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Tag Archives: Federal Reserve

The media pundits are shocked! The politicians are slack-jawed. What can we do? Our financial system is in tatters! We’re in a housing crisis, a recession, or a depression, depending on which term you prefer. Credit has dried up for all but the squeaky cleanest of borrowers! How could this be possible? After all, here in the good ol’ U.S. of A. we have this wonderful institution called the Federal Reserve that’s supposed to keep the financial system safe from all of those power mad, greedy capitalists who supposedly ruin the good times for everyone. Well, the whole mess can be summed up with two words: credit expansion.

From USAGold.com we see this statement concerning the central banks actions in the aftermath of the September 11 attacks : “The Fed moved aggressively to supply credit and lower interest rates in an effort to resurrect the markets and keep the economy out of recession.”

And from NPR: “Federal Reserve officials kept interest rates artificially low after the Sept. 11, 2001, terrorist attacks and that helped create the housing bubble.”

Even CNBC’s ranting establishment money man, Jim Cramer had harsh words for the Fed when he railed that, “The Federal Reserve created the stock bubble with low margin rates and it created the housing bubble with low mortgage rates, yet I never hear about anyone talking about investigating the Fed,”

And from Robert P. Murphy and Lee Hoskins on Forbes.com: “A good portion of the housing mess itself is the result of Fed policy: In response to the 2000-2001 recession, chairman Alan Greenspan brought the federal funds rate down to a shocking 1% by June 2003, then held it there for a full year.”

Those are just a few comments. However, they illustrate the dangers that are involved when the Fed slashes interest rates below the normal market level in an effort to expand credit and lead people to believe that prosperity can be created out of thin air. The Austrian economists, however, recognized the dangers of reckless credit expansion many years ago. Here a few comments from Ludwig von Mises on this subject. They are all taken from his book Human Action , which was published in 1949.

“The essence of a credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment.”

“What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.”

“If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”

“The final outcome of the credit expansion is general impoverishment.”

“Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”

These quotations, and many others on various topics and issues are compiled in The Quotable Mises, edited by Mark Thornton.

Wow! It’s been over four months since my last blog post! My, how time flies when I’m thoroughly disgusted with politics! And that just about sums it up for me. I’m disgusted.

It was just over one year ago when I attended a rally for erstwhile Republican presidential candidate Ron Paul here in Pittsburgh. As the year passed I watched the “news” and the “debates,” and came to this conclusion: everything about the American political system as it is now construed is a farce.

Why do I say it’s a farce? Well, let’s just start with the blatant violation of the Constitution by nearly all politicians. Now, maybe I’m missing something here but, it is supposed to be the law of the land, is it not? It is supposed to protect us, the people, against the depredations of government, right? Well, unfortunately, most politicians simply regard it as “just a piece of paper.” And while there are numerous abuses of that document that could be noted, I’ll just mention  the one I consider to be the most egregious. It’s pretty simple, really. According to the Constitution  the power to declare war is given to Congress. However, since the Korean War, yes for longer than half a century,  the president, regardless of his party affiliation, regardless of any popular outcry against going to war from the American people, has been given the authority to bomb anyone, anywhere, at any time, WITHOUT a congressional declaration of war. Congress has shirked its Constitutional responsibility, and the president is now EXPECTED to be the final arbiter in all matters of war. And what do we hear from the mainstream media about this illegal  congressional transfer and presidential usurpation of power?

Zilch.

Call it the liberal media or the conservative media. The truth is that it is the Statist media.

Even more farcical is the fact that our central bank, the Federal Reserve, receives virtually no blame for the calamitous financial situation that exists in America today. Never mind the fact that the dollar has lost 96% of its value since the Fed was created in 1913. Never mind the fact that there exists virtually no oversight of the Fed. Never mind the fact that the housing bubble never would have been “inflated” had it not been for the Fed’s artificial lowering of interest rates to ridiculous levels. Never mind the fact that the United States would not have entered into so many preposterous wars over the last several decades had it not been for the Fed’s relentless dollar creation. Don’t pay attention to any of these facts. Just listen to the blabbering airheads on CNN and Fox News, and their State Department correspondents, Defense Department correspondents, and White House correspondents. Then sleep well knowing that you are receiving the “inside scoop” from all of these wonderful “journalists” who allow us to share in their privileged access to the inner workings of the American body politic. As if they’d even be granted their “privileged access” if they actually reported the truth.

And so here we are on the eve of another presidential election. On the left we have Barack “guns and butter” Obama. On the right we have John “bombs and…well, more bombs” McCain. You call this a choice?! I’d rather see the presidency completely vacated than have either of these two frauds occupying it.

Barack Obama is not about “change.” Sorry to disappoint people but, if he really intended to change anything about the American political system he would have never made it this far in the campaign. If he truly intended to “change” Washington, the media would have paid very little attention to him. Just think about that for a second. When has the mainstream media ever glorified a candidate who truly represented a dramatic change from mainstream American politics? The bottom line is that Obama is just another politician who is willing to say anything to get elected.

As for John McCain, well, I just get the feeling that the man is desperate to be president before he shuffles off this mortal coil. Forget all of this “maverick” nonsense. The man is clueless. Oh, and he never met a war he didn’t like, so I guess that’s a plus when you’re running for President of the American Empire.

As for me, well, I think I’m going to get one of those bumper stickers that reads: “Don’t blame me. I didn’t vote!”

The hot issue in American politics is the economy. It stems, of course, from the housing boom of the early 2000’s, that inevitably became today’s housing bust. People are angry. They want action. Many of them are calling for tighter regulations and increased oversight of lenders as well as the larger financial sector. Well, the Bush administration has devised a plan. According to this plan, the Federal Reserve would become the great overseer of the financial sector. In fact, the Fed would assume the role of “market stability regulator.” Furthermore,

“The role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing to shore up the financial system would be formalized in the administration plan by giving Fed officials greater power to detect where threats might be lurking in the system.”

How interesting. Under this plan the fox would, indeed, be in charge of the hen house. Let’s remember that the Fed slashed interest rates in the aftermath of the 9/11 terrorist attacks in an attempt to spur demand and encourage consumerism. Americans were led to believe that they could spend and borrow their way into prosperity. Many Americans proceeded to buy overvalued homes which they could not afford. The Community Reinvestment Act, which I highlighted here, also forced lenders to issue loans to many subprime borrowers, who normally would not have qualified for those loans.

Everything that transpired after the interest rate cuts, however, would not have happened if the rates were allowed to be determined by the market. So before we blame the market for the mess, it’s important to remember that it was the Federal Reserve that set and held interest rates well below the normal market level. As far as the great borrowing frenzy is concerned, the Fed was the great enabler.

And now were supposed to trust the Fed to oversee the entire financial sector? We’re supposed to trust the Fed to ensure everything remains copacetic?

Here’s what Ben Bernanke, the Chairman of the Federal Reserve, had to say about the housing boom in 2005, just before President Bush nominated him to become Chairman:

“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”

And how did he feel about the prospect of the boom in the housing market coming to an end?

“A moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.”

In other words he simply told everyone to take it easy. Don’t worry. Everything’s under control. That was the message.

Congressman Ron Paul, on the other hand, issued these prescient statements on the housing situation in May of 2004.

“Federal Reserve manipulation of interest rates and the money supply has created a perilous situation for millions of Americans,” Paul stated. “Rising interest rates may well cause housing prices to fall dramatically, leaving many homeowners who bought at the height of the bubble owing more than their homes are worth. Homeowners with adjustable-rate mortgages are especially vulnerable, as are those who used paper gains in real estate values as collateral for second, third, and even fourth mortgages. The Fed’s easy-credit policies are directly responsible for lowering creditworthiness standards and encouraging millions of Americans to overextend themselves. If trillions of dollars in housing equity disappear, no amount of Fed sorcery will keep record amounts of Americans out of bankruptcy.”

Keep in mind that Paul’s statements were issued more than a year before Bernanke shrugged off the looming debacle. Paul predicted that rising interest rates could cause housing prices to fall dramatically, leaving many homeowners owing more than their homes are worth. And then we see this article from marketwatch.com on March 25, 2008, in which it is stated:

“Home prices in 20 major U.S. metro areas have plunged a record 10.7% in the past year as prices continued to decelerate, Standard & Poor’s said Tuesday.

The 20-city Case-Shiller home price index fell a record 2.4% from December to January, the 18th consecutive decline in prices. For 10 major cities, prices fell 2.3% in January and 11.4% for the past 12 months.”
Furthermore, from Bloomberg.com on February 26, 2008:

“Falling prices have trapped many homeowners who would like to sell or refinance their houses because they owe more money on them than the homes are now worth.”

Dr. Paul also highlighted the risk for homeowners with adjustable rate mortgages. In the same marketwatch.com article we see:
“Falling home values could also trigger higher monthly payments for many homeowners with adjustable rate loans.”
And from Bloomberg.com on those rising rates:
“Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records three years ago.”
So, it would appear that the man who has been labeled by some as a paranoid, crackpot, conspiracy theorist actually had it figured out. And he wasn’t afraid to spell it out, either. The man who is now the Chairman of the Federal Reserve, on the other hand, simply brushed the matter aside.
Now what’s that about the Fed possibly being the “market stability regulator?”

Would you like to see what has been happening to our money since the Federal Reserve Act of 1913 was passed? For a graphic illustration of just how severely the central bank of the United States has crippled the dollar check out the Inflation Calculator.

Here’s a great example. Let’s say we start off with $20.00 in 1819, ninety-four years before the Federal Reserve was created. We then purchase some goods with that money. Now fast forward to that fateful year of 1913 and we see that those same goods could be purchased for only $12.91. Fancy that! Prices actually went DOWN in the ninety-four years leading up to the passage of the Federal Reserve Act. Our money was actually worth more as the years passed.

Now let’s take a look at what’s happened to the value of our money in the ninety-four years since 1913. Again we’ll begin with $20. And here’s where the extent of the damage wrought by the Fed’s years of monetary meddling becomes clear. The goods we could purchase with $20.00 in 1913 would cost us $424.60 in 2007. Our money has lost almost 96% of its value!

Now, everyone seems to understand how counterproductive monopolies can be in the business world. It’s not a particularly difficult concept to grasp. If only business “A” is allowed to supply everything we need to make our daily lives more bearable, we know that we can expect to pay exorbitant prices for those supplies. Add a few more businesses in to the mix to sell the same products and directly compete with business “A” and we see prices fall as each business attempts to lure customers away from the competition. Well, in monetary terms we have been living with a monopoly since 1913, when all of the private banks were cartelized. As the late Austrian economist and hero of libertarianism Murray Rothbard put it :

the Federal Reserve and other central banking systems act as giant government creators and enforcers of a banking cartel; the Fed bails out banks in trouble, and it centralizes and coordinates the banking system so that all the banks, whether the Chase Manhattan, or the Rothbard or Rockwell banks, can inflate together. Under free banking, one bank expanding beyond its fellows was in danger of imminent bankruptcy. Now, under the Fed, all banks can expand together and proportionately.

Furthermore:

In modern central banking, the Central Bank is granted the monopoly of the issue of bank notes (originally written or printed warehouse receipts as opposed to the intangible receipts of bank deposits), which are now identical to the government’s paper money and therefore the monetary “standard” in the country.

So we are left with NO competition. But what if we had competing currencies? Well, it’s not surprising that the only politician who understands how beneficial this situation would be is Ron Paul. Actually, there probably are other politicians who understand it. Unfortunately, only Ron Paul cares enough about preserving peoples’ wealth to say that in order to preserve that wealth, the people, not powerful central bankers must have the freedom to make the monetary decisions that will affect their lives. On February 13, 2008, in the U.S. House of Representatives, Congressman Paul had this to say about the currency issue:

“Madam Speaker, allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government. The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government’s ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess. With a sound currency, everyone is better off, not just those who control the monetary system. I urge my colleagues to consider the redevelopment of a system of competing currencies.”

And just consider this. How free are we in this wonderful “free country” of ours when our money is controlled not by us, but by our government and its central bank?

What really gets today’s rank and file Republican all fired up? Is it principles of limited government? How about personal liberty? Maybe the idea of cutting taxes AND spending? Or is it the free market, that, when not being distorted by the collusion of big business and government, provides virtually limitless possibilities for just about everyone? Listening to most Republicans speak one could easily be led to believe that everything I just mentioned does, in fact, excite Republicans. But, as so often happens when dealing with politicians, people are being hoodwinked. Most of today’s Republicans only hold one principle near and dear to their hearts: the principle of endless war.

How else can we explain the near landslide of support for John McCain? He is now almost a lock for the Republican nomination. Remember, this is the man who said he didn’t care if American troops were in Iraq for 100 years. Yet this is also the man who has pledged to protect individual liberty and reduce the size and scope of the state while he complains about the Democrats blocking the passage of legislation that makes it okey dokey for Uncle Sam to spy on all of us without warrants. You’ll also hear him talk about utilizing everything Washington’s got to combat those Islamic extremists that are coming to get us because we’re so darn prosperous and free. All of this comes, mind you, from someone who promises to SHRINK the federal government.

He’ll also tell you about making the Bush tax cuts permanent. And there’s really nothing wrong with that. But what good do the tax cuts do if government spending keeps rising as it will certainly do to execute Mr. McCain’s 100 year war. What good are the tax cuts if our dollar continues to be destroyed by the Federal Reserve? What good are the tax cuts if the Fed continues to artificially hold interest rates down, literally stealing Americans’ savings from them, and causing widespread malinvestment by the corporations who supposedly benefit from the tax cuts? The truth is that Mr. McCain has absolutely NO knowledge of economics. And he really does not care. No matter what he tells you, he only loves one thing: war. He loves the idea of pursuing the Wilsonian goal of “making the world safe for democracy.” He cherishes the fact that the American military garrisons the entire planet, making sure all of those swarthy foreigners stay in line. He spouts off about freedom for Americans while telling the rest of the world that they better do as “we” say or else. He talks about bringing Americans together, when he is exactly what drives Americans apart. He has no problem committing thousands of young men and women to perpetual wars that have nothing to do with our national security, but everything to do with lining the pockets of military contractors and satisfying the Israel lobby.

Sadly, most Republicans have voted for John McCain in this year’s primary elections. If we needed confirmation, we now have it. Republicans (except for Ron Paul and a few others, of course) care not a whit about limited, constitutional government. They care about war, plain and simple. After eight years of rule by George W. Bush and Dick Cheney, two men who have unleashed untold death and destruction in the Middle East as well as in their secret prisons worldwide, most Republicans crave even more blood.

It’s sickening, but true.