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Tuesday, August 24, 2010 1:23 AM

Dissent at the Fed, 7 of 17 Express Reservations about QE; Appeals Court Refuses Fed's Motion to Dismiss Bloomberg's Freedom of Information Request

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Beneath the surface of a 9-1 vote in favor of continued quantitative easing, 7 of 17 Fed officials at the last FOMC meeting had at least some reservations about Bernanke's policy.

The Wall Street Journal reports Fed Split on Move to Bolster Sluggish Economy

The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke's four-and-a-half year tenure as central bank chairman. With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.

At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.

Officials were clustered in two camps. In one camp, Mr. Dudley, and the presidents of the Boston and San Francisco Fed banks, Eric Rosengren and Janet Yellen, were distressed that the Fed was far from its objectives of low unemployment and stable inflation.

Richard Fisher, president of the Dallas Fed, and others expressed a concern that Fed moves might be ineffective, arguing that businesses weren't using already ample, cheap credit to fund investments because they were uncertain about many other problems, including government deficits and new financial regulations.

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today's unemployment problem is caused by issues the Fed can't solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted. "The Fed does not have a means to transform construction workers into manufacturing workers," Mr. Kocherlakota said in a speech after the meeting.

The president of the Philadelphia Fed, Charles Plosser, who has had misgivings before about Mr. Bernanke's initiatives, deemed the latest move premature because, though the Fed was lowering 2010 growth estimates, it wasn't significantly ramping down its estimates for growth in 2011 and beyond. Two other frequent dissenters, Thomas Hoenig of Kansas City, and Jeffrey Lacker of Richmond, Va., also objected. Fed governor Betsy Duke, a former commercial banker, also expressed reservations, according to participants.
Fed Worried Balance Sheet Might Shrink Too Fast

The concern of Bernanke and other Fed officials was the Fed's balance sheet might shrink too fast. According to the New York Fed, as much as $340 billion would be paid back including $55 billion Fannie and Freddie mortgages.

A shrinking portfolio in the face of slowing economic growth amounted to "prematurely applying the brakes" according to New York Fed President William Dudley.

Excuse me for asking but how the hell does repayment of Fannie and Freddie loans (with consumers refinancing at lower rates) constitute tightening?

Only in the perverted world of Fed minds with government backstopping all losses at Fannie and Freddie could mortgage paybacks be construed as tightening. The same applies to any balance sheet assets paid back because of favorable bond market conditions.

Indeed, the Fed should be thrilled to get rid of garbage on its balance sheet at a time when mortgage rates are dropping.

Exit Strategy Blown

Note how the Fed blew a chance at an exit strategy handed to them on a silver platter. They are unlikely to be so lucky down the road.

Quantitative Nothingness vs. Quantitative Easing

I discussed the FOMC decision in Quantitative Nothingness and the Yield Curve's Reaction
Bernanke's pledge to hold the Fed's balance sheet constant is certainly a new twist. However, given that quantitative easing will not do a damn thing as discussed in Quantitative Easing Take II; Uncharted Territory it is silly to think that Quantitative Nothingness will do anything.

When the equity market will figure this out remains a mystery, but the treasury market seems to have figured it out already.
For still more on the debate, please see Will Quantitative Easing Spur Inflation? Job Creation? Credit Expansion? Do Anything? written on August 6, before Bernanke opted for constant garbage.

Appeals Court Refuses Fed's Motion to Dismiss Bloomberg's Freedom of Information Request

In other Fed news, Bloomberg reports Fed Loses Bid for Review of Bailout Disclosure Ruling
An appeals court refused to reconsider a decision compelling the Federal Reserve Board to release documents identifying banks that might have failed without the U.S. government bailout.

The full U.S. Court of Appeals in New York, in a docket entry dated Aug. 20, denied a May 4 request by the Fed to review a three-judge panel’s unanimous March 19 decision requiring the agency to release records of the unprecedented $2 trillion U.S. loan program begun primarily after the 2008 collapse of Bear Stearns Cos.

Unless the court stays its decision, the Fed will have seven days to disclose the documents. In the event of a stay, the central bank and the Clearing House Association LLC, an organization of 20 commercial banks that joined the Fed in defense of the lawsuit, will have 90 days to petition the Supreme Court to consider their appeal. The Clearing House has already said it will ask the high court to rule on the case.

“We are reviewing the decision and considering our options for appeal,” David Skidmore, a Fed spokesman, said.

At issue are 231 “term sheets” documenting Fed loans to financial firms during 2008. The records, which include the banks’ names, the amounts borrowed and the collateral posted in return, were originally requested by late Bloomberg News reporter Mark Pittman through the Freedom of Information Act, which allows citizens access to government papers.

The amount the Fed and the U.S. government lent, spent and guaranteed to stem the recession and rescue the banking system peaked in March 2009 at $12.8 trillion, most of it following the September 2008 bankruptcy of Lehman Brothers Holdings Inc.

Fox News, a unit of New York-based News Corp., also sued the Fed to force the release of loan documents for transactions in 2008 and 2009.
The hypocrites at the Fed have promised more transparency and show it by fighting freedom of information requests all the way to the supreme court, which appears to be where this lawsuit is headed.

Should the Fed does deliver any data now, it will only be because the data is already entirely useless and/or they fear setting a supreme court precedent.

Fed's Transparency Policy Unveiled

The Fed's transparency policy amounts to a spoon-feeding of blatant lies, distortions, half-truths, and purposely overoptimistic guesses, along with a few smatterings of obvious truths hoping to make the entire package look legitimate.

The simple fact of the matter is it's Not Practical To Tell The Truth.

Mike "Mish" Shedlock
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