Previously, and by charter, the Fed only lent directly to banks. On March 17, the Fed overreached that charter and started direct lending to broker dealers via the Primary Dealer Credit Facility (PDCF).

As one might expect, Investment firms have already tapped the Fed for billions.

The Fed, for the first time, agreed to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed’s lending authority since the 1930s.

Doing this was “a very substantial step,” Bernanke told lawmakers at a Senate Banking Committee hearing on Thursday. “We didn’t take it lightly.”

The Federal Reserve reported Thursday that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program. That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.

Big Brother Moves In

Since the Fed has violated its charter by lending to broker dealers, it should come as no surprise to find it usurps still more authority to monitor them. The price (in freedom lost) keeps getting bigger and bigger. Big Brother has moved in.

The Times Online is reporting Federal Reserve staff move into offices of investment banks to monitor activities.

The US Federal Reserve has sent staff into some of Wall Street’s biggest firms and its New York branch is gathering evidence on key traders’ activities as America’s central bank raises its scrutiny of risk to an unprecedented level.

Fed staff have set up shop in Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns to monitor their financial condition just days after Henry Paulson, the US Treasury Secretary, proposed that the Fed become the financial industry’s “risk czar”.

This is the first time in more than a decade that the Fed has put staff in securities firms and is a response, in part, to its decision to extend to investment banks the “discount window” of cheap loans traditionally offered only to the commercial banks. The Fed argues that if it is to act as lender of last resort to the securities firms, it should keep a closer eye on their activities.

The Fed declined to comment on its attempts to increase its market scrutiny.

Fed Uncertainty Principle In Action

Sadly, we are already seeing Corollary Number Two to the Fed Uncertainty Principle being carried out in spectacular fashion.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

If you have not yet done so, please read the Fed Uncertainty Principle. Inquiring minds may also wish to read Fed Defends The Indefensible.

Ron Paul vs. Bernanke

Ron Paul was the only one who stood up to Bernanke during the Fed’s testimony before the Senate Banking Committee on the Fed’s role in the Bear Stearns debacle. Click here to play a video of the exchange.

Partial Transcript

Ron Paul: Does the Federal Reserve contribute to the business cycle?
Bernanke: It has. It has at times ….
Ron Paul: Does excessive credit and artificially low interest rates cause malinvestment?
Bernanke: The question is, [what] is the judgment as to where interest rates ought to be? Of course we have a mandate for maximum employment and price stability and we try and balance those obligations. So we could make mistakes and put the interest rate at the wrong place and that would have negative impacts, I agree. So we are doing the best we can to find the right place to put the interest rate, the one that’s consistent with the neutral rate, the rate that establishes a full employment economy.
Ron Paul: And some day we may try the market to determine the interest rates. Thank You.

Suggestions For Ron Paul

These exchanges are welcome given that no one else is willing to stand up to Bernanke. However, I am frustrated every time because Ron Paul does not make good use of his time. Instead of starting with a long dialog, a shorter dialog and more pointed questions would serve everyone far better.

I propose a question like “You have blown bigger bubble after bigger bubble and we have neither price stability nor full employment to show for it. Instead of micromanaging interest rates, why don’t you simply let the market set the interest rates? You don’t really have any idea where interest rates should be, do you?”

“Now you are in a power grab in a mad attempt to bail yourselves out of a crisis a free market would never have created.”

That’s something that needs to be heard. And phrased that way, it might have made front page news.

Mike “Mish” Shedlock
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