QUESTION: In your Nov. 15 blog you said about the Fed “ I do not think in its present form it should be owned by banks collecting 6%. I would advocate a public float as is the case in Switzerland. Can you explain what that means, and how that works. Thank you

There is a ring of truth to what you say.

Thank you.

ANSWER: The Fed is far more independent than many portray. Its decisions to raise or lower interest rates are not at the direction of bankers, but its understanding that it must steer a realistic path. Yellen has inherited a nightmare. Raised were lowered and the Fed became trapped, They stopped buying 30 year bonds and moved to mortgage securities. It cannot sell anything it now holds. Yellen realized that the pension funds will go belly up and keeps saying the rates must rise to be “normalized”.

The Fed is far too much influenced by politics. We cannot afford a central bank controlled by politicians. Likewise, bankers should not control the Fed if they no longer retain loans on their books and sell them becoming transactional bankers.

The only solution would be that the Fed is floated publicly so anyone can buy shares. The influence of politicians and bankers must come to an end. Banks should NOT be qualified for any bailout on their trading – PERIOD. If they do not retain loans, they are not entitle to use elastic money. Floating the Fed makes it a private corporation that must report its balance sheet like everyone else. Congress MUST be forbidden to order the Fed to do anything. That has been the problem all along. Stimulation should be returned to buying corporate paper, not hand banks cash and hope they lend it out. Enough is enough.

QUESTION: Don’t you think it is wrong that the private banks own the institution that administers them.

ANSWER: You have to understand what was intended. It was originally a bailout entity for banks so they had to fund it. That made sense initially, Then with time and circumstances, the Fed has morphed into something that is now some quasi-political-governmental-agency that nobody would have created from the outset.

I do not think the Fed should be owned by the Treasury since then politicians will control it for political purposes. I can hear it now: “Vote for me and I will give free interest on credit cards!” I do not think in its present form it should be owned by banks collecting 6%. I would advocate a public float as is the case in Switzerland.

My point is the politicians keep changing the Fed and relieve themselves of ALL fiscal responsibility for economic booms and busts and blame the Fed, which is wrong, since they are the primary cause of aggravating the business cycle.

I do not advocate conspiracy theories against the Fed or criticism of exclusively the Fed ignoring the role of Congress. To solve the problem we MUST look at the whole. You need a central bank to clear. Bank failures were because of relationship banking where they borrow short-term and lend long-term. Elastic money made sense under the idea you did not have to liquidate loans to repay depositors in a panic. The elastic money would expand during a panic and then contract when over.

Now that banks are doing transactional banking and not holding long-term loans on their books, then they no longer need elastic money or bailouts and should collapse when they screw up. They should be held for CRIMINAL prosecution if they are trading with other people’s money. You cannot have it both ways. If the Fed is to stimulate, then they should buy corporate paper, not government, and then the money is directly injected into the economy whereas currently the banks still refuse to lend money long-term.

The Fed is caught between politicians and bankers. That is not a very nice place to be these days. We will have to REFORM this position after the crash, but eliminating the Fed will create chaos and it will not solve the problem as long as Congress has any power to create debt and the big banks moved to transactional banking abandoning relationship banking.

The Dow is pulling back on schedule. We do not see a breakout to the upside. This should tread water for a bit waiting for everything to align. A closing today below 17785 will signal that this is not ready to breakout and a retest of support is likely. Key support lies down at 16500.

The ECB does not reveal in detail its QE and most people have no idea that its asset-backed securities (ABS) and covered-bond purchases are actually carried out by private asset managers: ING Investment Management, Deutsche Asset & Wealth Management International, State Street Global Advisors, and Amundi. These asset managers intervene into markets on orders by the ECB.

Those strategies contrast with the Federal Reserve. It has become conventional wisdom that when all else fails to make economies grow, create new money and buy government bonds. Of course, the “all else” never includes deregulation and lowering taxes. These people do not comprehend that FATCA becomes global by 2017 and the private costs have exceeded $200 billion. Moreover, there are now more people employed in compliance than in generating actual business. Government has succeeded in Byzantinianizing the private sector, which can only mean lower economic growth.

So this formula dubbed quantitative easing, or QE, is simply a punishment side of stimulation for it is coupled with lowering interest rates that wipe out savings. Most economists think QE helped keep the U.S. and the other countries that used it, such as Japan and the U.K., from collapsing into a catastrophic dark depression. Nobody bothers to look at over-taxation when in fact Keynes himself said that deficits were OK part-time for a depression and cutting taxes would be appropriate for recession.

If we follow the logic here, QE is supposed to “stimulate” the economy by reinventing inflation. But does this only create cost-push inflation or asset/currency-inflation rather than demand-inflation that marks economic growth? The first two forms of inflation reduce the living standard as net disposable income shrinks. Demand inflation requires confidence as people invest expecting to make more in a boom, not punishment. This type of stimulus will widen the gap the socialists talk about between rich and poor for it will only create asset inflation. So it is hard to follow the logic that QE alone, while hunting money for taxation, will have any stimulus impact other than eroding the economic base.

Then the central banks have the bonds, which they could never sell again, and as debt rises, the central banks go belly up. Honestly, this is what we deserve for electing lawyers who think they can just write a law and make the impossible happen.