Dear CIGAs,

IT’S JUST A PROPOSAL THUS FAR, BUT POTENTIALLY IT IS SCARIER THAN A HORROR MOVIE

While reading the report on the Obama administration’s proposed new financial regulations, we were concerned to see the following. “In order to improve accountability in the use of other crisis tools, we also propose that the Federal Reserve Board receive prior written approval from the Secretary of the Treasury for emergency lending under its ‘unusual and exigent circumstances’ authority.”

The Federal Reserve board is made up of economists whose sole purpose is to be able to monitor and manage the banking risks that are under their purview, and to set monetary policy without political pressure.  They are free to do politically unpopular, but economically correct things.  The recent crisis in the banks happened in large part because many banking institutions set up offshore holding companies that were thus not under the Federal Reserve’s purview.

Many politicians added to the problem with unwise, politically motivated pressures on banks to make irresponsible loans.  The result has been a huge mess.  Now, the politicians are proposing that the one institution which actually has the best interests of the nation’s future in mind, the Federal Reserve, should have to report to politicians who have demonstrated time and again that they care more about themselves, their goals, and their re-election.

What group which has the best interests of the future of the United States (and world banking system), would think of putting a politically appointed Secretary of the Treasury in charge of how much the Fed can do to bail out banks, and eventually in charge of other Federal Reserve activities?  We believe that President Obama sincerely wants the best long-term outcome for the U.S. economy. However, we can surmise that the political functionaries do not have the best interest of future generations in mind when they make such proposals.  Whoever proposed the politicization of The Federal Reserve has interests in short-term political goals. They want to accomplish their goals of more political and governmental control over the economy.

President Reagan tried to gain control of the Federal Reserve in the early 1980’s when interest rates were too high for his taste.  He later admitted that the Federal Reserve did the right thing, in breaking the back of the inflation of the late 1970’s and early 1980’s. Presidents of all political stripes resent those who hurt their short term political agendas, but the fact that our Federal Reserve is independent of politics is a primary reason that the U.S. has enjoyed the economic prosperity that it has enjoyed.

ACTION TO POLITICIZE THE FED WOULD BE A MISTAKE FOR THE U.S.

We do not exaggerate when we say politicization of any central bank in any country is a major mistake.  This statement has been proven repeatedly over the last few decades by many banana republics and irresponsible third world countries.  These examples have clearly shown the eventual economic devastation that can be unleashed by such an approach.  Politicization of central banks has been the precursor of ruinous inflation, government confiscation of assets, foreign exchange control regimes, currency debasement, and has led to a low standard of living and impoverishment of hundreds of millions of citizens of the countries which never had, or chose to abandon, a strong independent central bank.

All is not lost; these are only proposals. May we recommend that the politically connected among our readers remind your political contacts of the importance of a politically independent Federal Reserve. Those of you who wish to do so could write to your congressional representatives and encourage them to keep the FED independent.

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com