Thursday, September 8, 2016

Who's in charge anyway?

Economy and Markets

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ECONOMY & MARKETS | September 08, 2016

Who's in Charge?

By Lance Gaitan, Editor, Treasury Profits Accelerator

A few weeks ago I wrote to you about the Fed's responsibilities as the central bank for the United States. Not long after, we had the Jackson Hole conference.

Well, we're now just seven days away from hearing the results of their September policy meeting (9/20-9/21). Don't hold your breath for a rate hike.

But while we wait for the Fed to do nothing… again… let's take a look at some of the most powerful people on the planet… the people who are responsible for guiding the U.S. economy and influencing central banking across the globe.

First, a quick breakdown of what the Fed looks like…

The Federal Open Market Committee (FOMC) voting members are tasked with deciding any change to monetary policy. There are supposed to be twelve of them:

  • Seven (currently five) members of the Board of Governors,

  • The President of the Federal Reserve Bank of New York, and

  • Four of the 11 Reserve Bank presidents that rotate annually.

The President of the United States appoints the seven Board of Governors (BOG) and congress confirms the appointments. With all the political gridlock of late, it's no surprise we're currently short two board members.

These appointments run 14 years and governors that served a full term may not be reappointed.

The chair and vice-chair serve four-year terms and may be reappointed.

But who are these guys tasked with making monetary policy decisions?

What qualifies them to decide if savers get paid or punished with low-interest payments or if borrowers have access to loans with reasonable repayment terms?

Surely they've had extensive experience with business or Wall Street finance!


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Janet Yellen became chairperson of the Federal Reserve in 2014.

She has an impressive Ivy League academic record at Brown, a Ph.D. from Yale and was on staff at Harvard, the London School of Economics and California Berkeley.

She served as an economist at the Federal Reserve BOG before taking leave from Berkeley to actually serve on the board.

She also served as Chair of the Economic Policy Committee of the OECD (Organization for Economic Cooperation and Development) and Chair of the Council of Economic Policy Advisers, the first being a White House adviser and the latter an international policy organization.

She then served as President and CEO of the Federal Reserve Bank of San Francisco until she was appointed to the BOG in 2010.

Hmm. While that's an impressive career, there's not much experience in business or on Wall Street there.

Stanley Fischer took office on the BOG in 2014 and was appointed vice-chair later that same year.

He received degrees from the London School of Economics and a Ph.D. from Massachusetts Institute of Technology (MIT). He was also a professor at MIT and the University of Chicago.

He worked at the World Bank, the International Monetary Fund (IMF) and then was Vice-chair of Citigroup until he served as governor of the Bank of Israel until he was appointed to the BOG.

Again, impressive.

Again, little to do or say with business or Wall Street.

How about Daniel Tarullo?

He took office on the Board of Governors in 2009. He went to Georgetown University, Duke University and then read for his law degree at University of Michigan.

He was a law professor at Georgetown Law, Harvard Law School and Princeton. After that he served in various government positions for the Clinton administration, Senator Edward Kennedy and the Department of Justice.

Lael Brainard took office at the BOG in 2014. Before that she was the Undersecretary of the U.S. Department of the Treasury along with a number of other government and think-tank positions.

She received degrees from Wesleyan and Harvard Universities and then was a professor at MIT's Sloan School of Management. She worked in management consulting for a short time with McKinsey & Company after receiving her Ph.D. from Harvard.

Jerome Powell took office in 2012 to fill an unexpired term and then was reappointed in 2014. He received a degree in politics from Princeton and then his law degree from Georgetown University.

Powell served on many corporate, charitable and educational institution boards and worked as a lawyer and investment banker prior to serving as Undersecretary of the Treasury under President George H.W. Bush. He was a partner at The Carlyle Group prior to his appointment on the BOG.

Do you notice the pattern here?

Ivy League educations, heavy political connections, lofty academic backgrounds… but very little practical business experience. Two governors have law backgrounds but their political connections point directly to the White House.

The question is, does the pattern continue among the remaining committee members?

William Dudley is the President of the Federal Reserve Bank of New York and is a permanent member of the FOMC as long as he remains in this presidential role.

Mr. Dudley received degrees from New College and then his Ph.D. from UC Berkeley. He was an economist for the Federal Reserve Board and worked as a VP of Morgan Guarantee Trust until he joined Goldman Sachs. There he had a variety of roles until he became their chief U.S. economist, a position he held for a decade. He joined the Federal Reserve Bank of New York in 2007 and became president two years later.

James Bullard took office in 2008 as the President of the Federal Reserve Bank (FRB) of St. Louis. He has degrees from St. Cloud State University and his Ph.D. from Indiana University. He started as an economist for the FRB St. Louis in 1990 after graduating from IU and spent his entire career moving up the ranks.

Esther George is the President of the Federal Reserve Bank of Kansas City and took office in 2011. She has degrees from Missouri Western State University, University of Missouri-Kansas City and the American Bankers Association Stonier Graduate School of Banking and Stanford University. Ms. George has spent her entire career at the Bank, starting in the Division of Supervision and Risk Management and moving up the ranks.

Loretta Mester took office in 2014 as the President of the Federal Reserve Bank of Cleveland. She has degrees from Columbia and a Ph.D. from Princeton and is an adjunct professor at the Wharton School of the University of Pennsylvania. She also taught finance at New York University. Prior to being named President of the FRB of Cleveland, she spent 19 years at the Federal Reserve Bank of Philadelphia overseeing economists and analysts.

Eric Rosengren is the President of the Federal Reserve Bank of Boston. He took office in 2007. He holds a degree from Colby College and earned his Ph.D. from the University of Wisconsin. Since earning his Ph.D., he has spent his entire career with the FRB of Boston, starting in research and climbing the ladder to the top.

Currently, four of the five voting bank presidents spent their entire careers at a Federal Reserve Bank. Only Esther George was able to move up the ladder without her Ph.D., and only William Dudley has experience outside of the Bank.

Seven of the 10 voting members of the FOMC are Ph.D.s and only two in the group have business experience outside of the Bank.

All of the Board of Governors have government ties as advisors or held positions with government organizations prior to being appointed.

And all 10 current voting members of the FOMC have attained the pinnacle of power by being politically connected with government or through the Federal Reserve Bank. None of them were elected and few have worked in private enterprise, but they're convinced that through all of their research and academic backgrounds, they can steer our economy, control inflation and create the right conditions for full employment and wage growth.

Are we to believe that this powerhouse of politically connected people is making their decisions free of political interference?

Can we be sure that their policies, like keeping the balance sheet full of bonds they bought during QE, isn't politically motivated?

I don't believe we can!

They've sent billions upon billions of dollars to the U.S. Treasury and nearly $100 billion from interest payments in 2015 alone!

They've kept interest rates artificially low for more than eight years!

That's mighty helpful for the U.S. government when it comes to debt repayment.

Call me a skeptic, but this very powerful group tinkers with and manipulates our economy, the markets and ultimately our standard of living through nothing more than academic experiments that haven't been proven. Some of these experiments have even outright failed, yet these people – who consider themselves economic scientists – simply respond by saying that not enough was done.

At what cost do we allow these people to continue their madness?

Harry mentioned in Economy & Markets just last week how our debt has exploded with these Fed policies and how asset bubble after asset bubble has been created.

This won't end well, and who pays the price?

You got it…

You and me!

Lance Gaitan
Editor, Treasury Profits Accelerator

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