the wall street jounal
Abolishing the Federal Reserve System might seem like a drastic idea, but not when you get the full story...
You see, Congress created the U.S. Federal Reserve System to restore public confidence, provide the banking system a source of liquidity that would prevent its collapse and protect the public against inflation.
A century later, the banking system is so big its risks dwarf the Fed's liquidity capacity, and what cost a buck back then now will set you back $21.
That's why we asked Money Morning Chief Investment Strategist Keith Fitz-Gerald to explain how the Federal Reserve System actually helps a country's economy.
Most importantly, we wanted to know if the United States - or any country - even needs the Fed anymore.
What You Absolutely Need to Know About Money (Part 8)
It all starts with the Arab oil embargo of 1973-74.
The Arab members of OPEC proclaimed an oil embargo to punish the U.S. for aiding Israel. This action quadrupled the price of oil, roiling commodity markets, equities, bonds, and foreign exchange markets.
Energy prices soared. Speculation in oil exploration and production became feverish.
There was money everywhere.
Oil exporters in the Arab states were depositing their windfall "petrodollars" into big U.S. banks, who were in turn lending the money out as fast as they could.
By far, the largest recipients of the flood of money looking to be lent out were Latin American and South American countries. Thus, the new tens of billions of dollars banks had to lend were showered on sovereign states with glaring credit quality blemishes.
In the meantime, banks were lending hand over fist to the energy patch. Small banks were getting into the oil lending game, too - sometimes in spectacular ways.
By 1982, tiny Penn Square Bank, located in the Penn Square Mall in Oklahoma City, Okla., had made over $1 billion dollars of energy loans and resold them to money-center bank Continental Illinois National Bank and Trust Company of Chicago.
The loans went bad, quickly.
What You Absolutely Need to Know About Money (Part 7)
By the start of the 1960s, banking in America was in a state of flux.
Boundaries were being blurred - especially those separating "commercial banks" and "investment banks" under Depression-era Glass-Steagall parameters. The banking landscape was shifting. In fact, it was about to go volcanic.
The Truman Administration had championed the break-up of bank cartel arrangements, whereby a powerful coterie of commercial-bank bond underwriters controlled how corporations financed debt and who got to distribute bond offerings. Subsequent regulatory changes (requiring bidding for underwriting assignments) broke up the "Gentleman Bankers Code," which had been code for cartel.
A more competitive landscape drove banks to expand. Branch banking spread through shopping malls and onto prime locations on America's Main Streets.
The hunt for deposits was on.
And it got ugly fast...
The New Crisis Warning Just Issued to the Federal Reserve
Before the housing market crash, economists warned that record low-interest and mortgage rates were fueling a housing bubble.
Unfortunately, those fears were both overlooked and underestimated.
Now, an advisory council to the U.S. Federal Reserve is warning the Fed that its record $85 billon-a-month stimulus and ultra-low interest rates are fueling new bubbles in student loans and farmland.
"Recent growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis," according to minutes of the council's Feb. 8 meeting.
In addition, "agricultural land prices are veering further from what makes sense," the council said. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."
These warnings come from the Federal Advisory Council, a panel of 12 bankers chosen by the 12 Federal Reserve banks, which consults with and advises the Fed. Members of the council include the CEOs of Morgan Stanley (NYSE: MS), State Street Corp. (NYSE: SST), BB&T Corp. (NYSE: BBT), Bank of Montreal (NYSE: BMO), Capital One Financial Corp. (NYSE: COF) , U.S. Bancorp (NYSE: USB) and the former CEO of PNC Financial Services (NYSE: PNC).
What's more, the council warned the Fed in September that QE3 and its plan to buy bonds indefinitely would distort bond prices and have a limited impact on the economy and that "uncertain effects" will arise from the eventual unwinding of the balance sheet, including "risks to price and financial stability."
So while Uncle Ben likes to remind us that the Fed will step in and take appropriate fiscal measures when necessary, the central bank's own council believes the Fed's actions are doing more harm than good.
What You Absolutely Need to Know About Money (Part 6)
Our last chapter was about how the U.S. Federal Reserve was created and why. But it ended with an extreme example of how the universal central banking model works today.
As another domino threatened the house of cards holding up European banks, more money had to be pumped into Cypriot banks so their doors didn't close and rapid contagion wouldn't implode all of Europe, and then the world.
Only this time was different.
The European Central Bank (ECB) reached straight into Cypriot bank depositors' pockets and stole about $6 billion from them. The "how" isn't important. It's a simple equation, as revealed in Part V. Governments are the backstoppers of central banks; that's where their authority ultimately comes from.
Why did the ECB steal depositors' money? So they could turn around and lend that and more to the insolvent banks to keep them alive. It's the latest twist in the old "extend and pretend" game.
The big question is, how did banks get so big and so dangerous in the first place?
Or, how did stodgy traditional banking morph into "casino banking" on a global scale?
Here's how it started...
What You Absolutely Need to Know About Money (Part 5)
Chapter Four ended as a cartel of powerful bankers gathered on Jekyll Island to develop a plan for creating a central banking system which would work for their interests.
John Pierpont Morgan was no stranger to how central banks worked. He had witnessed their power firsthand.
Junius S. Morgan, Pierpont's father, became a partner at George Peabody and Company in 1854 and moved to London - where the American-born Peabody had been bankrolled by Baron Nathan Mayer Rothschild. At the time, the rich and powerful Rothschilds exerted extraordinary control over the Bank of England.
George Peabody and Company rode the mania for railroad shares, whose prices in 1857 were benefiting from the Crimean War's impact on rising grain prices, which Western railroads transported in huge quantities.
But the good times didn't last.
FOMC Preview: Will the Fed Continue its $85B/Month Bond-Buying Program?
Investors will be looking to the Federal Reserve Wednesday for clues about how long it might continue its bond-buying program aimed at pushing interest rates down.
The Federal Open Market Committee is expected to release a policy statement at 2:15 p.m. Wednesday, the second day of its two-day meeting.
In keeping with a practice it began last January, the first meeting of the new year will highlight the FOMC's long-term goals and monetary policy.
The Central Bank likely will reiterate the goal it has maintained all of last year: boosting the stagnant U.S. economy.The Fed's first meeting of 2013 comes after an extraordinarily busy year, capped by two key moves in December.
That's when the Fed said it would continue spending $85 billion a month on bond purchases to keep interest rates low. At the same time, the Fed set unemployment and inflation "thresholds" instead of a date when the central bank expected to be able to raise interest rates.
The One Question We Must All Ask Ourselves
Rampant profiteering by Congress and greedy bankers is forcing us to weigh the slings and arrows of outrageous fortune against honesty and transparency - both of which are being trampled by crony capitalists in pursuit of the almighty dollar.
What's at stake is whether gross criminal activity and reckless disregard for the public will continue to be whitewashed by regulators like the Securities and Exchange Commission (SEC), the U.S. Federal Reserve, courts, and Congress, which encourage half-baked civil fraud charges followed by non-prosecution agreements and nickel-and-dime fines.
And even more galling, guilty parties end up neither admitting nor denying wrongdoing.
Let's face it, we have allowed the SEC, the Fed, and Congress to be corralled as a matter of regulatory and legislative capture by the very crooks they are responsible for policing and protecting us from.
We are lying to ourselves if we do not believe that we are all part of this problem. It's not that most of us aren't honest. It's that we venerate money and wealth too much.
Rather than being disgusted by dishonest manipulators, liars and cheats, we excuse the less-than-obvious perpetrators as if their example of cutting corners to get ahead, as far ahead as possible, might clear a path for some of our own pursuits.
What have we become? Are we a nation of people with liberty and justice for all, or just a bunch of money grabbers stepping on each other's liberties to pursue self-centered happiness by becoming filthy rich?
Don't get me wrong. There's nothing wrong with the profit motive driving business. And there's nothing wrong with working hard and trying to make a lot of money. Those are honorable pursuits.
President Calvin Coolidge said: "The chief business of the American people is business."
But in the same speech made on January 17, 1925 our 30th president went on to say: "Of course the accumulation of wealth cannot be justified as the chief end of existence."
Tragically, the fountainhead of greed in America emanates from our own Congress. It has become obvious that the accumulation of personal wealth is their primary civic duty.
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These Three Men Represent Everything That's Wrong with Wall Street
I've already expressed my desire to embrace the Occupy Wall Street movement. I said last week that I would join in whole-heartedly if I knew exactly what the protesters were trying to achieve.
But I don't know - and I'm not convinced they do, either.
Still, that doesn't mean we should dismiss them entirely. After all, there are millions of Americans who sense there's something terribly wrong with our capitalist system, but they can't pinpoint exactly what it is either.
But I can.
Bad actors have done bad things to good institutions and our capitalist system. Today, I'm going to let you in on who three of those bad actors are.
You see, part of the problem is that when we think of the "bad guys" on Wall Street, or in Washington for that matter, we don't often think of specific people. We talk about "them" as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans.
I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they're using to get away with it.
So, I'm going to start today with three of the biggest perpetrators of the mess we're in.
The Three BearsThere are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are:
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