Signs Of The Fed's Era Of Secrecy Coming To An End

Ralph Benko

The Federal Reserve increasingly is attracting scrutiny across the board. Now add to that a roller coaster of a thriller, using a miracle of a rare device, shining a light into the operations of the Fed — that contemporary riddle wrapped in a mystery inside an enigma: Matthew Quirk’s latest novel, The Directive.
“If I’ve made myself too clear, you must have misunderstood me,” Fed Chairman Alan Greenspan once famously said. The era of a mystagogue Fed may be ending. Recently, the House Government Oversight Committee passed, and referred to the full House, theFederal Reserve Transparency Act of 2014. This legislation is part of the legacy of the great former Representative Ron Paul. It popularly is known as “Audit the Fed.” How ironic that a mystery novel proves a device to dispel some of the Fed’s obscurantist mystery.



Novelist/reporter Matthew Quirk’s The Directive does for he Fed what Alan Drury did for Senate intrigue with his Pulitzer Prize winning Advise and Consent, what Aaron Sorkin did for the White House in The West Wing and, now, what Beau Willimon, is doing for the Congress with House of Cards. Quirk takes the genre of political thriller into virgin territory: the Fed. Make to mistake. Engaging the popular imagination has political potency. As Victor Hugo, nicely paraphrased, observed: Nothing is as powerful as an idea whose time has come.
Quirk, according to his website,“studied history and literature at Harvard College. After graduation, he spent five years at The Atlantic reporting on crimes, private military contractors, the opium trade, terrorism prosecutions, and international gangs.” His background shows. Quirk’s writings drips with the kind of eye for the telling detail that only a canny reporter, detective, or spy possesses. (Readers will learn, just in passing, the plausible identity of the mysterious “secure undisclosed location” where the vice president was secreted following 9/11.)
If you like Ludlum you are certain to like Quirk. And who isn’t intrigued by such a mysteriously powerful entity as the Fed? Booklist calls The Directive a “nonstop heart-pounding ride in which moral blacks and whites turn gray in the ‘efficient alignment of power and interests’ that is big time politics.” Amen.
The Directive describes an effort to rob the biggest bank in the world. The object of the heist is not the tons of gold secured in the basement of 33 Liberty Street. (As Ian Fleming pointed out, in Goldfinger it logistically is impossible to move the mass of so much gold quickly enough to effect a robbery.) Rather, Quirk uses as his literary device, with a touch of dramatic license, the interception of the Federal Open Market Committee’s directive to the trading desk of the Federal Reserve Bank of New York to raise (or lower) interest rates in order to use that insider information to make a fast killing.
Lest anyone doubt the power of such insider information consider William Safire’s report, from his White House classic memoir Before the Fall, of the weekend at Camp David before Nixon “closed the gold window.”

After the Quadriad meeting, the President remained alone while the rest of the group dined at the Laurel Cabin. The no-phone-calls edict was still in force, raising some eyebrows of men who had shown themselves to be trustworthy repositories of events. but the 6’8?, dour Treasury Under Secretary Volcker explained a different dimension to the need for no leaks: “Fortunes could be made with this information.” Haldeman, mock-serious, leaned forward and whispered loudly, “Exactly how?” The tension broken, Volcker asked Schulz, “How much is your budget deficit?” George estimated, “Oh, twenty three billion or so — why?” Volcker looked dreamily at the ceiling. “Give me a billion dollars and a free hand on Monday, and I could make up that deficit in the money markets.”

Safire provides context making Volcker’s integrity indisputable lest anyone be tempted to misinterpret this as a trial balloon.
This columnist has been inside the headquarters of the Fed, including, many years ago, the boardroom. Quirk:

Every eight weeks or so, a committee gathers near the National Mall in a marble citadel known as the Board of Governors of the Federal Reserve. Twenty-five men and women sit at a long wooden table with an inset of black stone shined to a high gloss. By noon they decide the fate of the American economy.

This columnist never has stepped foot inside the Federal Reserve Bank of New York, much less its trading floor(s). Few have entered that sanctum sanctorum. By taking his readers inside Quirk provides his readers a narrative grasp to how the Fed does what it does.
Quirk:

[T]he Fed is by design very friendly to large New York banks. When the committee in DC decides what interest rates should be, they can’t simply dictate them to the banks. They decide on a target interest, and then send the directive to the trading desk at the New York Fed to instruct them about how to achieve it. The traders upstairs go into the markets and wheel and deal with the big banks, buying and selling Treasury bills and other government debts, essentially IOUs from Uncle Sam. When the Fed buys up a lot of those IOUs, they flood the economy with money; when they sell them, they take money out of circulation. They are effectively creating and destroying cash. By shrinking or expanding the supply of money in the global economy, making it more or less scarce, they also make it more or less expensive to borrow; the interest rate. In this way, trading back and forth with the largest banks in the world, they can drive interest rates toward their target.
The amount of actual physical currency in circulation is only a quarter of the total monetary supply. The rest is just numbers on a computer somewhere. When people say the government can print as much money as it wants, they’re really talking about the desk doing its daily work of resizing the monetary supply—tacking zeros onto a bunch of electronic accounts—that big banks are allowed to lend out to you and me.
***
Every morning, on the ninth floor of the New York Fed, the desk gets ready to go out and manipulate the markets according to the instructions laid out in the directive. Its traders are linked by computer with twenty-one of the largest banks in the world. When they’re ready to buy and sell, in what are called open market operation, one trader presses a button on his terminal and three chimes — the notes F-E-D — sound on the terminals of his counterparties. Then they’re off to the races.
There are usually eight to ten people on that desk, mostly guys in their late twenties and early thirties, and they manage a portfolio of government securities worth nearly $4 trillion that backs our currency. Without it, the bills in your wallet would be as worthless as Monopoly cash. The traders on that floor carry out nearly $5.5 billion in trades per day, set the value of every penny you earn or spend, and steer the global economy.

As Quirk recently told Matthew Yglesias, at Vox.com:

I was casting about for the biggest hoards of money in the world, and you get to the Federal Reserve Bank in New York fairly quickly. But that’s been done. Then I learned more and more about the trading desk, and my mind was blown. You get to have this great line where you say, “There’s $300 billion worth of gold in the basement, but the real money is on the ninth floor.” …

I was a reporter in Washington for a while, and I thought, “Oh, the Fed sets interest rates,” because that’s always what people say. But as you dig into it, you realize that the Fed just has to induce interest rates to where they want to be. They have to trade back and forth with these 19 or 20 banks, and they have 8-10 guys at this trading desk, trading about $5.5 billion a day. That’s actually how the government prints money and expands and contracts the monetary supply.
It’s this high wire act. You explain it to people and they say, “Oh, it’s a conspiracy thriller.” You say, “No, no. That’s the real part. I haven’t gotten to the conspiracy yet.” But it’s a miracle that it works.

Quirk’s own dual mandate? Combine fast-paced drama with a peek behind the scenes of the world’s biggest bank, providing vivid entertainment while teaching more about the way that one of the most powerful and mysterious institutions in the world works. In The Directive Matthew Quirk shakes, rather than stirs, his readers brilliantly.