The Professor Who Did Not Save the World

A very good summary, by Frederic Sheehan, of the massive expansion of Fed and Treasury power, crony capitalism sold by Bernanke, Paulson, Geithner and crew as necessary to save the financial system, when all it actually did was transfer a lot of money from taxpayers to bail out banks, insurance and trading companies that made a lot of bad decisions.

"The Fed's efforts prevented a 'total meltdown' of the financial system at a time when fears of a second Great Depression were 'very real,' Mr. Bernanke said Tuesday at the third of his four lectures at George Washington University in Washington."

- Wall Street Journal, "'Fed Prevented Total Meltdown,' Bernanke Said," March 28, 2012.

This is not true.

Each of Federal Reserve Chairman Ben S. Bernanke's four lectures at George Washington University was unfortunate in its own way. In his third assault on history, logic, and common sense, "The Federal Reserve's Response to the Financial Crisis," Simple Ben made it clear he still cannot think his way through the 2008 financial crisis.

The sequence of events follows: On September 15, 2008, Lehman Brothers, an investment bank, failed. This triggered claims on credit default swaps. These derivatives pay the holder a specified amount of money when a company defaults. American International Group (AIG), an insurance company, had sold credit default swaps to protect the buyer if Lehman Brothers failed. (Credit default swaps are often labeled "insurance." As an analogy to insurance, this description is helpful; but they lack a key feature of insurance (insurable risk), one reason they should be banned.) It was time to pay, but AIG did not have the resources to do so. In the mythology of the moment, Ben's World introduced a waterfall of Old Testament proportions: AIG would fail, and the entire financial system would follow, without a government bailout.

On September 16, 2008, the U.S. government "seized control of AIG" (quoting from the September 17, 2008, Wall Street Journal). The Federal Reserve lent AIG $85 billion which allowed AIG to honor its credit default swaps.

On Sunday, September 21, 2008, "Morgan Stanley and Goldman Sachs applied to the Fed to become bank holding companies." The applications were "approved with extraordinary speed." (Financial Crisis Inquiry Commission Report) This was "in tandem with the Department of Justice," a caper that has been insufficiently explored.

The mythology is just that. I thank David A. Stockman, former director of the Office of Management and Budget under President Reagan, for the analytical assistance and for the pleasure of reading an early draft of his book: The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.

Follow the link and read the rest.

The Secret Tax

Analysis from Robert Higgs:

About a month ago, I posted in regard to what I called “the euthanasia of the saver.” This comment had to do with the fact that nominal interest rates in the United States for financial investments such as bank certificates of deposit and bank savings accounts—the kinds of investments traditionally employed by retired persons and small savers, who wish to gain income without exposing their funds to great risk of capital loss—now fall considerably below the rate of inflation, and hence the real (or inflation-adjusted) yield on such investments is negative. That is, the nominal payoff is insufficient to offset the loss of purchasing power of the money invested.

About a month before I wrote my commentary, my old friend Richard Rahn had, without my noticing, written on the same issue in a commentary article published in the Washington Times, but he had gone beyond the simple point I made. Rahn notes that besides suffering the loss of wealth occasioned by the negative real yield on such investments, the investor has to pay tax on the nominal yield—truly a case of the government’s adding insult to injury. He notes that given the currently prevailing rates of interest, rate of inflation, and tax rates, a small investor who earns a nominal yield of 1% and pays a 20% marginal tax rate, while the rate of inflation is 3.5 %, actually ends up paying a real tax rate of 370%. For example, an investor buys a $100,000 CD, earns $1,000 in annual interest, pays a tax of $200, and incurs a loss of $3,500 in purchasing power on the invested principal. Total (nominal) income is $1,000; total real tax (nominal tax plus inflation tax) is $3,700.

This expropriation of private wealth is not accidental.

It is the joint product of the Fed’s near-zero interest-rate policies, the Fed’s money supply increases that underlie the current rate of inflation, and the tax rates established by Congress and administered by the IRS, including the taxation of nominal interest earnings even when they amount to real losses of capital, rather than genuine earnings. The government clearly aims to expropriate private wealth on a massive scale. The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.
The expropriation amounts to a huge sum. For example, the value of the Non-M1 component of the monetary aggregate M2—consisting of savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts—currently amounts to more than $7.5 trillion. If investors lose 2.7% on this investment each year (nominal yield minus the sum of the amount lost via taxation of nominal interest and the amount lost via the inflation tax), the loss amounts to about $204 billion. Because this type of investment is not the whole of the investments subject to this effect, the total amount the government is expropriating comes to a much larger sum.

Because this taking continues year after year, so long as current conditions persist the continuation of this expropriation for another year or two will bring the cumulative amount expropriated in this fashion to more than $1 trillion since the onset of the recession and the Fed’s adoption of the near-zero interest-rate policies, along with its allowance of substantial growth of the money stock and the consequent decrease in the money’s purchasing power. This is a rough calculation for the purpose of illustration. My point does not hinge on a precise estimate, because any well-founded estimate is sure to amount to a gigantic sum.
In sum, the government’s monetary and fiscal authorities are currently engaged in the expropriation of private wealth on a vast scale. Entire classes of investors—especially people who saved during their working years and expected to live on interest earnings on their accumulated capital during their retirement years—are being steadily wiped out. Astonishingly, this de facto robbery is being committed by a government that misses no opportunity to shed crocodile tears over how single-mindedly it seeks to protect the weak and helpless among us.

Obama's regime dissected

Naked emperor and a conspiracy of silence By Spengler America is exceptional - utterly and absolutely exceptional - because the rest of the world depends on American guns, American money and American mediation in a way that no other country or combination of countries possibly might replace. Any other power that suffered the setbacks that America sustained during 2010 under the Barack Obama presidency would have been pushed off the top of the hill. The reason America still has diplomatic currency to spend in Asia as well as actual currency to borrow demonstrates its indispensable role: no one, least of all Chinese Premier Wen Jiabao or Russian Prime Minister Vladimir Putin, wants America to fail. That is why a conspiracy of silence surrounds the observation that the emperor is naked. But the facts are depressingly clear. After one trillion dollars and 5,000 casualties, America will leave Iraq with nothing to show for its Quixotic commitment to build a nation in the Mesopotamian sand. As Steven Lee Meyers reported on December 18 in The New York Times, "The protracted political turmoil that saw the resurgence of a fiercely anti-American political bloc here is casting new doubt on establishing any enduring American military role in Iraq after the last of nearly 50,000 troops are scheduled to withdraw in the next 12 months, military and administration officials say." The pro-Iranian government of Prime Minister Nuri al-Maliki will eliminate America's role in Iraq after America's scheduled withdrawal. Four years after Lebanon's "Green" revolution, hailed by the George W Bush administration as an exemplar of Middle Eastern democracy, the formerly pro-Western (that is, Saudi-allied) PrimeMinister of Lebanon, Saad Hariri, went to Iran as a supplicant in December to endorse Iran's dominant role in that country. Hariri's government includes men who have come under suspicion of ordering the assassination in 2005 of his father, the ex-premier Rafik Hariri. "In contrast with Iran's muscle-flexing, the moderate Arab states, led by Egypt and Saudi Arabia, appear weak while preparing the ground for new leadership as their rulers age. Concurrently, America's influence, as demonstrated in WikiLeaks documents, is on the wane, due to its withdrawal from Iraq, the deepening morass in Afghanistan and its domestic economic woes, " columnist Amos Harel wrote in the Israeli newspaper Ha'aretz on December 17. Russia is holding America's feet to the fire over ratification of the Strategic Arms Reduction Treaty (START) nuclear weapons treaty which - stripped to essentials - forces the world's only first-rate power to deal with a vanquished second-rate power as equals. Russian surface-to-air missiles and other technology remains an instrument of blackmail against the US. As US Senator Richard Luger wrote on his website on December 19, "A rejection of New START would be greeted with delight in Iran, North Korea, Syria, and Burma [Myanmar]. These nations want to shield their weapons programs from outside scrutiny and they want to be able to acquire sensitive weapons technologies." America's capacity to punish Pakistan for its ongoing support of the Taliban as an anti-Indian force in the region has reached the vanishing point. "If America cut off spare parts for Pakistan's F-16's," an advisor to former Afghanistan commander General Stanley McChrystal observed, "they'd be flying Chinese planes the next day". China wants Pakistan to continue to maintain pressure on India, and has visions of a warm water port on the Indian Ocean linked by rail to China. After years of offering Venezuelan President Hugo Chavez all carrots and no sticks, the South American rogue state is ready to install Iranian medium-range missiles on its territory close enough to reach Washington, the German daily Die Welt reported on November 25. No one offered more carrots than Obama, who went out of his way to shake hands with Chavez at the April 2009 meeting of the Organization of American States. If Iran were to acquire nuclear weapons, it well might be able to hit Washington in a few minutes' flight time. American attempts to contain North Korea collapsed in December when the North shelled a disputed South Korean-held island, killing South Korean civilians - after likely being behind the unprovoked sinking of a South Korean naval vessel. North Korea also presumably is supplying fuel for Iran's nuclear program. And last, but not least, at the Group of 20 meeting in Seoul in November the United States suffered the worst rebuff to its global economic stance since the Europeans forced president Richard Nixon to delink the dollar from gold in 1971. The Federal Reserve's new "quantitative easing" campaign was a buck too far. German Finance Minister Wolfgang Schaeuble described the Fed as "clueless" in a newspaper interview, and Asian nations began to impose exchange controls to stop the septic tide of dollars from creating bubbles in their own economies. It's worse than in 1980, when then Fed chairman Paul Volcker returned from an October meeting of the International Monetary Fund in Belgrade and pushed the fed funds rate into double digits. At least in those days criticism of the Fed was made behind closed doors. Most ominous is that China, long the mainstay of the US Treasury market, became a net seller of long-term US Treasury securities in October. The run-up in US long-term interest rates, which pushed the 10-year Treasury yield almost a full percentage point above its August low, is in large part the result of Asian reluctance to continue to buy America's long-term debt. Never before in the course of strategic events have so few done so much damage to so many in such a short period of time. The "few", to be precise, are Obama and the tiny coterie of advisors through whom he runs the government. Obama was true to his baffling words before the United Nations General Assembly on September 23, 2009: "No one nation can or should try to dominate another nation," Obama told the United Nations on September 23. "No world order that elevates one nation or group of people over another will succeed. No balance of power among nations will hold." In my year-end review for 2009 (Life and premature death of Pax Obamicana) I warned: History speaks of a PaxRomana, a Pax Britannica, and a Pax Americana - but no other namable eras of sustained peace, for the simple reason cited by Henry Kissinger: nothing maintains peace except hegemony and the balance of power. The balancing act always fails, though, as it did in Europe in 1914, and as it will in Central and South Asia precisely a century later. The result will be suppurating instability in the region during the next two years and a slow but deadly drift toward great-power animosity. Those who wanted an end to US hegemony will get what they wished for. But they won't like it. America's competitors have seen the erosion of American power as if through a time-lapse camera, and they don't like it at all. Obama's self-shrinkage of American influence may give us a civil war in Iraq, a new Israeli-Hezbollah war in Lebanon, a nuclear-armed Iran, a replay of the Cuban missile crisis in Venezuela, an unshackled rogue state in North Korea, an ungovernable Pakistan, and - worst of all - another American recession as the US Treasury struggles to fund a government deficit in excess of 12 percentage points of gross domestic product. Confronted with the consequences of a naked emperor in Washington, the other powers of the world can only avert their eyes and hope he will get some clothes before it is too late. Having renounced hegemony as well as the balance of power, Obama by year-end chose to prop up the power balance in the region with additional American and allied soldiers in Afghanistan. Obama chose the least popular as well as the least effective alternative. The US president's apparent fecklessness reflects the gravity of the strategic problems in the region.

First they came for the creche at city hall....

This is pretty outrageous. Apparently Federal Reserve officials aren't awsare of the First Amendment.

PERKINS, Okla. -- A small-town bank in Oklahoma said the Federal Reserve won’t let it keep religious signs and symbols on display.

Federal Reserve examiners come every four years to make sure banks are complying with a long list of regulations. The examiners came to Perkins last week. And the team from Kansas City deemed a Bible verse of the day, crosses on the teller’s counter and buttons that say "Merry Christmas, God With Us." were inappropriate. The Bible verse of the day on the bank's Internet site also had to be taken down.

“I don’t think there should be a problem with them displaying whatever religious symbols they want to display,” said Amy Weierman, a Perkins resident.

Specifically, the feds believed, the symbols violated the discouragement clause of Regulation B of the bank regulations. According to the clause, "...the use of words, symbols, models and other forms of communication ... express, imply or suggest a discriminatory preference or policy of exclusion."

Banks are private businesses. The Federal Reserve's job, other than destroying the value of the currency and destabilizing the economic system, is to regulate the financial state of banks to insure they remain solvent, something that they've also failed spectacularly at. They have no business whatsoever determining what religious symbols the bank can display. If they have any evidence of discrimination of non-Christians let them bring it, otherwise they should mind their own business. I do hope the bank fights this in the courts, but because it's not good to be on the bad side of the Fed, they probably won't. And tyranny advances step by step.

[UPDATE: Apparently the bank has decided to fight. They've contacted their Senator and congressman who have sent a letter to the Fed.]

(h/t KisP)