The Federal Reserve's Magic Money
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 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.
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