Bailouts, Reforms, and the Federal Reserve: When Less is More
By: BJ Lawson
I’ve dissected the credit crisis in previous posts since last August, and outlined the bureaucratic overreach that we can expect as a result:
http://blog.lawsonforcongress.com/2008/02/24/mortgage-fun-and-games/
http://blog.lawsonforcongress.com/2007/12/19/a-review-of-the-mortgage-crisis/
http://blog.lawsonforcongress.com/2007/12/09/unintended-consequences/
http://blog.lawsonforcongress.com/2007/11/19/whered-the-money-go/
http://blog.lawsonforcongress.com/2007/08/30/obamas-gonna-fix-it/
Since then, we’ve witnessed the Bear Stearns debacle, where a bankrupt investment bank will have its trading losses covered by the Federal Reserve for up to $29 billion in taxpayer dollars. Clearly, these actions illustrate that the Federal Reserve puts the interest of Wall Street well ahead of Main Street. Even worse, these actions open a pandora’s box where further bailouts will be justified and expected.
So what is a bailout, anyway? Essentially, the government (through the Federal Reserve) is using its ability to create money out of thin air. This new money is given to those affected either directly or in the form of “loans” backed by questionable assets. That new money from the Federal Reserve enters into the banking system, and competes with your hard-earned dollars for goods and services. Did the Federal Reserve give you your Bailout Bucks today? If not, you suffer from the higher prices that result as your dollars purchase fewer goods and services.
Our financial system is broken. The inherent instabilities we’ve been experiencing are a symptom of a debt-based paper currency that’s managed by a money monopoly headed by our nation’s third central bank, the Federal Reserve. The Federal Reserve’s shareholders are its member banks, so it is owned by the banking industry. Furthermore, the Federal Reserve also regulates the banking industry. Talk about the fox guarding the henhouse.
The Federal Reserve has been widely implicated in the financial crises that have afflicted our economy since its founding in 1913, starting with the Great Depression. Here’s a recent apology for the Great Depression from our own Ben Bernanke:
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
The “Anna” mentioned in Bernanke’s apology is revered economist Anna Schwartz. Dr. Schwartz doesn’t seem too impressed with the apology, as this past January she publicly blamed the Federal Reserve for its creation and mismanagement of the current credit crisis:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. “The new group at the Fed is not equal to the problem that faces it,” she says, daring to utter a thought that fellow critics mostly utter sotto voce.
Anna Schwartz wrote a seminal text
on the causes of the Great Depression“They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence,” she told The Sunday Telegraph. “There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.
The Federal Reserve’s ability to create new money and allow the government to live beyond its means without raising taxes is the primary driver of inflation — you’ve noticed this recently if you’ve been watching your grocery and gas bills. Indeed, since the Federal Reserve was founded in 1913, its $1 Federal Reserve Note (a.k.a our dollar) now requires $21.38 to purchase the equivalent goods (by the government’s own optimistic estimates). So much for a stable currency.
Given this mess, one would think that we’d finally be ready to ask questions about how to arrange an alternative to the current system. Instead, Treasury Secretary Henry Paulson and the Bush administration propose to give us more of the same — more regulatory powers to the Federal Reserve, more bailouts for its friends on Wall Street, and higher prices for working American families.
Not surprisingly, the Wall Street crowd is singing its praises:
Wall Street’s main lobby group, the Securities Industry and Financial Markets Association, embraced Paulson’s proposals. “Our present regulatory framework was born of Depression-era events and is not well suited for today’s environment where billions of dollars race across the globe with the click of a mouse,” said Tim Ryan, chief executive of the association. “That fact, teamed with the current market conditions, result in an universal agreement that it is time to modernize and revitalize the current system.”
And our Chairman of the House Banking Committee is weighing in with his support:
Last week, Massachusetts Congressman Barney Frank said Congress should authorize the Fed to act as a risk regulator across the markets. “To the extent that anybody is creating credit, they ought to be subject to the same type of prudential supervision that now applies only to banks,” he said.
Instead of Frank’s gentle acquiescence, here’s the key question we need to ask: Can we continue allowing banks and other financial institutions to have a monopoly over creating money, through credit, in Federal Reserve Notes? The answer is no, we cannot. The current system is not sustainable, and we need to provide an option for the American people that includes the use of Constitutional money. Americans need to be free to save, invest, and transact business in gold and silver in addition to Federal Reserve Notes, without any sales or capital gains taxes.
While treating the symptoms of the credit crunch through “liquidity injections” and bailouts is a short term solution that may prevent the financial system from freezing up, it will cause accelerating inflation and further rob American workers of their purchasing power. The true solution to our current financial crisis is not giving more power to a broken system. That’s simply rearranging the deck chairs on the Titanic. We need the Honest Money Act, HR 2756. Allowing Americans to transact business with honest, Constitutional money instead of only paper created out of thin air by our central bank will provide a needed alternative during this period of turbulence.
March 31st, 2008 at 12:58 am
As an American, it was very worrying to me when I heard Mr. Paulson advocate a plan to give even more regulatory control to the Federal Reserve, in the event of a financial crisis. It is ironic that the same men and women who have caused these economic bubbles in the first place, by creating excessive credit and destablilizing the currency, would be given even more power because of their actions. If we desire to save our economic system, it would be wise to stop our unethical central bank. This begins with talking to friends, family, and colleagues about how vile and unstable the Federal Reserve is. Sadly from my experience, too many people in this country are ignorant about what the Federal Reserve does. And its time to reverse that thinking.