up to its potential to do the right thing, I do not want to give up on the Fed. The Fed is our central bank, and the only one we have.

Jesus would not save under this monetary policy. If you invest, chances are you are going to make out OK. Those that have the extra cash to invest can buy stocks or equity mutual funds. If you do not like the stock market, there are bonds and bond mutual funds to buy. If you are worried about inflation eating up your principal, there are TIPS. What are TIPS? They are U.S. Treasuries that adjust for inflation, known as Treasury inflation-adjusted securities (TIPS). If the Consumer Price Index goes up the TIPS adjust to protect the investor from the loss of purchasing power from the effects of inflation. What about the family that can not afford to buy TIPS? What do they do? Well, they can put their cash in an insured savings account at a bank and earn a lower taxable interest rate and the principal is not protected by a Consumer Price Index adjustment. Why would anyone save money under such a scenario? Poor people are stuck with a traditional savings account while the wealthy people can put their money in bonds that adjust for inflation. Now, perhaps you can understand why I ask: whose monetary policy is it anyway?

We know that there is no such thing as a level playing field. The level playing field is the ideal that supposedly we all strive for. Why is our monetary policy so segued in favor of the rich? By definition, such a policy makes the rich get richer and the poor get poorer. It is time for monetary policy in this country to be practiced with an eye to protect the working poor as well as the rich. Inflation hurts people because it reduces their purchasing power. They can not afford to buy as much food, gas, clothing and shelter to meet their needs. The rich can hedge themselves with TIPS and equity investments both public and private funds. The poor takes what is left, a traditional savings account with no Consumer Price Index protection. This is not right. The families that can least afford to take the hit take the hit in their wallets and in their budgets.

So, what is the Fed doing that has got me upset? The Fed has opened a new window for brokerage firms at the Federal Reserve Bank. This window allows brokerage firms to cash in their AAA rated asset-backed bonds for cash, also described as cash for trash. This option for the brokerage firms, in my opinion, makes things a little too easy. Furthermore, the brokerage firms can push off their worst AAA rated paper on the Fed.

What do you mean worst AAA rated paper? Is not all AAA rated paper the same? The short answer is no. The rating agencies gave many of the asset-backed bonds that brokerage firms securitized a AAA rating, but now after the sub-prime mortgage crisis, we come to find out that some of these bonds that were given a AAA rating should not have received a AAA rating.

If an art gallery advertised paintings by Jasper Johns for sale, and you paid a few million for a flag painting by Jasper Johns only to find out later that it was a flag painting by Fred Zigler, you would have been cheated. Such behavior by an art gallery would result in someone going to jail for fraud most likely. But when the rating agencies make “mistakes” and give a AAA rating to a piece of paper like a mortgage bond, there are no consequences. This is a major failing in the rating system. However, no governmental agency wants to take on this problem, not even the Securities & Exchange Commission.

So, what is the bottom line? The Fed is coming to the rescue of these brokerage firms and giving them the opportunity to trade their trash, also know as AAA rated asset-backed bonds, for U.S. Treasuries. Talk about a good deal. They are not asking for a few new cards, they are getting a whole new deck for free. What happens when they go out and repeat the same mistakes? Who pays for their mistakes? Bingo! Yes, you and I the tax payer will pay the price in the end.

So, again I ask: whose monetary policy is it anyway? The central bank, our Federal Reserve Bank, is suppose to help the banking system keep afloat and facilitating the movement of funds from lenders to borrowers and all that good stuff. But, can not this all be done on a more level playing field Mr. Bernanke? Stay tuned.