The Federal Reserve's Magic Money

By Alan Caruba

Historically, the Federal Reserve has had a poor record when it comes to correcting an economic slide into Depression.

In his book, “New Deal or Raw Deal?” historian Burton Folsom, Jr, asked and answered the question “What caused the Great Depression?” Among the factors he cited was the huge debt left over from World War One. In the United States, the national debt had ballooned from $1.3 billion to $24 billion in three short years, half of which consisted of loans made to the allies.

Today the U.S. is feeling the impact of the aftermath of 9/11 when military action was taken first in 2001 and then in 2003. We are still in Afghanistan and Iraq without much to show for it. As opposed to short, preemptive, lightning strikes, we have become involved in “nation building.” Forgotten is the fact that it was the Russian intervention in Afghanistan that ultimately brought down the former Soviet Union.

In the 1930s, in addition to tariffs on imported goods, “The third cause of the Great Depression was the poor performance of the Federal Reserve,” concluded Folsom. “The Federal Reserve was created in 1913 to control the money system by regulating interest rates and lending money to banks.”

In an eerie way, Raymond Moley, a member of Franklin D. Roosevelt’s “brain trust” of advisors and an initial advocate of the New Deal, reflects the widespread perception of Barack Obama today. In 1933 Moley broke with FDR and became a conservative. Following a meeting with FDR, Moley recorded his observations.

“I was impressed as never before by the utter lack of logic of the man, the scantiness of his precise knowledge of things that he was talking about, the gross inaccuracies in his statements, by the almost pathological lack of sequence in his statements, by the complete rectitude that he felt as to his own conduct, by the immense and growing egotism that come from his office, by his willingness to continue the excoriation of the press and business in order to get votes for himself, by his indifference to what effort the long continued pursuit of these ends would have upon the civilization in which he was playing a part.”

This description of FDR is, in astonishing ways, a mirror image of Barack Hussein Obama.

The dissatisfaction that Moley expressed has been manifested in the immergence of the Tea Party movement and the rejection of many in Congress who supported Obama’s agenda, including Obamacare, his failed efforts to jump-start the economy with large, temporary stimulus bills, temporary housing rebates and business tax credits, and the one-time cash-for-clunkers program that followed the federal takeover of General Motors and Chrysler.

There are harsh facts being ignored about the present economic crisis. More than 42 million Americans were on food stamps in August, an all-time record and a number that is 17% higher than a year ago. The U.S. is experiencing massive unemployment and the American Bankruptcy Institute predicts there will be an estimated 1.6 million consumer bankruptcies this year.

The U.S. government is completely and totally broke. A Boston University economics professor, Laurence J. Kotlikoff, has concluded that the U.S. government is facing a “fiscal gap” of $202 trillion dollars.

John Allison, who for two decades served as chairman and CEO of BB&T, the nation's 10th largest bank, told CNSNews.com that it is a “mathematical certainty” the United States government “will go bankrupt unless it dramatically changes its fiscal direction immediately.”

Having tried “quantitative easing” once already the Federal Reserve is undertaking a second effort. It consists of printing magical money and using it to purchase U.S. treasury securities. QE-1 cost $1.7 trillion and did not work. QE-2 will fail as well to the tune of $0.9 trillion.

The U.S. dollar has lost 50% of its purchasing power since 1986 and it has dropped 11% in value since June of this year.

Writing in the November 8 edition of The Wall Street Journal, Kevin M. Warsh, a member of the Federal Reserve’s Board of Governors, went public to warn against QE-2. “Fiscal authorities should resist the temptation to increase government expenditures to compensate for shortfalls of private consumption and investment,” said Warsh who urged “a strict economic diet of fiscal austerity.”

Whether it is Congress or the Federal Reserve, the failures of the present reflect the failures of the past. Major surgery is needed to pare the entitlement programs of Social Security and Medicare. Instead, Obamacare added millions to the Medicare rolls.

The government sponsored entities, Fannie Mae and Freddie Mac, need to be privatized to avoid using billions more in public funds to save them and the too-big-to-fail banks that engaged in “liar’s loans”; mortgage loans that ignored prudent lending practices resulting in the housing market collapse.

TARP did work as an emergency measure, but the government has got to stop being the lender of last resort. It’s our money.

The Federal Reserve is contemplating the creation of “magical money” at a time when the U.S. economy is in deep trouble. It is a trouble that can only be cured by retaining the Bush tax cuts and by simplifying the current insane tax code. Why is there such slow growth? American corporations pay the second highest tax rate in the world.

The burden of federal regulation must be reduced. Economists W. Mark and Nicole Crain, noted in a September Wall Street Journal that “The annual cost of federal regulations increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income.”

The President’s original economic advisors have departed. They, like Raymond Moley in the 1930s, know that he is either clueless and/or resistant to any pragmatic solutions.

The midterm elections gave power to the Republicans in the House, the branch from which all financial bills must originate. Failing to do the same in the Senate, it may take two years to repeal Obamacare, but efforts must be taken to defund it, to render it inoperable. The courts may offer relief with a decision that it is unconstitutional.

When the new Congress meets in January 2011, every pressure possible must be brought to bear on the Federal Reserve to stop short-term failed “solutions” before the U.S. dollar is utterly debased.

© Alan Caruba, 2010

We're Doomed and Other Thoughts on the Economy

By Alan Caruba

Writing about the national debt, Stephen Dunn, said, “At $13 trillion, that figure has risen by $2.4 trillion in about 500 days since President Obama took office, or an average of $4.9 billion a day.” – Washington Times, June 2, 2010.

There are reports that the U.S. Treasury is predicting U.S. debt will be $15 trillion by 2015. Federal Reserve chief, Ben Bernanke just warned Congress that this is “unsustainable.”

One of our favorite cartoon characters is the guy with the sign that says, “The end of the world is coming. Repent!” You can find him enshrined in the Old Testament’s Jeremiah, between Isaiah and Ezekiel.

“I am the laughing-stock all the day, every one mocketh me,” lamented Jeremiah (Chapter 20). He was, of course, warning his fellow Israelites that trouble was headed their way and, sure enough, it was. It always is. I am 72 and have not lived a day when there wasn’t a war in progress somewhere. This also means I was born in the midst of the Great Depression and have lived long enough to see another coming my way.

A lot of people are going to get all worked up over the predicted end of the world in 2012. The prediction will sell books, there will be a movie, but the world will not end. The Earth is 4.5 billion years old and has been around before and since the Mayans who are no more.

On the contrary, our present troubles will begin to end that year when we bid goodbye to Barack Obama after the national election and begin to undue the unbelievably awful “reforms” and “transformation” he has forced upon an unwilling America. The Supreme Court may or may not play a role in this, but it will mostly be up to the voters.

I was thinking about the current financial crisis while reading a recent issue of Business Week that gave a thumbnail description of just six U.S. States that are mired in debt. Leading the pack is California, mired in $272.4 billion worth of debt. Its governor is trying to close a $19 billion gap for the year starting on July 1.

Governor Chris Christie of New Jersey took office with a debt load of $207.4 billion. He is trying to bridge an annual budget shortfall of about $11 billion. He has stunned the State and the nation by speaking the truth about it.

Illinois has a debt load of $237.3 billion, Michigan comes in at $207 and New York State has $203.8. All of these States have one thing in common, legislatures controlled by Democrats, not unlike our current Congress.

The other thing they have in common are public sector unions representing government workers, teachers, and such that have negotiated wage increases, health care benefits, and pensions that make your eyes roll when you find out the details.

The old saying, “When you’re in a hole, stop digging” applies to the federal government in general and President Obama in particular. The “stimulus” bill was one huge earmarked monstrosity that has not and will not “create” jobs. That’s something the private sector does.

Also grabbing up General Motors, taking over one-sixth of the nation’s economy in the form of healthcare, and attempting to throttle the greedy pigs of Wall Street is not working and these efforts will be repealed in one fashion or another.

It is the federal government, however, that has to take much of the responsibility for the latest financial crisis.

By way of example, the Competitive Enterprise Institute just announced “The U.S. Supreme Court will soon hand down a major ruling which could put much-needed constitutional limits on an agency that imposes incredibly burdensome accounting requirements on American companies.

The case, Free Enterprise Fund v. Public Company Accounting Oversight Board, challenges the constitutionality of the Sarbanes-Oxley corporate accounting law, which since 2002 has imposed massive burdens on businesses, entrepreneurs, and investors, with costs passed along to consumers. A decision from the Supreme Court is expected imminently, possibly next week.”

The key words here are “massive burdens.” Very slowly the process of identifying the many ways the feds have burdened Americans and the economy in the name of “social justice” is being reexamined. Why doesn’t it cure unemployment? Why are there always poor people? And why does spending more money on education not improve test scores? Et cetera!

Business Week’s May 23 issue had an article, “Rethinking Fannie and Freddie” referring to the two federally-sponsored entities, Fannie Mae and Freddie Mac, the cause of the mortgage meltdown, that have since been seized by the government in the wake of a $145 billion bailout that is likely to cost more. Something is terribly wrong when the government owns 76% of all mortgage originations.

That said, the two other social justice programs, Social Security and Medicare, have fallen afoul of the unbending law of demographics as more people reaching age 65 take out more money than a declining number of younger workers who are required to pay into these two programs can provide. In the case of Medicare, it has never worked wherever it has been tried, whether it’s Massachusetts or whole nations like Canada and England.

Nouriel Roubini, the economist who predicted the 2008 financial crisis, was interviewed recently by Charlie Rose. He was full of bad news, but common sense. He noted that “generation after generation, we seem to forget the past.” The result is, of course, the latest generation makes all the same mistakes, excessive risk-taking, debt that they could have learned about and avoided.

As I have pointed out, when interest rates for borrowing money are at zero, that essentially means the money has no real value. That in turn devalues everything else such as the homes we bought, thinking they were really piggybanks or ATM machines. When that happens, people send the keys to the banks and walk away.

Roubini, though, also noted that “Most financial institutions are making huge amounts of profits in proprietary trading—borrowing at zero rates and making investments.” That may be good for the banks and investment houses, but it does nothing for the economy, for jobs, for the ability of businesses and people to get banks to lend them the money to start or maintain new businesses.

We have to get away from the notion that businesses and banks are too big to fail. That’s why bankruptcy exists as part of capitalism’s “create destruction.” General Motors and Chrysler should have been allowed to fail. When Wall Street firms tottered there were a number of shotgun marriages to enable them to become parts of banks that, in turn, became “too big to fail.” That just delays and distorts the natural cycle of capitalism.

The whole system is being propped up by a fearful Congress and Federal Reserve, the latter being responsible for determining lending rates. Ever since Alan Greenspan and now with Ben Bernanke, the hard decisions have been put off.

It’s not just the United States. It’s most of Europe with its socialist systems. When the Soviet Union collapsed in 1991, it was telling the world that communism/socialism doesn’t work. It’s time to take this message seriously.

© Alan Caruba, 2010