An Analysis of the Fed’s Plan to “Curb Shady Mortgage Practices”

July 18th, 2008

In a July 14, 2008 AP article titled: Fed adopts plan to curb shady mortgage practices , Fed chairman Ben Bernanke is quoted as saying:

“Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”

Keep that in mind as you read these two sections taken directly from Title 12 (quoted as 12USC) of the United States Code:

Sec. 354. Transactions involving gold coin, bullion, and certificates

Every Federal reserve bank shall have power to deal in gold coin and bullion at home or abroad, to make loans thereon, exchange Federal reserve notes for gold, gold coin, or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security, including the hypothecation of United States bonds or other securities which Federal reserve banks are authorized to hold.

Sec. 411. Issuance to reserve banks; nature of obligation; redemption

Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.

Read the sentences I placed in bold print. Does anything jump out at you? When I first read these two sections in the ‘90’s I immediately called the San Francisco federal reserve bank.

I wanted to redeem my FRN’s (Federal Reserve Notes) for gold. I was told all I could get for my FRN’s was like denominated FRN’s. In other words, if I came into the bank with a FRN that was denominated with a 5, I would receive another 5 FRN in its place.

It was explained to me that these sections didn’t mean what they say. What they really mean is a person can show up at any Federal Reserve Bank and get only a like denominated Federal Reserve Note. They wouldn’t receive any gold or silver despite the plain language of the code sections.

Accepting that on face value, let’s read Bernanke’s remarks again but with a question in mind. That question being, how does a liar and deceiver expect anyone to believe any of his remarks.

The quoted sentence was from an article about the fed stepping in with new and better regulations covering mortgage lenders if you hadn’t figured that out. The first clause of his remarks is actually the smoking gun (according to me).

The many causes are actua