News & Analysis
Blame Government, Not Greed – and, Please, Ignore Central Banking
There is no mystery where the Occupy Wall Street movement came from: It is an offspring of the same false narrative about the causes of the financial crisis that exculpated the government and brought us the Dodd-Frank Act. According to this story, the financial crisis and ensuing deep recession was caused by a reckless private sector driven by greed and insufficiently regulated. It is no wonder that people who hear this tale repeated endlessly in the media turn on Wall Street to express their frustration with the current conditions in the economy. Their anger should be directed at those who developed and supported the federal government's housing policies that were responsible for the financial crisis. – Wall Street Journal
Dominant Social Theme: Look here, look here ... It's government policies, see! Don't look THERE. Don't look at central banking. Look away from there. Look here ... at government.
Free-Market Analysis: Peter Wallison, a senior fellow at the American Enterprise Institute and member of the Financial Crisis Inquiry Commission has had a high profile of late, publishing several articles in the Wall Street Journal (see excerpt above) blaming government rather than the private sector for the 2008 meltdown.
When the Financial Crisis Inquiry Commission (FCIC), he tells us, reported in January that the 2008 crisis was caused by "lax regulation, greed on Wall Street and faulty risk management at banks and other financial firms, few were surprised."
Wallison differs. The crisis wasn't the fault of the private sector, he writes. It was the fault of the government. Unfortunately, when Wallison states it was the government's fault, he has a fairly specific idea about "government." His government analysis seems to leave out the leading cause of the disaster – central banking policies.
It is central banking's money creation and low interest rates that created the fuel for this last catastrophic bust that has – evidently and obviously – virtually ended the dollar reserve system. But that's not Wallison's emphasis.
He's obviously in the business of helping create the power-elite meme that public and private institutions were responsible for the current meltdown – but not central bank monetary price fixing. That would be hitting too close to home. Here's some more from his latest article at WSJ:
Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007 ...
It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards. Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who Save Like 2K Mary O'Grady and Mary Kissel on how New York's economy and budget depend on Wall Street ...
The loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments. Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from. The huge government investment in subprime mortgages achieved its purpose. Home ownership in the U.S. increased to 69% from 65% (where it had been for 30 years). But it also led to the biggest housing bubble in American history.
This version of history is convincing only to those who don't understand the corrosive nature of the business cycle itself. Central bankers create booms and busts by constantly conducting monetary stimulation. The booms occur spontaneously in different parts of the economy and act as fuel for the euphorias that then turn into disasters.
Wallison himself points out that the genesis of his version of events was 1992; the business cycle actually turned twice before the sub-prime mortgage disaster was actuated. It's a simplistic analysis he offers, therefore, designed to focus attention on government rather than on the elite's financial war chest – its money printing via central banking.
The Anglosphere power elite, as we regularly mention, will do ANYTHING to deflect blame away from central banking. There is no justification for having a handful of people deciding on the price and quantity of money that the economy needs. It's price fixing, an economically illiterate activity.
Wallison surely knows this; he's an educated man and a sophisticated economic analyst. Yet he tries to turn our attention away from this fundamental flaw in Western finance by refocusing on rules and regulations.
Wallison DOES have a point, of course. Laws can aggravate and redirect bubbles. But it is central banks that provide the fuel for these serial disasters. One can, thus, actually see history being built (and rewritten) in the millions of mainstream commentaries (Wallison's included) about the current economic crisis. In the US, Democrats blame private market "greed." Republicans (like Wallison) blame "government."
Conclusion: Both explanations resolutely ignore monetary excitation. In the pre-Internet era we would not be nearly as aware of the manipulations inherent in this dialogue. But technology has given us the ability to see clearly how the conversation is pursued and manipulated. This is yet another reason why the Internet Reformation proceeds and expands.
Posted by Bischoff on 10/17/11 10:04 PM
@ olde reb
I very much appreciate your comments. I agree with you regarding the Federal Open Market Window at the FRBNY. While the Fed (Board of Governors of the Federal Reserve System) is generally just the "marketing arm" for the sale of U.S. Treasuries, it is the proceed from the sale of the U.S. Treasuries which are funneled through the FRBNY to the U.S. Treasury. The money in the sale was made by "prime" dealers of government bonds, i.e. Goldman/Sachs or Morgan/Stanley. The taxpayer is on the hook for the annual interest on the U.S. Treasuries.
However, since the Congress continually runs budget deficits, the annual interest debt compounds and compounds until the exponential growth curve of compound interest crosses the line representing linear growth of debt, and the game is over.
The real way the Fed "creates" money seems to escape everybody. It is done on the local economy level.
The post-1935 Fed central banking system is sort of modification of the pre-1935 Fed system operating under the Real Bills Doctrine. The difference is that the currency created against Real Bills and gold (FRA requirement until 1935) was a currency which had a "positive" value, while the currency created by the Fed central bank after 1935 until 2008 was a currency with a "negative" value.
Let me explain, assuming that you are familiar with currency creation under the Real Bills Doctrine.
The post-1935 Fed is involved with currency creation on the local level, not by printing FRNs against U.S. Treasuries, but by extending loans on a local level against initial credoit authorization.
The U.S. Treasury expends funds received from the sale of U.S. Treasuries into local congressional districts based on the "ear marks" placed into the annual congressional budget by U.S. House members. 420 out of 435 U.S. House members routinely enter "ear marks" into the annual budget. A failure to do so earns them the ire of their leadership, regardless of party affiliation. These congressional "ear marks" are an integral part of the Fed central banking system. Yet, no one seems to understand this. It certainly is not taught in college.
When the "ear marked" funds reach the local economies, they stimulate productive activity which give rise to loan requests which are met with initial credit authorization extended to member banks by their regional Federal Reserve bank. As local banks collect payments on the active loans, they have to furnish a Fed Agent with proof of their collection by providing a T-Bill to obtain additional credit authorization for further loans. The Fed reserve requirements were used to match the cycling of loans to match economic activity.
The loan procedures of post-1935 Fed banks on the local level mirrows the currency circulation produced with the Real Bills Doctrine, except that one currency had a basis in "positive" values (Real Bills), while the other has its basis in "negative" value (Debt created by the Congress).
The contention that the Fed can willy-nilly create currency by loaning deposits over and over again due to low reserve requirements, is a totally bogus contention. A little bit of thinking will bring one to that conclusion.
What put the USD/FRN on the ropes is compound interest. After 2008, the destruction of the USD/FRN took on a totally different aspect with the monetization of defaulted mortgages and credit card debt under TARP, and now with Quantitative Easing. The Fed is now doing exactly what people have accued it of for decades, it is "printing money out of thin air".
Posted by Avatar on 10/15/11 10:52 PM
Mussolini himself defined FASCISM as a marriage of Corporations and Government-
Simple and to the point. In fact there was a conspiracy to overthrow the FDR and the US government in 1933. Look up Brig. General Smedley Butler and the conspiracy Gen. Butler was awarded the equivalent of 3 congressional medals of honor. He was no patsy. Presott Bush was part of this conspiracy and look where his son and grandson ended up.
Posted by olde reb on 10/15/11 09:42 PM
You present exceptional awareness of the devastating consequences of compound interest, but I believe there may be more.
First, the system was initiated in 1913 when the Federal Reserve System was legislated by a rump session of Congress after most members had departed for Christmas vacation. In 1930's, the gold-backed currency was removed from circulation. It had been used to boot-strap the interest bearing debt based FRN's into circulation. The silver backing was removed by Nixon and a total fiat currency was completely installed.
The expansion of the monetary base is by the issuance of a Treasury security issued to the Fed. Upon receiving the collateral, the Fed provides a line of credit for that amount (a loan). Voila! Fiat money has just been created. Overlooked is the obvious that when the security matures, the fiat money must be paid to the Fed.
Since the government does not have money to redeem the security, it gives the Fed another security for the same amount. The security is perpetually rolled over. Once a security is issued, it is never redeemed; it is always rolled over.
The national debt is impossible to pay off. Each security creates the principal of the 'loan.' The borrower (government) must pay the lender (Fed) the principal PLUS interest. The interest is never created. The interest must be paid to the Fed from the principal received from a subsequent security. Here is the compound interest.
The debt will exponentially increase until the entire wealth of the nation is exceeded. Every citizen now owes $40,000---for the funded debt. 'Financiers' will foreclose as in Greece.
Rolled over securities for 2010 was $7 trillion; deficit spending was $1.4 trillion. The auctions makes it appear the public is funding the government. If the money went directly to the government, there would be no inflation. A total of $8.4 trillion Treasury securities were auctioned in 2010.
Proceeds from the auctions are handled by the FRBNY. Profits of the Fed belong to the government. None of the profit from the auctions was turned over to the government. It is a crime to hide money due to the government.
But this understanding of economics is never taught, even in college.
If the Daily Bell will permit a hyperlink, this thesis is detailed and documented at Click to view link , RIP OFF BY THE FEDERAL RESERVE.
Posted by Avatar on 10/15/11 10:23 AM
Excluding the questionable Nathan Rothschild quote, (try to find the source), this is the best article I have read in the Daily Bell today. Behavioral Economics has proved that traders constantly create bubbles in trading games and these bubbles occur even when the participants have ALL the data in front of them to make good decisions. Great response,Speedy.
American Fascism ( Corporatocracy) has been in control for a long time.
Posted by Avatar on 10/15/11 10:13 AM
Had the government simply required an affordable mortgage payment, financial institutions would have made money and the game would have played on. It was predatory lending practices that brought down ignorant unsuspecting poor people and senior citizens. The REAL crisis was the derivatives and packaging of these sub-prime mortgages and selling them as investments all over the world. You also fail to mention the short-sighted, short-witted people who owned million dollar homes and still were in credit card debt up to their eye-balls who refinanced every two years to take credit on the growing equity in their homes in order to pay off their credit card debt. Had commercial banks been prevented from the same risk taking as investment banks the crisis would have been less. Had Banks Not been allowed to carry separate parallel accounts only one of which had to be reported to the public, the crisis would have been less. And yes, if the Central Bank had not so got caught up in the bubble they might have raised the interest rates. Had Bush not run up the deficit through useless hegemony, the crisis would not have been so bad. Had financial institutions not lent monies to governments with GDP's not large enough to cover the debt the crisis would not have been so bad. If "if ifs and buts were candy and nuts, we would all have a Merry X-Mas." Did you forget AIG ????
Posted by Hoss on 10/15/11 09:24 AM
Redefine the term, lump freedom in with fascism, declare it evil, and get people to toss out their own freedom in order to rid themselves of the evil.
It's philosophical poison.
If fascism is capitalism and capitalism is fascism, what new term must be invented to describe what it is that free, honest people do to survive and thrive in the absence of coercion?
Posted by speedygonzales on 10/15/11 07:13 AM
Capitalism is a totally flawed economic system and its collapse was inevitable. Capitalism's distinguishing defects include the inevitability of overproduction of goods for too few markets--leading to economic and military warfare between competing capitalist nations. Since about 1950, return on investments in manufacturing has sharply decreased, leading to the creation of a fantasy economy of financial scams such as derivatives, swaps, futures, options, mortgage-backed securities (MBSs), collateralized debt obligations (CDOs), and structured investment vehicles (SIVs). There has been a massive migration of capital from real, productive industry to the "speculative sector" run by financial giants like AIG and Lehman Brothers. All of these swindles are unreal, mere entries in digital "space."
Derivatives, for example, are mere mathematical formulas in which profits are supposed to derive not from trading assets but from speculation on the expectations of the risk of underlying assets. Such speculative chimera have created a nuclear device that has now exploded, mortally wounding the "real economy."
Governments and their central banks are now trying to "save" the real economy by "buying up" failing banks. But nothing will really work as long as they insist on remaining with the schizoid capitalist system. Even if they try a bit of so-called "socialism" by buying interest in banks, they'll still try to prop up the decayed corpse of the "free market economy."
We are constantly told that we live in a 'Capitalist' society. But what does 'Capitalism' mean? The word comes from the Latin 'capitalis', meaning 'of the head', and the relation of this concept to the later financial connotation of the word 'capital' is unclear. Its first use in that sense was actually the word 'capitale', meaning 'stock or property.' The basic building unit of capitalism is the corporation, and these first started in the 1600s.
They created a 'corporation': a group of investors who would collectively invest in a business venture to form a company, which then became a 'legal person' according to a declaration in the company's charter, granted by the government. This 'person' was then able to enter into legal contracts and business ventures, just like a regular person. But there was one important difference: unlike a real person, the corporation could not be thrown into debtor's prison.
Click to view link
Like it or not system caled capitalism has nothing to do with free market and competition. It is simple criminal enterprise where common criminals are imune from prosecution and won't end up in prison.
Hans Herman Hoppe his "Democracy The god who failed" was right. It is enough to have 500 corrupted folx on Chapito Hill and that's it. Glass-Steagall act or Enron.
Nathan Mayer Rothschild, who, by 1820, had established a firm grip on the Bank of England stated:
"I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British Empire, and I control the British money supply."
The Second Bank of the United States, was also chartered by the Bank of England to carry the American war debt. When its charter expired in 1836, President Andrew Jackson refused to renew it, saying a central bank concentrated too much power in the hands of un elected bankers.
In 1838 Nathan made the following statement:
"Permit me to issue and control the money of a nation, and I care not who makes its laws."
Reply from The Daily Bell
We have nothing against corporations if they are PRIVATELY generated and exist without the monopoly force of government. We have nothing against bank clearinghouses and private bank combines (even ones that issue money) so long as they private, do not derive their authority from the state and do not manipulate government into granting them state enforced monopoly powers. It is the conflation of state power with private enterprise that eventually causes ruin.
Posted by RR on 10/15/11 06:11 AM
Posted by byrresheim on 10/15/11 03:31 AM
Funny you should mention violent revolution. The sacred cow here seems to be the french revolution.
While everybody knows about the gouilotine in Paris and judges according to his preferred ideological blinders, nobody seems to mention the vendée or Carnot's massacres in Lyon. Par for the course that from '89 to '71 the french had only five years of what even vaguely resembles democracy - that too is never mentioned, just as a quarter of a century of european wars and generalized bloodshed coming from the revolution and its heirs is never mentioned.
Should we now take a cursory look at the glorious red revolution in Russia?
Posted by byrresheim on 10/15/11 03:10 AM
You are absolutely right. Now, who gave government the idea to enforce that monopoly?
Posted by davidnrobyn on 10/15/11 02:15 AM
The Constitution defines the dollar as 371.25 grains of fine silver. As far as I know, this has never been amended. Therefore, any attempt to define the dollar in terms of gold would seem to be at least extra-Constitutional, if not unconstitutional. I'm really astounded that our 19th century forebears had the chutzpah to do so in a time when the Constitution was held in much higher regard. I'm not necessarily against a gold standard, understand, but there's this small matter of a previous Constitutional definition...
Posted by memehunter on 10/15/11 01:52 AM
I agree with you here. A relevant quote from Guido Hulsmann's "Ethics of Money Production" (Chap. 7):
"Inflation can certainly also exist in a hypothetical society
in which the government does not in the slightest way interfere
with the production of money. The crucial point is that in
such a case there are no legitimized institutions of inflation.
Being a criminal activity, inflation has to flee the light of day
and lingers only at the edges of such a society. As long as the
citizens are free to produce and use the best money available,
therefore, sound money prevails, whereas debased money
and fractional reserves lead a fringe existence. Inflation can
then cause occasional harm for individuals, but it cannot
spread far and last long. Only the government has the power
to make inflation a widespread, large-scale, and permanent
phenomenon, because only the government has the power to
systematically prevent the citizens from spontaneously adopting
the best possible monies and money certificates. Unfortunately,
as we shall see, this is exactly what governments have
done in the past. The resulting damage has been immense, not
only in terms of material wealth, but also in terms of the moral
and spiritual development of the western world."
Also from Hulsmann's book, chapter 10:
Long before the age of banking, Oresme stressed the scandalous
quantitative aspect of inflation protected by legal-tender
". . . Again, if the prince has the right to make a simple alteration
in the coinage and draw some profit from it, he must
also have the right to make a greater alteration and draw
more profit, and to do this more than once and make still
more. . . . And it is probable that he or his successors would
go on doing this either of their own motion or by the advice
of their council as soon as this was permitted, because
human nature is inclined and prone to heap up riches when
it can do so with ease. And so the prince would be at length
able to draw to himself almost all the money or riches of his
subjects and reduce them to slavery. And this would be
tyrannical, indeed true and absolute tyranny, as it is represented
by philosophers and in ancient history."
Posted by Bischoff on 10/15/11 12:34 AM
The USD is the US Dollar. It is lawful money of the United States valued at 1/42 of an ounce of gold as of January of 1971.
The FRN is the Federal Reserve Note. It is issued with the USD accounting standard. In August 1971, Nixon suspended redemption of USD denominated currency which included the FRN.
The FRN was given "legal tender" protection with the Coinage Act of 1982.
When I write USD/FRN, I mean to point out that we are dealing with an "irredeemable" currency denominated in USD accounting standard, the value of which floats.
In other words, financial statements can no longer be
evaluated using the "fixed standard" of lawful money of the U.S. Instead, the meauring standard is that of a "rubber band", because the FRN, though carrying the USD accounting standard, changes value in a manner agreed upon between the Saudis, the US Treasury and the Fed.
Posted by Bischoff on 10/15/11 12:05 AM
If by "those cash on the barrelhead guys", you mean the guys who made a deal with the U.S. Treasury and Fed Chairman Volker at the Jamaica Conference to have their "petro" dollars turned into bullion or gold futures on recycle, I agree.
Posted by Don on 10/14/11 07:48 PM
Thanks for a most excellent description of the ruthlessly relentless nature of compounding interest! My OCD compels me to note that the mission of the education establishment (at least in 1647 when Massachusetts passed its "ye old deluder satan law" to create America's first public schools) was to make students literate enough to read their Bibles.
Posted by turtle on 10/14/11 07:32 PM
Pardon my ignorance. What is USD/FRN?
Only FRN I know is the forward rate note. Don't the saudis just quote in outright USD?
While I agree central banking has its own flaws, your point about blaming government agrees with my understanding of how the USD value is manipulated by the ESF (Exchange Stabilisation Fund) which is under the direct control of the US treasury (ie. government) and not the Fed. These ESF history videos argue that the Fed actually did an OK job at maintaining USD value until the ESF arrived in 1935.
Click to view link
Part 1 (9 mins) gives a quick introduction but the whole series 6 parts (1 hour) is worth it if you have the time.
Posted by onebornfreeatyahoo on 10/14/11 06:59 PM
You don't have to "resign resistance", or "accept tyranny". All you have to do is start to look for direct ways to increase _your_ freedom that do not depend on the consent of [even] one other person, or on the attainment of completely unrealizable goals [such as getting rid of government currency debasement systems, or limiting a government.]
The key to your freedom is always in acting alone to improve _your_ life, never with Quixotic group movements that ultimately will fail to achieve your freedom for you, simply because you are not a group, but one unique individual with your own values, needs, wants . Regards, onebornfree
Posted by nithsdale on 10/14/11 06:58 PM
The financial crisis was fueled by our government having to borrow consistently the last fifty years just to operate. It began with misappropriating "trust funds", replacing money with "chits" and escalated to using treasury securities as "roll over" instruments never to be redeemed but just to mark another expansion of government borrowing.
The problems compounded because banking regulations require banks to have on hand secure funds with which to stem any problems that occur in our system but the government redefined those security funds as its own certificates, denying the use of gold and silver, even cash. As treasury certificates mounted as revolving "debts", they were supplemented with Fed Reserve "credits" operating in the same revolving manner. In essence,our banks had no usable reserves for any crisis. When banks got into difficulty, the banking overseers just "merged' the problem banks into new entities, ergo new corps to assume the problem.
In effect,the US government took Ponzi to new heigths. When Citibank, the worldwide oil funds transfer agent for OPEC, could not scare up enough physical dollars to settle OPEC accounts in early 2008 (all oil must be paid with "cash on the barrelhead", not credits in a ledger et al), it turned to the US Treasury for redemption of necessary security funds. There were not enough physical dollars to accomplish this request... that is what sent Bush and Paulson to Congress to ask for lawful printing of all that TARP.
The government asked the banks to take the hit, to rescue Washington's reputation and maintain its aura of stewardship. That is where Wall Street made a wrong "trade". It assumed that the government would be appreciative of its compliance in this grave matter of obvious government insolvency but it made a big mistake. The Globalists saw their opportunity to move quickly to assert the time had come for a new supra government. Wall Street could not retrace its steps, so it became the battering ram not only here in the US but everywhere else. The Globalists also miscalculated. The interdependency of the worldwide banking system had already taken place, pushed by the Globalists and suddenly there was not a single financial instrument trading in the world that was worth the paper it was printed upon, if the problem was really examined. Henceforth, there has been nothing but deliberate fielded confusion while the Globalists try to figure out what their next move must be.
It appears there are no more moves to stabilize the downhill run of all western governments, their financial affairs so the Globalists have turned to deliberate unrest and riot in the problem areas to buy time for their next brain child, if they can find one. The first "rebellion" forays were used to keep the Islamic world at bay, those cash on the barrelhead guys, but today it is the major countries themselves - Britain, The USA and now Germany.
We are all on the rollercoaster and the Globalists are betting that the under 30's, who love the mosh pits and the woodstocks, are the perfect shock troops to keep their world occupied while they try and come up with something!
Posted by Dave Jr on 10/14/11 06:30 PM
That is a good point, but to the degree we resign resistance; to that degree we accept tyranny.
Posted by onebornfreeatyahoo on 10/14/11 06:27 PM
"There can be no such thing as "limited government," because there is no way to control an entity that in principle enjoys a monopoly of power."
And besides which, even if governments _could_ somehow be limited to specific functions, they would still end up spending more than they took in regardless - they are not businesses, you know, in fact they are the antithesis of business, as you should well be aware. Regards, onebornfree.