Editor's Note: This article was written by James Quinn, a senior director of strategic planning for a major university. James has held high level financial positions with a retailer, homebuilder and a university in his 22-year career.
“Paper money eventually returns to its intrinsic value -- zero.” -- Voltaire“The Federal Reserve in collaboration with the giant banks has created the greatest financial crisis the world has ever seen. The foolish notion that unlimited amounts of money and credit created out of thin air can provide sustainable economic growth has delivered this crisis to us. Instead of economic growth and stable prices, (The Fed) has given us a system of government and finance that now threatens the world financial and political institutions. Pursuing the same policy of excessive spending, debt expansion and monetary inflation can only compound the problems that prevent the required corrections. Doubling the money supply didn’t work, quadrupling it won’t work either. Buying up the bad debt of privileged institutions and dumping worthless assets on the American people is morally wrong and economically futile.” --Representative from Texas Ron Paul questioning Federal Reserve Chairman Ben Bernanke
Ron Paul’s scathing assessment of the Federal Reserve’s primary role in creating the financial crisis and his raking of Chairman Bernanke over the coals is so accurate, truthful, and sane that it should blow your mind. Mr. Bernanke must have felt like his head was spinning like a top while Ron Paul gave him a tutorial in basic economics.
Mr. Paul’s noble efforts to Audit the Fed (HR 1207) and eventually to rid the country of its insidious control over our lives will bring the pillars of the Federal Reserve building crashing down upon Mr. Bernanke in his mahogany-paneled gold-plated boardroom with ornate chandeliers.
The worldwide financial system experienced a 6.8 magnitude earthquake in September 2008. The very foundations of our economy were shaken to their core. The fear exhibited by government officials, politicians, and the public was palpable and real.
For a few weeks, there was the distinct possibility that the system would come crashing down. A massive printing of dollars and the clandestine buying-up of toxic assets by the Federal Reserve, behind-the-scenes deals with the biggest banks, covert currency-swap deals with foreign Central Banks, and the forcing of the FASB to change accounting rules to allow banks to fraudulently value bad loans temporarily staved off the final chapter in the 96 year old diabolical experiment in currency manipulation.
The moment the system stopped functioning was our “Minsky Moment.”
Hyman Minsky was an American economist and professor of economics at Washington University. Dr. Minsky put forward theories linking financial market vulnerability in the normal life cycle of an economy with speculative investment bubbles produced by financial markets. Minsky declared that in good times, when corporate cash flow rises beyond what’s needed to pay off debt, a speculative bubble develops. And soon thereafter, debts exceed what borrowers can pay off from their incoming revenues. This, in turn produces a financial emergency. As a result of such dangerous debt bubbles, banks tighten credit availability -- even to companies with good credit -- and the economy enters recession.
This movement of the financial system from stability to crisis is the “Minsky Moment.” At this point, a major sell-off begins due to the fact that no counterparty can be found to bid at the asking prices previously quoted, leading to a swift and steep collapse in markets and a dramatic drop in market liquidity.
What Dr. Minsky failed to address was that the Federal Reserve has been responsible for every financial crisis in the United States since 1913.
The Federal Reserve Act of 1913 created the Federal Reserve Bank with the following mandate:
An Act to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.
The original mandate was clearly limited. The idea was that a Central Bank would be able to keep the periodic panics -- like the Panic of 1907 -- from ever happening again. It appears that four innocuous words opened up Pandora’s Box and unleashed evils upon all mankind: “and for other purposes.”
The bankers who control the Federal Reserve along with their politician protectors have dramatically expanded the scope, authority, and influence of the Federal Reserve with each scientifically created crisis that’s occurred in the last 96 years. They’re attempting to grab more power as we speak.
Since 1913, the Federal Reserve has amassed more and more authority and now has vast responsibility and control over our lives. The Federal Reserve website lists the following functions:
- Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
- Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
- Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
- Providing financial services to depository institutions, the US government, and foreign official institutions, including playing a major role in operating the nation's payments system.
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”
By any reasonable measure, the Federal Reserve has failed miserably in all their responsibilities. When organizations fail in a capitalist system, they’re supposed to be replaced, not given more responsibility. They’re now an immense entity with insidious tentacles throughout the worldwide financial system.
Arrogance and Incompetence
In 1915, according the Federal Reserve annual report, they operated with 35 total employees. Today, they operate with over 20,000 employees costing $1.4 billion per year. The cost to operate the system exceeds $3.3 billion. With 20,000 of the “best” and “brightest,” you’d think someone would have predicted the current financial crisis before it hit.
Ben Bernanke thought the underpinnings of the economy were strong, housing was on a firm foundation, and the subprime issue was confined. This instance of incompetence is just one of many since 1913. When examining the history of the Federal Reserve, you realize that it has overwhelmingly been led by weak, pliable, politically motivated men with little or no backbone.
The last two Fed Chairmen have brought the country to the brink of disaster.
The quote above would indicate a man whose principles in sound economic theory couldn’t 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 US history.
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 1990s.
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 dot-com bubble burst, the Y2K phony scare and the 9/11 attacks, Greenspan committed the worst offence of his 20-year monetary reign of terror: He 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 humungous 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 low-income 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 speeches clearly point to his guilt.
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 from 1966 and caused the worst economic calamity since the Great Depression. Ben Bernanke (2006-?)
Here's a Harvard-trained economist who’s 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 1930s. He should talk to the Alan Greenspan of 1966. The Federal Reserve caused the Great Depression through its easy-money policies during the 1920s. 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’d do as Federal Reserve Chairman in the current economic environment. He has followed the script to the letter. 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?
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 wouldn’t spread into the greater economy. He now assures the public that he’ll know the proper time to withdraw the monstrous amount of stimulus he’s pumped into the world economy before hyperinflation takes hold. Does his track record give you comfort that he’ll correctly figure out the right time to withdraw the stimulus?
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 won’t reveal the worthless collateral that they’ve put up for those loans. The Fed has lent in excess of $2.2 trillion to banks, yet they’ve 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’s a reasonable and smart thing to do. Operational weaknesses and fraud are often uncovered in these audits. The bill has 282 co-sponsors. Ben Bernanke -- “Mr. Transparency” -- wants no part of getting audited. Operating in the shadows is preferable. The Fed has proven to be anything but independent, stability isn’t the first word that comes to mind when discussing our financial system, and the dollar has lost 95% of its purchasing power since 1913. The 14 men who have occupied the position of Federal Reserve Chairman should have occupied the office with a huge dose of humility. The complexity of financial markets makes it impossible for anyone to pull the levers of monetary policy in order to generate the result that you wish for. Humans are incapable of understanding the millions of interactions that make up world commerce. The Fed cannot control the emotions or irrational behavior of investors.
The Federal Reserve mandate of moderate long-term interest rates has clearly not been met. The Fed Funds Rate has plotted a path of extremes over the decades, ranging from 0% to 19%, not exactly stable. The Fed has consistently set rates too low, leading to credit bubbles, which always end in recession or depression. Free-market pricing wouldn’t be manipulated or influenced by political considerations or agendas.
The mandate of maximum employment has also been a miserable failure. The easy-credit policies of the Federal Reserve during the 1920s led to the Great Depression, with unemployment rates exceeding 20%. Unemployment has averaged between 5% and 10% consistently since the formation of the Federal Reserve. Government bureaucrats have attempted to hide the true rate of unemployment through the use of deceptive categories and by changing the rules of the game. True unemployment, consistent with the way it was measured during the 1930s, is currently over 16%. This level of “maximum” employment is due to the policies of the Federal Reserve.
The facts prove beyond a shadow of a doubt that the Federal Reserve has failed in every one of its mandates: Inflation has destroyed the value of the dollar. Interest rates and employment have been violently erratic. The Fed has been manipulated by politicians, showing a complete lack of independence. And only two of the fourteen Chairmen have been truly independent and competent -- Paul Volcker and William McChesney Martin. The incompetence and arrogance of the other Chairmen have brought the country to its knees.
The final chapter is about to be written.
Our fiat currency system has proved to be a wretched failure. Within the next five years, a final crisis will bring an end to this diabolical experiment in hubris. Man is not smarter than the free markets. The US dollar is a piece of paper. It only has value because people have trust that the government issuing the paper is financially stable with rational fiscal policies.
This doesn’t describe the United States of today. When the next crisis causes the dollar to collapse and uncontrollable inflation to result, abolition of the Federal Reserve will become feasible. Average Americans have been victims of the boom and bust caused by the Federal Reserve policies. The sole beneficiaries have been bankers, politicians, the military industrial complex, and the super-rich elite.