100 not out….Yet!

100 not out usually refers to the game of cricket when a batsman hits 100 runs & is still not out, although it could nowadays equally be used in respect of the huge increase in the number on centenarians, who are still in the field, still running – and yet to be bowled out.

However, our focus is on the most watched financial institution in the world, The Federal Reserve System, better known as the Federal Reserve or the Fed, the American central bank created on the 23rd December 1913, 100 years ago next Monday.

The Federal Reserve Act introduced the Fed with Congress establishing three key objectives for monetary policy, maximum employment, moderate long-term interest rates and stable prices, although its duties have expanded over the years to include the supervision and regulation of banking institutions and maintaining the stability of the financial system.

Its structure is unique among central banks in that it’s composed of the presidentially appointed Board of Governors, the Federal Reserve Board, with the Federal Open Market Committee (FOMC) made up from twelve regional Federal Reserve Banks located in major cities throughout the US. The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time (the president of the New York Fed and four others who rotate through one-year terms). The Fed has both private and public components, and was designed to serve the interests of both the general public and private bankers. So how has it done?


First up we can note from the above that interest rates, and by default prices, were far more stable in the 100 years before the creation of the Fed than since.

Economic growth, aside of the bounce out of the Great Depression, has been down hill ever since. Lower growth = Less jobs, not more.


As for the supervision and regulation of banking institutions and maintaining the stability of the financial system, we’ll let the following do the talking:-

The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that “the crisis was avoidable and was caused by: widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; an explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.”

We are indebted to Barry Ritholtz and EWI for the aforementioned damning charts, as we are to Grant Williams, of Vulpes Investment Management, for reminding us of the Fed’s role ahead of and throughout the 2007 financial crisis and for observing that the Fed currently has $55 billion of total capital and assets of $3.843 trillion, which means that the Federal Reserve is leveraged roughly 70 x or about twice that of Lehman Bros just before its bust.  

At the Ceremony Commemorating the Centennial of the Federal Reserve Act, held in Washington, D.C. on the 16th December, Chairman Ben S. Bernanke’s concluding remarks were:-

I have been asked to close this ceremony marking the 100th anniversary of the signing of the Federal Reserve Act–the law that created the Federal Reserve–by looking ahead to the next century. Given the well-known difficulties that economists have in forecasting even the next few quarters, I will happily point out one important advantage in making a 100-year forecast, which is that I won’t be around to explain why the forecast went wrong. Our ability to make accurate long-term forecasts is limited, to say the least. Nevertheless, I will venture one prediction that I don’t think is too bold, which is this: The values that have sustained and served the Federal Reserve at its best, and have permitted it to make critical contributions to the economic health of our nation during the past century, will continue to serve it and the nation well in the century ahead.”

With a leveraged balance sheet of 70 times, not to mention a turned interest rate cycle over which it has no control, we’ll predict that the Fed can forget about the next 100 as it will be “bowled out” well within the next decade.


weekly_blog_131218_03 This will be our last Investment Commentary of 2013

We wish all readers a Merry Christmas
and a happy, peaceful
and prosperous New Year.




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