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Iron Capital Insights

  • Iron Capital Insights
  • July 23, 2009
  • Chuck Osborne


I am pleased to introduce you to a new service from Iron Capital. During the financial crisis last year we sent several unscheduled communications to you, our clients, letting you know our thoughts on what was happening and how it could effect you. We received very positive feedback on those efforts, so we have decided to formalize them and create Iron Capital Insights. These will be periodic electronic client communications regarding investing and economic happenings that could impact your portfolios. With this we are proud also to unveil our new and greatly improved website. In addition to more accurately representing the firm, the new will archive our Insights and The Quarterly Reportnewsletters. Also in the Research & Commentary section of the site, our private clients will have access to our full institutionalCapital Market Review if they wish to see our analysis and views in more detail than we provide in our other communications.

We hope you enjoy the increased communication. Of course, if you prefer not to get these communications you will have the ability to opt out.

So now for our inaugural Insight.

There Is A Reason for The Separation of Powers.

Over the last few weeks, those who follow the goings-on in Congress have been witness to a witch hunt. Our political leaders have been attacking Federal Reserve (Fed) Chairman Ben Bernanke and former Treasury Secretary Henry Paulson for the unprecedented actions taken during the financial crisis. As a matter of firm policy we do not weigh in on purely political matters, and much of this is purely political, but there is the potential here for a longer-term economic impact that could be devastating to the United States: many in Congress are now pushing for greater congressional oversight of the Fed.

Last week 250 leading economists, representing all political persuasions, signed a petition essentially begging Congress to leave the Fed alone. In our opinion, the independence of the Fed is crucially important. Let me explain why. In many respects, the Fed’s job is to be the party pooper. They control the money supply, or how much money actually is in circulation. When the economy slows, they pump in more money to try to get it going, and more importantly, when the economy is booming they reduce the money supply to try to keep things from overheating. This is never popular, but someone has to be the “adult” who says it is time to take the punch bowl away before things get out of hand.

Congress, on the other hand, has the job of spending money. They control government spending and therefore are most responsible for the government’s impact on the economy. So the Fed creates money, and Congress spends it. When put in these simple terms it’s easy to understand why the Fed must maintain its independence. The congressional appetite for spending knows no bounds, and as we have seen this is true no matter who is “in charge” To give them sway over the actual printing press would be disastrous. There is nothing in the history of Congress that would lead one to believe they would have the discipline to take the punch bowl away while the party is still going.

This is not a defense of the Fed’s actions over the last several years; they do deserve some of the blame for this mess. But there is plenty of blame to go around, and Congress deserves a great big helping themselves. The same congressional leaders who are attacking Bernanke and Paulson were, just a few short years ago, pushing for more home ownership and easier access to mortgages. Who is providing oversight on them? Hopefully it is us, the American voting public, and hopefully we are paying attention.

Chuck Osborne, CFA
Managing Director