The reason that Ben Bernanke is the most powerful man in the world is that because he controls our nation's money supply, and the one that controls the money controls everything.
Did you ever stop to think that the creation of the Fed made it much easier to make war? That's because the Fed can very easily print money through a variety of sources. By doing so, waging war no longer requires raising taxes like it used to.
But here's the dirty little secret that 'we must not repeat within the Beltway' or elsewhere: The Federal Reserve is broken and has been for some time.
Did you know that most politicians don't even understand how the Federal Reserve works? It's true. Here is why:
Most politicians do not even know the Fed is broken. The central bank's awesome authority is an intimidating mystery to most elected officials, and they typically defer to its oracular pronouncements. But the Federal Reserve, like all human institutions, is subject to folly and error. In fact, it has experienced colossal failure once before in its history. After the stock market crash of 1929, the Fed was utterly disgraced because its response led directly to the Great Depression. Fed governors were motivated by conservative orthodoxy and their desire to protect the profitability of the largest banks, but they misunderstood the mechanics of monetary policy and also stuck to outdated theory that produced the disastrous results. D'Arista's analysis is chilling because she suggests the modern central bank, albeit in very different circumstances, may again be pursuing wrongheaded theory, blinded by similar political biases and obsolete doctrine (for the history, see my book Secrets of the Temple: How the Federal Reserve Runs the Country).
When deregulation began nearly thirty years ago, some leading Fed governors, including Volcker, were aware that it would weaken the Fed's hand, and they grumbled privately. The 1980 repeal of interest-rate limits meant the central bank would have to apply the brakes longer and harder to get any response from credit markets. "The only restraining influence you have left is interest rates," one influential governor complained to me, "restraint that works ultimately by bankrupting the customer." Yet the Fed supported deregulation, partly because its most important constituency, Wall Street banking and finance, pushed for it relentlessly. Working Americans felt greater pain as a result. The central bank braked the real economy's normal growth continually in a roundabout attempt to slow down the credit markets.
The central bank was undermined more gravely by further deregulation, which encouraged the migration of lending functions from traditional bank loans to market securities, like the bundled mortgage securities that are now rotten assets. Greenspan became an aggressive advocate of the so-called modernization that created Citigroup and the other hybridized mega-banks--the ones in deep trouble. Old-line banks lost market share to nonbanks, but they were allowed to collaborate with unregulated market players as a way to evade the limits on borrowing and risk-taking. In 1977 commercial banks held 56 percent of all financial assets. By 2007 the banking share had fallen to 24 percent.
The shrinkage meant the Fed was trying to control credit through a much smaller base of lending institutions. It failed utterly--witness the soaring debt burden and subsequent defaults. Greenspan, celebrated as the wise wizard, never acknowledged Wall Street's inflation of debt. Indeed, he attempted to slow down the economy in order to constrain the financial system's bubbles. That did not succeed either. As Nation readers may recall, I have more than once blistered the Fed's inept performance and blamed Greenspan's "free-market" ideological bias [see "The One-Eyed Chairman," September 19, 2005]. D'Arista's analysis goes deeper and attributes the systemic malfunctioning to the Fed's weakened control mechanisms.
Central bankers attempted to fix the problem, but they may have made it worse. In the late '80s, the Fed and Wall Street leaders, joined by foreign central banks, created an international regulatory regime that requires banks to hold greater levels of capital instead of bank reserves. Reserves are the Fed's traditional cushion for ensuring the "safety and soundness" of the system. Banks were required to post non-interest-bearing accounts on their balance sheets to backstop deposits and as the means for the central bank to brake bank lending. It was assumed that the new capital requirements would do the same. Instead, the so-called Basel Accords (named for the Bank of International Settlements in Basel, Switzerland) applied very little restraint on lending but created an unintended vulnerability for banking. The new rules have acted like a pro-cyclical force--driving banks into a deeper hole as the crisis has spread because bank capital is destroyed directly by the mounting losses from market securities. The more banks lose on their rotten assets, the more capital they have to borrow from wary investors, who understandably refuse to play. That spreads the panic and failure that governments are trying to cure with public money.
Meanwhile, acting at the behest of bankers, the Fed has practically eliminated the old safety cushion by allowing reserve levels to fall nearly to zero. Bankers complained that reserves were a drag on profits and were no longer needed given the capital rules. In a shocking new arrangement, the Fed, with approval from Congress, has started to pay interest to the banks on their reserves. The commercial banks already enjoyed privileges and protections from the government that were unavailable to any other business sector. Now they insist on getting paid for their public subsidy.
The Federal Reserve is now positioning itself to become the Super Regulator for the Banking industry and Wall Street. This is nothing short of a 'suicide bomber' going into finish off the chaos that the Federal Reserve has already created in the past several years. In addition it creates a substantial conflict of interest on many levels. I have been reading about what 'real reform' should look like and have become interested in an article written by Jane D'Arista:
Ms. D'Arista is a reform-minded economist and retired professor with a deep conceptual understanding of money and credit. (Read her recent essay, "Setting an Agenda for Monetary Reform.") D'Arista proposes operating reforms at the central bank that would be powerfully stimulative for the economy and would also restore the Fed's role as the moderating governor of the credit system. The Fed, she argues, must create a system of control that will cover not only the commercial banks it already regulates but also the unregulated nonbank financial firms and funds that dispense credit in the "shadow banking system," like hedge funds and private equity firms. These and other important pools of capital displaced traditional bank lending with market securities and collaborated with major banks in evading prudential rules and regulatory limits. "Shadow banking" is, likewise, frozen by crisis.
You can read the entire article she has written at http://www.peri.umass.edu/... but here is an overview:
Setting an Agenda for Monetary Reform
D'Arista, Jane | 1/12/2009
Downloadfileadmin/pdf/working_papers/working_papers_151-200/WP190.pdf 304 kB
Abstract:
The monetary policy that culminated in the current crisis and the failure of the Federal Reserve’s efforts to end the credit freeze in 2008 are critical components of the analysis needed as a backdrop for reform. This working paper argues that the link between excess liquidity, the buildup in debt, the asset bubbles that debt created and the financial crisis that followed are outcomes of monetary as well as regulatory policy failures; that they reflect a substantial weakening in the Fed’s ability to implement countercyclical initiatives. D'Arista argues that the effectiveness of monetary policy can, and must, be restored. She proposes a new system of reserve management that assesses reserves against assets rather than deposits and applies reserve requirements to all segments of the financial sector. She concludes that a change in the current system for implementing monetary policy is needed to end the credit crunch, address the impact of the current crisis on the financial sector and the economy and ensure the success of any fiscal stimulus that will be undertaken.
There is a huge smoke screen and hidden agenda behind what Ben Bernanke, Geithner and Summers are doing. Rather than facing the problem and creating real reform, what we are finding is more of the same. The idea that if enough money is continued to be thrown into the Banks that somehow this will fix the terrible case of 'Bank Flu' that the Banks have when what the Banks really have is a terrible prognosis of terminal cancer. We are told that this is the Only choice. This is not true.
Congress and the Obama administration face an excruciating dilemma. To restore the crippled financial system, they are told, they must put up still more public money--hundreds of billions more--to rescue the largest banks and investment houses from failure. Even the dimmest politicians realize that this will further inflame the public's anger. People everywhere grasp that there is something morally wrong about bailing out the malefactors who caused this catastrophe. Yet we are told we have no choice. Unless taxpayers assume the losses for the largest financial institutions by buying their rotten assets, the banking industry will not resume normal lending and, therefore, the economy cannot recover.
This is a false dilemma. Other choices are available. Throwing more public money at essentially insolvent banks is like giving blood transfusions to a corpse and hoping for Lazarus--or, as banking analyst Christopher Whalen puts it, pouring water into a bucket with a hole in the bottom. So far Washington has poured nearly $300 billion into the bucket, and Treasury Secretary Timothy Geithner has suggested it may take another $1 trillion or more to complete the banks' resurrection. The president has budgeted $750 billion for the task. Morality aside, that sounds nutty.
Here is a very different way to understand the problem: to restore the broken financial system, Washington has to fix the Federal Reserve. Though this is not widely understood, the central bank has lost its ability to govern the credit system--the nation's overall lending and borrowing. The Fed's control mechanisms have been severely undermined by a generation of deregulation and tricky innovations that have substantially shifted credit functions from traditional banks to lightly regulated financial markets. When the Fed tried to apply its old tools, starting in the 1980s, the credit system perversely produced opposite results--an explosion of debt the policy-makers could not restrain. In its present condition, the Fed may even make things worse.
Instead of frankly acknowledging the problem, Fed governors proceeded in the past two decades to engineer exaggerated swings in monetary policy--raising interest rates, then lowering them, in widening extremes. This led to the series of bubbles in financial prices--first stocks, then housing and commodities--that collapsed with devastating consequences, climaxing in the present crisis. In other words, the central bank's weakened condition and its misguided policy decisions have been a central factor in destabilizing the American economy. More to the point, the Fed's operating disorders are directly threatening to recovery; the economy is not likely to get well if the dysfunctional Fed is not also reformed.
Jane D'Arista makes more sense than any other economist or financial person that I have read about to do date: Here is a bit more of her ideas:
But where does the Fed find the money to make all these transactions? Essentially, it creates the money. That is basically what occurs routinely whenever the central bank decides to inject new reserves into the banking system. It is accomplished with a computer keystroke crediting the money to the private bank's account (and money is extinguished whenever the Fed withdraws reserves). The mystery of money creation defies common reason, but it works because people believe in the results. The money supply relies on the "full faith and credit" of the society at large--pure credit from the people who use the currency. The public's faith can be enlisted in the national recovery, a far better option than spending the hard-earned money that comes from taxpayers.
D'Arista's solution would create the scaffolding to impose many other regulations on the behavior of lending and borrowing. But it does not resolve the problem of what to do with zombie banks. Some of them deserve to die--right now--because they are "too big to save," as the Levy Institute puts it. Other institutions in trouble can be tightly supervised by regulators for years to come, without relieving them of their rotten assets. This will require a kind of silent forbearance that lets the bankers slowly work off their losses, but it does not dump the losses on the public. D'Arista points out that the government has done this many times in the past. The closest comparison is the Third World debt crisis during the 1980s, when some of the same major banks were under water as Latin American nations threatened massive loan defaults. A lengthy, methodical workout was managed by the Fed under Paul Volcker. It wasn't pretty, nor was it just, but the public was not really aware of the deal-making. This time, the deal is too big to hide. People see it happening and are rightly enraged.
The great virtue of D'Arista's approach is that it's forward-looking. Her focus is not on saving the largest and most culpable names at the pinnacle of the financial system but on creating the platform for a financial order composed of thousands of smaller, more deserving institutions that can serve the country more reliably. To achieve this, the Federal Reserve will have to submit to its own reckoning. By its very design, the cloistered central bank is an offense to democratic principles--and now the Fed's secretive, unaccountable political power has failed democracy again. The question of how to democratize the temple or whether to tear it down has to be on the table too, the subject of future discussion.
You can read more about this at:
http://www.thenation.com/...
The idea of allowing the Federal Reserve to become the Super Regulator of our financial institutions is in a word: insane. President Obama is simply putting 'gum and glue' on a problem that needs a complete over hall. It is the proverbial cart before the horse.
The Federal Reserve is 'broken' and is leading us down the road to Perdition. We need the 'reform' first, then we should proceed to implement strict regulation, so that the power of our dollar does not reside in the hands of one person. Especially Ben Bernanke who is, I can assure you not working for the best interests of the American people. He works for the interests of Wall Street and the Bankers.
For those of you who have not researched or understand exactly how the Federal Reserve works or what they can or cannot do, here are some facts:
Here are some interesting Facts (not media fiction) about the Federal Reserve.
* The Federal Reserve is not a Federal Agency, so it is not a Government Agency but works in cooperation/partnership with the Government but not in terms that you think.
* The Federal Reserve is a Private Bank owned by other private banks, in hence it is a cartel.
* It was promoted to end the money trust of big banks, yet those who set up The Federal Reserve WERE the money trust.
* The Federal Reserve controls the interest rates of our economy not the free market. In essence we do not engage in a true free market because the free market should dictate interest rates, not The Federal Reserve
* Since its inception in 1913 the U.S. Dollar has lost 96% of its value.
* 100% of individual income tax revenue goes directly to The Federal Reserve banks to pay interest only on federal debt. Not one nickel is spent on Gov't services.
* The primary owners of The Federal Reserve are European
* The Federal Reserve prints are money for a fee, Lends us money we pay them to print, Charges us interest on the loan, then sends our money over seas.
* The Federal Reserve has never been audited, NOR has our gold which they also control.
* They lend in excess to flood the economy, while at the same time pulling their money out causing our on-going financial crises.
* This on-going process keeps the U.S. Gov't constantly borrowing money and the American people constantly in debt.
* The more bailout money pushed into the economy with lower interest rates and more credit will result in hyperinflation and our dollar worthless.
* Remember our dollar's value is based on how much money is in the money supply. Since the U.S. dollar has dropped 96% since 1913, The U.S. Dollar is worth a measly .04 cents on the open market.
* Money can be created out of thin air at any time
It is good to understand who and why Ben Bernanke of the Federal Reserve is the most powerful person in the world. Whoever controls the money, controls everything.
Thanks for your interest.