Subprime Loans and Abolition of the Federal Reserve Bank

O'Reilly's bluster signifies nothing because he is not willing to discuss underlying causes. We cannot "fix it" if we do not understand the reasons for banking losses (and O'Reilly's claim that there is a CRISIS! is not true. (H/t Larwyn and Stop the ACLU for video clip.)

From the 1820s until 1913 there was no Federal Reserve or central bank. From 1913 to 1932 the Fed had restricted power to expand and contract the money supply. Even so, with that limited power, the Fed managed to create the Great Depression that began with the stock market crash of 1929. Rather than reconsider the Fed's existence, the American political establishment at that time used the high unemployment that Hoover's and Roosevelt's Progressivism caused as pretext to remove all restrictions on the Fed's money-creation power. In the twentieth century, the American economy has been considerably less innovative than it had been in the nineteenth. The Fed has allocated capital in directions that accord with the banking establishment's preferences rather than entrepreneurs'. This effect combines with high income and other taxation to squash innovation.

The Fed has the power to create money, which it does primarily through purchase of bonds from commercial banks. The banks then lend a multiple of the reserves the Fed deposits. As a result, banks profit handsomely from new money. The chief borrowers, hedge funds, large corporations and government, also benefit. As the dollars circulate, more money chases more goods, but the increase in goods is less than the money supply increase. The reason is that the next project is less productive than the last. As the money supply expands, the less valuable projects receive funding. Artificially depressed interest rates facilitate otherwise impractical projects. As the quantity of money increases, bankers become eager to invest since low returns are sufficient to cover their costs.

Similarly, as the Fed "prints money" the stock market is invigorated because lower interest rates increase the present value of future earnings. Interest rates go down because the amount of money goes up. Wall Street and hedge funds benefit from the fresh money because investors are drawn to the market as it inflates. Naive speculators are the victims, not the cause of this process. The Fed is the cause. As well, mortgage borrowers benefit as do homeowners and other real estate investors.

As the money the Fed creates circulates, prices begin to rise because low quality projects are not worth the counterfeit dollars that funded them. Sub-prime loans are an extreme example of this. Rising prices help some, such as debtors. The wealthy, the owners of stocks and hedge funds were helped when the banks lent the hedge funds money. Losses they subsequently sustain due to inflation are offsets to their gains from Fed counterfeit. The inflation losses are less than the investment gains because the fresh money was distributed in a more concentrated way among a few hedge fund managers while the price increases are diffused over all Americans.

Part of the rationale for the Fed's existence is its "expert" management. William Greider's "Secrets of the Temple" is full of naive hyperbolic awe of the Fed's abilities. Similarly, the Economist Magazine recently ran an article praising the "expertise" of the Fed's economists. However, the Fed's historical track record is dismal. The Fed has overseen a long term reduction in innovation, the Great Depression, the 1970s stagflation, and now multi-trillion dollar banking losses for which the average American is asked to further subsidize commercial banks and investment companies who have been milking them dry for decades.

The nineteenth century did just fine without the Fed. The 20th century saw several major economic disasters (there was one in the late 1910's right after the Fed was founded) and a slackening of American innovation. The late twentieth century saw an explosion of misallocation of wealth to Wall Street and real estate development funded through commercial banks. This misallocation seemed to make America richer in the last two decades because houses and cars were getting bigger, but in reality it made America poorer because we could not really afford those houses or SUVs.

The economists at the Fed are responsible for massive misallocation of resources. Their "paper economy" approach has lead to bad ethics, bad investments, less innovation and massive diseconomies of scale, as the very large financial conglomerates that have been picking Americans' pockets now come to them with hat in hand.

The debate about abolition of central banking was diffused throughout America in the 19th century, and although most Americans lacked high school degrees, they well enough understood what was at stake. As education rates increased, Americans' ability to discuss this issue declined. Americans became docile to the claims of quackish professionals who, like the good people who run the Fed, know more about less, and the less they know is irrelevant to practical reality.

The abolition of the Federal Reserve Bank would improve life for all except the economic elite. Investment bankers, real estate developers and hedge fund managers would suffer and would oppose this step. The media, from Bill O'Reilly and Rush Limbaugh on the right to to the editors of the New York Times on the left, do not merely oppose such a step. They find discussion of it threatening because their employers, Rupert Murdoch and the Ochs Sulzbergers, are direct beneficiaries of the system. For instance, O'Reilly's Spin Zone emphasizes the role of "speculators" in causing inflation (a nonsensical distortion that goes back to the days of the Roman Emperor Diocletian in fourth century Rome, which was an inflationary period due to debasement of the currency) but O'Reilly has never once mentioned the Fed. O'Reilly's spin is more vicious than MS-NBC's. At the end of each show Mr. O'Reilly says that he looks out for his viewers. A con man who claims to be honest, Mr. O'Reilly's spin is worse than Chris Matthews's and Keith Olbermann's, buffoons who openly spin the news.

The Federal Reserve Bank ought to be abolished. It is a failed institution, a Progressive Rube Goldberg device that has caused one financial debacle after the next even as it has transferred wealth from the average American to the wealthy.

Citizens' Welfare Preferable to Bankers'

Contrairimairi sent me an e-mail from TJ Birkheimer, part of which is copied below. Here's an alternative idea along the same lines as Birkheimer's. Rather than bail out failing banks and insurance companies, combine and liquidate them, spinning off the non-performing mortgages and going after all current and former officers for restitution.

Break the financial institutions' assets up into 250 parts, producing 250 smaller banks and insurance companies. Choose the CEOs of the new banks and insurance companies randomly from the Yahoo! people search page. Subsidize the 250 new banks to the degree necessary to make them solvent. Use the remainder of the $750 billion bailout money to provide unemployment insurance to any employees who lose their jobs and need to be on the dole.

This plan would have several advantages. First, by hiring new CEOs out of the phone book, more competent management would be obtained than through the firms' HR systems.

Second, instead of a few large firms that are too difficult for their present managers to run, there will be 250 smaller, more nimble firms with better leadership.

Third, rather than subsidize mismanaged businesses, citizens' welfare would be directly protected.

In addition, the public might consider whether commercial banking ought to be phased out and replaced by Savings & Loan (non-fractional reserve) style banking. The public ought to look at the root cause of this problem, the Federal Reserve Bank, and abolish it in place of a gold standard.

Progressivism is so dominant that public discussion about nonsensical cries of "depression" and "crisis" proceeds on silly assumptions.

Here is an excerpt from Birkenmeier's e-mail:

>Hi Pals,
I'm against the $85,000,000,000.00 bailout of AIG.
Instead, I'm in favor of giving $85,000,000,000 to America in a "We Deserve It Dividend".
As for AIG - liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Birk

T. J. Birkenmeier, A Creative Guy & Citizen of the Republic

The Republicans Let a Corrupt Obama Win

Sadly, the Republicans are falling over themselves to let Obama win, so there's little we can do. Once John McCain decided to identify with George Bush, he ensured Obama's victory.

Contrairimairi writes:

>John Gibson just reported on Fox News, that Jim Johnson is still working with the Obama campaign. In an e-mail sent to former Hillary supporters, Tom Daschle has invited them to a breakfast given by him and Jim Johnson. Mr. Gibson made it abundantly clear that Jim Johnson is still very much involved in Obama's candidacy.

What is it going to take to prove that Obama does not now, did not then, and NEVER will have America or Americans best interests at heart? This apparent liar and "rip-off artist extraordinaire" has ALWAYS put himself first in EVERYTHING he has undertaken. It appears he was lining his pockets within MOMENTS of landing in Washington as the junior Senator from Illinois from the very companies he now "pretends" to be so "outraged" about. Not too surprising considering his contacts with Tony Rezko.

One HAS to wonder WHERE all the money from the millions "earmarked" to improve public housing in Chicago ended up..........where the millions "earmarked" to improve education in Chicago's poorest schools ended up.........WHY, despite his continuing "efforts" as a "community organizer" on Chicago's south side, NOTHING in those neighborhoods seems to have significantly improved. Probably, it would be safer to say that things have probably grown WORSE! More young people die in those neighborhoods than have been lost in similar time frames in the war. Housing in those areas remains sub-standard and dangerous. The peoples' quality of life in those areas NEVER seems to improve. I think we can tell from the trail we ARE able to pick up on, despite Obama's efforts to "hide everything from his past", that he never does ANYTHING without major benefit to himself.

I would LOVE to see one member of the MSM walk the sidewalks in the areas of Obama's "community organizing"....walk the hallways of the low income housing that SHOULD have been improved with the millions that had been earmarked for the area.......sit in a classroom with the children whose schools and education SHOULD have improved after Obama's "efforts" there.

Instead, we find out today, that one of the main contributors to the ills on Wall Street and the near financial collapse in America, is STILL on the campaign trail with Obama. I BEG Americans, do NOT listen to what this man says, watch what he does! He insults Americans at EVERY opportunity, apparently thinking we are just too stupid to get it.

This man is NOT POTUS material, and can NEVER even hope to be! We cannot ever expect the media to show the true facts that cloak this man. John Gibson stated on Fox News, the reason I am here telling you about this, is because the media will not!

This is just too truly pathetic!

John McCain Follows Jimmy Carter

In an e-mailed press release, Andy Martin asks whether George Bush's invitation to Barack Obama to "help solve the financial crisis that is supposedly threatening America" may have been "the biggest blunder in presidential politics since President Jerry Ford in 1976 said Poland was not in the Soviet sphere of influence."

I have been complaining about the Federal Reserve Bank's influence on the economy and the triumph of Keynesian economics among Republicans for the past two or three years, and my old friend Howard S. Katz has been complaining about them for nearly 40 years. The underlying problem with the current financial system is its excessive expansion of credit, which in turn stimulated overly aggressive lending and excessive real estate prices.

The response of conservatives to the crisis reflects what psychologists call perceptual distortion. Distortion occurs when someone feels threatened by information. The person does not hear it or hears it differently.

Conservatives have been reacting to the current decline in real estate prices by saying it is due to Progressive lending programs, which is only partly true. The excessive lending, like the tech bubble, would not have occurred without Republican Federal Reserve monetary policies. When Nixon said that "we are all Keynesians now" he ensured that distortions of this kind would occur over time. It took 37 years, and Howard is to be commended for fighting this fight during the upswing of the Republican Keynesian bubble.

Politicians always try to repeal the laws of economics, and we see the same kind of distortion occurring among Republicans now. One example is the belief that even more inflation, increasing the money supply by one half or $750 billion, would solve the problem. This, of course, begs the question of why the past 75 years of monetary inflation did not solve the "problem". Also, the idea that house prices must always rise was nonsensical when people were saying it in the '80s, '90s and '00s. Now that it is turning out to have been false all along, politicians and conservatives argue that there is a CRISIS.

The correction of real estate prices will causes losses among those who paid too much, just as the tech bubble of 1999 caused losses. Rather than confront the excesses and incompetence of the Federal Reserve Bank as an institution, conservatives, along with the Progressive media, frame this as a CRISIS. A CRISIS.

Martin points out that Obama has been making political hay out of Bush and McCain's naive invitation:

"Obama will have attained the last stop on his self-referential crusade by being accepted at the White House as a statesman and dealmaker. Good grief."

The invitation is symptomatic of incompetence at the apex of the Republican hierarchy that is philosophical as well as political. Lacking a truthful model of what Federal Reserve Bank monetary expansion over the past 40 years has done to the economy, the Republicans fall into the same pattern that Jimmy Carter did in the late 1970s when he listened to the Progressive economists of the Brookings Institution who claimed that inflation helps the poor and working classes because they hold more debt than the wealthy. This claim overlooked historical and dynamic realities. In particular, monetary expansion boosts the stock market, helping the wealthy. Inflation comes several years later and will not show up in cross sectional or even three-year-lagged correlations between monetary expansion and wealth. The gains that the middle class enjoys due to inflation are entirely attributable to increasing house prices and so are difficult to extract except through debt (or becoming homeless), which requires a riskier profile than many people prefer. Neverthelss, debt and inflation have become national habits, creating a stress-and-risk profile that frustrates many Americans, even as they consume on credit. Moreover, much of the gain from house prices is eroded through increasing repair, insurance and property tax costs.

Older Americans are forced to give up their homes because of such costs, and many are forced into poverty in order to continue to live in their homes. Economists treat increasing house prices as wealth gains, but such gains come at the costs of increased risk.

Equally, such gains come at the expense of other Americans. In order to gain due to house prices, Americans must ultimately sell their homes to new buyers, and those buyers must pay much higher prices. Thus, higher house prices mean that new buyers cannot afford homes equal to what they once could. My students will not share in the American dream if the current Republican administration has its way. On paper Americans seem to become wealthier, but what has occurred is a transfer of wealth from buyers to sellers, and the sellers often do not want to sell but have to because they would forced into eating cat food otherwise. Moreover, they cannot enjoy their "wealth" because doing so involves increasing stress due to borrowing or selling. Thus, inflation destroys community. It pits one generation against the other, it forces people to leave their homes and it prevents children from remaining in the communities in which they grew up.

The lag between monetary expansion and price inflation prevents economists from detecting monetary expansion's relationship to income inequality. Hedge funds have obtained capital and made profit through monetary expansion. That wealth is attributable to future inflation. Demand for resources increases prices in later periods, when average Americans foot the bill for the hedge fund managers' profits. In order to see this you need a multi-decade view. The methodologies that economists use look at single years at a time and relate same-period phenomena (inflation in this period versus house price in this period), but the process takes decades to unfold. However, left wing writers such as William Greider in his book "Secrets of the Temple" about the Fed, were happy to make the nonsense claim that inflation helps the poor. Greider can be excused because he was basing this argument on academic studies. But how wrong can academics be before we conclude that they are simply quacks and then move on?

Unfortunately, today's conservatives have bought into the Keynesian model, which is now going to turn out to be suicidal for them. They are following the path of Jimmy Carter.

I would urge a return to monetary conservatism, the gold standard, and a Great Awakening from Republicans' Keynesian slumber.