Saturday, November 13, 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 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


joetote said...

Alan, once again you are dead on.

I have seen various assessments that this latest round of printing bogus money, because that is really what QE2 is, will devalue the dollar by close to 20%. and this moron Beramke is already telling us he'll have to do this again! As, if I am reading things correctly, we have already done at least 1.2 trillion dollars of this QE2 stuff before this latest step, that brings us to almost 2 trillion dollars. That is debt! As you say Alan, the country is beyond bankrupt.

We have seen this before. The Weimar comes to mind as does Argentina and of course Greece and the European Socialist nations who are on the edge at this moment. History shows the results. Yet we have morons in leadership positions telling us "What, Me Worry? (Alfred E. Newman of Mad Magazine fame, great satire but so dead on).

This is easily one of the scariest moments in our country's history, worse than any war, etc. We have people in government undercutting this country's financial underpinnings and driving us to the Soviet Socialist model. And to accomplish the deed, they openly lie to the electorate.

Alan Caruba said...

@Joe: For people who still cannot understand what is happening, I tell them it is the same as paying off one credit card will using another. You're still in debt!

I researched this commentary very carefully and the results are just frightening.

TheJollyGreenMan said...


I like your writing and blog, but, aren't you just a touch too gloomy?

I read a biography of Winston Churchill, written by Roy Jenkins in which he noted that the great man himself didn't have a clear understanding of Economics, much like your current incumbant of the White House.

What I do know is the that US federal and state governments own vast tracks of land, state lands, national parks - Yellowstone comes to mind - etc. When push comes to shove these holdings can be turned to cash by selling it off. Given the fact that your government employees may have to choose between a pension or a park, which way do think they will vote?

Until the US government has sold off all its land, lease the White House other Washington properties, its too soon to call them bankrupt.

Alan Caruba said...

@Jolly: Why do I have a feeling you're not an American? For the record, Winston Churchill (whom I greatly admire) was subject to terrible fits of depression. He called them "the black dog."

And, no, the US will not selling off its parks and forests. It is far more likely that someone will point out we have tons of coal and barrels of oil, as well as huge deposits of natural gas) with which to generate income.

TheJollyGreenMan said...

Hi Alan,

Your are correct, I am not an American, actually a South African, living (with permanent residence) in the UK.

I had the pleasure of visiting your country, both in a business and leisure capacity, and must say I was impressed. Because I was a mining engineer I had the opportunity to visit some of the big operating copper mines in Utah and Arizona.

The guys from Cat told me that the US Forestry department is the biggest single consumer of earthmoving equipment in the world.

Churchill thought that the US government made its money by selling off pieces of federal land, and bemoaned the fact that the UK was so small, nothing for the government left to sell.

For somebody that grew up with a clear view of the role of the US in the world, that followed the antics of every Gemini and Apollo space launch, that had the good fortune of seeing a Shuttle launch in person, I am telling you, don't be too gloomy. The US is an amazing place with amazing people, don't write the country off too soon!

Ps. You did not state anywhere that your blog is only for Yanks!

Alan Caruba said...

@Jolly: My blog is not just for Americans though it does naturallyfocus on the problems we have created for ourselves by failing to pay attention to the lessons of history and by encouraging the mortgage meltdown through government programs.

If I sounded gloomy it is because, as Churchill said, Americans will do the right thing, but only after trying everything else first.

joetote said...


I more then many appreciate the deep research you do. I for one have learned so much just in the short time I have found and started following your blog. Great explanation in your reply to me. Most americans should understand it.


Alan is so dead on in his final comment to you (Churchill is someone I also admire). For whatever reason, we here in the states tend to let things go to long. Once we're awake though we do normally do the right thing. Alan is also right on target as to learning from history. Things always seem to bite us in the ass as the same mistakes are made over and over.

Guy in Ohio said...

Jolly, I suppose to someone who lives in a country like yours, things would look pretty good in America, even now. However, we have a much different perspective, and we have a right to be gloomy.

Yes, we have lived charmed lives in a very privileged society, but that is exactly what makes America great. America is the land of opportunity and throughout history, hard work has always been rewarded with prosperity. Most of us have worked diligently throughout our entire lives, putting a little bit of that prosperity aside every year, with the expectation that WE would have a warm house and food on our tables in our golden years.

What this government, and the Fed, are doing now threatens to destroy all of that. They are undermining the value of our savings, our retirement plans, and our property, leaving many of us who worked hard and planned responsibly broke and homeless. It is theft, on a grand scale.

This isn't the first time this has happened, but until now, they have always been careful to leave us with enough to be comfortable, albeit angry. This time, it is being done on a scale that could easily destroy the country, and leave many of us starving. And for what? To line the pockets of the greedy, and to buy votes by "redistributing the wealth" to those who have slacked off their entire lives and failed to plan for THEIR OWN future.

What they are doing is criminal, and "quantitative easing" is just the first step. Once they've devalued our retirement holdings to the point where we're scared, their next move will be to come after what is left and gather it all up into a giant slush fund, to be managed and "redistributed" as they see fit, with the promise that we'll all be better off. We'll be told that it's the only way to save America ...

When they're done with that, our personal property and land will be next. They haven't made much of an effort to hide their intentions. You need only to listen to their speeches, and read between the lines. Their plan is obvious. We stand to lose all we've worked for, and we're not happy about it.

"Gloomy" attitudes are going to be the least of this government's worries if they continue down this path....