“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
In grammar school in the 1950s, we learned a valuable lesson in economics. Each Thursday was bank day. We put our nickels, dimes and quarters into an envelope to deposit. As the Brinks truck entered the parking lot we watched the armed guard march into our classrooms. He’d go from desk to desk as we dropped our meager offering into his canvas bank bag. He stood in front of the class and officially “lead-clamped it shut,” then paraded back to his truck to take our money to the bank.
Mother Jude told us those precious nickels and dimes we gave to him would grow into dollars and someday we’d have a lot more than we faithfully deposited. She assured us, banks rewarded us for saving. She explained, when banks loaned our money to people to buy things, they charged them interest. When borrowers paid it back, part of that interest would go into our accounts to pay us for loaning it to them. That was a valued lesson in economics – one Common Core doesn’t teach today.
That was a time when most of the money in our economy was created by banks when they made loans. For decades, that is how our banks remained solvent and secure places for people to save their money and watch it grow. But today, banks no longer rely on the average Joe to deposit his money into savings accounts, to loan and pay them interest? What destroyed our banking system?
In reaction to the panic of 1907, Congress passed the Federal Reserve Act of 1913. This allowed J.P. Morgan and other profiteers to create a central bank, the Federal Reserve. It soon became a political football. Since then, the Fed has played an ambiguous role in corroborating our monetary methodologies.
“The modern banking system manufactures money out of nothing.” – Josiah Stamp
Since the Federal Reserve’s governors are appointed by the president, it has become his political football. The Fed continues to defy common economic logic. They prolonged the Great Depression of the 1930s and the Great Inflation of the 1970s. When Ben Bernanke caved to political pressure, and gobbled up home loans to bail out the housing industry, he protracted the Great Recession in 2008.
As a result, spending and creating new capital dwindled during the recovery, since The Fed was in bed with the Obama administration for eight long, miserable years. Companies only bought existing assets, which removed competitors from the markets. The only industry that profited was housing, which helped builders and repeat buyers but inflated prices and property taxes for tax collectors.
“We laid a rock-solid foundation to insure everyone could afford a new home.” – Barack Obama
After the recession, banks stopped traditional lending, which ceased creating money and America’s money supply went south. To counter and replace the lack of new money, the Fed created billions of phony dollars through a scheme called Quantitative Easing (QE). A recent study by the National Bureau of Economic Research finds government benefits from QE and consumers pay dearly for it.
The chief beneficiary of QE comes from gains in stock markets. Speculators and short-term traders love this big increase in stock prices. What the Fed failed to reveal is that unlike the stock market, the economy only benefits from the higher stock prices if increases in asset prices stimulate new investment. New investment occurs if investors see the lower price of new capital as a substitute for purchasing existing assets. This does not happen with phony paper money created by The Fed.
The worst damage done by QE is taxpayers pay for this botched Fed policy. Maintaining these low interest rates shadows federal government’s increased spending. This was the only time since the Fed was founded it ignored logic to finance government debt; except for the two great world wars.
“Let me issue and control a nation’s money and I care not who writes the laws.” – Mayer Rothschild
Money does not grow on trees. If it did, it would not be worth anything. The peril of QE is it creates total dependence on the Federal Reserve to create money. That makes the federal government entirely dependent on an independent non-government entity for financial and economic survival.
The federal government then becomes an ever-willing servant to the Fed instead of to the people?
The Fed’s policy of keeping interest rates at sub zero through QE defies all sound economic policy. What is meant to encourage borrowing empowers governments to borrow and spend to buy votes. The Fed ruined the loan and investment markets. When Obama created Dodd-Frank, it nailed the coffin shut on banks. They lost profitable instruments that covered risky commercial loan business.
We have been living in a decade of QE. With the economy clawing back from the sharpest slump in recent history and socialists and leftist Democrats running government, QE will be with us for an eternity. States that held back opening their economies to help the left take control of government will expect the far left to pay their bills for this since they accrued debt that exceeds 106% of GNP.
“The first thing I’ll do is cancel the Trump tax cuts. And big business will pay for this.” – Joe Biden
With socialist Bernie Sanders running the Budget Committee, he’ll expand the use of reconciliation, which allows bills to pass with simple majorities. This is a license to steal from taxpayers. Biden will appease the socialists’ “Medicare for All,” by lowering Medicare eligibility and add a “public option.” The cost for this is estimated to be over $2 trillion, according to the U.S. Federal Budget Committee.
Milton Freeman told us, “Desperation driven policy is dangerous.” When The Fed ran out of ammo to restart the economy with zero interest rates, it took a leap of faith into un-chartered waters with QE. Ben Bernanke grew up during the Depression and was a student of Adam Smith’s economics. This resulted in a painful recovery we are still living with today. He thought he’d make the financial crisis magically disappear with QE. Instead, he cut the heart out of our trustworthy banking industry.
The idea lower interest rates allow the U.S. government to finance its operations better is absolute lunacy. It is a license to steal. The federal government issues bonds to cover spending, which is a monetary tool not a financing tool. If Congress wants more cash, they will walk into a room and type numbers into spreadsheets. This only gives government more money to buy votes on paper.
Bernanke’s QE scheme drove up asset prices and bailed out government and industry but it is the consumers who pay for it. The housing market is thriving due to record low interest rates. The only ones who can afford to buy at these current prices are those trading up. It priced Millennials out of the market. Conflating QE-induced wealth affects borrowing costs that arise through conventional channels. Bernanke conveniently swept aside risk taking, especially for those acquiring assets and investing. We can only pray The Fed never experiments with “we the people’s money” again.
And the government hopes that “the people” never learn: “The Federal Reserve System is not Federal; it has no reserves; and it is not a system at all, but rather, a criminal syndicate.” – Eustace Mullins
