The US Federal Reserve: A Bank that Will Live in Infamy

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“A day that will live in infamy…” – Franklin D. Roosevelt

The Dow ended down 19 points yesterday. Gold up $9.

Thanks to the socialist Senator from Vermont, Bernie Sanders, we get to see what the Fed is up to. He insisted on learning where the Fed’s bailout money was going. Turns out, not only did billions go to European banks…billions more went to firms in the US that pretended they needed no help.

Goldman Sachs, for example.

Goldman went to the Fed 212 times between March 2008 and March 2009, according to Fed documents. It collected nearly $600 billion.

Morgan Stanley. GE. Citigroup. They were all in on it.

The Fed put out $3.3 trillion worth of credit, buying up speculators’ bad bets. Not surprisingly, the price of the bad credits rose. So that now the Fed can say it hasn’t lost a penny.

Ha. Ha. What a sense of humor!

Let’s imagine that instead of banking and speculating…Goldman was a cabbage grower. And let’s say Goldman overdid it. It planted far too much cabbage. The price dropped…and Goldman was on the verge of bankruptcy. So, in comes the Fed…and buys cabbage by the boatload. And what do you know? The price of cabbage goes up. So, the Fed then looks in its warehouse and it finds it owns tons of cabbage. It multiplies the price of cabbage by what it has in inventory. Wow! It hasn’t lost a penny!

(For more on the magic of modern central banking…see below…)

The feds are supposed to pursue corrupt operators. But now the feds are at the center of the racket. Talk about infamy? Now, it’s right here at home…

How does the racket work? It’s very simple. The Fed hands out money to its powerful cronies. Remember, the Fed is a private bank. It serves what is supposedly a public purpose. But it is neither owned nor controlled by the government. Instead, it’s part of the banking industry. Its official role is to give the US a trustworthy currency…and (more recently) to promote full employment. You can see how well it fulfilled the fist part of its mission. Consumer prices are up about 33 times since the Fed was formed in 1913.

Or, to look at it another way, a $20 gold piece from pre-Fed days – a one-ounce US gold coin – is now worth about $1,450. How’s that for a stable currency?

As to employment… Before 1913, unemployment was virtually unheard of. Why? There was a free market in labor. If you need to work, you took whatever work you could get at the then-prevailing wage. End of the story. There were no subsidies for people who were unemployed. No minimum wages. No safety nets. It was just supply and demand. When demand for labor increased, so did wages. When it decreased, wages went down. Except for brief periods of adjustment, there was no unemployment.

And now? Well, you know the facts as well as we do.

The Fed’s real mission now is to make sure the banks stay in business and make a profit. This it does in the simplest way – by transferring money to the banks. How does it get the money? It just prints it up. Who pays the bill? Eventually, taxpayers and citizens…when this new money reduces the value of their old money.

Neat huh? Who complains? Who has a cause of action? Who even realizes what is going on?

The European Central Bank is duplicating this trick in the other part of the Old World. It is buying up the debt of Ireland and Greece. And what ho! The more you buy…the more the price goes up. Pretty soon, the ECB – with hundreds of billions of this paper in its vault – will be able to announce that it too has made money!

But there’s a strange smell coming from the central bank vaults. Maybe that cabbage isn’t so good after all.

And more thoughts…

It says here in the Financial Review that Australia is boosting its exports of ore to China. It will export more than one billion tons per year.

Wait a minute. At that rate there soon won’t be anything left Down Under….

Elsewhere, the Financial Review’s man on the scene in Manhattan tells us that “Jobs data spoils recovery hopes.”

“A painful reality check,” he calls it.

*** Melbourne is an agreeable place. We see it from the dining room…out across the river… There are polished steel and glass skyscrapers…gracious old buildings…tramways…and there is the Melbourne aquarium…a modernist white building with sails as an architectural motif.

People come and go on their bicycles. And on the river, rowers add a Cambridge-like touch of civilized athleticism.

It is nothing like Beijing or Mumbai. There is no hustle. No bustle. No noise to speak of. You can practically hear the rowers’ oars as they break water on the Yarra River. Each person has plenty of space. You could drop a Congressman from a helicopter and not hit a single voter.

It seems like a nice place to live…agreeable…calm…but prosperous.

Melbourne’s prosperity probably comes largely from selling off bits of Australia – by the pound – to China. When prices for metals are high, Australia rides hide. When they suddenly turn down, so do the faces of Australia’s investors and businessmen.

At present, prices for steel and other metals are high. So Melbourne is a happy place.

Smart people save their money in the fat years, knowing that lean years cannot be far off. Currently, Australians are saving about 10% of disposable income.

That’s two to three times more than Americans.

*** Colleague Justice Litle sent us this explanation of the modern, enlightened way to manage an economy:

Mary is the proprietor of a bar in Dublin. She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Mary’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Soon she has the largest sales volume for any bar in Dublin.

By providing her customers freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Mary’s gross sales volume increases massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Mary’s bar. He so informs Mary.

Mary then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Mary cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks’ liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Mary’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion euro no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Mary’s bar.

Now, do you understand economics in 2010?

Regards,

Bill Bonner.
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. EVeryone knows what I think of FDR and all the other “Sons of the American Revolution” (the US’s elite imperial warmongering club) so I’ll leave it alone after that splat.

    The thing to watch http://www.bloomberg.com/news/2010-12-08/treasury-10-year-yield-rises-the-most-over-two-days-since-september-2008.html

    and another sub effort on the one day from Bloomberg which is all told in the completely schizoid category

    Treasuries Slide on Tax-Cut Prospects; Stocks Advance, Copper Hits Record

    Build America Yields Climb to 11-Month High as U.S. Subsidy Set to Expire

    U.S. States Face `Cliff’ as Federal Stimulus Ending Opens $38 Billion Hole

    Don’t worry though Ben’s helicopter can still lift the printing press off the deck at the moment, he will buy more of his own debt, suppress the yields by being the market maker, and put another debt mountain under that cliff.

    Reply

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