What is the True Motivation of Bankers?

In my life time I have never see such a horrible job done by the Federal Reserve than has been done in the last decade. It first started with Alan Greenspan’s intentional sabotage of the final years of the Bush Administration. By keeping the federal fund rate at 1% while the housing bubble rose to catastrophic proportions Mr. Greenspan guaranteed disaster. The opposite reaction he had in 1989 to 1991 during the Savings and Loan crisis. Now we have Time’s “Man of the Year” Ben Bernanke completely blow up the Federal Reserve. With Bernanke’s actions we are almost assured of depression with inflation.

Ben Bernanke Federal Reserve Chairman

Let’s take a step back and look at “bubbles”. Money, rail road, housing, commercial real estate, stock and other “bubbles” have been around for centuries. Why create them if they cause damage? Bubbles take advantage of “irrational exuberance” to quote Mr. Greenspan. And the great thing about them is only a few insiders know that they are artificial. Everyone pretends the gains in the hot asset of the year will go up forever and the smart money sells. No one really knows when it will end but it always does.

Mr. Greenspan’s famous “irrational exuberance” quote was in 1997 concerning the NASDAQ bubble. He missed the peak by three years.

Basically for the banking industry a central bank, like the Federal Reserve, decides to print more money than the year before. This can be 5% to 120%. Most economist feel a modest inflation rate is desirable because it “lubricates” the economy. This is a fancy way of saying a employer can have a price cut or wage cut without changing anything. Just keep the prices on the menu the same for the next year or someone’s wage. If the inflation rate is predictable and modest business can easily adjust and plan future activities.

Where the devious part comes in is what is known as “Keynesian” economics which is what the current administration is practicing on the economy. John Maynard Keynes was an economist for FDR in the 30’s and 40’s. He came up with “priming the pump” and other nonsense that Nancy Pelosi spews to this day. His basic belief was that the federal government should continually increase spending “tricking” manufacturers into producing more than they would have in the belief that they were too stupid to realize the money stock was becoming devalued. This meant basically paying manufacturers with devalued dollars. The problem is this method builds distrust as was seen in the 1960’s and pretty soon everyone from producers to the unions automatically assume there will be more inflation than anticipated and contracts are adjusted accordingly. The federal government has to spend an ever increasing amount to “trick” manufacturers and a vicious cycle is created triggering inflation.

But let’s assume the only ones who know that the money supply was increased were the insiders at the Federal Reserve in New York. These guys are buddies with their pals at Goldman Sacks. They socialize at the finest New York restaurants, date, marry, play softball and intermingle. The Federal Reserve guys tell the Goldman Sacks guys what is happening on the Open Market Committee and with the Federal Reserve Chairman. Secrets don’t last long when there’s money to be made. So the Goldman employees know to buy now with valuable dollars before they depreciate. The same holds true for bankers. The bubble occurs and no one knows exactly when it will burst but it will. So the inside crowd sells off assets sometimes to soon or on time but they do sell off. And the public is left holding worthless assets. That’s how it’s supposed to work which is why we have a Federal Reserve and not “Free Banking”. Corruption and greed. This last housing bubble didn’t quite work out that way which is the real reason Bush Treasury Secretary Paulson freaked out and got the bail out billions to pay off a bunch of pissed off investment bankers.

And now we are in a dollar bubble just waiting to burst. Its 1931, 10% unemployment, bad economy and for the most part blissfully ignorant of how bad it will get in the coming years. And there is the federal government doing everything wrong. Printing money, buying unproductive junk, producing temporary jobs. Basically moving more and more of the economies resources from the productive sector to the unproductive sector. All the while increasing taxes and further retarding growth. And to top it off proposing new trillion dollar programs that add uncertainty to the business community. This is going to be a big fall.

The main point is that we don’t need a Federal Reserve. In the past banks would print their own notes and back them with gold, silver or even regional bank notes. So why do we have a Federal Reserve setting interest rates and exploding the money supply? It makes no sense.

One of the reforms that will need to occur if America is to remain viable is to strip the Federal Reserve of all it powers except as a partner to assist with bankrupt banks. We don’t need it. The damage far outweighs the benefit. We need to have a “Free Banking” movement in the United States and get back to “hard money” banking policies.

In the past I have supported the Federal Reserve because for most of my life from 1981 to 2001 it was rational and generally respectable in its operations. Wow was I ever wrong. Time to get back to Andrew Jackson’s values and the idea of killing the federal bank for another 77 years or so.