Europe's inverted socialism

And most Northern Europeans also seem to believe that the bailouts have gone to lazy Southern Europeans. In fact, their purpose has been to shore up the fragile Northern European financial systems. German banks are among the weakest in Europe; some of them (especially the state-owned landesbanks) are effectively bankrupt. If they were forced to mark down their Southern European debt, they might well collapse in a heap, and the European financial system could grind to a halt. Just as in the United States, the real impact of the European bailout has been to shore up the continent’s banks – not to help the continent’s debtors. The recent downgrading of two of France’s most important banks, due to their holdings of Greek debt, reminds us of how exposed Northern Europe’s financial systems remain. And rumors of a recent IMF report that European banks are over $270 billion short of the capital they need to confront their current problems served to drive the point home.

- Jeffry Frieden, "Europe's Lehman moment"

Europe's financial problems have escalated to the point where a world-wide contagion has become again possible.  Economists and international leaders are sounding alarms that have rarely been spoken in unison, since the inception of the 2008 financial crisis.  Christine Lagarde, the managing director of the International Monetary Fund, said "We have entered into a dangerous phase of the crisis." Her words come at a point where the Greek debt crisis appears to be reaching its climax.  Moody's Investors Service downgraded two of France's top banks, Societe Generale and Credit Agricole, stating that it had concerns about the two banks funding and liquidity profiles, due to their exposure to Greek debt.  A recent analysis indicates that 43 large European banks hold debt in the PIIGS equivalent to 65% of the book value of those institutions. Gretchen Morgenson of the NY Times explains the current situation:

Some of these [European] banks are growing desperate for dollars. Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce. Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.  

As a result several central banks have mounted a coordinated effort to inject US dollars into the financial system to stimulate market confidence.  The Guardian newspaper elaborates:

The Bank of England joined the US Federal Reserve, the European Central Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce that they would flood money markets with dollars over the coming months.

Gus Faucher, director of macroeconomics at Moody's Analytics, states "The big question is: is this enough in the short term to get us to a longer term solution? There is a potential for a really huge financial crisis in Europe. Things are bad now, but they could get a lot worse."

Many observers are looking at the current European situation and seeing similarities between Lehman Brothers demise and the 2008 crisis.

Adding to the peril is that these banks are funded primarily by short-term investors, like buyers of commercial paper, rather than by depositors, as is more often the case with American banks. This was the same problem faced by Bear Stearns and Lehman Brothers, which collapsed after short-term lenders fled in panic.

Economist Barry Eichengreen says that, "The euro’s survival and, indeed, that of the European Union hang in the balance."  He says long term proposals on restructuring Europe's sovereign debts are not of immediate concern, rather the continent needs to act decisively in stabilizing its banks.  The European Financial Stabilty Facility (EFSF) and even the IMF should be used to re-capitalize Europe's weak banks.  The second move should be to give Greece sufficient room to maneuver by asking its creditors to relax its fiscal targets.  Third, governments need to end this futile dalliance with austerity and proceed with stimulus projects that would create real growth.  He states, "Without growth, tax revenues will remain stagnant, and the capacity to service debts will continue to erode. Social stability, similarly, depends on it."

Economist Paul Krugman at the beginning of this week had some serious words for European governments.  He states, "We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer"  Likewise, he is telling Europe to use the ECB to continue buying up Spanish and Italian debt to contain the risk of default. The moral argument for inaction or worst punishing Europe's peripheral nations and the Mediterranean nations of Spain and Italy, will drive the continent -if not the world- into another economic abyss.

The reality is Greece's debt problems have been growing and not diminishing over the past two years.  The country is not in any position today or in any foreseeable future to repay the totality of its debt.  Under the current regime imposed on the country, Simon Johnson a former IMF chief economist concludes that "The tax revenue needed to service [the Greek] debt would burden businesses and households for decades – enterprising and productive people will move their fortunes and their futures elsewhere in the euro area or to the United States." Throwing billions of dollars at the nation, only to prop up banks in the northern economies of Europe and hoping that the situation will be resolved at a later date, has now been shown to be an unfeasible and irresponsible position.  Europe needs to first stabilize its banking sector immediately and then proceed in an orderly default of Greece's debt. An unorderly default will plunge the entire Eurozone into chaos.  Spain and Italy will face unprecedented pressure, whereas the remaining nations of Portugal, Ireland, and Greece may well face economic collapse.

GOP's memo to America's unemployed: Drop Dead!

Stephen Pearlstein, business columnist for the Washington Post, recently wrote an enormously useful post in which he takes apart the Republican stance on the economy, the Federal Reserve, and the current unemployment situation across America.

He first establishes the governing philosophy of the party of 'no' since the mid-term elections:

Only two weeks after the midterm election, it seems clear that the 2012 campaign has begun. For too many Republicans, the aim is to politicize policy, trash the institutions of government and intimidate anyone who might disagree with their radical ideology.

The Republican party's public mantra has long been low taxes, smaller government, and accountability.  If anyone can find a Republican that has pursued this trifecta consistently while in congress I'd like to know, because the reality is that they have pursued low taxes for corporations and the very rich, while irresponsibly failing to engage in concomitant spending cuts.  Conservative economist Milton Friedman said, "for the government to spend is for the government to tax."  So, despite their claims, what Republicans are actually doing is shifting the tax burden, "explicitly or implicitly to tax somebody, either in the present or the future, either directly or indirectly, to pay for that purchase." They counter that that is not true, because the tax-cuts magically pay for themselves.  Again, this supply side voodoo-economics, has been shown to yield either no or minimal value to the economy and therefore do not pay for themselves.  For example, analysis of George W. Bush's tax cuts indicate that it produced an insignificant level of economic growth during his presidency. Hence, this is just the attempt of one group of people to evade paying taxes and force another group to subsidize their excesses.

Pearlstein recognizing the fallacy of the Republican tax-cut and spend mantra, estimates the impact of not extending the Bush tax cuts to small cash flow-through businesses and people earning beyond $250,000.

The macro view, from the forecasting firm Macroeconomic Advisers of St. Louis, is that not extending tax cuts for high-income households would reduce gross domestic product growth by - drumroll here - two-tenths of one percent in each of the next two years. And the difference in the unemployment rate? A whopping one tenth of one percent!

The impact of letting the richest people in the country pay the same taxes on the top tier of their income, as what they were paying during the Clinton administration in regards to the overall economy, is virtually negligible.

Regardless of the context, the same failed policies are trotted out as a panacea to every economic situation. And here is where the standard argument becomes exceptionally ugly. Knowing that their policies have failed and have lead to the harshest economic downturn since the Great Depression, Republicans are demanding that not only that their rich-friends, who have been on a tax vacation for the past decade, not be further taxed, but that those who are unemployed "drop dead."  In their devious minds, they are now attacking the Federal Reserve for pursuing monetary policies that leads to full employment. Whereas these same miscreants didn't attack the Fed when it was bailing out their fat-cat friends on Wall Street and creating a firewall of secrecy that concealed the extent of the criminality between big business and the government when Republicans were in power. Their hypocrisy is endless.

Get sick; drop dead.
Need help in paying for a family member's health care; let them drop dead.
Need to upgrade your skills at college to get a job; drop dead.
Cannot find a job and you've used up your savings; drop dead.
Need help preventing foreclosure on your home; drop dead.

Obama's failure and the floundering of the American economy is their ultimate objective. In their minds the death of the American dream is their stepping stone back into power. Republicans are traitors to everything that the country is supposed to represent.

Matt Taibbi talks about the Tea Party, Palin, & the Banks

I really hope if you have an opportunity to watch Eliot Spitzer on his CNN news-talk show, Parker-Spitzer.  The man always impresses me when he's debating friend or foe, with his enormous knowledge of governance, financial affairs, and the inherent corruption that exists between government and big business.  There really isn't any other show on the MSM cable channels, in America at least, that I think is worth watching.  Even if you're into liberal talk shows, MSNBC's lineup tends to be a little repetitious and self-serving when it comes to engaging in substantive issues. 

The above video post is another with Matt Taibbi, who grouses on the media obsession with Caribou Barbie and the Tea Party movement, the criminality of the banks, and the incompetence of Tim Geithner and Alan Greenspan.  Spitzer and Taibbi unleash a real pummelling on the ass-clowns of casino-capitalism!

"Helicopter" Ben Bernanke now with Kung Fu Grip

You too can imagine the day when you will be richer than you thought possible, when Helicopter Ben shows up on the horizon with his duffel bags of loot!

Yeah... a lost decade with Japanese-like deflation will be slayed by Helicopter Ben and merry printing presses of the Federal Reserve.  Let's see Greenspan look so cool!

Federal Reserve to be Audited

The worm has turned several times in the effort to audit the US Federal Reserve and reclaim some democratic  accountability of the secretive machinations of this institution.  Joseph Stiglitz, Nobel recipient in economics, has called the Fed a corrupt institution.  Many on both sides of the political spectrum, like Congressmen Ron Paul (R-Tx) and Alan Grayson (D-Fl), have questioned the basis and decision making structure of the Fed and demanded that more transparency be provided.

On the other hand, many Democrats, Republicans, and status quo defenders of Fed have attempted to defeat any legislation that would review and address the gross failings of the Fed, which directly lead to the Great Recession.  The arguments offered by these groups have varied from the supine to the ridiculous.  For example, claims were made that American capitalism itself would be imperiled (unlike the current situation) if politicians were given the ability to review the monetary policies of the Fed.  The sacred independence of the Fed would be lost and monetary policy would be subject to the whims of politicians, who are subject to short-term re-election thinking; thus potentially pushing the country into a Zimbabwe-like economic collapse.  However, the problem isn't so much congress' meddling in monetary policy, but the Fed's persistent habit of defining fiscal policy, which is clearly the purview of the elected representatives in Congress and the executive.  During the past recession, the Fed shifted its position from being the lender of last resort to the investor of last resort.  In practice this meant that the Federal Reserve, under Ben Bernanke, has been picking the winners and losers in the US market by defining who would be protected by the state if their businesses faltered.   That is the definition of crony-capitalism.

Last week, 11 May 2010, the US Senate voted 96-0 for the Government Accountability Office to audit the "Fed's activities since the outbreak of financial turmoil in 2007."   Unlike in the past where the Federal Reserve and its Chairman were given "deference and near-reverence" by members of Congress, populist anger at all branches of government have forced politicians to respond.

The chief backers of the audit idea are a political odd couple, Rep. Ron Paul (R) of Texas in the House and Sen. Bernie Sanders (I) of Vermont. On the right, Representative Paul is a libertarian who sees the audit as a step to help the public conclude that the Fed should not exist at all. On the left, Senator Sanders is known as a "democratic socialist" crusading against an institution that critics say is closely allied with powerful Wall Street bankers.

The recipients of all those trillions of dollars, which to date the Fed has refused to provide, and the underlying rationals for providing these parties with such grandiose sums, will now be open to public inspection.  As Senator Sanders said, "We also need to know what possible conflicts of interest exist involving the heads of large financial institutions."

Jobs? What Stinkin' Jobs?

A week ago the US government published statistics, which state that the US economy added 162,000 jobs in March.  The conventional propagandists make the absurd claim that the recession is over and that the Gilded age can continue again without interruption.   A huge hurrah could be heard in the financial district of New York as the DJI passed the 12 thousand mark; a level it hasn't reached since June 2008.  Once again, the divide between reality and Dr. Greenspan's imaginarium of useless financial gimmickry grows even larger.  An emerging view that has now become nearly axiomatic amongst those of us in the reality-based sciences, is that the study of economics has become little more than an ideological handmaiden to political forces and is polluted to the point of uselessness.

Those economists, on the other hand, who have been constantly critical of both the Bush and Obama administrations economic dissembling and the "green-sprouts" argument, have noted their objections to the over-simplified and intellectually dishonest statements of their peers who claim that the US economy is on the mend and jobs will soon abound.

Robert Reich, Dean Baker, and Mark Thoma, to name a few, outline the situation:

• The positive news is that manufacturing has shown a brief but constant uptick in jobs over the past few months in the USA.  A total of 45,000 jobs since December 2009.  However, future growth is likely to be anemic.
• The US census bureau added at least 48,000 new jobs for the 2010 census in March.  As many as a million jobs will be added alone for this endeavor in the following months. These jobs are temporary and only provide a short-term solution to those who are chronically unemployed; however.
• Since the inception of the Great Recession, the US economy has lost 8.4 million jobs and failed to create an additional 2.7 million necessary as per population growth.  Thus, a total of at least 11 million jobs have either disappeared or failed to materialize.
• Many of the jobs that have been lost were in construction, mortgage banking, appraisal, financial and legal services associated with the bubble market, and manufacturing.  Most of these service oriented jobs will not return and in the case of manufacturing, are permanently lost as long as the Chinese retain their slave-labor policies and currency manipulation practices.
• State and local governments have shed 72,000 jobs since December, or 24,000 a month.  A trend that will accelerate as the federal stimulus program weans and state revenues continue to slump.
• The federal government's spending on last year’s domestic stimulus is still near its peak, and the Fed continues to hold down interest rates.  Without these two factors, there would be no job growth to report.
• Nominal wages fell in March for the sixth time since 1964. Dean Baker states that, "This is not a good sign for future income growth."
• Consumer debt remains high, with those who are employed saving and paying off existing debts rather than engaging in further purchases.  If there is a permanent change in consumer demand, no recovery to pre-recession levels of economic activity will occur in the near future.

The obvious question that remains is what has the US government or the Fed done to prevent the big banks, which are now bigger than they ever were and were at the center of this recession, from engaging in the same activities that led to this current economic collapse?  Nothing.

Stiglitz Calls the US FED Corrupt

Last week Joseph Stiglitz, professor of economics at Columbia University and recipient of the Nobel Memorial award in Economics (2001), made a set of explosive criticisms about the Federal Reserve at a public forum on financial reform that has largely been ignored by the mainstream media to date.    Tim Iacono at SeekingAlpha says, with respect to the comments, that they are, "patently obvious to anyone with a working knowledge of how the Federal Reserve system really works, yet, even to me they somehow seemed shocking."

What was it that Stiglitz said?

If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.

The pseudo-public (and therefore pseudo-private) Federal Reserve has long pretended to the serve the public interest, while hansomely filling the vaults of the banks to whom they are supposed to supervise and regulate.  Since the the inception of the Great-Recession libertarians, progressive-liberals, and an assortment of economists have been asking tough questions about the conduct and competency of Alan Greenspan and Ben Bernanke and the entire Federal Reserve system, which to date has blocked, scuttled, or diluted any attempts to allow transparent examination of its activities.  I too have been questioning the basis for the US Federal Reserve system (here, here, and here) for some time, and Stiglitz's comments, which I do not consider hyperbole, are a refreshing anodyne to the usual mealy-mouthed platitudes offered by the MSM on why meaningful examination of the Fed and financial system reform cannot occur.

Sen. Bernie Sanders on Bernanke

Sen. Bernie Sanders (I-VT) wrote on the (27th January, 2010) op-ed pages of USA Today, of his opposition to the re-appointment of Mr. Bernanke to Chairman of the Federal Reserve Bank of the USA.  He skewers Bernanke for his failure to be forthright about his activities as FED Chairman in the aftermath of the 2008 collapse and for not adequately addressing  the deregulatory mantra that still holds sway amongst FED officials and Wall Street. 

Despite what appeared to be a growing chorus of dissention, Mr Bernanke was reappointed by the Senate on Thursday evening; although with a historic number of oppositional votes (30 nays).  Stock markets responded favorably that the Global Arsonist had been given another term to evade accountability and ensure the wily casino-capitalists of Wall Street, including Goldman Sachs Group Inc. and Wells Fargo & Co. which also saw their stocks rise, are well taken care of by friends in high places.

Opposing view: Bernanke must go

Fed chair was asleep at the switch. Don’t reward him with a new term.
By Bernie Sanders

Today, the United States is in the midst of the worst economic crisis since the Great Depression. More than 17% of the American workforce is either unemployed or underemployed. Millions more have lost their homes, their savings, their health care and their pensions.

The immediate cause of this economic disaster is the greed, recklessness and illegal behavior of the largest financial institutions in the country. One of the major functions of the Federal Reserve is to protect the safety and soundness of our financial institutions and to oversee their actions. It is clear to almost everyone that Chairman Bernanke was asleep at the switch while Wall Street became the largest gambling casino in the history of the world and hurtled into insolvency. His failure to adequately regulate financial institutions should not be rewarded with a reappointment.

As part of the huge taxpayer bailout of Wall Street, the Fed provided trillions of dollars in virtually zero-interest loans to large financial institutions. Bernanke consistently has refused to provide the transparency needed so that the American people can learn which banks received those loans. Our democracy cannot tolerate this kind of secrecy. We need a new Fed chairman who believes in transparency.

As the country desperately tries to work its way out of this severe recession, the Federal Reserve has the capability of playing a significant role in improving the economy for working families and small- and medium-sized businesses.

Today, it could protect consumers by lowering outrageously high credit card interest rates that millions are paying.

Today, it could help create millions of new jobs by providing low-interest loans to credit-worthy small businesses.

Today, at a time when four of the largest financial institutions issue two-thirds of the credit cards and half the mortgages, and when three out of the four largest are even bigger now that when we bailed them out last year, the Fed could begin the process of breaking up these "too big to fail" banks so we will never have to bail them out again.

We need a new Fed chairman who understands that his or her major task is to protect ordinary Americans, and not just Wall Street CEOs. Ben Bernanke must go.

Sen. Bernie Sanders, I-Vt., serves on the Budget Committee and has placed a procedural hold on the Bernanke nomination

Global Arsonist named TIME's man of the year!

For the majority of the year the managers of America's economic news have been issuing headline-after-headline declaring that 'green shoots' were upon us, jobs growth was around the corner, consumer confidence was returning, the banks were once again sound, and corporate profits are once again booming. To date, none of these exaggerations have been remotely correct; including the statement by Ben Bernanke, "that the recession is very likely over."

In terms of understanding propaganda, 2009 has been another boom year. Much like the Bush years, where government lackeys bemoaned the fact that little good-news was being reported about the Iraq war, the Obama administration has likewise, with the collusion of mainstream media (MSM), produced voluminous statements to create the public perception that the global economy was on the mend. This week Ben Bernanke, chairman of the Federal Reserve, was named TIME magazine's man of the year. To the glee of media bobble-heads everywhere, Mr. Bernanke has single-handily prevented America from sliding into a depression. Endless articles have now been written about how in the darkest moments after the collapse of Lehman Brothers, Bernanke marshaled all the power of his office to save capitalism and right the debt-laden banks from implosion. It's a compelling narrative, but one that is completely false.

Bernanke, Greenspan, and the rest of the laissez-faire economists of the Federal Reserve not only ignored regulating the housing bubble and the "shadow economy" that included the toxic assets that brought down Bear Sterns and Lehman Brothers, but encouraged the expansion of these bubbles. Bernanke served as one of the Fed's governors from 2002 to 2005, and then did a brief stint as head of the Council of Economic Advisers before taking over as Fed chair in early 2006. There were few people in government who were better situated to correct the "irrational exuberance" in the markets than this man.

In the fourth quarter of 2007, Bernanke repeated to congress and the media that there was no need to cut interest rates and that there was no recession on the horizon. Weeks later, he cut interest rates. He remained steadfast afterwards that the economy in 2008 would be "strengthening as the effects of tighter credit and the housing credit began to wane." However, his actions and private statements belied the opposite was occurring. Two months after he gave his prepared statements to Congress, the greatest economic downturn since the Great Depression began December 2007.

When the September Crisis of 2008 unfolded, the FED loaned at least $2 Trillion dollars to both US and foreign banks. Economist Dean Baker, co-director of the Center for Economic and Policy Research, elaborates on Bernanke's perfidy at this critical juncture:

[Bernanke] has refused to provide the public, or even the relevant congressional committees, with information on the trillions of dollars in loans that were made through the Fed's special lending facilities. While anyone can go to the Treasury's website and see how much each bank received through Tarp and under what terms, Bernanke refuses to share any information on the loans that banks and other institutions received from the Fed.

Where we do have information, it is not encouraging. At the peak of the financial crisis in October, Goldman Sachs converted itself from an investment bank into a bank holding company, in part so that it could tap an FDIC loan guarantee programme. Remarkably, Bernanke allowed Goldman to continue to act as an investment bank, taking highly speculative positions even after it had borrowed $28bn with the FDIC's guarantee.

The rational in naming Ben Bernanke as the most important person of the year, is simply to provide him with official credibility in the face of the ruinous laissez-faire ideology that has held sway over Washington for the past thirty years. Wall Street has given the MSM its orders to present the fiction that Mr. Bernanke is the man who saved the world and who must naturally be given another term as FED chairman. The financial world that existed pre-Lehman Brothers no longer exists and the elites who destroyed the world economy, do not wish anyone to understand the scope of their mismanagement in hyping casino-capitalism, while destroying the American dream.

***

Additional blog postings and links of interest:

Eliot Spitzer has "Nine Questions for Ben Bernanke," which to date, none have been adequately addressed by either Mr. Bernanke, the FED, or the feckless MSM.

Critics who said Bernanke should not be re-appointed: Nassim Taleb, Anna Jacobson-Schwartz, Senator Bernie Sanders (I-VT), and Ron Paul (R-TX) to name a few.

People who have advocated Bernanke's reappointment in the media with reservations are Nouriel Roubini and Paul Krugman.

Democrats attempt to Deep-6 FED Audit Bill

The Ron Paul (R-TX) and Alan Grayson (D-FL) amendment to HR 3996, the “Financial Stability Improvement Act of 2009,″ allows the US Government Accountability Office (GAO) to conduct a wide-ranging audit of the financial activities of the Federal Reserve Board. Specifically:

• Removes the blanket restrictions on GAO audits of the Fed
  
• Allows audit of every item on the Fed’s balance sheet, all credit facilities, all securities purchase programs, etc.
  
• Retains limited audit exemption on unreleased transcripts and minutes
  
• Sets 180-day time lag before details of Fed’s market actions may be released
  
• States that nothing in the amendment shall be construed as interference in or dictation of monetary policy by Congress or the GAO
  

This amendment, if enacted, would permit for the first time, since the inception of the US Federal Reserve in 1913, a complete examination of the underlying financial machinations of this institution.

Only to prove their critics point, that this bankers-only club is rotten to its core, current Chairman Ben Bernake, FED lawyers, and an assortment of affiliated yes-men have said implicitly or as in the case of former FED Governor Laurence Meyer explicitly that, "U.S. stocks, bonds and the dollar would collapse" if the US Federal Reserve was audited. In other words, according to these finely tailored gentlemen, if the current institution is audited, they suggest that the entire financial system of the United States of America, maybe even the world, will be ruined! The conclusion is clear: only a system based on fraud, corruption, and extreme kleptocratic policies that are meant to enrich a small coterie of elite entities (ex. post-Soviet Russia in the 1990's and their oligarchs and criminal syndicates), would make such outrageous statements, if subject to the same rules of transparency, openness, and accountability that every other small business is. The end of crony-capitalism is near, and the only question left is whether the greed-heads in control will take the whole world down with them?

Nine Questions for Ben Bernanke

I'm not a fan of the monetary or regulatory policies advocated by the Federal Reserve. I think Alan Greenspan was a crook; although unlike the politicians and corporate yes-men he served, he never claimed he wasn't. Nassim Taleb has called for Bernake's head, as have persons on both the right and left; although for quite different reasons. It is clear that Mr. Bernanke will be confirmed without undue problem, just as Greenspan was. If the Democrats were serious (which it doesn't appear to be) or at least a few outliers, like Representatives Ron Paul (R-TX) or Gary Ackerman (D-NY), who do sit on the House Financial Services Committee were able to ask the right questions, then we might actually understand where this listing ship will finally sink.

Elliot Spitzer, former Governor of NY, has listed some decisively intelligent questions that should be asked of Mr. Bernanke when he's subjected to appointment. They are:

1. How does the Fed define economic success? If the Fed is to be the macro giant that it seeks to be, we must understand whether its metrics for success focus on GDP growth, job growth, household median income growth, inflation moderation, or some other data.

2. What industrial policy does the Fed see best fitting our macro goals?

3. How do we define and measure systemic risk? If the Fed wishes to be granted the authority to be the regulator of risk, it better be able to explain how it measures it.

4. Has the Fed found the analytical error that permitted it to believe throughout 2008 that the crisis was contained and would not jump from the sub-prime sector to the entire financial system? If we cannot locate that analytical error, how can we possibly begin to spot systemic risk in the future?

5. Has the Fed examined why it permitted the avalanche of debt to course though the financial system without one of its own analysts observing that the risk of default was not reflected in the market's pricing of risk?

6. What bank structure will best accomplish the macro goals the Fed defines? Do we desire a market dominated by several institutions that are openly "TBTF"—too big to fail—or are we going to reverse the implicit and explicit federal guarantees of the past year and cut loose the major institutions? And if we are to cut them loose, how will the market be persuaded that they really are on their own, and the Fed will not rescue them next time, too?

7. Does the Fed stand by the notion that asset bubbles are better dealt with after the fact than during their creation? Does this view, which the chairman has articulated with some frequency, doom us to the incessant cycles we have lived through over the past decade?

8. Does the Fed still have faith in "self-regulation," the concept that was used to justify the decay that set in throughout the regulatory apparatus in Washington?

9. What governance structure is appropriate for the Fed, given its new authority?

Eliot Spitzer: the FED is a fraud machine!