International Forecaster Weekly

Fiat Currency and Insiders

A choice between Gold or Fiat Currency, free markets made to run wild, and a Fed that has been wrong about so many things. Greenspan's ideas toxic, and exercises of banking and bailing

Bob Chapman | February 2, 2008

Wall Street and the Fed haven’t changed one bit since the 1980s, the decade of greed. The supposed free market is less free and since Ronald Reagan’s executive order creating the “Working Group on Financial Markets” the market is more manipulated in favor of the insiders at the Fed, banking, investment banking and in brokerage than ever before. They certainly learned well that greed is good. The game has been geared to major financial profits for the leveraged speculator community. In that process Wall Street has snatched control from the Fed and the banking community. As a result, we have no regulation and control over securitization, derivatives and hedge funds. We remember well 35 years ago when the banking community via the SEC put Investors Overseas Services out of business for having a Fund of Funds. Today that is absolute child’s play. The Rothschilds did not want the competition, so a great mutual fund selling organization was destroyed. This is also part of what Wall Street is all about. That is connections and corruption, we know, we spent 28 years in the brokerage business.

Since Sir Alan Greenspan came on the scene in 1987, markets and the economy have run on money and credit creation. That Keynesian mode of operation has been continued under Ben Bernanke. When you don’t have a gold backed currency, or what is known as a fiat currency, you have to perpetually recapitalize the banking system via money, credit, in the repo market, at the discount window and via increased fiscal spending. The result is an ever-falling currency versus gold as well as some other currencies. The result of this Fed policy has allowed Wall Street to run wild in the guise of free markets. Little regulation arranged by the elitists allowed derivatives, hedge funds, securitization and private equity asset strippers to do as they pleased. In order to accommodate Wall Street’s thirst for leverage liquid and continuous markets were provided. The result is a collapsing stock market, a credit crisis, insolvent banks, investment banks, brokerage houses, real estate, insurers and derivative writers. This is new age finance. The result is stagflation, which eventually will destroy the value of all paper assets and leave gold as the only true, unencumbered real currency.

Not only were the masters of the universe at the Fed wrong about all of the above, but deliberate suppression and lying regarding inflation sealed the Fed’s fate. The policy brought on one bubble after another and as time went on the bubbles got ever bigger and impairment to the monetary system deepened one bubble after another. Just eight years ago it was the dotcom collapse then followed by the real estate crash.

Our monetary system is in the process of destruction due to the Fed and particularly Sir Alan Greenspan who is simply a loser. We’ve been citing his shortcomings for many years and finally the world is catching on. As of late he has taken great pains to shift blame for the mortgage crisis away from himself and his policy of low interest rates, plenty of money and credit and the simple use of he repo pool. He said if the crisis had not been triggered by the mispricing of subprime mortgages it would have been produced by eruptions in some other markets. Alan created the crisis and he says it was an accident waiting to happen – his accident. He even has the audacity to say, “the Fed didn’t push interest rates lower, the global economy did. China and other countries flooded the West with cheap products, (which they did and that is what the US wanted), kept wages low in developed countries and pushed down inflation expectations everywhere. Central banks lost control of long term rates.” Those comments are certainly up for debate, but his being cheerleader for a mortgage industry gone wild is indefensible as he is being champion of no regulation of derivatives and hedge funds. The excuse is everyone in America should have a home and that fueled the building boom Now 50% of those homes will go into foreclosure. House starts and permits have collapsed, as have prices. Let’s put credit where credit is due. It was just four years ago in a speech to credit union executives, that Mr. Greenspan lavished praise on how toxic adjustable-rate mortgages were just wonderful for America and Americans. The Fed created these excesses. They allowed banks to buy totally unsuitable loans and put bogus quality ratings on them with the assistance of rating companies and then sold these loans to unsuspecting professionals worldwide. There was nothing too excessive as Wall Street and banking’s financial alchemists truly ran amok, inexplicably turning junk mortgages into credit-worthy bonds.

Now Mr. Greenspan receives princely fees selling his advice to the industry he totally failed to regulate or keep in check as the central banker. He receives six figures for speeches and consulting services from major corporations, ostensibly as a payoff for is previous policies. No matter how you cut it Sir Alan is no friend of Americans.

It now turns out that Mr. Greenspan’s main job was to enrich Wall Street, big banks and derivative writers, as well as hedge funds. It is no wonder he was so strongly against regulation of derivates and hedge funds. In 2006, all these institutions simply got filthy rich. Goldman, Morgan Stanley and Lehman made 34% growth. All of these and others had become too big to fail and that is why today’s Fed is bailing them all out. It has too. Otherwise the system collapses.

In effect, if the banks are using CDOs and SIVs as collateral for money that they borrow from the fed, which obviously is being rolled and it is the Federal Reserve that ends up with the properties. It is assumed that in the future when markets are more calm that the Fed will sell the paper monetizing the debt. The banks will have dumped the paper on the Fed at full value. The difference between full value and what the Fed sells it for is the Fed’s loss, the Fed is privately owned.  They have created the money, which they gave to the banks out of thin air. So they really have no loss.  The important factors are the banks in effect have sold their paper at full value and then Fed has purchased it at full value and monetized it. That causes inflation immediately and in that sense the average American citizen is paying for the Fed to bail out the banks via increased inflation.

The Fed also knows that there are so many complex derivatives that all the risks are not even understood by the most sophisticated professionals and investors. The Fed and Greenspan were fully aware of this. They are also well aware that five of our biggest commercial banks hold over $160 trillion of derivatives with very little underlying capital. These derivatives are essentially naked or uncollateralized. These are 95% of all credit swaps, which happens to be the most profitable sector of derivatives. Thus, there is a malevolent hand that tricks us all supposedly for our own good and safety when in fact it is for more profit and more control over our daily lives. The Fed protects rich Illuminists and elitists, not the American people.

The real damage to the economy began six years ago as we passed the point of no return. Officially we lost almost 400,000 jobs in 2007 when in fact we lost almost 1 million good paying jobs as free trade, globalization, offshoring and outsourcing continue unabated. If you noticed during 2007, your media did not even mention any of the above and they won’t because they are controlled by the elitists. Manufacturing employment has fallen under 14 million and that hasn’t happened since 1950. These are official figures, so you can see how dire the situation has become and the terrible damage that the internationalists have visited upon our economy. Officially private sector jobs fell some 13,000 and manufacturing 21,000 and construction 49,000. Food services gained 27,000. Private sector jobs fell 13,000. Government jobs gained 31,000. In order to get a reliable figure double all of the above. In December, the loss between imports and exports was 9.3%. This balance of payments and current account deficits can only worsen as government prepares to stimulate and support the economy by making direct monetary infusions and adds stimulus for the poor and Middle Class to buy more foreign goods. This is the part government, Congress and the Fed fail to tell you about.

Even as Fed Chairman Ben Bernanke tells us we are ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risk, he tells Congress to act quickly because the Fed’s efforts will take months to affect the economy. While all this creation of additional money and credit takes place and fiscal madness takes place, inflation that our government perpetually lies about, heads ever higher.

As we write, the dollar on the USDX is about to break to new lows as the result of these and previous policies - the flip side of our monetary and fiscal profligacy. Outright grants of hundreds of dollars to American families and more tax cuts for businesses. That should help put the federal deficit ever closer to $10 trillion. As an added bonus interest rates will fall to 2.5% to 3.5% and the creation of money and credit will continue to be supercharged. At the same time our Treasury and the Fed race about the planet obtaining fresh money to keep our banks, investment banks and insurers from entering bankruptcy. Is it any wonder why gold has its sights set on $1,000 and silver on $20.00? The Fed has obliged the market as well via the repo market and secret $30 billion auctions every two weeks. Is it any wonder that the dollar is falling against other currencies and gold and silver? Even sales of assets by those in financial trouble have been terminated, as the Fed supplies needed cash and credit. We cannot have market sales because stocks and bonds may fall in value and expose the entire charade This is an exercise in bailing out banking, insurance and Wall Street. It has nothing to do with bailing out our economy, although at times they are synonymous. As a result of these policies international reserve assets of central banks grew to $1.3 trillion or 27% in 2007 to a record $6.1 trillion or over 50% over the past two years. This is the result of foreign central banks supporting the dollar and cheapening their national currencies, so that their exports will remain less expensive, they’ll make more money and America will go deeper in debt. The thing the Illuminists fear most is US trade barriers. That will bring their mercantilist game to an end. They won’t be able to continue to loot and cannibalize the American economy at will anymore. That is why it is very important to elect Ron Paul and to defeat every incumbent in Congress.