THE FEDERAL RESERVE’S (ONLY) WAY OUT:
Stop the Financial Fraud!
By Wayne Jett
© June 16, 2009
Anxiety is growing over the Federal Reserve’s stressed financial position and its implications for the dollar and economic growth. The Fed has created almost $1.2 trillion during the past 12 months and advanced it for an assortment of assets, including $428 billion in mortgage-backed securities, $119 billion in Treasury securities, $222 billion in term auction credit, $80 billion in federal agency debt, other loans $102 billion, commercial paper $170 billion and Bear Stearns portfolio assets of $61 billion.
In 12 months, the Fed created 128% more new dollars than previously existed. During the same 12 months, GDP output shrank about 6%. These historically unprecedented facts worry dollar users that the currency’s value will drop precipitously as economies adjust.
Market Fraud Caused Credit Crisis
The Fed contends its actions were necessary to avoid imminent collapse of major banks and of commercial finance. Both the Fed and Treasury argue they stepped in only after private firms failed to perform customary market roles. But this rationale is too superficial to justify what was done either entity.
Why did private firms stop pursuing their business plans in the markets? They were pushed out by an illicit combination of private profiteers and corrupt public officials. Many firms were destroyed by private and public malfeasants acting in combination. Must particular cases be reiterated? Bear Stearns, Fannie Mae, Freddie Mac, Countrywide, Lehman Bros., IndyMac, AIG, Wachovia, Washington Mutual, National City and Merrill Lynch are merely the most prominent firms. Their share prices were battered by heavy naked short selling abetted by SEC rules (“the Madoff exemption”) expressly permitting sellers of “put” options and credit default swaps to sell short unlimited numbers of shares without delivering them to buyers.
Founts of malfeasance are Congress, Treasury, the Fed and the SEC. Congress still permits trading of crude oil futures in “dark” unmonitored U. S. markets to manipulate global prices of crude oil. Congress does nothing to end the SEC’s obvious captivity by Wall Street’s big players, who defraud ordinary investors in detectable ways. Both Treasury and the Fed (not to mention the White House) are dominated so intensely by Wall Street that their officials refuse to tell members of Congress the names of private parties given large sums of taxpayers’ money.
All this has been said in The Supply Side Guide for a period of years. The point under analysis is whether the Federal Reserve has any hope of extricating itself from the slippery slope towards hyper-inflation paved by recently doubled monetary base. Plainly the Fed cannot remove its newly created capital from the banks or from the commercial paper market under present conditions. First, fraudulent trading practices and manipulations which attacked the banks and destroyed the commercial paper market would have to be stopped, if not remedied. Otherwise, banks would immediately come under attack again and commercial paper would go dormant.
The Fed’s orthodox approach is to run the dollar’s value to the brink of disaster, permitting Wall Street’s insiders time to position themselves short, and then drain excess liquidity. Production suffers badly in such periods (see 1981-1982), and Fed chairman Ben Bernanke does not relish the experience. But, if Wall Street insists that fraud not be curtailed and the dollar fails, the Fed will further damage economic growth in the interest of saving the dollar.
Thus, the Fed chairman does not control his own destiny. Both Congress and the Fed are dominated by Wall Street. Even if Bernanke were so inclined, he could not end market fraud without major assistance from Congress. In this context, Bernanke has been in close quarters with Treasury’s Paulson and now Geithner in very dubious transactional interplay. Whether his efforts turn out beneficially is yet to be seen.
Although ending market fraud seems the obvious solution, prodding government in that direction is not simple. The Fed serves the desires of its dominant banks, whose interests to date have not aligned with ending fraud in U. S. financial markets. For the same reason, “fraudulent trading practices” is a phrase those in Congress and in the financial sector dare not speak. This is stark reality surpassing mere scandal or crisis; it is cancer at the heart of republican democracy.
Reality of Credit Markets
Even the astute economist Gary North misses market fraud as the central cause of the “unprecedented” event “all over the western world” that banks are not lending the capital injected into them by central banks. The “money multiplier” factor collapsed from about 1.7 to about 0.8 last September. Banks do not lend when their own survival depends upon direct access to their capital. This is the case if fraudulent manipulators attack the banks’ debt or share price, or if federal regulators swoop in to allege financial instability. These are the fears behind collapse of private credit markets.
So long as the corrupt alliance between private financial fraud and federal power continues, the Federal Reserve cannot withdraw its $1.2 trillion in excessive monetary base without collapsing banks and commercial paper markets. Leaving the money where it is presently deployed, on the other hand, allows more time for so-called “toxic” assets acquired in the Bear Stearns takedown, from Fannie and Freddie, and from other banks to prove they are really not so toxic after all. Unwinding those assets in the Fed’s hands (no one can sell the Fed’s shares short, naked or otherwise) protects banks from further attacks on their securities based on rumors of their ownership of “toxic” assets, even while the SEC has done nothing effective to prevent such attacks on other companies.
Paulson the Incompetent
Noteworthy in this discussion is opinion recently published in the Times of London that “unforced errors” by Henry Paulson as U. S. Treasury secretary caused “near-collapse of the global financial system” in 2008. Anatole Kaletsky laments Paulson’s “astonishing misuse of mark-to-market accounting standards to expropriate the shareholders of Fannie Mae and then to bankrupt Lehman Brothers.” Kaletsky further describes Paulson’s testimony to Congress on September 23 regarding his proposed $700 billion “bailout bill” as “the moment when everyone realized [Paulson] did not know what he was doing.” Most surprisingly, Kaletsky observes financial markets and economic conditions improved noticeably when Paulson was replaced at Treasury by Timothy Geithner.
The first query to be made of Kaletsky is how he narrowed the firms whose shareholders were destroyed by Paulson to Fannie and Lehman. Bear, Freddie, AIG, Washington Mutual and so many others qualified for equal recognition. Second, if “everyone realized” Paulson was incompetent on September 23, 2008, and he had already abused accounting rules to rob shareholders of billions, then why on Earth did no one in officialdom of New York, London or Washington, D.C., say so?
That small display of integrity and courage might have saved America’s laboring taxpayers $700 billion in the first bailout, plus trillions more already poured into the same black hole. Geithner’s new role at Treasury certainly did not serve that end. Hardly a word critical of Paulson’s role has been heard. In fact, James K. Galbraith, the University of Texas economist with close ties to Democratic Party lawmakers going back to drafting of Humphrey-Hawkins mandates on the Federal Reserve in 1978, was quoted recently as expressing gratitude that a person with Paulson’s intellectual capabilities – not his predecessor John W. Snow – held the Treasury post during 2008, because Paulson was “someone we could work with.”
Time and Congress of the Essence
All of this demonstrates a ubiquitous alliance among financial pools of Wall Street, political power and media. The alliance affords capacity to perpetrate financial fraud of enormous magnitude – fraud so great as to cripple the global economy, the Federal Reserve and the U. S. government.
Fed chairman Ben Bernanke, having incorrectly conceded the Federal Reserve was to blame for the Great Depression, does not wish to be blamed for this depression. To avoid that fate, Bernanke has created more new money than all Fed chairman in history combined. But all this will be to no avail if Congress does not stop Wall Street from defrauding the markets. ~