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Our Magic Piggy Bank 17 September, 2008

Posted by David Anderson in Economic Policy.
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I heard it on the radio news. Taxpayers are bailing out AIG. It turned out the Fed(Federal Reserve Bank) was bailing out AIG. That is a big difference. The fact that even the news reporting can’t get this right concerns me. The truth is today, America may have become a temporary corporate state. We are seeing the economic power of America consolidate in the hands of a few planners who have government power to print as much money as they see fit.

In 1913 the United States established an Independent central bank system called the Federal Reserve System headed by the Federal Reserve Bank and its politically appointed board of governors with banker appointed members of the open market committee. It was established to put professionals in charge of monetary policy. The Treasury Department had shall we say varying degrees of success.

The Federal Reserve by law is charged with keeping inflation under control, keeping us from deflationary depression, and keeping us as close to full employment. They have enormous power over the banking industry, the money supply, interest rates and now that depression era laws have been activated, investment banks. The maestros of the privately owned central bank have become the most important people in world. If I can find an hour this week, I will write about the implications of the bankers expanding their control to the insurance, investment banks and commodities. No promises though.

Many people think the Fed is a federal agency. Like Freddie Mac and Fannie Mae it is not really a federal agency, but unlike them (which were publicly held) it is privately owned. It is an amazing innovation. Instead of having political hacks running the money supply and then have to be bailed out by the bankers every 20 years, the professionals run the money supply by controlling the federal bond market, bank margins, and printing the money.

The money that the Fed is using does not come from the federal budget. It is not tax money. This unique ability to print money gives the policy makers a major temptation; it is to treat the Fed like a magic piggy bank (as Greenspan warned us against). It can do amazing things to stabilize the economy, but it comes at a price. Too much money equals inflation which is a silent tax on wages and assets. Allow the Fed to expand its scope too much and it becomes distracted from its historic and vital role. The reason companies like AIG ran into problems is that they became to diversified for anyone to manage. Imagine trying to control the variables of the global economy. No one can do it. If the Fed becomes too preoccupied, it may well miss the next crisis signal. For our own sake, we need an economic policy which restores risk management to the market place, a sound energy policy, and sound fiscal policy, and tax reform.

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Comments»

1. bluescreenmarketing - 17 September, 2008

Why is it that our nation’s leaders are allocating our tax dollars to a non-governmental entity to bailout a company most of us could care less about? Since when does failure to operate a business properly merit the pity and hard-earned dollars of American citizens? I know of hundreds of business owners who have made mistakes in running their business; and not only does no one come to their aid one iota, but because they are self-employed business owners, even in a crisis they are unable to get access to simple financial benefits such as food stamps or Medicaid (that even illegal immigrants can get) when necessary!

2. david anderson - 18 September, 2008

It is a widely spread and believed myth that our tax dollars were used. They were not at this point.

I care a lot about AIG and so should you. Construction would grind to a halt without insurance that AIG provides. If the mortgages that are purchased by AIG are dumped on the market at a fire sale, new ones would be hard to get for most people. If the Private Mortgage Insurance (PMI) is closed down, half of home buyers would have to turn to the already stressed Fannie Mae and HUD which would put at risk a lot more tax dollars or send home prices in a spiral. If home prices tank, you would then have banks with unsecured loans instead of home equity loans. If investors panicked, You would have a collapse of the financial system.

If this rescue didn’t happen, we would have 10% unemployment by Christmas,and be on the hook to bail out all of the banks which are on the brink. The FDIC is backed by tax money. I read that 50 good size banks are on the watch list.

Just between us, there is a real problem. I think they will maneuver past it. Just in case, pay off all the debt you can and build an emergency fund. Have water and canned food available for disasters now because they may be a lot more expensive later. Buy some gold or silver.

To see how that looks go back in history and look at the Panic of 1893 or the Great Depression. Unlike 1893 but like 1929, if the U. S. goes the world goes. As the President of one of the African countries said, the third world cannot afford a U. S. collapse right now. Literally millions of poor people would starve and die. Literally hundreds of millions more couldn’t get medicine and public health aid. The human toll in the U. S. would be suffering. The human toll world wide would be death and devastation on a scale not seen since WW2.


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