How the Fed Is Set to Become More Powerful Than the White House

[Guest guest]

Is this SCARY or what!!! This is an investment newsletter I to, but LOOK AT THE POLITICAL RAMIFICATIONS OF WHAT IS GOING ON! Jan Monday, March 31, 2008 · We are witnessing financial history in the making -- right here, right now. · A newly proposed ‘blueprint’ represents the most sweeping change since the Great Depression. · For the Fed, it all goes back to a quiet meeting on Jekyll Island… where the whole thing first began. The Fourth Branch of Power: How the Fed Is Set to Become More Powerful Than the White Houseby Justice Litle, Editorial Director, Taipan Publishing GroupLadies and gentlemen, we are witnessing financial history in the making. This is not exaggeration. No, this is what history feels like. Right here. Right now. And, let me tell you, it is breathtaking to behold. Martin Wolf of the Financial Times feels it. He tells us to remember the Bear Stearns rescue as “the day the dream of global free-market capitalism died.” Wall Street historian Charles Geisst feels it, too: "We have to realize that central banking now takes into its orbit everything in the financial system in one way or another,” Geisst says. “Whether we like it or not, [the Fed has] recreated the financial universe."Four Branches of GovernmentLike me, you probably studied high school civics. And if your textbooks were like mine, they taught that there are three branches of American government: the executive, the judicial, and the legislative. As it turns out, those textbooks were wrong. There are actually four branches of government. One of them has simply been wreathed in shadows all this time. And now, from the smoking wreckage of the “shadow banking system,” the fourth branch is set to overtake the other three. To get a handle on the topic, let’s start with money… a subject Mayer Rothschild, founder of the immortal Rothschild empire, knew a thing or two about. “Give me control of a nation's money and I care not who makes her laws,” Rothschild said.Rothschild knew the power of the golden rule: “He who has the gold makes the rules.” Except today, in an age of digital currency, that saying might better serve as, “He who runs the printing press makes the rules.” Of course, a printing press isn’t much good if you can’t get people to accept what it prints. If what you print happens to be the world’s reserve currency, however -- and the global financial system is bloated with your scrip -- then truly awesome power can be yours. There is just that little matter of taking the reins firmly in hand. Getting around the bother and headache of elections, putting the other branches of government in their place, that sort of thing. Such endeavors take some doing, and more than a little back-room planning. It helps to have a long-term time horizon, too. In this case, nearly a hundred years long at that. Paulson’s New Financial OrderOkay, okay, you say. What’s all this “financial history in the making” stuff? Why the breathless rhetoric? Well you see, over the weekend -- while America took a breather from the markets -- Treasury Secretary Hank Paulson revealed his sweeping new “blueprint” for financial regulation. (That blueprint is set to be officially released today, March 31.)In a word, this news is big. Very big. In fact, Paulson’s blueprint proposes the biggest Wall Street shake-up in 80 years. It calls for the broadest, most sweeping changes to financial legislation since the Great Depression…. since FDR and the New Deal… since the 1929 market crash.As Paulson told the WSJ, dealing with the current disaster offers an opportunity to “start over” in terms of regulation. The blueprint is what he calls an “optimal financial regulatory model,” and “an aspirational model which can only be achieved after many years.”Here Comes SupercopOne big Paulson suggestion is to merge the SEC (Securities and Exchange Commission) with the CFTC (Commodity Futures Trading Commission). That thought in itself should be enough to make traders spit coffee all over their screens. (And newsletter publishers, too.) Another suggestion is to create something called the “Mortgage Origination Commission.” Who knows just what that outfit is supposed to do?But the proposal we’re concerned with today (as you might have guessed) is the one that deals with the Federal Reserve. Paulson wants to turn the Fed into a kind of “supercop.” The Wall Street Journal offers more detail: Over the long term, Mr. Paulson advocates a new, and instantly controversial, role for the Federal Reserve. Mr. Paulson sees the central bank eventually taking on the role of a "market stability" sheriff. This would move the Fed away from direct bank supervision, something the central bank has always argued is vitally important. A new entity would take that over. Instead, the Fed would use a broad authority to monitor any company or any business line that could destabilize financial markets.Paulson adds, “[The Fed] would have broad powers so that they could go anywhere in the system they needed to go.” Hmm. Broad powers, eh? Anywhere in the system they needed to go? Presumably to do whatever they needed to do upon arrival? Thirty billion here, 200 billion there and so on? That sounds powerful indeed. It’s a good thing the Fed is a highly responsible entity, instead of some quasi-private institution run by unelected officials with plenty of back-room connections and no true accountability to the public. Oh, wait. So far, Paulson’s proposals are just that -- mere proposals. There is no telling how much of the blueprint will be accepted, or what ultimate form it will take. But, from a bigger-picture perspective, the details don’t really matter. The key thing is, change is coming. Major change. Opportunity KnocksYou can expect lots of debate in the coming days. There will be plenty of back and forth over the merits of the Paulson blueprint; over the challenges and risks of expanding the Fed’s power; over the ins and outs of how the changes might take place and what they might mean. In the midst of all this, it will be good to remember at least three things: First, that the surface level aspects of the debate won’t matter all that much; second, that most pundits won’t really know what they’re talking about; and third, that the really big wheels are already in motion. They’ve been in motion for a long, long time. Confusion creates opportunity for those who know how to take advantage. The money men -- i.e., the Federal Reserve and those insiders connected to it -- will exploit that confusion to its fullest. Take the current crop of presidential candidates, for example. None of them -- Republican, Democrat or Independent -- has the foggiest notion of how the Federal Reserve works on a nuts-and-bolts level. Nor does the current White House occupant. When it comes to regulating and managing the vast and unwieldy “shadow banking system,” as bond fund manager Bill Gross calls it, the nation’s commander in chief is clueless. His successor will be equally clueless, in terms of not knowing where the important levers are, not knowing how to throw them, and not knowing who to trust. Thus, barring some divine miracle in which Ron Paul gets elected, the money men will soon gain total control of America’s financial system… and thus the dollar-driven global financial system by default. The next president will talk tough, craft authoritative sound bites for the masses, and then, in regard to the nation’s balance sheet, simply do what he (or she) is told. Congress and the Supreme Court will be equally impotent here. After all, what do they know of structured finance? What role could they possibly play in saving the system from itself? In a time of crisis and turmoil, the money men will argue, this sweeping arrangement will prove necessary. As Paulson has said, implementing the new model in full will take “many years.” That kind of talk is akin to giving a plumber a blank check and letting him disappear into your basement. Who knows what’s really going on down there? Who could have any idea? The true dirty work will continue to take place where it always has --behind closed doors. None the less, the sheer boldness of this financial power grab is quite the spectacle. It has all the grit and guts of a train robbery in broad daylight. And for all the hemming and hawing about crisis management and the need for better financial regulation, what’s truly happening here is plain as day once the blinders are removed. As George Orwell said, “Sometimes the first duty of intelligent men is the restatement of the obvious.” Jekyll Island ReduxAnd why would the Fed’s new bid for dominance come from the Treasury, by the way, instead of from within the Fed itself? Partly for the sake of appearances, no doubt, but also because of who happens to be Treasury Secretary. “Hammerin’ Hank,” as the Treasury Secretary is sometimes known, is an alumnus of the most powerful investment bank on Wall Street. Mr. Paulson was CEO of Goldman Sachs when the White House tapped him for the job in 2006. (The appointment also enabled Paulson to cash out $700 million worth of Goldman Sachs stock tax deferred -- quite a neat trick.) How fitting, then, for a new era of Fed power to be ushered in by a connected investment banker. After all, that’s pretty much how it happened the first time around. The Federal Reserve, as market historians will recall, was born under cover of darkness. The institution’s origins can be traced to the Jekyll Island Hunting Club, a most curious club in that no birds were actually hunted. Instead, the “duck hunters” were some of the world’s wealthiest men: investment bankers, oil barons, powerful politicians and the like. They all met, in great secrecy and seclusion, for a series of meetings in a private hunting lodge on Jekyll Island in 1910. The lodge, and the island itself, were owned by J.P. Morgan at the time. (Jekyll Island sits off the coast of Brunswick, Georgia. It’s a resort destination today.) Morgan was at that fateful meeting in November of 1910 that led to the Fed’s creation three years later. Rockefeller was there, too. Many strings have been pulled, and many favors traded, from that day to this. Now, almost a full century later, the Federal Reserve is about to experience its greatest ascent, rising to new heights of power as the dollar fades into twilight. For the money men, this day was a long time coming. Consequences, ConcernsBut what does it all mean? Not just in regard to the health of the dollar or the fate of the U.S. financial system, but in regard to you and me? The sheer depth of what’s happening is hard to fathom. It’s certainly too much to cover in one Taipan Daily episode. In terms of volatility and wild market moves, the fun has only just begun. There will be clear and sharp consequences to this turn of events; that means significant opportunity, and significant dangers too. I’ll do my best to keep you up to date on what’s happening, and you better believe I’m watching closely. (Reading about what just transpired, I nearly fell out of my chair.) In terms of deeper level explanations, though, I’ll have to take a little bit of a cop-out and ask you to to the Taipan newsletter. Sally Limantour is the highly capable editor of Taipan, but I also contribute to each issue. In a recent issue, the Taipan newsletter discussed why $1,000 is “just a milestone” for gold. The next issue, hot off the presses as I type, explains why financial booms and busts will always be with us. And for yet another upcoming issue, Sally is planning an in-depth exploration of market volatility: what it is, where it comes from, how to deal with it and how to profit from it. You can go here to or find out more about Taipan. And of course, in both Taipan Daily and the Taipan newsletter, we’ll continue to explore these dramatic changes to the market landscape and what they mean. As far as the Fed goes, March 2008 could carry the same weight in the history books as November 1910. Stay Tuned, JLTaipan Premium Investment Strategies · The "little differences" aren't always so little.· Tough times ahead for ethanol producers.· Canadian dollar goes loonie tunes.· Putting out the fire with gasoline.· For more investment strategies, visit Taipan Publishing Group.Having trouble getting your emails? Add us to your address book. Get Instructions here... 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