Update: David has confirmed he did not attempt to block my IP, I have been able to submit comments to his blog since this post. I look forward to his follow up post on this topic.

[1] There are many other allegations not related to the discount window that Congress would like to pursue, is secrecy also justified in those cases? Even questions regarding 30 year old events? Why doesn’t the Fed respond to access to information requests?

[2] No it shouldn’t be given the benefit of the doubt because I don’t know what Bernanke and Obama will do to prevent the Fed from ever losing a penny if conditions deteriorate in the future. I won’t speculate here, but there is precedent:

“Because of the slowdown, Federal Reserve district banks were transacting less business with member banks and hence earning so little funds it was feared that some banks would not meet their expenses. So, Fed banks purchased government securities at a great pace through the first half of 1922 to improve their earnings positions.”

http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3826

I don’t want to draw inappropriate conclusions, but I will simply say the 1920s didn’t end well. My point regarding MBS was that things can happen for the first time, open market operations didn’t begin until 1922. Also, the quote below is not particularly comforting for obvious reasons.

“Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae”

http://www.newyorkfed.org/markets/mbs_FAQ.HTML

[3] I haven’t read your entire paper but I read parts of it, and for what it’s worth I find it strangely reminiscent of a partially discredited concept in Engineering often practiced by the Soviet Union:

http://en.wikipedia.org/wiki/Security_through_obscurity

From wikipedia:

“Operators and developers/vendors of systems that rely on security by obscurity may keep the fact that their system is broken secret to avoid destroying confidence in their service or product and thus its marketability, and this may amount to fraudulent misrepresentation of the security of their products. Instances have been known, from at least the 1960s, of companies delaying release of fixes or patches to suit their corporate priorities rather than customer concerns or risks.”

Sound familiar? There are well documented risks with this approach, I’m willing to bet many of them translate.

From your paper:

“In competitive economies, the disclosure of high-frequency information unrelated to an asset’s “long-run fundamentals” may be detrimental to economic welfare when claims to such assets serve as high-velocity payment instruments.”

Who determines which information is related to an asset’s long-run fundamentals? How do I determine whether this information is a catalyst for insider trading if it never becomes public? You said you weren’t asking me to trust Bernanke, unless I missed something, your paper infers otherwise.

[4] As a matter of fact I do. If they take the gold then people can use silver. If they take the silver then people can use tally sticks. If they take the tally sticks then people can use seashells. If they take the seashells then people can use feathers. Obviously that’s a little tongue-in-cheek, but the point is clear — multiple circulating competing private currencies. The government can’t steal them all.

The problem with currency unions like the Euro is that each country has a different level of productivity. Just as tremendous wealth in Alberta causes a strong Canadian dollar that punishes the maritime provinces, the same thing happens in Europe between Germany and Italy. The union in Europe is supposed to be a union of independent states, but so too was the United States of America until Lincoln (that was the real cause of the civil war) and FDR came along. The currency union in Europe will make that relationship impossible to sustain. In the United States and Canada the problem isn’t as severe because it’s much easier for people to move (similar culture, language, religion, etc) but even we have some form of transfer payments to help the poor regions cope, and that’s not the case in Europe. The same movement towards socialistic big government ideas that swept the US and Canada will eventually hit Europe and decades from now it will look very similar to the US and Canada today, with European wide pension plans and an ever increasing amount of resources allocated by the central European government to level the playing field between states. That’s the covert process by which power is usurped from individual regions and centralized in the hands of a few men.

But here’s the problem, everybody knows this story now, so it’s unlikely China and Brazil and especially Russia will get suckered into this scheme on a global scale like the American states and the European states. All of that is why I believe it will be an electronic currency that exists only on computer. If they go ahead with this plan, it probably won’t be a currency like the Euro that individuals can touch and hold and use at the store. It will be a replacement for the US dollar as global reserve and essentially act exactly as gold used to act in previous centuries as a mechanism for automatic re-balancing of current account deficits. Every country will have their national currency pegged to this international currency, at different rates based on their productivity, and if a country over consumes and thus has diminishing reserves of the international currency, they must devalue their national currency or default. Exactly like the gold standard, but without the gold, at least that’s how it will be sold. Nobody will sign up unless it works like this.

The advantage of course is no need to waste resources digging metal out of the ground. The disadvantage is the ease with which people can inflate this new currency like any other fiat currency. Gold was not used as money because it’s easy to spell, it’s because it imposes discipline. You can’t print gold. There is no difference between the new currency and the US dollar, except one will be new and the other will be old. The new currency may even initially be backed by gold, the IMF claims to have 3000 tons of gold. But so too was the US dollar, they still claim to have 8000 tons of gold. So the initial backing will only be a ruse to get support. One day 40 years from now there will be another deflation scare or war that needs to be fought (but instead of fighting each other we’ll be fighting carbon dioxide or something) and the world will leave the gold standard just as it did 40 years ago. There’s always another crisis behind the curtain.

I’m actually 100% convinced such a plan could work flawlessly for a few decades then once we’re all convinced it’s the best thing since sliced bread and completely vested in its success, they will create another crisis to push the process one step further.

At least that’s how the story goes…

The end result of this stupidity is that a problem which could have been isolated to a few adventurous mortgage lenders has contaminated the balance sheets of almost every player in the industry. Spreading the risk worsened the problem by lengthening the amount of time it took for these irresponsible brokers to go bankrupt, and greatly increasing the amount of toxic paper in circulation. Instead of one or two institutions going under quickly, they will all suffer for a long time.

Imagine that you’re a basketball scout getting paid per signed athlete and every team has promised to accept any player above 7 feet tall. Would you go out of your way at great cost to find the best players? Of course not, you would probably hack into the health insurance company database and grab any giant you can find regardless of their abilities. Why do you care? The risk associated with finding these people has been spread out across the entire industry, you can’t lose. They get hundreds of mostly worthless athletes and you get rich.

Risk is good, not bad. It shouldn’t be spread, it should be isolated. Everyone should have clarity and a full understanding of the risks associated with their investments. How else could anyone possibly make intelligent and informed decisions?

Uncle Ben, if you’re going to speak big and carry a soft stick you will only destroy the Fed’s credibility. Didn’t your mother ever tell you the story of the boy who cried wolf? We don’t believe you anymore and your sheep are about to get eaten.