The Federal Reserve Rip-Off

By Alan Caruba

I have not been kind to Ron Paul and his participation in the Republican primary campaigns and it has taken me a while to understand why he is doing this. It is clear that he wants to be around to influence the Republican platform and the issue about which he is abundantly correct is the Federal Reserve.

Anyone taking notice of Obama’s latest budget has to conclude that his mission is to crash the nation’s economy and turn America into a Socialist worker’s paradise. The only problem is that Socialism has been a dismal failure everywhere it has been tried.

One only has to look at the collapse of the Soviet Union for confirmation of that, the Chinese abandonment of Communist economic theory, and Obama’s odd notion that a nation can spend itself out of ever-increasing debt.

I am not a fan of Paul’s isolationism, but he is absolutely right about getting rid of the Federal Reserve.

Established in 1913, the same year income taxes were instituted, the Reserve is not part of the federal government. It is, in fact, privately owned by a consortium of banks and that might include foreign banks as well.

In a remarkable essay, “10 Things That Every American Should Know About The Federal Reserve” by Michael T. Snyder, it is clear that the Constitution intended to have the U.S. Treasury to be soley responsible to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”

Snyder points out that the Federal Reserve System (the Fed) is a privately owned banking cartel and one granted the right to create money out of thin air.

It is, says Synder “a perpetual debt machine because “whenever more money is created, more debt is created as well.” On top of its ability to create money, the government then borrows it, increasing the cost to taxpayers by way of the interest that must be paid to the Fed.

The government issues U.S. Treasury bonds with which to secure a loan from the Fed and it, in turn, sells them to others. Money from nothing; interest on that money, and earnings from the U.S. Treasury bonds it then sells!

Synder noted that in fiscal 2011 the U.S. government paid out $454 billion just in interest on the national debt. “The truth is that our current debt-based monetary system was designed by greedy bankers that wanted to make enormous profits by using the Federal Reserve as a tool to create money out of thin air and lend it to the U.S. government at interest.”

“On July 1, 1914 (a few months after the Fed was created) the U.S. national debt was $2.9 billion dollars. Today it is more than 5,000 times larger.”

If Rep. Paul can convince enough people to end the Federal Reserve Americans might actually learn how many trillions it loans to “too big to fail” Wall Street banking institutions as well as to foreign banks, generally without oversight by the Congress.

The previous Chairman of the Fed, Alan Greenspan, confessed to be totally astonished by the housing bubble that led to the 2008 financial crisis, His successor, Ben Bernanke, the current Chairman of the Fed, has been consistently wrong about the economy since taking office. In 2005 Bernanke said that housing prices had never declined on a nationwide basis and predicted full employment as far as the eye could see.

Those mysterious financial instruments, derivatives, were perfectly safe said Bernanke.

In 2008, he was still predicting housing prices would probably keep rising. In 2007 he saw no problem with the subprime mortgages that two “government sponsored entities”, Fannie Mae and Freddie Mac, kept pressuring banks to make. “A few months before Fannie Mae and Freddie Mac collapsed, Bernanke said ‘The GSEs are adequately capitalized. They are in no danger of failing.’”

Any CEO or CFO with a record like that would be out on the street looking for a job. And this man is still in charge of the Federal Reserve.

The latest budget put forth by the Obama administration demonstrates the same level of incompetence and wishful thinking. “All the voters need to do is suspend belief for another nine months. And ignore the first four years,” opined The Wall Street Journal.

The budget essentially says that what a government that is deeply in debt---with the size of it growing daily---has to do is to borrow and spend more! And, oh yes, Obama wants to raise taxes on everyone and everything.

While I would not vote for Rep. Paul to be President, I applaud his lonely campaign to get Americans to think about ridding the nation of the Federal Reserve and to begin exercising fiscal restraint before we become the next Greece, Spain, Portugal, Italy or France.

© Alan Caruba, 2012

Looking to the Dollar, Gold, and "Mutti" to Save the World

By Alan Caruba

The most formidable couple in the world during the 1980s was Ronald Reagan and British Prime Minister Margaret Thatcher. Thatcher, a conservative and a woman of iron will, must be looking across the Channel with some amusement to see how her German counterpart, Chancellor Angela Merkel, is literally the only person keeping the European economy from collapsing and, it must be said, taking England and America with it.

The cover article of this week’s Business Week noted that “Merkel is the daughter of a Lutheran pastor. She won a PhD for a thesis on quantum chemistry…though childless, she is known as Mutti, for Mother.” Born in the post-war years, “Merkel’s worldview reflects the German desire for stability. Chaos plagued the German-speaking people long before there was a German nation…Later the hyperinflation of the 1920s and Depression of the 1930s, both of which undermined the middle-class, gave rise to Nazism.”

Plainly said, Angela Merkel is showing the rest of the world why Keynesian economics doesn’t work; that governments with huge “entitlement” programs and a tendency to throw vast amounts of money at their problems invite disaster. If Europe does not plunge into chaos, it will be because she refused to bail it out with the deutschmark.

Meanwhile, the Federal Reserve is moving billions to Europe to ease its lending crisis.

If you read just one book this year, I recommend James Rickards’ “Currency Wars: The Making of the Next Global Crisis” ($26.95, Portfolio Penguin). An advisor to the Department of Defense, the U.S. Intelligence community, and major hedge funds on global finance, he brings more than thirty years’ experience to a book that explains what has gone so terribly wrong and why.

Rickards spells out how the U.S. economic system has been gamed over the years to ensure that “elites captured most of that growth in income and profits.” It is the reason we are just learning that many members of Congress have grown wealthy using insider information, an act that would land anyone else in jail.

“Over time and with increasing complexity, returns on investment in society begin to level off and turn negative…Bureaucracies that started out as efficient organizations turn into inefficient obstacles to improvement more concerned with their own perpetuation than with service to society.”

This is a definition of the U.S. Departments of Education, Labor, Housing and Urban Development, Health, and Energy, along with the quintessential monster, the Environmental Protection Agency. For good measure, include Fannie Mae and Freddie Mac, the two mortgage loan agencies.

In a chapter titled “Endgame—Paper, Gold or Chaos?” Rickards looks at the weakness of the U.S. dollar, pointing out that “As the dollar and sterling were trading places in the 1920s and 1930s, there was never a time when at least one was not anchored to gold.”

“Gold is not a commodity. Gold is not an investment. Gold is money par excellence. It is truly scarce—all the gold ever produced in history would fit in a cube of twenty meters (about sixty feet) on each side, approximately the size of a small suburban office building.”

“Today, under Bernanke’s guidance, the United States is trying to do what England did in 1931—devalue…What is happening instead is that all the major currencies are devaluing against gold at once. The result is global commodity inflation, so that beggar-thy-neighbor has been replaced with beggar-the-world.”

Rickards’ book is a warning against what we are witnessing. “Perhaps the most likely outcome of the currency wars and the debasement of the dollar is a chaotic, catastrophic collapse of investor confidence resulting in emergency measures by governments to maintain some semblance of a functioning system of money, trade and investment.”

The two currency wars of the last century led to two world wars. Rickards warns that “The path of the dollar is unsustainable and therefore the dollar will not be sustained.” A return to the gold standard “offers the best chance of stability.”

Rickards recommends that the big banks be required to become smaller and that derivatives be banned because “they serve banks and dealers through high fees and poorly understood terms.” Derivatives are contracts between two parties that define the value of underlying variables. The “bundling” of mortgages that were then sold as assets is an example and, as the financial crisis revealed, their value was dubious at best, criminal at worst.

“The dollar,” says Rickards, “for all its faults and weaknesses, is the pivot of the entire global system of currencies, stocks, bonds, derivatives and investments of all kinds. It is the store of economic value in a nation whose moral values are historically exceptional and therefore a light to the world. The debasement of the dollar cannot proceed without the debasement of those values and that exceptionalism.”

The coming national election will be a choice between a President who does not believe the United States of America is exceptional and whoever the Republican Party selects to help the nation return to its fundamental values.

© Alan Caruba, 2011

Paper Money, Real Debt, and Spendthrift Nations

By Alan Caruba

As the citizens of the United States and the seventeen member-nations of the European Union look on, a great drama regarding the future of the EU and its currency, the Euro, is occurring.

The essential problem is that both the U.S. dollar and the Euro are just so much paper, despite the promises and guarantees that they will be honored as real money. The trick has been to keep everyone believing there are sufficient real assets to back up those promises.

Since the U.S. dollar is a kind of universal currency to which other nations peg the value of their currencies the problem for everyone is that the U.S. is broke. Its debt exceeds its annual capacity to generate income, otherwise known as its Gross Domestic Product. Every hour of every day it must borrow billions to meet its obligations. Forty cents of every dollar the U.S. spends is borrowed.

There is a reason why television these days if filled with commercials offering to sell gold. Gold has always retained its value though it does fluctuate. The U.S. Treasury’s gold hoard has a value of more than $400 billion these days, but that value is the flip side of the Federal Reserve’s demolition of the dollar which has lost 95% of its value since1913, the same year the Fed was created.

Currently the Federal Reserve has been printing vast quantities of dollars—quantitative easing—that only serves to devalue it. The dollar is backed by the “full faith and credit” of the United States, but for the first time in our history our credit rating has been downgraded by agencies such as Standard & Poor’s and Moody’s.

Not that the rating agencies haven’t also been part of the problem. They are famous for telling everyone that the bundled mortgage assets of Freddie Mac and Fannie Mae were okay right up to the day the 2008 financial crisis occurred and Lehman Brothers collapsed

When the 2008 financial crisis hit, the American taxpayer was tapped to bail out a number of banks, a huge insurance company, and even General Motors. This was followed by “stimulus” spending, all of which drove U.S. debt levels to historic highs. The vast matrix of Federal Reserve central banks, government agencies charged with oversight of financial institutions, and the ratings agencies all contributed to the crisis.

The U.S. went off the gold standard in 1931, in effect exporting deflation around the world. Other nations followed suit. At the time, Americans were experiencing high debt burdens, unemployment, and money hoarding. If that also sounds like 2011, you’re right.

The crisis of 2008 was brought about by the “bundling” of mortgage assets. Fannie Mae and Freddie Mac, two Depression-era social justice inventions, currently own 50% of mortgages, many of which were the result of pressures on banks to make loans to people who clearly could not pay them back. What the banks considered “assets” were phantoms whose collateral could often not be traced.



Ben Bernanke, Fed Chair

 Little noted is the role of the Federal Reserve. A government investigation into the causes of the 2008 financial crisis concluded that “The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not…”

What the Fed had done, in fact, was to lower the interest rate it charged for lending to banks to very nearly zero.

In his book, “Currency Wars: The Making of the Next Global Crisis”, author James Rickards explains what is actually occurring.

“The United States now has a system in which the Treasury runs non-sustainable deficits and sells bonds to keep from going broke. The Fed prints money to buy those bonds and incurs losses by owning them. Then the Treasury takes IOUs back from the Fed to keep the Fed from going broke.”

We’ve been here before in two previous currency wars, the latter of which led to World War II. The problem then and now is the need for job creation, something that can only be achieved by private enterprise.

The United States government has not provided a good environment for its business and industrial community to invest and expand. It has, as just one example, very nearly the highest corporate tax in the world; beyond that, a vast matrix of regulations makes doing business in America expensive, difficult, and often uncompetitive.

How this will all play out depends in large part on whether Americans are prepared to reduce the size of a government that grew precipitously in the 1930s and the second half of the last century. We must begin to slowly and fairly phase out the “entitlement” programs.

The great question facing Europe is whether the EU disbands and its members return to individual national sovereignty in a response to a continent-wide economic disruption caused by unsustainable debt in its southern tier nations. The EU was a response to a history that generated two major wars in the last century, bankrupting the continent morally, socially, and economically. The road back has been in part due to U.S. aid and protection against the former Soviet threat.

While the possibility of abandoning the Euro was unthinkable bare months ago, it is now an option; a very difficult option because of the vast interconnectiveness of Europe’s and our own banks.

In America the only real hope we have is that in November 2012 we will elect men and women who will turn the ship of state around before the latest currency war sinks ours and the world’s economies.

© Alan Caruba, 2011

System Failure on a Global Scale

By Alan Caruba

We are living in times when the structures involving the global financial system, national security, and self-governance are under attack, decaying, or just self-destructing due to all the ills to which humanity is prone.

Wars in the twentieth century were always an example of either the failure of nations to resolve their differences or of the ancient human inclination to steal whatever they can from their neighbor. Wars organize this into armies for that purpose. The other cause for war is the necessity to rid the neighborhood of the crazy guy who’s hoarding weapons and building bombs.

What is occurring of late, however, goes beyond the usual casus belli to something far greater, a loss of faith in national and international banking systems, aggravated by the failure of nations to act in a prudent fashion to protect the wealth of their citizens and their national sovereignty.

The cause of this is socialism, the polite name for communism. Like Islam, it exists for world domination, the control of the population for the enrichment of those holding the reins of power. It is no accident that the U.S. Congress is filled with millionaires or those who soon will be.

Communism, the creation of a man who never held a job in his life, Karl Marx, and its theoretically gentler version, Socialism, has proved to be a failure wherever it was implemented. It is always introduced as the antechamber to utopia, a better life for everyone and it has always led to the slaughter of millions in the name of achieving it. It is just another form of slavery.

Socialism, as practiced throughout the United States and Europe, dependent as it is on the “redistribution of wealth” in the form of “entitlement” programs is now crashing down around the heads of various elected leaders.

As the former British Prime Minister of Britain, Margaret Thatcher, once famously said, “Sooner or later you run out of other people’s money.”

When you pile on debt beyond the mind’s capacity to imagine and you empower “super committees” or hold desperate meetings as are occurring in Europe, public faith in national currencies begins to disappear and with it a rational world in which goods and services generate income.

We are now 66 years since the end of World War Two, the war that followed “the war to end all wars”, World War One. Peace—the absence of war—lasted a scant twenty-one years in Europe before the latter cataclysm began in 1939.

Times of turmoil are the perfect opportunity for tyrants of every description to emerge, organize the collective anger, and launch new wars. In the past 66 years of “peace” there has been a succession of wars, usually between Communist and Capitalist nations such as the Korean and Vietnam Wars or civil wars. The recent wars and revolutions in the Middle East have been about oil and who gets to pump it out of the ground.

Threatening the entire world is the rise of the Islamic Revolution. Islam is less a religion than a battle plan for global conquest that has the added fillip of enslaving its adherents in a faith system that demands total obedience on pain of death. Unbelievers in general face this threat. Israel in particular always has.

Capitalism isn’t a perfect system, subject to periodic cycles of recession and depression, but it does require a greater measure of individual freedom than any other in order to encourage the kind of innovation and risk-taking that creates vast wealth-producing economies.

The problem the West is facing has been brought on by the profligate and often corrupt waste of the people’s wealth. This has been the result of metastasizing laws whose ultimate purpose is to keep populations from demanding more freedom from rapacious taxing, borrowing, and spending. Even central banks are powerless against this. Ours, the Federal Reserve, has responded by printing dollars out of thin air.

On November 18th a proposed constitutional amendment that would require Congress to balance the budget failed in the House. The U.S. is currently $15 trillion in debt. The worst fears of our Founding Fathers are coming true. Presiding over the nation is a Marxist ideologue and his henchmen.

When the Congress of the United States of America refuses to obey the limits of the Constitution, you have failure.

When that same Congress refuses to reform “entitlement” programs and reduce massive spending, you have failure.

When the Federal Reserve—a central bank that is not a part of the federal government— owns most of the nation’s debt, you have failure.

In my lifetime, the United States of America went from a largely Capitalist system and society to one of near total government control. It is Socialism supported by an insane system of taxation lacking even the appearance of fairness.

The United States has moved too far away from the purpose of the Constitution, established to “form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity…”

We are that posterity,

In the decades since the last Great Depression a succession of Congresses has bankrupted the nation once again. It is happening as well in Europe because nations like Greece, Italy, Spain, Portugal, Ireland and France thought they too could defy common sense and fiscal prudence.

It is system failure on a global scale.

Americans and the citizens of Europe are the unwilling victims of too much government, too much regulation, too much corruption, too much taxation, and the general inclination of those in charge to acquire as much wealth for themselves while keeping the rest of the population complacent with “redistribution of wealth” schemes that always fail.

The Tea Party movement is calling for a restoration of America. We have precious little time to do that and it is the Democratic Party in league with unions who oppose that goal.

© Alan Caruba, 2011

Destroying the Dollar

By Alan Caruba

Something I never thought I would ever see in my former hometown, a wealthy New Jersey suburb of New York City, was a Dollar Store, but one opened recently in a former supermarket. Dollar Stores are giving Wal-Mart, Target, and similar outlets a run for their money and it’s not hard to see why. The local one has just about everything you could need and all for astonishing low prices.

In countless ways people are looking to save money these days. The looming problem, however, is the question of what happens when Americans wake up to learn that even a dollar can no longer buy anything?

“When Faith in U.S. Dollars and U.S. Debt is Dead the Game is over – And that Day is Closer than You May Think” is the cheery title of an article recently posted on EconomicCollapse.com.

There’s a reason why both the mental condition and the financial condition are called a Depression. It’s hard to be happy about anything when your nation’s currency is not worth the paper on which it is printed. The Federal Reserve’s answer, some fear, is to print more money and to continue to buy U.S. debt with it. It is doubtful, however, this Ponzi scheme will continue.

There isn’t a day that goes by when some U.S. government agency doesn’t send me a news release to announce that it is giving millions for something and, if our elected leaders are negotiating a solution to this insane spending and giving, there is precious little evidence of it.

New unemployment numbers are up. The administration continues to churn out thousands of pages of new regulations. It has stalled the energy sector from oil and gas exploration that could create thousands of jobs. And China is divesting itself of U.S. securities, anticipating a bad outcome for our economy.

Meanwhile, the so-called “entitlement” programs represent sixty percent of all the money the government spends. Without some changes, these programs are unsustainable. The Democrats’ answer is to depict Republicans as wanting to kill grandma.

The Gross Domestic Product

In a Mid-May article posted on American Thinker.com, Randal Hoven spelled out a number of facts that are overlooked in the political battles between liberals and conservatives. “The entire debate is about a difference that is less than 4% of GDP. According to International Monetary Fund figures, government in the U.S. is spending 41% of GDP in 2011. The current debate is about whether government spends 40% or 44% of GDP.”

The government is absorbing far too much of the Gross Domestic Product for its own purposes. We are in a league shared by Greece and other nations with a serious financial crisis.

While the federal and state governments plunders every cent they can extract from those still fortunate to have a job, any investments, or will die at some point, both Republicans and Democrats have participated in expanding government since the last Great Depression.

While President Obama’s constant blaming of George W. Bush for his first two years became a joke, Hoven notes that Bush expanded Medicare with a prescription program and many of the “liberal” programs we conservatives denounce occurred while Bush was president. “No Child Left Behind”? Bush. Outlawing light bulbs? Bush. Ethanol subsidies? Bush.

The absurdity of President Obama’s mantra that millionaires and billionaires be taxed more ignores the fact that such taxes, even if we took all of their money, would barely cover the rate at which government spends and wastes such income.

While negotiations, we’re told, are occurring or will, the greatest impediment is Obama’s open disdain and dislike for Republicans. This cannot be underestimated in terms of finding a solution.

At the heart of our current problems is that, having inherited a financial crisis, Obama devoted the last two years to a government takeover of both the health care industry and the financial sector with two bills, each of which exceeded 2,000 pages and vastly expanded government bureaucracy.

More government control of the economy is the last thing this nation needs at this time. Or any time.

Social Security will be insolvent by 2037 and, together with Medicare, they have unfunded liabilities of $107 trillion in today’s dollars. That is seven times the size of the U.S. economy and ten times the size of the national debt.

The real problem for the United States is the falling confidence and faith in the U.S. dollar. It is the default reserve currency of the world. Just about everything trades in U.S. dollars. It’s not only Americans losing faith in our government’s ability to maintain its value, it is everyone else.

In April, Standard & Poor’s downgraded its outlook on U.S. government debt from “stable” to “negative.” It warned that the U.S. could lose its prized AAA rating. Unless Congress and the current occupant of the White House take specific steps to fix Social Security and Medicare, the dollar compared to other major national currencies will continue to fall. It has fallen 17% since 2009. Moody’s rating service has also issued its own warning.

Pretty soon, nobody will want to buy U.S. securities used to currently borrow 41 cents of every dollar the government spends. The U.S. borrows about $168 million every single hour.

In April, CNSnews reported that “the federal government made $125 billion in ‘improper payments’ in fiscal 2010, more than eleven times the total 2010 spending by the U.S. State Department.”

That’s a government that doesn’t know what it’s doing and isn’t in a hurry to fix it.

That’s why a Dollar Store just opened in one of the most affluent suburbs of New Jersey.

I know the economists and others keep saying that the Recession that began in 2007, ended in 2009. I know they can and will cite all manner of good economic indicators, but if faith in the U.S. dollar continues to falter, it won’t matter.

© Alan Caruba, 2011

History is No Help to the Federal Reserve

By Alan Caruba

Federal Reserve Chairman, Ben Bernanke, gave a press conference on Wednesday and, try as I did, I fell asleep almost immediately. For those suffering from insomnia, I would recommend you “take two Bernanke’s and call me in the morning.”

At the time of his appointment Bernanke was widely known as an expert on the history of the Great Depression. It was commonly thought that he would avoid putting the nation through a similar experience, but a long, deep recession has put that in doubt.

In “New Deal or Raw Deal”, historian Burton Folsom, Jr., identified three major causes of the Great Depression, beginning with a Smoot-Hawley Tariff Act on imported goods that was signed in June 1930 by Herbert Hoover. It was the highest tariff on imported goods in U.S. history. Other nations retaliated. “Our exports, therefore, dropped from $7 billion in 1929 to $2.5 billion by 1932.” The result was that “By July the stock market had lost one-third of its value in ten months”, a second major cause of the Depression whose beginning is generally dated to the Wall Street crash of October 1929.

The other cause was due to the fact that, in the three years leading up to the bill, “the national debt balloon(ed) from $1.3 billion to $24 billion.” Our current national debt is equal to our entire Gross Domestic Product, the value of all of the nation’s goods and services.

Folsom identified the third leading cause as “the poor performance of the Federal Reserve. “In practice, the Fed had raised interest rates four times, from 3.5 percent to 6 percent, during 1928 and 1929. That made it harder for businessmen to borrow money to invest, which hindered economic growth.”

Under former Chairman Alan Greenspan and Bernanke, the Fed has kept the interest rates it charges banks to nearly zero. Bernanke is no doubt aware that the Fed’s failure to lend money to cash-hungry banks led to the collapse of hundreds during the Great Depression.

Fast-forward to present times and we see that the Fed has literally flooded the economy with cash, essentially by simply printing money out of thin air. All of it is backed by the “full faith and credit” of the government.

On April 25, The Wall Street Journal headlined an article, “Fed Searches for Next Step” noting that it “is likely to begin closing a wide-open credit spigot this week—but faces a major decision: when to start draining the excess credit out of the economy by raising interest rates.”

Whether the economy was infused with great gobs of cash or whether that liquidity is slowed, the Fed—then and now—is caught in a vice because history demonstrates that neither action had the desired purpose. If this was a game of Monopoly, the players could put the board away in its box, but neither history nor current trends point to anything other than a severe depression.

The rating service, Standard & Poors, recently issued a warning that the U.S. debt was slipping into a “negative” situation and this has been followed with a prediction by the International Monetary Fund that the U.S. economy will be overtaken by China in just five years. S&P is famous for its failure to spot bad guys like Enron, to whom it gave high ratings right up to the day it collapsed, nor should we believe the IMF propaganda which suspiciously tries to panic Americans.

The Fed was created by a small group of bankers and came into being in 1913. In good times and bad it has functioned in concert with international banks to control the volatility of the financial marketplace and sustain the viability of the individual nations they represent. The Fed functions largely in secret. The oversight that Congress is supposed to exercise is much the same of its regulatory agencies that have rarely seen trouble brewing, nor been able to do much about it except to clean up the mess with taxpayer’s funds.

The problem in the 1930s and now is the national debt, the result of insane, profligate spending. Those in the White House and the Democratic Party are opposing any rational steps to reduce it.

Instead, it enacted Obamacare, legislation that will further crash the economies of individual States. Some twenty-eight States are already on record opposing it. An effort to have it declared unconstitutional was greeted by the Supreme Court with a refusal to expedite the case just before the judges began a three month vacation.

An April 27, 2010 Cato Institute briefing paper by Arnold King presciently noted that “Recently, the Federal Reserve has significantly altered the procedures and goal that it had followed for decades. It has more than doubled its balance sheet, paid interest to banks on reserves held as deposits with the Fed, made decisions about which institutions to prop up and which should be allowed to fail, invested in assets that expose taxpayers to large losses, and raised questions about how it will avoid inflation despite an unprecedented increase in the monetary base.”

The Cato paper was titled “The Case for Auditing the Fed is Obvious.” The fate of the nation is held in the hands of the Federal Reserve. It performed poorly in the late 1920s and 30s, and confidence in its ability to extricate the nation from its enormous debt may well be misplaced.

A combination of unsustainable entitlement programs, too much spending, and the collapse of the housing market that resulted from Fannie Mae’s and Freddie Mac’s belief that housing prices would never fall has brought us to this point in the wake of the 2008 financial crisis.

The response by the government, however, was to buy the bank’s bad debts and engage in multi-billion dollar “stimulus programs” which we were told would create employment and put the economy on track to recovery. It has not happened.

Instead, taxpayers have had the nation’s future put in jeopardy into the next and further generations, some of whom are as yet unborn.

Despite the Fed’s printing presses, the U.S. dollar is in decline at the same time that the price of gasoline, food, and everything else is rising.

The 2010 elections that put Republicans in charge of the House of Representatives, the branch of government that initiates spending bills, has resulted in partisan warfare on Capitol Hill as the GOP weighs what steps it can take. Ambivalence about raising the debt ceiling reflects GOP concerns regarding the 2012 national elections and their fear that they, not the Democrats that regained control of Congress in 2006 will be blamed for the current crisis.

Suffice to say that both political parties deserve blame for years spent initiating excessive spending and ignoring the warning signs.

Meanwhile President Obama has declared his candidacy airily demanding that taxes be raised on “the rich” at a time when raising taxes is the worst possible choice to make as the economy struggles to recover. For the passed two years, the Obama administration has engaged in every effort to undermine and destroy the economy.

John Adams, one of the Founding Fathers and the nation’s second President, warned “Remember, democracy never lasts long. It soon wastes, exhausts and murders itself. There never was a democracy that did not commit suicide.”

2012 looms as an election year in which Americans will decide whether to change course or, indeed, commit suicide.

© Alan Caruba, 2011

Debt Beyond Belief

By Alan Caruba

Have you noticed the many television advertisements urging you to buy gold, to refinance your home, to get a reverse mortgage, or to fix your personal credit score? There’s a reason for this, not just individuals are financially stressed, but the entire nation is broke.

The nation has not seen this level of debt since the end of World War Two. We have debt equal to the entire value of our Gross Domestic Product. The government cannot collect enough taxes to make a dent in it. It has to cut spending. It has to find ways to reduce the need to borrow.

Monday’s Standard & Poors' downgrade, not of the nation’s triple-A rating for its treasury securities, but a warning that the nation’s “sovereign rating” has a “negative outlook” says that America has wandered into a dangerous area in which worldwide confidence in the dollar is slipping away.

For too long, too many of the economic advisors to presidents Clinton, Bush and Obama, have been allowed to cause this damage and then, as often as not, return to their ivory tower jobs secure in the knowledge that more knucklehead economists will fail to apply the brakes.

How does a nation engaged in two foreign wars do that? The answer is that it can’t. No matter how much government waste is exposed, it rarely translates to a reduction. The bureaucrats running federal departments and agencies understand that failure to spend as much of their current budget as possible threatens their ability to ask for and get more

The responses to the S&P news, as reported in Monday’s Wall Street Journal, demonstrate that economists, tightly wrapped in their favorite theories and masses of numbers, are clueless. Mark Thomas of the University of Oregon dismissed the S&P warning, airily saying “the political process will deal with this problem.” It is the political process, specifically decades of interfering with the nation’s housing market that caused the 2008 financial crisis.

Add in interference with the energy marketplace since the days of Jimmy Carter and you have $5.00 a gallon gas by June, maybe sooner.

It is the political process that is blathering about raising the debt ceiling when all it has ever done is raise the debt ceiling. The same political process has proven incapable of eliminating federal government agencies and programs that have ballooned the debt while slowing economic growth.

Dean Baker of the Center for Economic and Policy Research noted S&Ps “horrible track record for judging credit worthiness” and, considering that it “gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse”, he’s got a point. Much of the alleged structure in place to avoid banking failures has been a failure.

Steven Richhiuto of Mizuho Securities suggested the “political realities” will make it difficult “to achieve the type of entitlement and tax reform necessary to put the deficit on a credible declining trajectory.” You think? For decades Social Security and later Medicare have been the famed “third rail” of politics.

No one wanted to address the way changing demographics—more older people, fewer working people—had rendered the systems unsustainable. Rep. Paul Ryan’s 2012 proposed budget does, in fact, address these and other problems, but if “political realities” fail to bring about the changes he and several deficit commissions have recommended, then the S&P warning is the equivalent of being on the Titanic.

Paul Krugman, Princeton University’s Nobel Prize winner, and New York Times columnist just repeats that same nonsense that “the U.S. is perfectly capable both of running large deficits now and getting its fiscal house in order over time”, cautiously adding, “but not if the parties cannot agree on any solution.”

The political parties have not been able to agree for decades. When the economy rebounded from President Reagan’s tough love, it still took a 1994 historic change in Congress to Republican control before welfare reform was embraced by President Clinton. He then took credit for an improving economy. In 2010 the voters returned control of the House to the Republicans, but the previous Democrat House and two other branches of government, the Senate and the White House, have plunged the nation into its current crisis by tripling the debt by trillions.

The bottom line is that the nation cannot continue to run large deficits because it cannot afford to pay huge interest rates on every dollar it borrows. That is a cycle that must be broken.

At the heart of present dangers is the Federal Reserve that has been printing money out of thin air for the purpose of buying the bank’s “toxic paper”, the millions in “bundled mortgages” for homes, the ownership of which is often in question. This is called “quantitative easing”. Other nations have gone this route and achieved little as a result.

Writing in November 2010, Bill Bonner, creator of newsletter The Daily Reckoning, said, “America’s own experience with quantitative easing is similarly discouraging. Between the beginning of 2009 and March 2010, the Feb bought $1.7 trillion worth of mortgage-backed securities, creating new money specifically for that purpose. Where did the new money go? Into the coffers of the banks. Did it stimulate the economy? Not so’s you’d notice.”

By April 2011, all the major economic and social indices by which a nation’s financial status is measured have been in the negative. Economists and others may choose to ignore the S&P warning, but eventually the nation’s economic system will simply collapse on its own if steps are not taken to dramatically address the issue.

You don’t have to be an economist to know that something is terribly wrong with the way all levels of government have horribly mismanaged the nation’s and the state’s fiscal affairs. You just have to watch the television commercials.

© Alan Caruba, 2011

Lame Ducks Threaten Economic Recovery

By Alan Caruba

As if the forcing of Obamacare on a nation vastly opposed to it was not enough, the lame duck session of Congress between now and December 31st has the potential to harm economic recovery still more.

Congress includes sixty Democrat Representatives in the House who will not be returning and six in the Senate who were also voted out of office or who have announced their retirement. If the world made any sense, none would be permitted to vote on anything at this point.

If, indeed, Congress functioned in a reasoned and rational fashion, the nation would not be forced to wait until the last month of the year for it to resolve a range of fiscal and other issues despite the fact that Fiscal 2011 has begun. It has not passed a budget and it will need to pass a continuing resolution to fund the federal government until it does.

Americans and the business community in particular are still waiting to see if Congress will extend the Bush tax rates. They have been in effect for nine years. Everyone understands maintaining the existing rates is essential to avoid worsening an ailing economy.

For the President and Democrats in Congress, the issue has to do with “billionaires” and “millionaires” when the real issue is whether small to medium-sized businesses will be able to hire and expand. The issue is whether millions of Americans who are still employed will see their take-home pay reduced in January by additional taxes. It’s worth noting that those high earners already pay some 70% of the income taxes collected every year.

Another problem is Sen. Harry Reid’s intention to bring the “Dream Act”, yet another amnesty effort, to a vote. Here again, Americans overwhelmingly oppose any easing of laws regarding illegal aliens.

Democrats are also discussing a ban on “Don’t Ask, Don’t Tell”, a policy that permits gays to serve in the military, but to keep their silence regarding their sexual orientation. In an all-volunteer military corps morale should trump this issue, but thanks to political correctness, it does not.

Medicare, who most agree was in need of repair, but not the bureaucratic monster of Obamacare, is required to reduce reimbursement rates for physicians every year and, to avoid that, Congress has always passed legislation to avoid the cut, called “the doctor’s fix.” If Congress does nothing in the lame duck session, reimbursement rates would plunge 23 percent. Those on Medicare would have to dig into personal funds as doctors would understandably raise their fees to make up for the loss.

The extension of unemployment insurance is going to prove a very difficult issue, which is why the Democrat-controlled Congress put it off until after the elections. Benefits averaging $310 per week are due to expire on November 30 and this affects some two million Americans. It is a disincentive to seeking employment.

Republicans and a contingent of Democrats are demanding that the cost of extending unemployment compensation be financed through budget cuts, but how does Congress achieve any savings when Obamacare creates a federal bureaucracy of more than 150,000 new employees? It will even provide insurance to non-U.S. residents whether they are here illegally or not. If that’s not bad enough, it gives the government real-time access to your bank account and the authority to make electronic fund transfers from it! That's not government, that's gangsterism.

Outside of Congress, another threat exists in the form of the Environmental Protection Agency’s illegal and obscene effort to regulate “greenhouse gas” emissions. The agency plans to initiate this power grab by January 2nd and it must be stopped.

After an orgy of borrowing for stimulus legislation that has failed to generate new jobs, the further devaluation of the U.S. dollar looms as the Federal Reserve undertakes a second “quantitative easing.” The first did not increase bank loans to businesses and others. The Russians and Chinese have just announced they will conduct bilateral trade using their own currencies, not the U.S. dollar that until now has been the global standard.

Further threatening an economic apocalypse is the question of whether more European nations will join the ranks of failed economies from Greece to Ireland to Spain and Portugal. England and France are imposing much needed budget cuts while Germany, the strongest European economy, appears to be understandably reluctant to bail out the Euro.

The arrogance and incompetence of the Democrat Congress and Administration defy the imagination and the clear intention of a growing legend of Americans is to put an end to their liberal legislative abominations.

© Alan Caruba, 2010

Cartoon Round Up

Halfway Between Sanity and Bedlam

By Alan Caruba

“In individuals, insanity is rare; but in groups, parties, nations, and epochs it is the rule.” – Friedrich Nietzsche (1844-1900)

To listen, watch, or read the news these days, one is struck by the sheer insanity of most of the activities sanctioned by the government and encouraged by the signs of sanity reflected by the outcome of the midterm elections.

The people have spoken! And they are still at risk of being ignored by the White House and the Democrats.

For example, the “enhanced” airport inspections complete with full-body scanners and “pat downs” that have managed to enrage air travelers. The Israelis don’t do this and they have never had an El Al flight hijacked or blown up. Meanwhile, al Qaeda is enjoying the way the Department of Homeland Security has vastly over-reacted to its threat. As many rational observers have pointed out, identifying ARABS and/or MUSLIMS for a closer look is a very good idea. There is no record of a Catholic nun having ever hijacked a commercial jet.

In March of this year close to a million Americans showed up near the Capitol steps to protest Obamacare. They were dismissed by David Axelrod, a White House advisor, who said, “They’re wrong.” This was followed by Speaker Pelosi telling Americans that Obamacare had to be passed first so everyone could know what was in it and that included the members of Congress who voted for it. That is a definition of crazy. Almost immediately, corporations and unions began to file for waivers for their employees and members. Laws are supposed to apply equally to all Americans. Obamacare does so by raising your health insurance premiums.

The Federal Reserve, charged with the responsibility of protecting the value of the dollar, hasn’t done that for decades. Since the dollar is not pegged to a commodity such as gold, it is merely a piece of paper that the government promises to honor. That is now in jeopardy as the Fed engages in yet another “quantitative easing”, buying U.S. debt with devalued U.S. dollars. Other nations watching this slight-of-hand are not fooled and at some point they will stop buying $50 billion in U.S. securities every day.

One sign of sanity were the midterm elections that returned power in the House to the Republicans and narrowed the power of Democrats in the Senate. Members of the Republican Party and Independents are waiting to see if its leadership has figured out that they do not want any compromise with the White House that has never shown any compromise during the last two disastrous years.

The Republicans have real depth in terms of whoever they might choose to run against Obama, but all the “buzz” remains focused on former Governor Sarah Palin who can be seen these days in a Discovery Channel series about her family and Alaska. I doubt Sarah will take us on a tour of the utterly barren Alaska National Wildlife Refuge under which lies millions of barrels of untapped AMERICAN oil. It is just insane to not tap the enormous reserves of oil that are known to exist throughout and offshore of AMERICA.

On November 20, General Motors held an initial public offering (IPO). You will recall that, instead of being allowed to go through the normal process of bankruptcy and restructuring, the Obama administration stepped in and made all Americans part owners. Isn’t that called Communism?

John Berlau of the Competitive Enterprise Institute said this of the IPO: “What exactly is so remarkable about a company coming back to life after a $65 billion taxpayer bailout, additional billions in tax breaks not available to other companies, and even an amazing “sovereign immunity” exemption for this IPO from anti-fraud securities laws and lawsuits? With this massive infusion of government aid and favors, even a company selling ketchup Popsicles to women wearing white gloves would likely show a profitable quarter!”

If, by now, you have seen a pattern of public policy that has staggered back and forth between sanity and bedlam, you are not alone. The first two years of the Obama administration has systematically destroyed confidence in America from within and without.

The international slap-downs the President has encountered speak to an insane policy that includes adding trillions to the national debt; thus putting the United States on a par with member nations of the European Union that are in financial trouble.

Americans, usually known for their common sense, are in near rebellion.

They don’t want to be fondled on their way to a vacation or business flight.

They don’t want the government to tell them what they should eat.

They don’t want a million mandates about everything they purchase.

They don’t want their children brainwashed in schools and colleges to believe utter nonsense about “climate change” and all the absurd claims attached to it. Change is what the climate has done for 4.5 billion years on planet Earth.

They don’t want amnesty programs for people who entered the nation illegally.

They don’t like the fact that government workers, thanks to the largest union in America, earn far more than those in the private sector and receive outsized pension and health benefits.

Et cetera!

America lost its mind over a totally unknown Senator from Illinois in 2008. In 2010 it is struggling to regain its sanity and is demanding the same of those whom it has elected to protect the nation against him.

© Alan Caruba, 2010

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

The Great Prevaricator

By Alan Caruba

Usually we have to wait around for the historians to pinpoint the exact day on which some politician crashed and burned his reputation beyond repair. My educated guess, however, is that President Obama’s first State of the Union speech will be the day when what little is left of his credibility and reputation goes straight into the toilet.

If Ronald Reagan was the Great Communicator, then Barack Hussein Obama will be known as the Great Prevaricator.

Obama is so comfortable telling lies that he no longer knows the difference between the truth, a falsehood, a promise, or a casual slander. Take, for example, his recent claim that he would rather be a great one-term President than “a mediocre two-term” one. If George W. Bush wasn’t around to blame for his own incompetence, Obama would have to invent him.

Before the demands arrive that I list each and every lie that passed Obama’s lips, let me say that this is a brief commentary, not a ten-volume exegesis of his campaign and first year in office.

The State of the Union speech is always hugely boring, listing the many “accomplishments” of the year and then listing the intentions for this one. It is a political act, not a reportorial one.

Obama’s intensions cannot be taken at face value. It is said he wants to put a “freeze” on government spending, but the reason usually given to run for Congress is to be able to spend taxpayer’s money on projects “for the folks back home.” The more you spend, the more times you are reelected, until you secure a committee chairmanship and can spend almost at will.

The alleged freeze covers nothing of significance. The real spending engines of government, Social Security, Medicare, Medicaid, Homeland Security and Defense will go untouched along with just about everything else other than a Department of Agriculture grant for the study of artichoke pollination.

When (if!) you listen to the President, keep in mind that at some point the money he’s talking about is no longer even “real.”

This is particularly true as regards the Federal Reserve, a private bank that isn’t federal in any sense except its name. Congress cannot even audit its books!

On the blog site of Theo Spark, there’s a brief, apt description of the way the Federal Reserve and the government “compliment” one another: “I understand that most folks think the Federal Reserve, the central bank of the U.S., is a governmental entity.” The reason people think this is because whoever is President appoints the Chairman with the approval of Congress.

Congress is debating the reappointment of Ben Bernanke, an acolyte of Alan Greenspan, the previous Chairman. Both are equally to blame for not putting the brakes on the cheap credit that led, in part, to the lending and borrowing spree that got us to this point. They had a lot of help, though, from Fannie Mae and Freddie Mac.

“Those pretty green slips of paper in your wallet commonly known as U.S. dollars are Federal Reserve Notes. Bank scrip. The Fed can print as much of it as it wants or needs to. With this in mind, consider that fully eighty percent (80%) of U.S. Treasuries (U.S. government debt) sold in 2009 were bought by the Fed because there were no other willing buyers.”

Here’s where you need to pay close attention. “Printing money to finance unsellable governmental debt is just like using a credit card to pay off a credit card. It is a scam, a Ponzi scheme. Like all such schemes it cannot go on indefinitely, but has to end. This will end badly.”

The annual Gross Domestic Product, the amount assigned to the value of all the goods and services sold, is about $14 trillion dollars. Congress has just voted to raise the “debt ceiling” to about $14 trillion dollars.

That is why a State of the Union speech promising to “freeze” spending or “cut back” on government waste, is laughable.

Spending is what the present-day government exists to do. It is why millions are spent on races for the White House and seats in Congress. It is why some enter the Capitol with modest means and leave as multi-millionaires.

The job of the President is to convince Americans and everyone else that the U.S. government is being wisely and prudently run.

When people at home and around the world no longer trust Obama’s Tele-Prompter words, the nation will be in big trouble.

If Obama was the CEO of a major corporation, the board of directors could get rid of him. We, the stockholders in America, are stuck with him for three more years.

A Man-Made Financial Disaster

By Alan Caruba

You will recall that, shortly before the end of the 2008 political campaign, the White House announced a threat to the entire financial system and called on Congress to enact emergency spending powers. The Emergency Economic Stabilization Act of 2008 was enacted on October 3, 2008.

Just eighteen days earlier an event occurred that slid under the radar screen of virtually the entire mainstream media. On Thursday, September 15, 2008, at approximately 11 A.M., the Federal Reserve noticed a tremendous draw down of money market accounts in the nation, amounting to $550 billion dollars. It occurred within an hour or two. The money was removed electronically.

It has never been made public which accounts were affected, nor where the withdrawn funds were sent. If we knew those facts, we would know who launched an attack on the United States that has been more devastating than any in our history.

Had the Federal Reserve not closed down the accounts involved it is estimated that by 2 P.M. $5.5 trillion would have been withdrawn and the entire economy of the nation would have collapsed. It would have been followed within a day with the collapse of the world’s economy.

What followed was the sub-prime mortgage loan debacle that can be traced to the government’s intervention into the housing loan marketplace via Fannie Mae and Freddie Mac. They ended up owning fifty percent of all the loans.

Americans were using home ownership as a credit card and government policies were mandating the issuance of bad loans in the name of “social justice.” Home ownership became “a right”, not an aspiration.

Throughout the 1990s, as communities revalued homes, increasing their alleged worth in order to impose higher property taxes, it was only a matter of time before a financial collapse became a reality. Virtually every State was spending beyond its means and increasing property taxes was the preferred choice to make up the difference.

That collapse, however, was initiated by unknown persons at precisely the time Americans were preparing to select a new president. That was not a coincidence.

In the October edition of “Budget & Tax News”, a publication of The Heartland Institute, a non-profit, free market think tank, there was an article by Sandra Fabry, the government affairs manager for Americans for Tax Reform and executive director of the Center for Fiscal accountability, a project of the organization.

The article was titled “61% of National Income Goes to Government.”

“Americans this year had to toil until August 12 to pay for federal, state, and local governments, according to the annual Cost of Government Day report by the Americans for Tax Reform Foundation and Center for Fiscal Accountability.”

“In 2009, the government will consume a whopping 61.34 percent of national income.”

The redistribution of income has reached a point in which 30.36 percent of the money Americans earn is consumed by federal spending. State governments take their percentage as well in income, sales, and other forms of taxation.

It means that Americans worked for 111 days of the year just to pay for the costs of the federal government and federal spending has reached a record 28.5 percent of GDP.

With the passage by the House of the government’s attempted takeover of the nation’s healthcare system and the up-coming cap-and-trade bill, a massive tax on energy use, there is no telling how many more government spending programs, huge redistribution schemes, Americans will be obliged to pay for.

The Obama administration swiftly embarked on an unprecedented spending spree, “bailing out” General Motors and Chrysler, in effect owning AIG, the insurance giant, and giving funds to various banks to “stimulate” loans, i.e. credit, that Americans and their business enterprises depend upon to function.

Peter Schiff, CEO of Euro-Pacific Capital, has long argued that the problems of the American economy were created by excess credit and debt, and that a massive infusion of credit and debt into the economy only exacerbates the problem. He is right.

The “stimulus” has not worked and the billions still unspent by the program should be returned to the American treasury. Taxes should be cut in order to allow Americans to save or spend their own money. Contracts with civil service and teacher’s union should be renegotiated. A vast regulatory revision to remove obstacles to economic growth should be implemented.

Meanwhile the government’s “official” figures say 10.2% of Americans are out of work, but the actual figure is estimated to be closer to 17%. Nothing is being done to facilitate hiring with tax credits and reduced taxation of small businesses, nor are the highest corporate taxes in the world being reduced to encourage domestic investment and growth.

And our present difficulties began on September 15, 2008 in what gives the appearance of a calculated attack that got Barack Obama elected and was immediately followed by all the subsequent efforts to grow the federal government ever larger to make more Americans dependent upon it. The Obama administration has increased the national debt more than all previous presidencies combined.

There is a determined effort under way to undermine the free market capitalist system that made America the greatest economic and military power in the world. Both the White House and the Democrat-controlled Congress are parties to it, but the identities of those who launched that September attack remain hidden.

Editor's Note: To read about the electronic attack, click on
http://www.capitalismgonewild.com/2009/02/electronic-run-on-banks-550-billion.html

Looting the National Treasury

By Alan Caruba

In the November issue of The DeWeese Report, published by the American Policy Center, Tom DeWeese provides one of the most cogent explanations for the current financial crisis that you will read anywhere. You can read it online at http://www.americanpolicy.org/more/market.htm.

For a decade I was the Director of Communications for the Center and remain affiliated. In a time when the need for truth and straight talk is critical, you might well want to join and support the Center.

The November issue contains a speech that was made on the floor of the House of Representatives by Louis McFadden, Chairman of the House Banking and Currency Committee. The year was 1934 in the midst of the Great Depression. Here are some excerpts:

“We have in the country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the FED. The Fed has cheated the government of these United States and the people of the United States out of enough money to pay the nation’s debt…many times over.”

How timely this is as the U.S. treasury is being raided to bail out banks, an insurance company, investment firms, and possibly individual auto companies and others to the tune of billions.

In 1934, McFadden noted that “This evil institution has impoverished and ruined the people of the United States, has bankrupted itself and has practically bankrupted our government.” What we are witnessing, of course, is the devaluation of the U.S. dollar and this must be laid at the feet of the Fed, the institution that was created to protect its value.

“Some people think that the Federal Reserve Banks are United States government institutions,” said McFadden. “They are private monopolies which prey upon the people of the United States for the benefit of themselves and their foreign customers: foreign and domestic speculators and swindlers; and rich and predatory money lenders.”

Consider how the present financial crisis was the direct result of government mandates that banks and other lending companies had to provide mortgage loans to people that otherwise would never have received them had prudent banking practices been allowed to function.

“The United States has been ransacked and pillaged. Our structures have been gutted and only the walls are left standing…What we need to do is send the reserves of our national banks home to the people who earned and produced them, and who still own them, and to the banks which were compelled to surrender them to predatory interests.”

This is precisely why banking and investment institutions “bundled” and sold mortgage loans as alleged “assets” for which no value could be assigned, knowing that Freddie Mac and Fannie Mae were backed by the U.S. government. As Tom DeWeese says in his commentary, “These were worthless loans to satisfy politically correct motives, and worthless money to pay for it all.”

The global impact of the U.S. financial crisis was anticipated by McFadden who called the Fed “a public trough of American wealth in which the foreigners claim rights to or greater than Americans…All this is done at the expense of the United States government and at a sickening loss to the American people.”

For those who might be tempted to dismiss those remarks from 74 years ago, I can tell you that I recently talked with a former Fed auditor who confirmed that its oversight of banks was and is farcical. “We were dealing with people who knew the regulations inside and out, who knew all the loopholes. It was not unusual for us to spend our days working The New York Times crossword puzzle to pass the time.”

The current Secretary of the Treasury, Henry Paulson, who announced a financial crisis rather conveniently for Barack Obama just before Election Day has now announced that plans for the $700 billion bailout money have changed. No more buying of “toxic paper” because, after all, it is worthless. The taxpayer’s money will now be redirected. Where? We have not been informed. The nation is being run these days by Goldman Sachs.

The Fed is a quasi-government institution. It is a consortium of twelve regional banks that is presumed to be answerable to the federal government. Under the regime of Alan Greenspan, its former chairman, it permitted, indeed, encouraged this debacle to occur. It is time to end the reign of the Federal Reserve. It was time in 1934.

Americans are watching the plundering and looting of the U.S. Treasury for political and private gain. Apparently, there is nothing we can do about it.

Needed: A Calm Approach to a Very Big Problem

By Alan Caruba

Your local bank isn’t called a “trust” for nothing. The only thing that keeps the banking and investment community going is trust. And liquidity. Money moving in and out. Since they underwrite all business and industrial expansion—essential for capitalism to succeed—that trust is essential.

If the bank grants you a mortgage or auto loan, they are trusting you to pay it back with interest. Your bank has to trust a network of other banks as they process their customer’s transactions. In addition, since they issue credit cards, they have to trust holders to pay their debts and to pay them for their use.

Everything seems to funnel back to the Federal Reserve whose job it is to protect the value of the U.S. dollar by raising or lowering the interest it charges when it loans money to banks. Why wouldn’t banks feel confident if they knew money would continue to flow from and through the Federal Reserve?

That’s what the current financial crisis is about. If banks cannot or will not trust the Federal Reserve and other banks, and if they will not trust you with a loan, the entire economy grinds to a halt. Money is like manure. You have to spread it around to get any value from it.

My late Father was a Certified Public Accountant. I was born missing the gene for addition, subtraction, and multiplication. He eventually made his peace with a son too idiotic to balance his checkbook, granting that I had stronger skills in other areas. I grew up largely disinterested in acquiring wealth. That was a mistake, though I do live quite well by most standards. My needs are few.

Having lived through the Great Depression, both my parents were more than content to earn enough to enjoy a classic suburban life in a lovely, three bedroom home with a car in the garage. After World War II, Mother began a career teaching haute cuisine and the appreciation of wine. Many of the men who had returned from war also returned with a taste for foreign foods and Mother taught them and their wives how to prepare them.

Thus, with two incomes, my parents were able to put two sons through college and still enjoy “the good life.” They avoided dabbling in the stock market.

Despite their experiences during Great Depression, they trusted the local bank to keep their savings safe for them, but their trust had been restored only after considerable regulation of the banking and investment industries. As far as they were concerned, Franklin Delano Roosevelt saved the nation.

As historian Donald J. Mabry notes, “[President] Hoover broke precedent because the national government assumed some responsibility for what happens during an economic depression, but he was not willing to go far enough. He believed that the depression was part of the normal business cycle and had been caused by international factors and not U.S. ones. To him, ‘prosperity was just around the corner.’ The best thing for the country to do would be to wait the crisis out.”

The crisis got worse and worse and worse. Bank robbers like Bonny and Clyde became folk heroes.

In 1932, Democrats nominated FDR for President and he would serve until his death in 1945. Government got very involved and has remained involved. It became the federal government’s responsibility to ensure that the trust that kept banking, investment, business and industry functioning was maintained. This explains why the Secretary of the Treasury and the Chairman of the Federal Reserve have been testifying non-stop before Congress.

However, the American people are being told that, without immediate intervention, largely without prudent oversight, we will be right back to October 29, 1929 and the appalling decade that followed. There were vast numbers of jobless men, soup kitchens, lost farms, failed businesses, and a desperation that defies description.

We are being told that we must act in haste and that the federal government should buy what those on Wall Street call “toxic paper”, the questionable sub-prime loans.

Calmer voices are suggesting that other steps should be taken to restore trust in the system. These involve changing the current accounting system and other options beyond this writer’s area of expertise. On the face of it, saving those investment houses that did not act prudently does not seem a good idea. The Federal Reserve has already allowed Lehman Brothers to fail.

If no one really knows what all that sub-prime mortgage paper is worth, throwing $700 billion at it might, in fact, just be the beginning and not the end to the problem. That said, doing nothing might be a whole lot worse.