Collateral of those asset types made up 72 percent of the total $164.3 billion in market-rate securities pledged to the Fed on Sept. 29, 2008, two weeks after the bankruptcy of Lehman Brothers Holdings Inc., according to documents released yesterday. The collateral backed $155.7 billion in loans on the largest day of borrowing from the Primary Dealer Credit Facility, which was created in March 2008 to provide loans to brokers as Bear Stearns Cos. collapsed.

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“I was surprised and deeply disturbed … to learn the staggering amount of money that went to foreign banks,” Paul said in a statement.

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A senior Chinese central bank official told reporters at the G20 summit in Seoul that the Fed’s move had caused “strong concern” around the globe, and major reserve countries ought to factor in the global impact of their policies.

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America is now isolated and the rest of the world is furious. The widespread use of capital controls and even a lurch into 1930s-style protectionism are both far more likely than just a few days ago.

The Federal Reserve’s words may have been anodyne. “We will adjust the programme as needed to best foster maximum employment and price stability,” said the US central bank’s Open Market Committee. But by announcing another round of “quantitative easing”, America is rightfully incurring the wrath not only of the emerging giants of the East, but the eurozone too.

The US had hoped China would use the forthcoming G20 summit in Seoul to accept America’s proposal that net exporters should limit their current account surpluses to 4pc of GDP. Any prospect of that is now gone.

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Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities.

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Just days after the Federal Reserve will announce it has launched QE2, the Fed will hold a major conference at  Jekyll Island, celebrating the secret meeting held 100 years ago that resulted in the creation of the Fed.

The island is off the coast of the U.S. state of Georgia.

In November 1910, Senator Nelson W. Aldrich and Assistant Secretary of the Treasury Department A.P. Andrews, and other top financiers,arrived at the Jekyll Island Club to discuss monetary policy and the banking system. The secret meetings led to the creation of the Federal Reserve.

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Yet policymakers seem determined to push ahead with QE2. On Wednesday, the US Federal Reserve is expected to sanction a further $500bn (£312bn) of bond purchases. And despite vocal objections from at least four members of the Open Markets Committee, Ben Bernanke, the chairman, has indicated a willingness to keep pumping money into the economy on a more or less indefinite basis until core inflation is unambiguously rising again and unemployment is falling.

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The world’s markets will be on tenterhooks until Wednesday’s over. By then, we should have a good idea of the results of the mid-term elections. More importantly, the Federal Reserve will have revealed how much more money it plans to print.

The Fed’s money printing has annoyed leaders of many countries. The US (regardless of what its politicians say) seems to want to drive the dollar lower. The idea is that this will make its exporters more competitive. But that’s bad news for rivals, particularly export-dependent countries such as Japan.

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Thomas Hoenig, who’s been the bank’s president for 20 years, has been a critic of the Federal Reserve maintaining interest rates at record lows, saying that doing so could lead to inflation or create speculative bubbles.

He opened a speech at Oklahoma City University by making his stance clear.

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* Conducting additional purchases of longer-term securities (quantitative easing);
* Modifying the Committee’s communication;
* Reducing the interest paid on excess reserves.

Here’s the problem with quantitative easing: even many on the Fed’s Open Market Committee (FOMC) doubt it will necessarily boost economic growth. What types of projects promoting economic activity will be initiated when extremely low interest rates are lowered further? One might argue that the problems faced by the economy is not that interest rates are too high, but that real estate prices have still not adjusted downward sufficiently. Instead of downsizing to homes mortgage holders can afford, consumers are subsidized to stay in their homes; there’s no difference between subsidizing an ailing industry or an ailing consumer: subsidies are expensive and cause a drag on economic activity. However, given that the “downsizing” implies foreclosures and bankruptcies, it’s political suicide to promote what may be most prudent for the economy as a whole.

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It is remarkable that mainstream media has given this speech no coverage. I repeat, the central banker of the United States says in his own words:

“Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit. ”

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Obama’s economic policies could trigger a currency crisis for America. If it does, it will most likely come in a flash. One day the greenback will be accepted by everyone, then overnight its value will implode. Sheiks won’t want it for oil, the Chinese won’t want it for everything on the Wal-Mart aisle.

A full-blown currency crisis will make the financial crisis of 2008 look like a cake walk.

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Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that’s the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke’s motives were.

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The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.

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Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order.

Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences).

“Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.”

Don’t you just love that throw-away line “decent”? Dr Athreya hails from the University of Iowa.

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But this just takes the cake. In “Economics is Hard. Don’t Let Bloggers Tell You Otherwise” Kartik says: “I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public.”

Alas, all Kartik achieves is to convince the general public that feeding Fed “economists” alcohol after midnight and letting them directly upload their resultant gibberish to the Fed’s broad RSS feed the second they think they have a coherent thought, is generally a disastrous idea.

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In a speech in Atlanta, Warsh set a high bar for his support of further asset purchases, saying he would need to be convinced the benefits of the purchases would outweigh the costs of “erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility.”

The Fed has bought over $1 trillion in housing-related assets to keep long-term market interest rates low and support the recovery. The purchases ended in March.

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Yesterday, I quoted
an economist with the U.S. House of Representatives Financial Services
Committee for eleven years who assisted with oversight of the Federal
Reserve to show that there might be some basis for Ron Paul’s questions
to Ben Bernanke about the Federal Reserve’s alleged shipment of money
to Iraq.

Here is some more information.

In July 2009, Congressman Henry Waxman stated:

In a 13 month period from May 2003 to June 2004, the Federal Reserve sent nearly $12 billion in cash, mainly in $100 bills from the United States to Iraq. To do that, the Federal Reserve Bank in New York
had to pack 281 million individual bills … onto wooden pallets to be
shipped to Iraq. The cash weighed more than 363 tons and was loaded
onto C-130 cargo planes to be flown into Baghdad…

And an interesting New York Times op-ed
written in 2004 by Martin Mayer, a prolific financial journalist,
Brookings Institution scholar, and the author of more than 30 books on
financial market issues, argues:

Among
[Saddam] Hussein’s possessions when he was captured was three-quarters
of a million dollars in United States currency in crisp new bills.
Whence came the gentleman’s stash?

 

Answering this question would
help our understanding of terrorist financial networks. And if the cash
is sequentially numbered, as is likely, then the question could be
easily answered.

 

All United States currency is printed
by the United States Mint, to the order of one of the 12 banks of the
Federal Reserve system. It comes into circulation through a bank that
has an account at the Fed for which it was printed. The Fed deducts the
face value of the bills from that account, and an armored car takes
them to their new owner.

 

That regional Federal Reserve
Bank keeps a record that identifies the purchasing bank. And the
purchaser knows how it disposed of the bills. When they are found all
together, it means that the bank that bought the bills did not feed
them out from the teller window or the cash machine, but delivered them
to a single customer.

 

And the bank knows who that
customer was. Between, say, Philadelphia and Iraq, there is no doubt a
chain, perhaps involving banks in the Cayman or Channel Islands, in Abu
Dhabi or Dubai. Still, each bank in the chain can give the name of the
customer to which it gave these bills.

Although Saddam
Hussein’s government had many sanctions against it, it may well be that
no laws were broken in the passage of the Federal Reserve notes from
the mint to Tikrit. But it would be interesting to know which banks
were collaborators in getting that cash to the tyrant of Iraq.

 

Unfortunately, the search for these witting or unwitting collaborators
cannot even get started, because the Federal Reserve Board will not
permit regional banks to reveal the identity of the purchasers of large
blocks of United States currency. There is no law that prohibits such
disclosure; it’s simply a Fed policy. Yet in this age of payroll
services and electronic payments, there are few legitimate uses outside
the banking system for very large orders of hundred-dollar bills.

 

The Fed has always resisted placing American banks under obligation to
reveal skulduggery, whether it involves drug smuggling, commercial
fraud, terrorism or other international conspiracy. Banks are not, the
Fed insists, law enforcement agencies. It may be that the F.B.I. has
access to the Fed’s records — a spokesman for the Fed, after checking
with the main office, would not say yea or nay — but it is not clear
that the F.B.I. has authority to continue such searches beyond American
borders.

 

The Fed’s manual on the Bank Secrecy Act still
says that ”know your customer”rules, while desirable, are ”not
presently required by regulation or statute” — though the Patriot Act
has spawned some rules on the identification of new customers. At any
rate, the manual says rather mysteriously, such rules ”should not
interfere with the relationship of the financial institution with its
good customers.”

 

Senators Charles E. Grassley and Max
Baucus, chairman and ranking member, respectively, of the Finance
Committee, complained to the Treasury Department last year that not
enough has been done to keep the financiers of terrorism from paying
their bills through the American financial system. Perhaps Congress
should tell the Fed to release its hold on information about which
banks supply the bundles of cash that facilitate international crime.

The head of the UN office on drugs and crime says
that drug money kept the global banking system afloat during the height
of the financial crisis.  Former Managing Director and board member of
Wall Street investment bank Dillon Read, Catherine Austin Fitts, has
long alleged that the American banking system launders huge amount of drug money.

I
don’t know anything about money laundering, drug trafficking or
terrorist networks. But I might be able to guess who could get that
kind of information: the Fed.

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