The name "Federal Reserve System" is supposed to conjure up nice, comforting images of a safety net, of a system to safeguard the economy of the United States. In fact, its creators were adamant about not calling it a bank… because banks and bankers were feared and loathed then – as they mostly are now.
But the truth is, the Federal Reserve System (remember, it's not a bank, it's a "system") is killing this country.
And the damage control we heard from Janet Yellen yesterday just proves how screwed over everyone who lives, works, pays taxes, has a bank account, or invests in this country really is, all thanks to the Fed.
They're false prophets with a god complex – the most dangerous kind…
"The Creature from Jekyll Island"
What the world refers to as the "Federal Reserve Bank" or "America's central bank" – all while believing it's a U.S. government body – is in fact a private enterprise system, secretly designed by bankers and their pet politicians on Jekyll Island, Georgia, in 1910.
After a great deal of manipulation, the outline of the plan drawn up at J.P. Morgan's private hunt club of an island became legislation: the Federal Reserve Act.
That legislation was quietly signed into law the day before Christmas Eve in 1913 by President Woodrow Wilson – a former Princeton professor plucked from obscurity by bankers and politicians who engineered his election, in part to bring the Fed to life.
With the Federal Reserve Act, Congress ceded the creation of money to the Federal Reserve System.
The dollars in your pocket are printed by the U.S. Treasury and signed by the Secretary of the Treasury to impart the Treasury Department's legitimacy, but they are neither issued nor owned by the U.S. Treasury or the United States of America…
The dollars in your pocket are Federal Reserve Notes. It says so on the top of every bill. Read it and weep.
The Fed owns the money of this country, and by extension, it owns the country.
That's the history. Whether or not you knew that isn't as important as what you may not know now: The Fed is killing America, dooming its people to economic ruin and a particular kind of socialist Hell.
That's because, as I've said, the Fed is a government-sanctioned private central bank. It does not have our best interests as voters or taxpayers at heart, it doesn't function to support our economic well-being.
The Secret to the Fed's Limitless Power
Central banks have a singular purpose – or at least they used to. Whether they are government entities or private "banks," they have the ability to issue virtually unlimited money and credit… without having to have any capital or assets.
But they don't issue credit or cash to the public, they issue it to member banks.
You see, if private banks get into trouble and can't raise money from depositors, or issue equity, debt, or get loans from other banks to remain solvent, then they go out of business.
To prevent them from going out of business, especially when a single bank failure can trigger a panic and then rolling failures, banks turn to their central banks.
Central banks have multiple ways of injecting liquidity into troubled banks to keep them open to prevent failures, panics, recessions, and worse.
That's what they do. Central banks serve banks by bailing them out with money and credit they create… out of thin air.
That's a tremendous, almost god-like power to possess.
America's Federal Reserve System, a private central bank, has the power to bail out any bank it wants to.
That's why bankers created it, and why they needed politicians to legitimize it to make it look like it was a bona fide government body, not the private bankers' bank it is. Hence the name "Federal" as in "government," "Reserve" as in "reserve safety net," and "System" as in "it's not a bank (wink-wink)."
With all this deception and double-talk, it's no wonder we're in this mess.
How the Fed "Fed the Machine" in the Financial Crisis
All the huge volume of academic research on how the subprime crisis developed covers everything that came together to form the subprime bubble. But the only common denominator in every study is that the Fed's artificially low interest rates fed the machine.
Since the Fed has the power to control the general level of interest rates in the United States, by a few different means, it does so.
The Fed engineered artificially low rates that allowed subprime credit borrowers to get cheap mortgages for houses they couldn't otherwise afford. At the same time, those low rates forced fixed-income investors to chase higher yields, which they did by investing in riskier bonds and mortgage-backed securities. So, because nominal rates were being suppressed, the Fed had to bail out all the banks (their favored banks) that ended up becoming insolvent when everything blew up.
The insolvent banks didn't have money to lend anywhere, and the rapid contraction of credit in the financial system drove the Fed to first flush-up all the big banks to keep them from failing. Then it fed them more money via quantitative easing (QE) programs to make them profitable again, and it kept rates near the zero bound for banks so they would make enough to start lending back out into the economy.
Now, it's bad enough that the Fed can control interest rates in what's supposed to be a free market economy, but it gets much worse.
How the Fed Got Its "Other" Mandate
In 1977, Congress amended The Federal Reserve Act to state the monetary policy objectives of the Federal Reserve as: "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
That act of Congress gave the Fed what became known as the "dual mandate," to maintain growth of the monetary aggregates (money supply) and maximize employment.In short, the dual mandate was Congress punting to the Fed its responsibility for generating growth in the economy and jobs. If there wasn't jobs growth, from then on it would be the Fed's fault, not Congress' fault.
That abdication of Congress' responsibilities, a de facto act of treason which transferred the President's and Congress' Constitutional powers to an oligarchy of banking officers, is worse than frightening.
The dual mandate is the reason we have do-nothing Congresses, such as we have now. There's no fiscal responsibility and no fiscal policies coming out of Congress, because they gave their Constitutional duties the hot-potato treatment and foisted them off on the Fed.
And so to fix the economy and lift employment, the two-trick Fed is simply doing the only thing it can do, besides bailing out banks: It's manipulating interest rates.
Needless to say, it hasn't worked.
We'll Never Get Anywhere with the Fed
Jobs growth is suddenly slowing drastically after years of artificially low rates. What's more, the jobs that have been created are mostly low-wage, entry-level jobs – not actual career opportunities.
The economy is dangerously close to stall-speed. Again.
And now, and for the foreseeable future, markets hang on every word the Fed says. Every. Word.
Is this any way to run a country?
The only way America can get back to being that "Shining City Upon a Hill" is by burying the Federal Reserve System for good.
And to the Fed's pet politicians that take issue with that, I ask you: What have you done for your country lately?
What would you do for your country – if you didn't have the Fed to punt your responsibilities to?
I'd like to know, and so would all of America. We deserve an answer.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
Ron Paul and his son Rand Paul have been the men in front of the End the Fed Movement. There currently is a bill to audit the Fed (which by the way has NEVER happened, yet). We need to support that and ALL legislation aimed at ridding ourselves of this horrible , horrible "system"
Its high time we got rid of the Federal Reserve 'Banksters' System. Ron Paul championed this fight for decades.
YEH this will happen, not.There is an elites sense of entitlement that Mr Rothschild and his Banker buddies have and will destroy this country . Solution, arrest all of them for treason , NOW!!!. Who has the guts I wish I had the power this country needs a revolution.
With the USA 19 trillion dollars in debt, how can the Federal Reserve be eliminated until much of this national debt is paid down by a new tax system that eliminates all the loopholes and write-offs for almost anything? In other words a flat and fair tax on all profit makers.
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A m pilaro
Great article. But there is much, much more to the story. Who really owns the "FED".
Indeed!
Get rid of the Federal Reserve!
I look forward to reading your "Monday Morning" Newsletter
sure is a nice way to engineer a living. the intention was to stabilise the banking system in usa but it has had 'unintended' consequences:-). initially pres. wilson was blackmailed over many loveletters he sent to his mistresses(silly bugger) and these were 'bought' for $40,000 by the rothschild etc. who had no problem getting the pres. to convince congress of its need. subsequently the treasury pays interest on monies it has borrowed over the past 113 years from the fed. pres kennedy took if off them june 1963..the bankers were furious and then we had dallas and they got it back… such nice people. and the public now pays over $1tn a year interest to the fed. tax free cos its a govt. bank you understand. lol and the debt is rising. cheers
What kind of central bank would replace the Fed? How would it relate to the international monetary system ?
I have proposed an alternative international monetary system replacing the present unjust, unsustainable and, therefore, unstable international monetary system. It is based upon a carbon standard of a specific tonnage of CO2e per person. The conceptual, institutional, ethical and strategic dimensions of this carbon-based international monetary system are presented at Verhagen 2012 "The Tierra Solution: Resolving the climate crisis through monetary transformation."
The UK and this country where I live now are both affected by what happens in the Fed Reserve . But neither country has anything like the fed reserve,They have a treasury answerable to the government of the day. The result is a stable economy . We pay interest on loans to other countries but there is no cancerous group of moneyed individuals helping themselves to the nations income . It's time for the USA to grow a spine and completely eradicate the fed and those scum who run it. The Western World deserves better .
This is a novel idea…although I'm not sure how you would go about using carbon emissions as a medium of exchange, that sounds like a logical leap to me.
Laughing…. Exactly, and the millions of deaf and dumb morons that apparently feel that tickle down their leg and bow and pray to their NEW God and savior – the king of kings. Their omnipotent one. The righteous Iiar and lover of all that-that is more evil than ANY predecessor before him.
Do you not know that carbon is life? Carbon dioxide is what humans "exhale" and trees "inhale", and that oxygen is what trees "exhale" and humans "inhale"? So if there is too much carbon dioxide (I call BS), then why not grow more trees? Instead, the elite want to make living people the "problem"/"enemy" of nature (nah, couldn't be all those military jets chemtrails, or HAARP). And you're playing right into their hands! We don't need to make living a burden on people more than it already is. The elite COULD feed everyone with the farming techniques that raise fish and fruits and vegetables together in a symbiotic relationship to both. But no, let's have more paper money, more wars, more of less for each and every one of us. Humans and nature can live perfectly in accord with one another. It's the manipulation by the elite that make this a messed up world to live in. Corporations, the bane of society, uses resources up without thought or care about their pollution or resource extinction. Just look at the Great Garbage Patch and the other garbage patches of the world's oceans. Let's kill the planet is their answer. Kill over 80% of the people. Keep the best resources for themselves and poison the rest. And of course constant war to pay for it and drain the people of their last vestiges of freedom or prosperity. If they're going to round me up and kill me then better get on with it! Tired of hearing of their Satanic plans! Tried of knowing that I will be beheaded because I will not bow to the Satanic NWO! AND tired of living in this hell SATAN HIMSELF engineered! Satan will have his day, and then the Lord will return and set all this nonsense right. As I said, get on with it if you MUST! God is STILL in control no matter what you do. And Satan and his followers WILL pay for what has been done to the world and its people, God's creation.
Thanks to Shah for bringing this up. Regarding the "climate crisis." First of all: there is no crisis. If carbon dioxide could be removed from the atmosphere, there would evolve a real crisis: the destruction of all life on the planet. Carbon dioxide is required to sustain plant life. Plants are required to sustain all animal life. Remove CO2 and you remove the entire food chain that supports all other life, all animals including human beings. The "climate crisis" is a phony invention designed to enrich those who now control the issuance of "carbon credits." That is people like Al Gore. Florists and others who grow plants in hot houses add carbon dioxide to indoor atmosphere to increase the rate of growth of the plants they grow in order to shorten time to maturity, thereby increasing their profits. Ice core samples show that atmospheric carbon historically increased following, not preceding, warming periods. Why should this be true? Because concentrations of atmospheric carbon followed oxidation of dead plant life, whose mass had increased due to higher preceding temperatures. In other words, global warming caused increased plant life followed by decay thereof, leading to higher atmospheric concentrations of CO2. The idea that human activity "causes" global warming is a gigantic hoax. This is appropriate to the discussion because the Federal Reserve is also a giant hoax on the political public. For those of you who still remember lessons in Latin: Federal Reserve delenda est. Hint: find speeches of Cato the Elder.
It's hard to believe someone actually wrote this article from a "non-conspiratorial perspective." Good for you! Would love to see how you follow this up.
Nevertheless, because of lack of intelligent behavior from humans equal to their capacity, getting rid of the Fed is more like bandage than anything. Why not engage in something more epic, more disruptive and in tune with human potential? Aren't we even TIRED of status quo? Can't we even think out of the proverbial box?
The idea that human beings, the so-called "top of the food chain", haven't evolved past the use of a monetary system at all is beyond reason. If our brains ever catch up (and I do mean EVER), ones and ones could see the whole system of exchange is meaningless and so unworthy our potential, and OH such a huge waste of time. Think about it, we exchange empty fake paper with little or no value for things with higher [perceived] value.
We have all the resources we need on the planet with a brain too small to figure out how to use them because we refuse to shift our paradigms, systems and thinking. Evolution to a moniless society is to difficult for most to even fathom–"how would I buy"–ugh..shakes my head.
"A slave is one who waits for someone to come and free him.” –Pound
Nothing appears more surprising to those, who consider human affairs with a philosophical eye, than the easiness with which the many are governed by the few; and the implicit submission, with which men resign their own sentiments and passions to those of their rulers. When we enquire by what means this wonder is effected, we shall find, that, as Force is always on the side of the governed, the governors have nothing to support them but opinion. It is therefore, on opinion only that government is founded; and this maxim extends to the most despotic and most military governments, as well as to the most free and most popular.–Hume
The Fair Tax plan seems to be the simplest solution to the problem and perhaps the most comprehensive. It eliminates the Fed, simplifies the tax code and crushes the lobbyists. It does all of this while having the most political enemies therefore it must be the right, right? A fair Congress and a market that truly wants to be free should be prepared to the right thing and do their jobs while not trying to screw everybody else for their own gains.
Congress has abdicated its responsibilities and the Fed. now has an added burden which it currently seems to enjoy, its new found "powers". Janet "DOVE" Yellen who has spent almost her entire working career at the Fed. seems to believe in its powers as she is Data dependent and believes in her "powers". Let us consider the following: most cannot comprehend our deficit but can understand time. If each dollar in our deficit equaled 1 second then the following is a true statement is true: 1 million seconds is 11 1/2 days; 1 billion seconds is 31.7 years and finally 1 trillion seconds is 31,688 years. At that point in time "Neanderthal"was the primary humanoid.Today we are 19.3 times that value, one day the world will understand this simple "Math" then the "Reserve Currency" will buckle and the "Neanderthals" at the Fed.and the halls of Congress will scratch their heads and ask "WHY" but what do I know. My first 20 years after a B.A. in Economics 1979 was in the U.S.Govt.Primary Dealer Markets.
Well the next move is going to be a flight to hard assets like Precious Metals, Real-estate (farmland) and other convertible currencies. Texas has become the only State Owned and Managed Metals Depository (Bank) in order to protect its hard assets and that of its citizens, creating a safe haven for Hard assets, that supersedes any federal access (The Treasury, IRS, etc.).
The banks, Wall street is still selling high yield bonds (subprime B, C, etc.) because of the Fed's control of the interest rates, which is 2007-8 all over again. The average consumer knows nothing about hedging and with the control the Fed presently has, the middle and low income wage earner is again heading for the cliff.
Excellent commentary from Shah Gilani. Having poured over many volumes about the FED's elitist goals Gilani is on target. The Creature from Jekyll Island does a great job to start with.
However, one small point for a few of those responding. I understand the FED was actually subject to a PARTIAL audit in 2012. Ron & Rand Paul and Jim DeMint were pushing for more but ended in getting a little look see and it was horrible. Seems the FED, between 2007-2010 loaned to list of banks and corporations 16 TRILLION electronically created dollars both foreign and domestic. The interest rate was ZERO and there seems to be no information out there that indicates any of it was paid back. The info came from the General Accounting Office, with a list of the banks and corporations and amounts loaned listed. Like Gilani says they issue credit and dollars and really don't need ANY reserves. Sounds like a criminal enterprise to me, lets abolish the FED and make our Congressman responsible again!
If I may,the issues surrounding the economic crises we face underscore the inadequacies of human social systems to balance the interests of parties,who in some measure,are diametrically opposed to one another. Jesus once said that"a house divided against itself cannot stand". The current economic climate is a result of a government who endeavors to be all things to all people all the time. Clearly the government spending deficit reflects this,the reality that our system has truly stretched to it's limit. The federal deserve was deliberately created to accommodate the ambitions of people who didn't want to be held accountable for how they used people to get power
Yeah … Jesus … Abraham Lincoln … whatever. You were close.
Shah Galani, you are hurting me…what is happening to your integrity. I have been watching you for many years and have understood that the bubble GSE crisis was not the main problem, but it was attributed to CDS, and I read in a recent article you wrote that bank regulation is to stiff as a result of Dodd Frank Act and results banks not lending, which is false. You said that they Banks must have adequate (at least equal) assets, which are there outstanding loans for banks, to cover all there CDS (Credit Swaps – aka: derivatives. You have compromised yourself and Money Morning and Money Map Press as creditable and trustworthy.
Here is an email that further explains your error and it was written to someone at Hillsdale College, published an article and I give my response to the author, quoting your article in 2008 and providing a copy of the article for your reference and all readers. Do not censor this email please, as follows:
Original email sent: Tue 1/6/2015 8:38 AM
'freedomlibrary@hillsdale.edu'
RE: Letter to Editor in response to "The Case for Repealing Dodd-Frank" by Peter J. Wallison November 2013, Vol. 42, No. 11 Imprimis
Dear Mr. Peter J. Wallison
I'd like to respond to article, "The Case for Repealing Dodd-Frank", Peter J. Wallison; November 2013, Volume 42, Number 11.
Mr. Wallison makes a good point that the financial crisis of 2008 was most likely due to the Housing Bubble caused by GSE's risky underwriting guidelines. However, why did he not mention that Lehmon Bros. and AIG Inc. were in financial trouble due to credit default swaps (CDS); risky financial derivatives traded amount (FDIC) Federal Deposit Insurance Corp insured banks insuring the 2007-2008 financial crisis?
I understand that CDS are now back partly because the recently passed federal spending bill reversed a Dodd-Frank rule that said big gambling banks had to separate CDS into units not guaranteed by the FDIC (aka: taxpayers). Mr. Wallison notes in the beginning of his article that the Dodd-Frank Act was founded on the notion that the financial system is inherently unstable and must be controlled by government and argues that this government regulation slowed economic growth from post-crisis. He believes that the opportunity cost would be to sacrifice economic freedom and growth for the sake of financial stability.
Unfortunately greed is always a serious problem we face in Corporate America. Wall street is always looking to find ways to capitalize and profit at the expense of the weak and desperate with their sly manipulation CDS liberal underwriting opportunities, due to no government regulation.
For example, per Shah Gilani, in his article written on December 29, 2014: "How Wall Street Wins Its No-Lose Trades", states as follows:
" Think of CDS as a kind of insurance. Companies issue debt, and investors buy their obligations to collect interest and expect their principal to get paid back at maturity.
But sometimes debtors get into trouble. CDS sellers offer the holders of debt insurance against the debtor defaulting.
That’s not a bad idea. In fact, it’s a good product.
But, Wall Street being Wall Street, that good idea became a great way to gamble. That’s because there’s no limit on how many “insurance policies” can be written on any company’s debts. For example, RadioShack Corp. (NYSE: RSH) has about $1.4 billion in outstanding debt (bonds and loans), and so the storied retailer is in trouble. Speculators betting on RadioShack defaulting, however, have bets that add up to about $23.5 billion.
That’s like everyone in your neighborhood taking out fire insurance on your house. These gamblers would be hoping your house burnt down so they could collect.
Sooner or later, someone might toss in a match to light the pile of potentially profitable bets."
Now, with Dodd-Frank being eviscerated, we’re going to see many more of these bets. It’s another way to make money – and Wall Street loves to make money.
I warned about CDS back on September 25, 2008, before the credit crisis reached its zenith. CDS were a big part of what caused the credit crisis. Of the 15 points in my How to End the Credit Crisis at No Cost to Taxpayers, No. 4 was:
Only allow issuance of credit default swaps up to the actual outstanding dollar value of corporate debts and loans outstanding. This will ensure legitimate hedging and eliminate undue pressure on outstanding debt issuers."
It looks to me like CDS are going to lead us to another inevitable financial crisis if we do not take Shah Gilani's advice above. and limit CDS up to the actual outstanding dollar value of corporate debts and loans outstanding. I do agree with you that the Housing Bubble and GSE's was a great contributor to our financial recession, but I believe CDS were the main causes for Lehman Bros and AIG, Inc. financial woes. What's your take on this Mr. Wallison? Thank you for your excellent article, it was very informative and helped me understand for the first time GSE's and how the system worked.
Below is the article written by Shah Gilani, that I referenced above, as follows:
How Wall Street Wins Its No-Lose Trades
4Dec 29th, 2014 | By Shah Gilani
The madness of the manipulation machinery on Wall Street knows no bounds.
Remember credit default swaps (CDS)? They’re the risky financial derivatives traded among Federal Deposit Insurance Corp. (FDIC)-insured banks that, during the 2007-’08 financial crisis, took down Lehman Bros. and almost bankrupted giant insurer AIG Inc. (NYSE: AIG).
Well, they never went away. And now they’re making a comeback, and Wall Street is using them in ever more maniacal ways.
They’re back partly because the recently passed federal spending bill reversed a Dodd-Frank rule that said big gambling banks had to separate CDS into units not guaranteed by the FDIC (aka taxpayers).
While I may come back to that, I’m not writing about Congress‘ latest gift to Wall Street today.
Today, I’m going to show you how Wall Street manipulators are using CDS and a false front of “activism” to make huge profits from troubled companies – and why that’s becoming routine.
Good Idea Gone Bad
This is about outright, legitimized (as in it’s not only legal – it’s business as usual) manipulation.
Think of CDS as a kind of insurance. Companies issue debt, and investors buy their obligations to collect interest and expect their principal to get paid back at maturity.
But sometimes debtors get into trouble. CDS sellers offer the holders of debt insurance against the debtor defaulting.
That’s not a bad idea. In fact, it’s a good product.
But, Wall Street being Wall Street, that good idea became a great way to gamble. That’s because there’s no limit on how many “insurance policies” can be written on any company’s debts.
For example, RadioShack Corp. (NYSE: RSH) has about $1.4 billion in outstanding debt (bonds and loans), and so the storied retailer is in trouble. Speculators betting on RadioShack defaulting, however, have bets that add up to about $23.5 billion.
That’s like everyone in your neighborhood taking out fire insurance on your house. These gamblers would be hoping your house burnt down so they could collect.
Sooner or later, someone might toss in a match to light the pile of potentially profitable bets.
Of course, that’s happening on Wall Street.
The RadioShack story is complicated. To keep it simple, today I’m going to let you know about a less known but less complex example of CDS manipulation.
When Debt Is a Bad Bet
In 2013, the Spanish gambling company Codere SA (BME: CDR) was in financial trouble.
Moreover, its managers didn’t know that GSO Partners, the debt-trading arm of Blackstone Group LP (NYSE: BX), had amassed a pile of CDS, betting that the company would default. Then, Codere received an offer of help, in the form of a desperately needed loan, from another Blackstone unit.
That’s weird, right?
Not if you’re the Blackstone Group.
The loan came with a provision. For Codere to get the loan, it first had to default on its outstanding debt.
That’s right: Codere got a loan from a Blackstone unit to avoid default. However, to get the loan, Codere first had to agree to delay interest payments on its other debts. Not paying that interest constituted a default. That made the CDS bets winners.
In other words, “activist” investors are now targeting companies and playing them like pawns.
Another such deal saw a trio of hedge funds buy CDS protection on a company’s debts and, at the same time, buy enough shares so they could vote down a plan the company had to merge with a stronger company.
How’s that for manipulation?
The company outsmarted the hedge funds by setting up a poison pill, so it could sell itself.
Now, with Dodd-Frank being eviscerated, we’re going to see many more of these bets. It’s another way to make money – and Wall Street loves to make money.
I warned about CDS back on September 25, 2008, before the credit crisis reached its zenith. CDS were a big part of what caused the credit crisis. Of the 15 points in my How to End the Credit Crisis at No Cost to Taxpayers, No. 4 was:
Only allow issuance of credit default swaps up to the actual outstanding dollar value of corporate debts and loans outstanding. This will ensure legitimate hedging and eliminate undue pressure on outstanding debt issuers.
It’s that simple.
Then again, it’s just as simple for Wall Street and its moneymaking madness to manipulate Congress, the White House and the financial regulators.
HERE IS THE ARTICLE FROM HILLSDALE COLLEGE:
A PUBLICATION OF Hillsdale COLLEGE
Imprimis
OVER 2,700,000 READERS MONTHLY November 2013 Volume 42, Number 11
The Case for Repealing
Dodd-Frank
Peter J. Wallison
American Enterprise Institute
The following is adapted from a speech delivered at Hillsdale College on November 5, 2013, during a conference entitled “Dodd-Frank: A Law Like No Other,” co-sponsored by the Center for Constructive Alternatives and the Ludwig Von Mises Lecture Series.
The 2008 financial crisis was a major event, equivalent in its initial scope—if not its duration—to the Great Depression of the 1930s. At the time, many commentators said that we were witnessing a crisis of capitalism, proof that the free market system was inherently unstable. Government officials who participated in efforts to mitigate its effects claim that their actions prevented a complete meltdown of the world’s financial system, an idea that has found acceptance among academic and other observers, particularly the media. These views culminated in the enactment of the Dodd-Frank Act that is founded on the notion that the financial system is inherently unstable and must be controlled by government regulation. We will never know, of course, what would have happened if these emergency actions had not been taken, but it is possible to gain an understanding of why they were considered necessary—that is, the causes of the crisis.
Why is it important at this point to examine the causes of the crisis? After all, it was five years ago, and Congress and financial regulators have acted, or are acting, to prevent a recurrence. Even if we can’t pinpoint the exact cause of the crisis, some will argue that the new regulations now being put in place under Dodd-Frank will make a repetition unlikely. Perhaps. But these new regulations have almost certainly slowed economic growth and the recovery from the post-crisis recession, and they will continue to do so in the future. If regulations this pervasive were really necessary to prevent a recurrence of the financial crisis, then we might be facing a legitimate trade-off in which we are obliged to sacrifice economic freedom and growth for the sake of financial stability. But if the crisis did not stem from a lack of regulation, we have needlessly restricted what most Americans want for themselves and their children.
It is not at all clear that what happened in 2008 was the result of insufficient regulation or an economic system that is inherently unstable. On the contrary, there is compelling evidence that the financial crisis was the result of the government’s own housing policies. These in turn, as we will see, were based on an idea—still popular on the political left—that under-writing standards in housing finance are discriminatory and unnecessary. In today’s vernacular, it’s called “opening the credit box.” These policies, as I will describe them, were what caused the insolvency of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and ultimately the financial crisis. They are driven ideologically by the left, but the political muscle in Washington is supplied by what we should call the Government Mortgage Complex—the realtors, the homebuilders, and the banks—for whom freely available government-backed mortgage money is a source of great profit.
The Federal Housing Administration, or FHA, established in 1934, was authorized to insure mortgages up to 100 per-cent, but it required a 20 percent down payment and operated with very few delinquencies for 25 years. However, in the serious recession of 1957, Congress loosened these standards to stimulate the growth of housing, moving down payments to three percent between 1957 and 1961. Predictably, this resulted in a boom in FHA insured mortgages and a bust in the late ,60s. The pattern keeps recurring, and no one seems to remember the earlier mistakes. We loosen mortgage standards, there’s a bubble, and then there’s a crash. Other than the taxpayers, who have to cover the government’s losses, most of the people who are hurt are those who bought in the bubble years, and found when the bubble deflated that they couldn’t afford their homes.
Exactly this happened in the period leading up to the 2008 financial crisis, again as a result of the government’s housing policies. Only this time, as I’ll describe, the government’s policies were so pervasive and were pursued with such vigor by two administrations that they caused a financial crisis as well as the usual cyclical housing market collapse.
Congress planted the seeds of the crisis in 1992, with the enactment of what were called “affordable housing” goals for Fannie Mae and Freddie Mac. Before 1992, these two firms dominated the housing finance market, especially after the federal savings and loan industry—another government mistake—had collapsed in the late 1980s. Fannie and Freddie’s role, as initially envisioned and as it developed until 1992, was to conduct what were called secondary market operations, to create a liquid market in mortgages. They were prohibited from making loans themselves, but they were authorized to buy mortgages from banks and other lenders. Their purchases provided cash for lenders and thus encouraged home ownership by making more funds available for more mortgages. Although Fannie and Freddie were shareholder-owned, they were chartered by Congress and granted numerous government privileges. For example, they were exempt from state and local taxes and from SEC regulations. The president appointed a minority of the members of their boards of directors, and they had a $2.25 billion line of credit at the Treasury. As a result, market participants believed that Fannie and Freddie were government-backed, and would be rescued by the government if they ever encountered financial difficulties.
This widely assumed government support enabled these GSEs to borrow at rates only slightly higher than the U.S. Treasury itself, and with these low-cost funds they were able to drive all competition out of the secondary mortgage market for middle-class mortgages—about 70 percent of the
$11 trillion housing finance market. Between 1991 and 2003, Fannie and Freddie’s market share increased from 28 to 46 percent. From this dominant position, they were able to set the underwriting standards for the market as a whole; few mortgage lenders would make middle-class mortgages that could not be sold to Fannie or Freddie.
Over time, these two GSEs had learned from experience what under-writing standards kept delinquencies and defaults low. These required down payments of 10 to 20 percent, good credit histories for borrowers, and low debt-to-income ratios after the mortgage was closed. These were the foundational elements of what was called a prime loan or a traditional mortgage, and they contributed to a stable mortgage market through the 1970s and most of the 1980s, with mortgage defaults generally under one percent in normal times and only slightly higher in rough economic waters. Despite these strict credit standards, the homeownership rate in the United States remained relatively high, hovering around 64 percent for the 30 years between 1964 and 1994.
In a sense, government backing of the GSEs and their market domination was their undoing. Community activists had kept the two firms in their sights for many years, arguing that Fannie and Freddie’s underwriting standards were so tight that they were keeping many low- and moderate-income families from buying homes. The fact that the GSEs had government support gave Congress a basis for intervention, and in 1992 Congress directed the GSEs to meet a quota of loans to low- and middle-income borrowers when they acquired mortgages. The initial quota was 30 percent: In any year, at least 30 percent of the loans Fannie and Freddie acquired must have been made to low- and moderate-income borrowers—defined as borrowers at or below the median income level in their communities. Although 30 percent was not a difficult goal, the Department of Housing and Urban
Development (HUD) was given authority to increase the goals, and Congress cleared the way for far more ambitious requirements by suggesting in the legislation that down payments could be reduced below five percent without seriously impairing mortgage quality. In succeeding years, HUD raised the goal, with many intermediate steps, to 42 percent in 1996, 50 percent in 2000, and 56 percent in 2008.
In order to meet these ever-increasing goals, Fannie and Freddie had to reduce their underwriting standards. In fact that was explicitly HUD’s purpose, as many statements by the department at the time made clear. As early as 1995, the GSEs were buying mortgages with three percent down payments, and by 2000 Fannie and Freddie were accepting loans with zero down payments. At the same time, they were also compromising other underwriting standards, such as borrower credit standards, in order to find the subprime and other non-traditional mortgages they needed to meet the affordable housing goals.
These new easy credit terms spread far beyond the low-income borrowers that the loosened standards were intended to help. Mortgage lending is a competitive business; once Fannie and Freddie started to reduce their underwriting standards, many borrowers who could have afforded prime mortgages sought the easier terms now available so they could buy larger homes with smaller down payments. Thus, home buyers above the median income were gaining leverage through lower down payments, and loans to them were decreasing in quality. In many cases, these homeowners were withdrawing cash from the equity in their homes through cash-out refinancing as home prices went up and interest rates declined in the mid-2000s. By 2007, 37 percent of loans with down payments of three percent went to borrowers with incomes above the median.
As a result of the gradual deterioration in loan quality over the preceding 16 years, by 2008, just before the crisis, 56 percent of all mortgages in the U.S.—32 million loans—were subprime or otherwise low quality. Of this 32 million, 76 percent were on the books of government agencies or institutions like the GSEs that were controlled by government policies. This shows incontrovertibly where the demand for these mortgages originated.
With all the new buyers entering the market because of the affordable housing goals, housing prices began to rise. By 2000, the developing bubble was already larger than any bubble in U.S. history, and it kept growing until 2007, when—at nine times the size of any previous bubble—it finally topped out and housing prices began to fall.
Housing bubbles tend to suppress delinquencies and defaults while the bubble is growing. This happens because as prices rise, it becomes possible for borrowers who are having difficulty meeting their mortgage obligations to refinance or sell the home for more than the principal amount of the mortgage. In these conditions, potential investors in mortgages or in mortgage-backed securities receive a strong affirmative signal; they see high-yielding mortgages—loans that reflect the riskiness of lending to a borrower with a weak credit history— but the expected delinquencies and defaults have not occurred. They come to think, “This time it’s different”— that the risks of investing in subprime or other weak mortgages are not as great as they’d thought.
Housing bubbles are also pro-cyclical. When they are growing, they feed on themselves, as buyers bid up prices so they won’t lose a home they want. Appraisals, based on comparable homes, keep pace with rising prices. And loans keep pace with appraisals, until home prices get so high that buyers can’t afford them no matter how lenient the terms of the mortgage. But when bubbles begin to deflate, the process reverses. It then becomes impossible to refinance or sell a home when the mortgage is larger than the home’s appraised value. Financial losses cause creditors to pull back and tighten lending standards, recessions frequently occur, and would-be purchasers can’t get financing. Sadly, many are likely to have lost their jobs in the recession while being unable to move where jobs are more plentiful, because they couldn’t sell their homes without paying off the mortgage balances. In these circumstances, many homeowners are tempted to walk away from the mortgage, knowing that in most states the lender has recourse only to the home itself.
With the largest housing bubble in history deflating in 2007, and more than half of all mortgages made to borrowers who had weak credit or little equity in their homes, the number of delinquencies and defaults in 2008 was unprecedented. One immediate effect was the collapse of the market for mortgage-backed securities that were issued by banks, investment banks, and subprime lenders, and held by banks, financial institutions, and other investors around the world. These were known as private label securities or private mortgage-backed securities, to distinguish them from mortgage-backed securities issued by Fannie and Freddie. Investors, shocked by the sheer number of mortgage defaults that seemed to be underway, fled the market for private label securities; there were now no buyers, causing a sharp drop in market values for these securities.
This had a disastrous effect on financial institutions. Since 1994, they had been required to use what was called “fair value accounting” in setting the balance sheet value of their assets and liabilities. The most significant element of fair value accounting was the requirement that assets and liabilities be marked-to-market, meaning that the balance sheet value of assets and liabilities was to reflect their current market-value instead of their amortized cost or other valuation methods.
Marking-to-market worked effectively as long as there was a market for the assets in question, but it was destructive when the market collapsed in 2007. With buyers pulling away, there were only distress-level prices for private mortgage-backed securities. Although there were alternative ways for assets to be valued in the absence of market prices, auditors—worried about their potential liability if they permitted their clients to overstate assets in the midst of the financial crisis—would not allow the use of these alternatives. Accordingly, financial firms were compelled to write down significant portions of their private mortgage-backed securities assets and take losses that substantially reduced their capital positions and created worrisome declines in earnings. When Lehman Brothers, a major investment bank, declared bankruptcy, a full-scale panic ensued in which financial institutions started to hoard cash. They wouldn’t lend to one another, even overnight, for fear that they would not have immediate cash available when panicky investors or depositors came for it. This radical withdrawal of liquidity from the market was the financial crisis.
Thus, the crisis was not caused by insufficient regulation, let alone by an inherently unstable financial system. It was caused by government housing policies that forced the dominant factors in the trillion dollar housing market— Fannie Mae and Freddie Mac—to reduce their underwriting standards. These lax standards then spread to the wider market, creating an enormous bubble and a financial system in which well more than half of all mortgages were subprime or otherwise weak. When the bubble deflated, these mortgages failed in unprecedented numbers, driving down housing values and the values of mort-gage-backed securities on the balance sheets of financial institutions. With these institutions looking unstable and possibly insolvent, a full-scale financial panic ensued when Lehman Brothers, a large financial firm, failed.
Given these facts, further regulation of the financial system through the Dodd-Frank Act was a disastrously wrong response. The vast new regulatory restrictions in the act have created uncertainty and sapped the appetite for risk-taking that had once made the U.S. financial system the largest and most successful in the world.
What, then, should have been done? The answer is a thorough reorientation of the U.S. housing finance system away from the kind of government control that makes it hostage to narrow political imperatives—that is, providing benefits to constituents—rather than responsive to the competition and efficiency imperatives of a market system. This does not mean that we should have no regulation. What it means is that we should have only regulation that is necessary when the self-correcting elements in a market system fail. We can see exactly that kind of failure in the effect of a bubble on housing prices. A bubble energizes itself by reducing defaults as prices rise. This sends the wrong signal to investors: Instead of increasing risk, they tend to see increasing opportunity. They know that in the past there have been painful bubble deflations in housing, but it is human nature to believe that “this time it’s different.” Requiring that only high quality mortgages are eligible for securitization would be the kind of limited regulatory intervention that addresses the real problem, not the smothering regulation in Dodd-Frank that depresses economic growth.
The Affordable Care Act, better known as ObamaCare, has received all the attention as the worst expression of the Obama presidency, but Dodd-Frank deserves a look. Just as ObamaCare was the wrong prescription for healthcare, Dodd-Frank was based on a faulty diagnosis of the financial crisis. Until that diagnosis is corrected—until it is made clear to the American people that the financial crisis was caused by the government rather than by deregulation or insufficient regulation—economic growth will be impeded. It follows that when the true causes of the financial crisis have been made clear, it will become possible to repeal Dodd-Frank.
This has happened before. During the 1930s, the dominant view was that the Depression was caused by excessive competition. It seems crackpot now, but the New Dealers thought that too much competition drove down prices, caused firms to fail, and thus increased unemployment. The Dodd-Frank of the time was the National Industrial Recovery Act. Although it was eventually overturned by the Supreme Court, its purpose was to cartelize industry and limit competition so that businesses could raise their prices. It was only in the 1960s, when Milton Friedman and Anna Schwartz showed that the Depression was caused by the Federal Reserve’s monetary policy, that national policies began to move away from regulation and toward competition. What followed was a flood of deregulation—of trucking, air travel, securities, and communications, among others— which has given us the Internet, affordable air travel for families instead of just business, securities transactions at a penny a share, and Fedex. Ironically, however, the regulation of banking increased, accounting for the problems of the industry today.
If the American people come to recognize that the financial crisis was caused by the housing policies of their own government—rather than insufficient regulation or the inherent instability of the U.S. financial system—Dodd-Frank will be seen as an illegitimate response to the crisis. Only then will it be possible to repeal or substantially modify this repressive law.
Here is another Expert that publishes on Money Morning – Michael Lewitt:
http://suremoneyinvestor.com/opportunity-reports/the-one-bank-that-will-blow-up-the-world/
"Derivatives and the crisis in 2008
In 2008, the world caught a glimpse of what happens when financial counterparties lose trust in each other and confidence in the system. Many of them refused to meet their obligations under all types of financial contracts including derivatives contracts. This led the entire system to the brink of collapse.
The financial system has placed itself in an extremely vulnerable position by allowing a superstructure of hundreds of trillions of derivatives contracts, including at least $16 trillion of credit default swaps as of December 31, 2014, to proliferate."
the answer to Ronald murphy is this. we nationalize the fed just like south American countries did to the American and european oil companies there. any reserves they have would belong then to the American treasury (which are ours any how ). the nineteen trillion debt would be greatly relieved as eighty percent of the debt is owed to the fed ! they are lending us our own money!
THE TRUTH. Well written. Bold stand.
Most are content to let the Federal Reserve continue to destroy the country. At most, they want to see some reforms made or some accountability on the part of the central bank.
You're right. We have to END this miscreant bankster fraud.
I direct my comments to the author of this article.
If you are familiar at all with much of the history of this 'democracy' ( the term doesn't appear in the constitution the convention for which was boycotted!) which is either lied about or untaught you will recall that congressional representative from the 14th district of Philadelphia (Luis Thomas McFadden) was shot at twice and later poisoned on his way to and during lunch in a New York hotel restaurant after having stood on the floor of congress condemning the Federal Reserve Board and the Central Banking systems of this world during the early 1930's calling for their abolition! John Fitzgerald F. Kennedy
after issuing executive order number 1110, which circumvented the Federal
Reserve's monopoly on money printing, had half his brains blown all over his
wife's dress in Dallas, Texas!
What idiot would think that the masters of hidden repositories of financial and political power in this world will ever allow anyone to usurp their dominance of the masses which Kennedy himself dared to mention in a speech decrying the "secret societies that manipulate the masses", pledging to do all that was in his power to change all that? And of course our friend Adolph Hitler had
at least one thing right during his untoward world influence when he said:
"HOW WONDERFUL FOR OUR GOVERNMENTS THAT PEOPLE
DON'T THINK!"
Erick Dean Tippett
Retired Musician/Teacher
Chicago, Illinois
Put in a single statement "Authority without Accountability is a recipe for disaster."
Hey Shah, I just got back from a trip to San Diego with my son's family and visited the San Diego Natural Museum. It is a great place to learn about California.
At the gift shop, I purchased a book, The Cosmic View of Albert Einstein, edited by Walt Martin and Magda Ott.
Albert Einstein had a passion for social justice.
On page 30, it is written, "The most important human endeavor is the striving for morality in our actions. Our inner balance and even our very existence depend on it. Only morality in our actions can give beauty and dignity to life.
To make this a living force and bring it to clear consciousness is perhaps the foremost task of education.
The foundation of morality should not be made dependent on myth nor tied to any authority lest doubt about the myth or about the legitimacy of the authority imperil the foundation of sound judgement and action."
Those words and thoughts are from Professor Albert Einstein. He was way ahead of his time and those thoughts are very appropriate today concerning the financial sector.
The "too big to fail" mantra is a myth. Let it die a quiet death.
In the next financial collapse (it is coming), let the ones in the financial sector take the most pain like what is occurring in the energy sector.
That is social justice! Keep focused on this injustice in your columns.
Another thing: America is still the greatest country in the world. It is alive and well. Our visits to Las Vegas and San Diego were awesome! The highlight of my trip was watching the baseball game between San Diego Padres and Atlanta Braves live. It is much better than just watching on television.
Cheers!