In my last post about 11 days ago, I complained about how people paid little attention to the looming economic collapse - and now of course things have changed quite a bit in that regard. As expected, everyone is following essentially the same line, that these massive bail outs are a necessary evil to save the economy, jobs, etc. Of course you all must know by now that I completely disagree with this idea. The bail outs postpone a short term recession, sure, but at the expense of ensuring a long term depression. Their solution is simply to create more false credit, which is how we got into this mess in the first place. I reccommend that all of you do a little research on the Federal Reserve System - the source of the dollar, its inflation, bank loans, government debt, and credit oversupply since 1913. The book "The Creature from Jekyll Island" is a good place to start. Here is a short snippet from a lecture by its author (from the mid 90s) on the subject of how bail-outs are the product of the Federal Reserve System:
Finally, did they pass along their inevitable loses to the taxpayer in the name of protecting the people? This is what I call "Operation Bail-Out." Every time one of the big banks gets into trouble, not the small banks remember, they're the competition, the big banks get into trouble and they are bailed out at taxpayers' expense. Always in the name of protecting the people. If a large corporation is in trouble because it can't make its interest payments to the bank anymore, they go to Congress and say "we can't let this corporation fold; look at the thousands of jobs that would be lost; look how the people would suffer." When a third world country can no longer make its interest payments to a large bank in New York, what happens? The bank goes to Congress and says "you know, you'd better do something about this because if we have to write that loan off of our books we may be bankrupt, we could fold. And look at all of the depositors, good Americans, who have their accounts with us who would lose their deposit. Maybe the FDIC won't be able to cover; we could have a crisis on our hands. If our bank falls maybe the other banks will fall too and we'll have a national recession. Look how the people will suffer." So Congress dutifully steps forward, remember it's a partner in this, and votes the funds to guarantee the loans or in some way to pass the payments on directly or indirectly in some very ingenious methods to the taxpayer. That money is raised primarily through the Federal Reserve System and we pay it through the Mandrake Mechanism.
So the Federal Reserve System has done pretty well on that. In case you have missed a few of the more memorable games, I'd like to review them for you. Penn Central Railroad was bailed out in 1970. That was a good year because Lockheed Corporation was bailed out the same year. Commonwealth Bank of Detroit was bailed in 1972; New York City in 1975; Chrysler in 1978; First Pennsylvania Bank in 1980; Continental Illinois, the largest of the banks so far, in 1982. And look at all of these third world countries which cannot pay their interest payments. They are paying their interest payments and you're doing it for them because the Federal Reserve System creates the money that we send to the International Monetary Fund and the World Bank and then they give it to those countries so that they can pay the interest to the banks. Maybe you've missed that little trail but that's how it works.
Congressmen and Senators don't talk about this as a source of the problem because if the Federal Reserve went away, Congress would no longer be able to print money to pay for things when it runs out of tax money (which it does every year), inflating the currency and increasing national debt. They would rather people continue to suffer economically than to remove a key source of their power and wealth. Also, they're poopoo heads.
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The Fed has 1 trillion dollars in US securities from their bank members on hand earning 6%. As you know the share holders get 6% as a dividend from the US although we pay 0.13% for a 30 day note holder.
nomedals.blogspot.com
I've read The Creature from Jekyll Island. I don't trust that book.
Any particular reason why?
For one thing, the guy that got me to read it was a total crank. It's been almost two years since I read it, but I seem to remember getting the impression that the book argued that the Federal Reserve was some kind of intentional scheme: that all the people involved could keep a lid on such a big conspiracy stretched belief. Which is not to say that we can't talk about whether it is a good institution; it just seemed wrong to discern a malevolent intent behind it.
If you take a look at the author's website, you can tell he's not exactly "in the mainstream." Which doesn't guarantee that he's wrong, but he's not exactly peer-reviewed, either.
(Full disclosure: I got kind of into it as I was reading it, as I tend to do with almost anything I read, but then I did some of my own research later on.)
(In case that guy who got me to read the book [and shall remain unnamed here] ever tracks me down and reads this post for some reason, he was a nice man, but I've come to disagree with nearly all of his economic beliefs.)
The author is a bit unsavory, but the conspiracy was to enact the federal reserve, which is pretty well documented. The conspiracy doesn't continue today, as the goals (to establish the Federal Reserve) were achieved in 1913. In that sense, the Federal Reserve WAS an intentional scheme. Legislation written by bankers, who then publicly opposed it to gain popular support, qualifies as a scheme in my book. It's a scheme that benefits the private banks, and the politicians who need political capital, all while providing no practical benefit to the citizen (more frequent and severe economic crises after its creation, 2500% inflation since its creation, support structure for the federal income tax - also enacted in 1913). It's probably one of the more blatantly malevolent moves our government has ever made (with the majority of the politicians involved - as well as voters - believing they were doing good). I suppose malevolent is too strong, but I would say the creators of the Fed had very little concern for the average citizen.
As I've said before, I'm under the impression that the 1800s were riddled with crises, whereas under the Federal Reserve we had the Great Depression, a dip in the 70s, a dip in the 80s, and this. Then there were the wars, and the international moments. The trouble is that I don't have time or the resources on hand to sort out the causation on all of this stuff, and it doesn't help that the only things more complex than modern economies are weather systems and the human brain.
And I might point out that along with the recessions and inflation came unprecedented technological development, at least part of which must be due to the resources made available by massive fractional reserve banking. And if we try to figure out what the world would be like if the Federal Reserve had never been made in the first place, well, we really have no idea what the 20th century would look like, just as we can't imagine the Jacksonsonian era without Biddle and the Second Bank of the US.
Perhaps the bankers' reasoning went like this: "We need a central bank to stabilize our operations (and, yes, our profits, but that's how business works). The economy relies on our stability. Therefore a central bank is good for the economy." Maybe they designed a bad system, maybe their goals were quixotic, but it's hard to call that sort of reasoning malevolent.
I could grope to say more, but here is the bitter truth of the moment:
I am stunned, almost destroyed at times, by the world's complexity. I wish I could believe things were simple. I wish I could sort out necessity and contingency in history: the small things that did matter, the big things that didn't. But I am lost here, and so I will lose this argument forever.
And for a nice article by someone who doesn't try to get out of economic arguments by playing the existentialism card, here's Megan McArdle.
Three points,
I believe your understanding of the state of the economy before and after the Fed creation is a little off. There were about 8 recessions/depressions in the 120 or so years before the Fed, and 9 in the 95 years since. Many of the pre-Fed recessions were caused by other central banks in the world (such as the Bank of England in the 1797 recession). Most likely your impression of greater economic instability in that era comes from 1) the 23 year recession from 1873 to 1896 (this was actually more of a paper recession, actual production in this period increased by huge amounts) and 2) the traditional measures of economic turmoil are weighted to favor the institution, not the individual (while organizations may seem to fare equally or better with a central bank, the population is deprived of wealth in a less apparent way).
Second, your conclusion that credit oversupply by a central bank stimulates technological growth is a bit of a stretch. Arguably most of the fundamental American technologies came before the central bank (electricity, internal combustion, flight, sanitation). Also, a vast majority of technological advancement in the past 95 years has come from, at least in some part, military research which is generally beyond market forces (though you could argue that the Fed allowed for the massive expansion of the government which allowed for such research).
Third, your realization that the world is too complex to be understood in simple terms is precisely the desired result of the Fed's creators. The "system" was intentionally designed to obfuscate it's workings, purpose, and consequences. Perhaps it's harder to argue that the Fed is solely responsible for our current troubles (though I tend to lean in this direction), but I believe that the argument that the Federal Reserve is bad for us, and provides little in the way of actual stability is a pretty solid one. There is no reason our money supply should be controlled by a private, profit seeking entity that meets in secret with little to no accountability. There's no reason our government should pay interest on its own money to this private group, and there's no reason the Fed should be able to spend the government's money at its discretion. The Federal Reserve simply strips power and money from citizens, and redistributes it to government and bank owners all for an illusory stability whose illusion is fading.
I'll give this one to you for now; as I said before, I have no convincing alternate explanation. Let's go another round some other time. In the meantime, I'll try to do some reading from sources I do trust, or that I trust more than TCfJI.
I know Milton Friedman thought the Fed was counterproductive; I've never read that he saw a conspiracy behind it. I was looking for Friedrich Hayek's views, but my brief search didn't get me anywhere. I won't go to the Austrians (von Mises, etc.): their philosophy of human action is so far from my own that it's painful.
From what I remember of Friedman's anti-fed argument (and it was really more of a preference; he didn't think the fed was going anywhere anytime soon), it was less conspiracy-oriented and more prudential, assuming good faith on the part of bankers but pointing out unintended consequences of centralized control.
But that's all I've got; I'm more into culture than economy, so I don't have any resources nearby that address this sort of thing in detail.
I think you're branding too much of what I'm saying as conspiracy (though there are shades of that in its founding). I have no doubt that the people currently running the Federal Reserve and the people who support it in government all believe it is better for us. It's just that it primarily serves their own interests, with the supposed benefits to the general population being just the rationalization.
I'll admit I'm incredibly confused by this whole situation. What can we expect now that today's bailout bill failed in the House?
Perhaps the source of the confusion: I believe that “The Creature from Jekyll Island” is a work of conspiracy theory. So if you're saying that the book describes mechanics of the situation if you can get behind some of the crazier aspects of the author's thinking, then we're talking policy. But then I think my point about the weirdness of the book should still stand.
But Emily's right that we should move on to more pressing issues...
Emily,
I doubt the bailout is truly dead. They'll get something through relatively soon, I'm sure. Not having a bailout would be the ideal situation, allowing the market to correct itself, and properly price these worthless securities. It's pretty much going to suck no matter how it plays out, but it will suck about half as much in the long run if they can truly hold off on spending 5-10% of our GDP on poorly run institutions.
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