The Federal Reserve Must Die, Part 2

Aug.24.09 | About: SPDR S&P (SPY)

<< Part 1

FED HALL OF SHAME File:Portrait of G. William Miller.jpg

Marriner Eccles......... Arthur Burns ........George Miller

File:Greenspan.jpg File:Ben Bernanke official portrait.jpg

Alan Greenspan......... Ben Bernanke....... Reserved Larry Summers

Marriner Eccles (1934 – 1948)

  • Banker and one of the architects of FDR’s Emergency Banking Act of 1933 that vastly expanded the powers of the President and Federal Reserve. It gave the President the ability to declare a national emergency and have absolute control over the national finances and foreign exchange of the United States in the event of such an emergency. The Emergency Banking Act was introduced on March 9, 1933, to a joint session of Congress and was passed the same evening amid an atmosphere of chaos and uncertainty as over 100 new Democratic members of Congress swept into power determined to take radical steps to address banking failures and other economic malaise. The sense of urgency was such that the act was passed with only a single copy available on the floor and most legislators voted on it without reading it. (Hmm. Remind you of any recent legislation?). One-third of all the banks in the country were shut down permanently after the passage, further concentrating banking wealth in a few mega-banks.
  • Roosevelt chose him to be Fed Chairman because he agreed to support the massive spending projects to fend off the ravages of the Great Depression. He fully embraced the Keynesian policies of government intervention in free markets to artificially fend off recessions.
  • He considered monetary policy, the primary purpose of the Federal Reserve, of secondary importance, and as a result he allowed the Federal Reserve to be controlled by the interests of the President and Treasury.
  • During World War II, Eccles pledged to the President to keep the interest rate on Treasury bills fixed at 0.375 percent. It continued to support government borrowing after the war ended, despite the fact that the CPI rose 14% in 1947 and 8% in 1948, and the economy was in recession.
  • He was a key architect of the World Bank and International Monetary Fund, which have perpetuated poverty throughout the world while centralizing economic power among a few dominant countries.

Arthur Frank Burns (1970 – 1978)

  • Columbia professor of economics who never worked a day in the private sector in his lifetime and possibly the weakest Fed Chairman in history.
  • In his book Six Crises, Richard Nixon blamed his defeat to John F. Kennedy in 1960 on restrictive Fed policy and the resulting tight credit conditions and slow growth. After finally winning the Presidency in 1968, Nixon named Burns to the Fed Chairmanship in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972.
  • Burns appeared to show some backbone and resisted Nixon’s demands, but after negative press about him was planted in newspapers by Nixon’s henchmen and, under the threat of legislation to dilute the Fed’s influence, Burns and other Governors succumbed to political pressure.
  • Burns believed that Fed action should try to maintain an unemployment rate of around 4%. Burns’ ultra- loose monetary policies resulted in inflation, which Nixon attempted to manage through wage and price controls. After the 1972 election, price controls began to fail and by 1974 the inflation rate was 12.3%. The annual average rate of consumer price inflation was 9% during his term.
  • The single biggest financial event in U.S. history occurred during Burns’ watch. By the early 1970s, as the costs of the Vietnam War and Great Society domestic spending accelerated inflation, the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. Other nations began demanding fulfillment of America’s “promise to pay” — in the form of gold from the U.S., in exchange for paper dollars. The dollar was plunging against all foreign currencies. U.S. gold reserves were being depleted. The world had lost faith in the U.S. government’s will to cut its budget and reduce its trade deficit. To stabilize the economy and combat runaway inflation, on August 15, 1971 President Nixon imposed a 90-day wage and price freeze, a 10% import surcharge, and closed the gold window, making the dollar non-convertible to gold. On that day, the dollar became a piece of paper with no intrinsic value, rather than 1/35th of an ounce of gold. The dollar has lost 93% of its purchasing power versus gold since this fateful decision. Click to enlarge

George Miller (1978 – 1979)

  • The first Federal Reserve Chairman from private industry who did such a horrible job that he was promoted to Secretary of the Treasury.
  • He was a member of the think tank the Club of Rome, which believed the common enemy of humanity is man, so democracy may not be well suited to the tasks ahead. However, the threat of pollution, global warming, water shortages, and famine can be used to fulfill humanity's need for a common adversary. (Sounds like an early version of Al Gore).
  • Jimmy Carter selected Miller in 1978 in the midst of an economic crisis. Inflation was running at 6.7% in 1977 and oil prices were soaring. Miller maintained his Krugman-like Keynesian belief that inflation could "prime the pump" of the economy, and would be self-correcting. He pursued a strongly dovish policy and refused to raise interest rates. The effect of this moronic policy was to send the dollar's value spiraling downward. In November 1978, only 11 months into his term, the dollar had fallen nearly 34% against the German Mark and almost 42% against the Japanese Yen.
  • In an unprecedented example of his weakness, Miller was outvoted by the Board of Governors at a meeting in 1979 where he opposed an increase in the discount rate. When he was “promoted” to Treasury Secretary in 1979 inflation was out of control, running at 14%. A Federal Reserve Chairman with a backbone, Paul Volcker, applied the shock therapy needed to crush inflation.
  • Steven Beckner, in his book Back from the Brink: The Greenspan Years described the dreadful politically influenced performance of the Fed Chairmen during the 1970’s:

Under Arthur Burns, who chaired the Fed from 1970 to 1978, and under G. William Miller, who was chairman from January 1978 to August 1979, the Fed provided the monetary fuel for an inflation that began as a flicker and grew into a fearsome blaze... If Nixon appointee Burns lit the fire, Miller poured gasoline on it during the administration of President Jimmy Carter. Without question the most partisan and least respected chairman in the Fed's history, this former Textron executive worked in tandem with fellow Carter appointee, Treasury Secretary W. Michael Blumenthal, in pursuit of monetary policies that were expansionist domestically and devaluationist internationally. The goals were to spur employment and exports, with little thought to the dollar's value. By early 1980, inflation was running at 14%.

Alan Greenspan (1987 – 2006)

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

- Alan Greenspan from an article written in 1966 entitled “Gold and Economic Freedom”

  • The quote above would indicate a man whose principles in sound economic theory could not be compromised. That proved to be dreadfully wrong, as Alan Greenspan turned out to be the most political, Wall Street pleasing, bubble inducing Chairman of all time. His reign of power set the stage for the greatest financial collapse in U.S. history.
  • He studied economics at Columbia under Arthur Burns, where he must have learned how to buckle to political pressure and please whichever party was in power. His pandering to Washington insiders and Wall Street bankers prove that he betrayed his true beliefs in a strong currency backed by gold.
  • Alan Greenspan systematically encouraged changes to the CPI index that have understated it by 4% to 5% for two decades. The result has been to cheat senior citizens of their Social Security income, overstate GDP, and artificially keep interest rates low. The insertion of owner’s equivalent rent, replacing steak with hamburger, and hedonistic adjustments were Orwellian measures used to mislead the American public.

Inflation: Chart of the CPI.Click to enlarge

  • During his first few years as Fed Chairman he successfully handled the stock market crash of 1987 and George Bush blamed him for losing the 1991 election by keeping monetary policy too tight, causing the 1991 recession. He worked well with Bill Clinton in keeping inflation and interest rates on a downward path, resulting in strong economic growth in the 1990’s.
  • Greenspan’s hubris and belief in his own infallibility led him to use monetary policy to “save the world” in 1997 and 1998. During the Asian financial crisis of 1997—1998, Greenspan flooded the world with dollars, and organized a Wall Street bailout of the reckless, irresponsible hedge fund Long Term Capital Management. These choices by Greenspan began two decades of bailing out failure. The “Greenspan Put” became known throughout the world. Everyone on Wall Street knew you could take excessive risk and if your gamble failed resulting in “systematic risk”, Greenspan would flood the system with dollars and save your ass.
  • After the bubble burst, the Y2K phony scare and the 9/11 attacks, Greenspan committed the worst offense of his 20 year monetary reign of terror. Greenspan initiated a series of interest cuts that brought the Federal Funds rate down to 1% in 2004 and left it at that level for over a year. He purposely created a housing bubble in order to artificially prop up the American economy after the huge stock market losses. The excess liquidity unleashed by Greenspan caused lending standards to deteriorate resulting in the housing bubble of 2004-2006 and the market meltdown beginning in 2008. His loose monetary policy resulted in a plunging dollar, surging commodity prices and humongous trade deficits.
  • Greenspan’s unyielding belief in unfettered markets, unregulated derivatives, adjustable rate mortgages for all, home equity extraction as a spending source and subprime lending to poor people combined to cause a financial crisis that still threatens to destroy the American financial system. He denies responsibility for the financial crisis, but his own words condemn him:

Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners have built up over the years.

– November 2002

Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.

– April 2005

  • Alan Greenspan sold his soul to the devil of Washington DC power and influence. He loved the accolades and headlines he received as the most powerful man in the world. The Maestro could pull the levers and make markets do as he wished. The man who knew that Federal Reserve manipulation caused the Great Depression disregarded his own words and caused the worst economic calamity since the Great Depression.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom.

- Alan Greenspan from an article written in 1966 entitled “Gold and Economic Freedom”

Ben Bernanke (2006 - ?)

  • Harvard trained economist who has spent his entire life in academia and government service. As an “expert” on the Great Depression, Dr. Bernanke is 100% wrong in his assessment of its causes. He believes the Depression was caused by the Federal Reserve reducing the money supply in the early 1930’s. He should talk to the Alan Greenspan from 1966. The Federal Reserve caused the Great Depression through its easy money policies during the 1920’s. The expansion of the money supply led to an unsustainable credit-driven boom. (Hmm. Does this remind you of any similar instances?).
  • In his famous 2002 “Helicopter Ben” speech, Bernanke previewed exactly what he would do as Federal Reserve Chairman in the current economic environment. Read his words carefully because he has followed the script to the tee. He has printed over a trillion dollars in the last year. Tax cuts have been rolled out. The dollar is being devalued. The only thing left is confiscation of gold. Is that next? :

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.

A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

  • Despite his Ivy League education and all of the supposed brilliant resources at his disposal, Bernanke has shown a remarkable ability to not see the housing bubble or the collapse of the financial system. He was convinced in 2005 that the housing market was strong and healthy. He was sure that the subprime problems were confined and would not spread into the greater economy. He now assures the public that he will know the proper time to withdraw the monstrous amount of stimulus he has pumped into the world economy before hyperinflation takes hold. Does his track record give you comfort that he will correctly figure out the right time to withdrawal the stimulus?
  • Bernanke and Hank Paulson used their positions of power to force Ken Lewis, the CEO of Bank of America (NYSE:BAC), to follow through on their acquisition of Merrill Lynch and to withhold knowledge of billions in losses from shareholders and the public. They threatened to remove Lewis as CEO if he did not agree. The SEC should be investigating this cover-up, but is not.
  • After promising a more transparent Fed, Bernanke has done the complete opposite. He continues to withhold the names of all financial institutions that have borrowed from the Fed and will not reveal the worthless collateral that they have put up for those loans. The Fed has lent in excess of $2.2 trillion to banks. The Fed has refused to reveal any information regarding these loans. Bloomberg News has sued the Fed under the Freedom of Information Act to force them to reveal where $2.2 trillion of taxpayer money has gone. Investment Manager Ted Forstmann’s opinion was, “It’s your money; it’s not the Fed’s money. Of course there should be transparency.”
  • Representative Ron Paul has introduced HR 1207 which would have the GAO audit the Federal Reserve every year and issue a report to Congress. Every public and most private companies have an annual independent audit. It is a reasonable and smart thing to do. Operational weaknesses and fraud are often uncovered in these audits. The bill has 282 co-sponsors. Mr. Transparency Ben Bernanke wants no part of getting audited. Operating in the shadows is preferable. His reasoning is laughable. The Fed has proven to be anything but independent, stability is not the first word that comes to mind when discussing our financial system, and the dollar has lost 95% of its purchasing power since 1913 :

My concern about the legislation is that if the GAO is auditing not only the operational aspects of the programs and the details of the programs but making judgments about our policy decisions would effectively be a takeover of policy by the Congress and a repudiation of the independence of the Federal Reserve would be highly destructive to the stability of the financial system, the Dollar and our national economic situation.

– Ben Bernanke

Part 3 >>

Click here to comment