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<\/a><\/p>\nChairman Greenspan was highly concerned about the rate of inflation in 1999 while the world awaited the transition into a new millenium. \u00a0In 2000, Greenspan convinced the FOMC to raise the Fed Funds to 6.5%\u00a0and kept\u00a0the rate at that level through the first half of 2001. \u00a0In the Fall of 2001, we experienced the attack on the World Trade Center. Shortly after, several large American corporations gave notice they were bankrupt, namely Enron, WorldCom, Global Crossings, Tyco International, Adelphia Communications along with 16 others.<\/p>\n
Was their failure due to incompetent and\/or corrupt management or because of actions by the FOMC. \u00a0 These large corporations were required by the Federal Securities and Exchange Commission to maintain their financial records on the “mark-to-market” accounting method. \u00a0 The “mark-to-market” accounting method requires that any negoitable security be valued on the books of the company based on \u00a0the contracts market value. \u00a0 Well, in the mid-1990’s while the Fed Funds rate was in the 3.00% to 4.5%, Enron and the other companies entered into long-term contracts for gas, water, electricity, and other commodities. \u00a0 So, if one buys a long-term contract based on the current interest rate for say $10,000, and the interest rate goes up, the value of the contract goes down in market value. \u00a0When the interest rate in the mid 1990’s went from 3.00% to 6.5%, that meant the value of a contract purchased in the 1995 would be worth around 50% of its face value in 2001. \u00a0 These corporations had to write down their assets because of an accounting method, not because the contracts were not viable. \u00a0 The same principle holds true for bonds, notes, and mortgages.<\/p>\n
Why did we have a near financial collapse in 2001-2002? \u00a0 The Redneck believes it was due to the FOMC raising the Fed Funds rate by more than 200% in 5\u00a0years. \u00a0 How did Greenspan react? \u00a0 The FOMC lowered the Fed Funds Rate by the end of 2001 to 1.75% and to 1.00% by the summer of 2003.<\/p>\n
Mr. Greenspan retired in 2004, and Bernard Bernacke took over as Chairman of the Board of Governors and the FOMC. \u00a0 Mr. Bernacke came into office with the expressed goal of raising the Fed Funds rate at least .25% each quarter to hold down the rate of projected inflation which at time was around 2.5-3.0%. \u00a0By the summer of 2006, Mr. Bernacke and the FOMC had raised the rate to 5.25% from the 1.00% in June, 2003. This resulted in the increase of 425.00%. \u00a0I hope by now you are getting the picture.<\/p>\n
The mortgage loan made by the Federally insured mortgage loan company got devalued by 425.00%, even though in many cases the borrower continued to make his monthly payment. \u00a0 The bank though had to write down the value of the mortgage on its books by 425.00%. \u00a0 No wonder we had a financial system collapse in 2009.<\/p>\n
What did Mr. Bernacke do because of the 2009 financial crisis? \u00a0 He and the FOMC immediate took action to lower the Fed Funds rate to .25% or by 525%. \u00a0 Why dd Citibank, JP Morgan, Bank of America, and smaller banks like Wellsfargo immmediately, in late 2010 andd 2011, report substantial earnings? \u00a0 Because they were able to adjust the carrying value of those mortgages back up erasing the loses they had recorded the previous year. \u00a0 Smaller banks and other financial institutions like Merrill Lynch, Countrywide Mortgage Co., and Lyman Brothers, never got \u00a0the chance because of forced takeovers or closures by the Federal government. \u00a0 GMAC, the financing company of the General Motors, and American Express, converted to be\u00a0banks. \u00a0 Why, to take advantage of the mark-to-market accounting rules for banks and to receive part of the billions of dollars poured into the banking system by the economic stimulus packages passed by the US Congress.<\/p>\n
Is the Federal Reserve Bank and the Federal Open Market Committee really looking out for our best interest or is it our worst enemy? \u00a0 We will discuss the expectation for the future in Part 4.<\/p>\n
The Redneck Economist, April, 2014<\/p>\n","protected":false},"excerpt":{"rendered":"
We discussed the role of the Federal Open Market Committee (FOMC) near the end of Part 2.\u00a0\u00a0 If you didn’t read Part 2, the FOMC is a committee of the Federal Reseve Bank.\u00a0 The members are the 7 members of the Board of Govenors of the Federal Reserve System and … Continue reading