If you care to read...The reason the Federal Reserve is having so little effect is that virtually all of the “bad money” was created out of its reach. People create their own money in many types of transactions, and even if some portion goes through the Federal Reserve, for purposes of accounting between banks, the creation and existence of the “bad” money exists apart from any action taken or not taken by the Federal Reserve. Greenspan might have had it wrong, but he isn’t to blame for the actions of people who were operating outside the scope of his authority or responsibility.
The Glass Seagal Act kept banks and securities firms apart. The simple logic was that neither banks nor securities firms have any direct interest in serving or protecting the public. That can only be achieved by regulation from government. Put them together and you have a recipe for disaster. Banks and securities firms have as their primary goal to make money. And if they get an idea to make a ton of it, no matter how stupid it is, (see Mortgage Meltdown), they will do it. Because in the end, the people who make these decisions do so in a bubble of their own — small wonder they create financial bubbles and crises.
If I agree to lend you $500,000 to buy a house worth $300,000, that is or was a perfectly legal transaction. It also is completely out of reach of the Fed. If you in turn sign papers acquiring the house and I pay the seller the $500,000, the transaction goes through the Fed for accounting purposes in determining the balances at financial institutions. But it is not money created by the Fed nor is it subject to regulation by the Fed. The “money supply” was increased by $500,000 and all the Fed could do is see it but not touch it. Insiders know that $200,000 of “value” is completely fake, but this is carefully scripted to create “plausible deniability.”
If I sell shares in your loan to other people as “derivative mortgage-backed” securities, they sound like pretty good investments to most people and they buy it for perhaps $600,000. Again, money exchanged hands and all the Fed can do is watch. And by the way the “money supply” was just increased by another $100,000 or $600,000 depending upon which theory of econometrics you subscribe to. Again only the insiders know that an additional $100,000 had been added to the completely fake valuation of the original transaction from which the mortgage backed security “derives” its value.
Here we had the perfect storm. The repeal of Glass Seagal which allowed financial institutions (regulated by the Fed) and securities firms (not regulated by the Fed) to become one institution provided they (the banks and securities firms) protect the public from scoundrels. This is akin to delegating the job of creating peace in the Middle East to Saddam Hussein.
Or if you like, it can be compared with the FDA and other agencies that have come under the direct influence and control of corporate America serving the profit motive, shoving aside the duty to serve and protect the people, leaving the citizenry with no protection.
Like the FDA, the law provided shields from the appearance of stupidity. In this case, even though banking and securities were under the roof of one house, it was OK as long as there was a chinese wall between the two functions. Right. I worked in both the banking and securities sectors. There is no wall but they all understand how to create plausible deniability.
The Fed alone is not going to stop the crash that is coming. But these behemoth two-headed monstrosities will probably be allowed to defer the crash with more funny money. This will compound the devaluation of the dollar but give the appearance, for a while, that everything is under control. Most people don’t remember what happened to the value of the dollar in the 1980’s. Few know or remember the 2500% inflation in Germany in one month. It doesn’t take much to crash because money is only an idea, a belief, a confidence in the system. If those ephemeral subjective perceptions of the public change, money is gone — all of it.
If we really want to allow the country to go into recession and not a crash we have to convince ourselves and convince people in other parts of the world that we are again a nations of laws, regulating currency, monetary policy, securities trading, in a sane reasonable manner. An economy based upon getting consumers to go deeper and deeper into debt buying things they don’t need and probably won’t want soon after purchase is not a valid premise.
Economic stimulus is a good thing in theory. But if it consists of getting more money into the hands of consumers and then pressuring them to part with it on objects of doubtful added value, then this plan is no better than the behemoth plan of creating more funny money to cover the old funny money.
The party is over. We are going to have to take the hit on our own nose to show that we are a stand-up crowd and not a rowdy group of criminal greedy myth-sellers. The fundamental premise driving the economy must include consumer spending only in relation to growth in other fundamental areas of commerce and society — innovation, production of products that people in other countries want, and the discovery of intellectual property that is useful in adding sustained value in the perception of consumers.
The answer is neither deregulation nor more regulation. It is changed regulation keeping the long-term viability of the country and its people as the top priority. Anything less will reduce the United States to a third world country that has adopted China as its lender of last resort — a country with no vested interest in doing anything other than using us for economic leverage, and who is now producing the control systems for our weapons, along with sponsoring the migration of Chinese nationals to the U.S. , while they build their own military capability at an alarming rate.
Something has to give folks. Is anyone out there listening?