The Federal Reserve: Crisis of a Century

The Federal Reserve is 100 years old. It has “navigated” through two world wars and the Great Depression of 1929. However, it has arrived at 100 years in disastrous condition and in a profound identity crisis. For the first time in history, it has completely changed its mission: From inflation regulator and political actor in fighting unemployment, it has become the source of unlimited liquidity, with a budget distorted beyond measure, equal to about a quarter of the U.S. gross domestic product. Before 2007, it not only ignored all of the initial signs of the looming financial plunge — worse, it seconded, if not favored, the most speculative and risky behaviors. Then, it bailed out all the big banks, in fact letting them continue to operate as before. The high level of liquidity is doping the economy, creating psychedelic and unreal visions of the economy, foreseeing a rosy end to the economic and banking crisis.

Perhaps to demonstrate that the Fed still has a hand on the financial steering wheel, at the last meeting of the Open Market Committee, chief Ben Bernanke announced that, beginning this coming January, the central bank will reduce quantitative easing by $10 billion per month: It will buy $35 billion, instead of $40 billion, in Treasury bonds and $40 billion in speculative asset-backed securities, instead of the usual $45 billion. In order to build on propping up Wall Street, he explained, these decisions would however not even minimally change the Fed’s “accommodating monetary policy.” In fact, in contrast to last May’s destabilizing reactions when Bernanke floated a possible change in QE policy, this time markets greeted his intervention with a significant surge in the stock exchange.

Bernanke also wanted to reassure banks that the interest rates would remain at baseline at least until the end of 2015, if not the end of 2016, and that the Fed would continue purchasing bonds in relevant quantities. In particular, he guaranteed that his budget would retain the hundreds of billions of dollars of already purchased toxic securities and the ones yet to be purchased. At this rate, the Fed’s budget at the end of 2014 will be $5 trillion, with a 100:1 ratio with respect to its capital base. However, the Fed’s real challenge is of a geo-economic and geopolitical nature. Does it want to keep maintaining the dollar as the central currency of the world’s monetary reserves, or does it intend to transform American money into something that can be printed whenever — what Americans call “fiat money”?

One thing is certain: It is impossible to maintain both policies for long. Even if the dollar is protected through the political, rather than economic, power of the government in Washington, its credibility and therefore its intrinsic value disappear, diminishing inversely with its rise in circulation. Sooner or later, things will come to a breaking point. There are already signs of this coming from China. While Beijing seems to be limiting itself to mere fastidious declarations about the Fed’s policies, import payments in Yuan are already double those regulated in euros. In just a year, all Chinese trade conducted with the rest of the world in Yuan went from 12 percent to 20 percent. Shortly, Saudi Arabia, Qatar, Kuwait and Bahrain will create a shared currency, even if it will remain pegged to the dollar for a time.

Even a certain number of African countries seem to want to do the same. On the chess board of the international monetary system, marginal initiatives can be maintained, but they are clear signs of intolerance toward a dollar whose true value is no longer known. They are moves that could lead toward an alternative system, toward a new money basket. These are some additional reasons that we cannot congratulate the Fed on its 100th birthday. We cannot tell it to “make merry,” as a Panettone commercial says, because it could misinterpret us and think that it is time to replace the Treasury and print bonds.