Gary North

Oct. 21, 2009

There is no hope politically to reverse what the Federal Reserve has done. There hasn't been ever since 1913. We must grin & bear it.

A year ago, Bernanke and Paulson went to Congress's senior leaders and said that the financial system was about to implode. To forestall this, Congress just had to pony up at least $700 billion for the Treasury to buy troubled assets held by the banks. Otherwise, the system would lock up. There would be no capital for borrowers.

This was a bailout for the very rich at the expense of the taxpayers. The voters knew this. They opposed it. The House opposed it for a couple of days. Stocks fell. Then Congress capitulated. They forked over the money, plus another $100+ billion of pork for their districts.

It was all a lie. The TARP money was not spent to buy the banks' bad assets. It was used by the government to buy preferred stock in the biggest banks. It was used to bail out AIG, so that AIG could pay Goldman Sachs what it owed GS. It was used to buy a 61% stake in General Motors, with the lion's share of the other shares going to the UAW's pension fund.

The FED then intervened and swapped T-bills for toxic assets at face value. The FED swapped marketable Treasury assets at face value for unmarketable bank assets and kept the toxic assets on its books as equal in value to T-bills. The FED can hold whatever assets it wants as reserves for the U.S. dollar. Toxic assets are held at face value: fake. Gold is held at $42.22/oz: fake. Because the FED does not have to answer to anyone except a toothless Congress, this did not matter to the accountants, who are hired by the FED.

Did the TARP money restore bank loans? No. Banks stopped lending as soon as the TARP money was doled out to the big banks.

The FED and the Treasury supplied capital to the big banks in the form of preferred stocks. The big banks then began buying up the good assets of busted smaller banks.

This was a gigantic bait & switch operation. Paulson and Bernanke terrorized Congress to pass the subsidies, and then used the money for other purposes. Congress has remained silent. It got snookered. It does nothing. There are no negative sanctions imposed by Congress or the regulators. The FED and the Treasury are the regulators.

Nothing ever changes. I was on Ron Paul's staff in 1976. It was the same then. The FED and Treasury were untouchable. They still are.

Until the FED imposes a fee to keep excess reserves at the FED, American bankers will not lend. They remain terrified of this recovery. So, without lending, there can be no sustained economic growth.

Decades ago, economist George Stigler wrote a paper on the economics of regulation. He concluded that the system always favors the regulated segments of the market. They get their agents onto the regulatory agencies and create oligopolies. The regulations keep out innovators.

The FED has always represented the big banks. The Treasury does, too. So, the only big banks that get in trouble are the competitors of the banks whose agents influence Treasury. Think "Lehman Brothers" and "Goldman Sachs."

The voters have no say in all this, and never have since 1913. They are the victims. No one speaks for them other than eccentrics like Ron Paul (libertarian right) and Alan Grayson (populist left).

As we plan for the wave of M1 inflation to come (if banks lend) or the decade of stagnation ahead (if they don't), we should expect Washington to make things worse.

The way around this is to establish new streams of income. There are niches out there where competition is weak. Your task is to identify one and fill it. There will be no long-term recovery that does not involve the erosion of the dollar.