And you get one guess as to whether this Congress will truly challenge the administration on this.

this statement "only if congress wishes it so". Does that mean that unless congress intervenes (how would they do this), this rearrangement will automatically take place??

I would demand the following: either the direct access to the discount window for non-bank primary dealers be withdrawn in six months, or these dealers must convert to a banking charter. They would then be subject to Federal Reserve or OCC direct supervision, they would have to begin paying FDIC insurance, their leverage would have to be brought down to the maximum allowed under the Basel Capital Accords, and their pay scales would have to be ratcheted down to commercial bank levels. If they don't like these conditions, they can always go back to their January status with no direct access to the lender of last resort facilities. If they object to this choice then it tells you a lot about their solvency and how they think the market will treat them if they were once again on their own.

The Congress has the right to demand this of the Fed. They can amend the Federal Reserve Act to clarify that any financial institution with direct access to lender of last resort privileges be chartered as a commercial bank subject to Fed supervision.

They have and can once again specify how much supervision is required of the Fed, and obviously they will want to question why the Fed didn't put a stop to egregious and risky mortgage lending practices among its existing members.

The Fed can be reminded it is chartered by Congress and subject to Congressional oversight. It is specifically not meant to be a creature of the Executive Branch, and as such, it is expected to resist moves by the Treasury Department and administration that infringe on its legislative responsibilities. In this regard, the Fed should answer questions about how much pressure was put on it by the Treasury to complete this Bear Stearns set of initiatives. The Fed should be probed on the $29 billion guarantee against losses it gave to JP Morgan Chase, and whether this constitutes an equity position rather than a pure loan (it almost certainly does in substance if not in law).

The Treasury Department should be asked under what authority it promised to reimburse the Fed for any losses under this guarantee. This is tantamount to spending taxpayer money, which is a Congressional prerogative, not that of the Executive Branch.

Any threat of legislation to fix these problems will obviously be met by a Bush veto, but the Congress has to be prepared for this. It must take a stand on these depredations against the law and the public purse. Even if it cannot override the veto, it may have a better shot after the coming election. The Fed will be under notice that a lot could change with a new President and a stronger Democratic majority.

Sounds like they need to behave in a responsible way. Unfortunately, I haven't seen much responsible behavior from congress in a while. One can only hope, I guess.

The Fed "experiment" has failed. Since the creation of the Fed in 1913, the dollar has lost 98% of its purchasing power due to monetary inflation. Nor has the Fed balanced full employment, economic expansion, and monetary stability successfully during that time. Meanwhile, managed by the private sector, the monetary system has benefited the wealthy to the degree that now 90% of the country's commercial wealth is in the hands of 1% of the population, and the country and world are facing another monumental depression because of irresponsible monetary creation through derivatives and leverage. If there is a depression, it will result in another huge transfer of wealth to the rentiers and increase the number of renters. For in deflationary times, those who have access to money buy assets for pennies on the dollar, and in inflationary times, they profit from speculative bubbles by the use of leverage through access to credit. The first is a scam, and the second a Ponzi scheme that leads to the first. The taxpayer is left holding the bag, and the poor suffer horribly.

The idea is that the government cannot be trusted to print bills instead of borrowing with bonds to create money, because the government cannot be trusted not to overprint, or to oversee the economy because of politics, is ridiculous. Instead, the foxes have been put in charge of the hen house, and taxpayers are forced to pay interest on bonds to a private financial sector under whose watch the dollar has declined in purchasing power 89% between 1950 and 2007.

Ron Paul's candidacy, whatever on thinks of it, was successful to the degree it was because he raised this issue. This is an indication of how much tension has already built over it. The Money Masters and Zeitgeist are cult favorites, although Georgetown Prof. Carroll Quigley's Tragedy and Hope (also a cult favorite) provides a more academic accounting (read a couple of reviews is probably sufficient). While the libertarians and gold bugs are primarily pushing this stuff, it is also a favorite of conspiracy theorists, too — or some combination thereof. However, there is an element of truth to it also, when you filter out the tin foil hat stuff. And you don't have to be a Marxist to see where Marxists have often provided insight into underlying motives of economic liberalism as being based on worker exploitation.

As I wrote in a previous post:

Study of the history of money and banking in the US shows that there has been a running battle between Hamiltonians favoring centralization and republicanism (plutocratic elitism) and Jeffersonians favoring decentralizaton and democratic populism. The former have fought incessantly for a monetary system under the control of a central bank in the hands of financiers, while the latter have insisted that there is essentially no difference between government bonds, one which taxpayers pay interest, and government bills on which they don't, e. g., Lincoln's "greenbacks" that paid for the Civil War instead of government debt. The difference is that the interest on government debt (bonds) goes to the rentier class and over time, wealth inevitably rises to the top. On the other hand, government bills don't require payment of interest through taxes, so there is no transfer of wealth upward to the rentiers.

Such issues are at the basis of an ongoing tussle between elitism and populism. For whoever controls the creation and allocation of money controls the game, i.e, the entire socio-politico-economic system of the nation. And the de facto linkage of central banks allows international financiers to dominate global wealth and to shape global politics.

Libertarian opposition to the UN (and John McCain's League of Democracies to replace it) as well as other international institutions such as the BIS, IMF and the World Bank is based largely on the premise that they are machinations of international financiers to control global monetary system. Based on a reading of economic and monetary history, there is good reason to think that this is a present danger that must be countered. Whenever money and power are centralized, the opportunity and temptation to seize control of them are present.

The goal of capital is always and everywhere ownership, which then exacts rent for use. Over time, all wealth becomes concentrated in the hands of a few, who only make enough available to others to allow the economic system to function. That is to say, so-called free markets are amoral, that is, do not take social value into consideration. Therefore, they operate on the basis of their objective, which is profit.

Money belongs ultimately to the people whose ingenuity and industry create and allocate it, not to the financial intermediaries who only act as middlemen. Money can be created either the financiers, the government, or the people, depending on the system that is adopted. If it's the financiers, it's capitalism. If it is the state, it is socialism. If it is the people, it is democratic populism. The financiers have framed the debate in terms of either a free market economy of capitalism or a command economy of socialism. However, this totally ignores the history of democratic populism is the US.

This US has consistently rejected socialism as a possibility. The monetary history of the US is the dialectic between Hamiltonian republican elitists favoring centralization, plutocracy and a private central bank in the hands of the financiers, and Jeffersonian democratic populists favoring monetary system in which money is not created or allocated by the private sector for rent. Rather, money is created and the money supply regulated by the people's servant, the elected government, which manages the money supply on the basis of corresponding changes in productivity, aiming for ample funds for growth while maintaining price stability. The people have control over this process through democratic elections, whereas they have no control over the central bank, and the fiction is perpetrated that their elected representatives don't either, in order to "insulate the Fed from politics."

Being put in charge of the henhouse, naturally the next step for the foxes is to reduce and finally eliminate regulation and oversight. They assert that they are honorable people and that the financial sector can police itself. They also add that markets are self-correcting anyway — of course, failing to mention that in event of a severe correction they plan to argue that they are too big to fail and need a taxpayer bailout.

We need to have this discussion yet again in a serious way, but unfortunately, we don't have an Andy Jackson or William Jennings Bryan in the Democratic party now, and the GOP has no Lincoln either.

Dennis Kucinich did get it though. Lots of people were surprised when he suggested an alliance with Ron Paul. It was over this economic issue, not Paul's political Libertarianism. The Green Party is also pushing this debate in a different direction. See The American Monetary Institute, and Peak credit and a flight to simplicity by Chris Cook.

And I haven't even mentioned the international financiers. The City of London is deep in this, too, as well as Continental interests. Throw in disaster capitalism, and you get the idea. Rich white men rule.

Here is the relevant section from Hank Paulson's speech this week:

Market Stability Regulator

Given its traditional central bank role of promoting overall macroeconomic stability, the Federal Reserve is the natural choice for the important task of market stability regulator. In our model, the Federal Reserve's market stability role would continue through traditional channels of implementing monetary policy and providing liquidity to the financial system. In addition, the Federal Reserve would be provided with a different, yet critically important regulatory role with broad powers focusing on the overall financial system.

This role would replace the Fed's more limited role of bank holding company supervision because we recognize the need for enhanced regulatory authority to complement market discipline to deal with systemic risk. To do its job as the market stability regulator, the Fed would have to be able to evaluate the capital, liquidity, and margin practices across the entire financial system and their potential impact on overall financial stability. The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability.

To do this effectively, the Fed will collect information from commercial banks, investment banks, insurance companies, hedge funds, commodity pool operators, but rather than focus on the health of a particular organization, it will focus on whether a firm's or industry's practices threaten overall financial stability. It will have broad powers and the necessary corrective authorities to deal with deficiencies that pose threats to our financial stability.

The key to these expanded powers is in the third paragraph. The Fed will be able to look at all players in the system and collect information., But it will no longer focus "on the health of a particular organization." Not being able to do safety and soundness examinations is a critical limiting factor in preventing the Fed from taking remedial action. It will only be able to take such action if it sees a systemic risk problem.

Later on in his proposal Paulson describes the creation of a Prudential Regulator responsible for safety and soundness matters of individual institutions. He describes this new agency as "like the OCC". It is safety and soundness matters that are critical to extending lender of last resort facilities, and this is also why the Fed was flying blind when it gave these privileges to all investment banks last month. It has no real idea what is going on in these banks. As systemic risk oversight and information gathering supervisor, it wouldn't known much more either.

You can read the details here: http://www.treasury.gov/press/releases/hp897.htm

those eleven words went by fast. Holy cow!

off the hook:

"The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability."

This could be any place that had accounting or banking metrics that did not look right.

He will say that the Fed can look as broadly or as narrowly as it wants. Thus daily oversight is implied along with whatever else it may have reason to do.

http://mauberly.blogspot.com/

Fact finding expeditions aren't the same as regular audits and examinations. I read this proposal as stripping the examiners out of the Fed and putting them into an OCC successor. Others who have commented on this see the same thing, and I wouldn't be surprised if the Fed fights this behind the scenes. Without the examiners, the Fed would be no different than the SEC, looking at reports and filing civil or criminal cases if it finds something that breaks the law. It is not even clear under this proposal if the Fed would still have the right to issue regulations.

The operative language from this letter is:

But in a letter to the bipartisan leadership of the Senate Finance Committee, Treasury officials admitted that Treasury was extensively involved in the deal, under which the $30 billion of taxpayer funds were put at risk.

Indeed, Paulson signed off on the important elements of the transaction, including the risk of the loss of taxpayer funds, in a letter to the central bank.

In layman's terms, the Fed earns a profit on its operations and sends this to the Treasury general funds. Any loss from the Bear Stearns bailout would be less profit for the government.

"On behalf of the Department of Treasury, I support this action as appropriate and in the government's interest, and acknowledge that if any loss arises out of the special facility extended by the Federal Reserve Bank of New York to J.P. Morgan Chase, the loss will be treated as an expense that may reduce the net earnings transferred by the New York Fed to the Treasury general fund," Paulson wrote in the March 17 letter.

The de facto guaranty comes about because Paulson will allow the Fed to reduce its dividends otherwise legally owed the Treasury from its operations, by the amount of any losses on the "loan" to JP Morgan.

There are many citations in the press and on the media, but here is one quoting the letter: http://quotes.freerealtime.com/dl/frt/N?tmn_id=%7B79C94AFF-EC37-44AC-A93C-721E276B8495%7D

The second requested link was already provided above.