Posts Tagged ‘federal reserve’

Tea Parties or Bank Runs?

April 19, 2009

Last week, there were hundreds of new-age “Tea Parties” all across the country on Tax Day, April 15th.  There is currently a lot of frustration out there, which has led to tremendous momentum for financial reform in our country.  Thousand of people attended the protests.  Some people wanted to protest the role of the Federal Reserve, others were mad about our tax dollars being spent to bail out failing companies.  Others wanted to reduce the size of government and federal spending.

The problem with the Tea Parties, is that the media and Democrats have miscontrued the meaning behind them.  They are saying they are just politcal stunts, organized by Republicans and Fox News, who are against anything President Obama does.  Even though there were both Democrats and Republicans at the Tea Parties, the protests have been marginalized by the mainstream media.  All of the effort that people went through to organize these rallies is essentially being wasted because those in Washington are not taking the protests seriously.

There is another method of protest though, that the government, big corporations, and Wall Street cannot stop.  We can all take our money out of big banks that are getting bailouts and put it in a local, community bank.  Most of these smaller, local banks have been able to withstand the downturn because they were prudent with the money we deposited and did not get involved in all sorts of derivatives, trying to make a quick buck.

If we are so upset about the government using our money to bail out banks, why not show the government that we have no confidence in these institutions?  As a business, banks depend on us, the consumer to lend them (deposit) our money so they can make loans.  If we all pulled our money out of the big, failing banks, they would be forced out of business.  We need to literally, put our money where our mouths are.

Local banks are at a disadvantage because they do not have the resources to devote to technology and security that the big, national banks.  But if we all deposited our money with them, their business would naturally grow and they would be able to make banking as convenient and easy as a Wells Fargo or Bank of America.

The same can be said for our investments.  If we are upset that JP Morgan and other Wall Street investment firms are getting our tax dollars, move your account to another broker.  We can’t protest with our words and then let our actions directly contradict our views.

A lot of talking heads have made fun of people for withdrawing their money from banks so they can have cash (as if this is such a bad thing in the first place).  In fact, MSNBC’s Rachel Maddow called Senator Richard Burr of North Carolina “Bank Run Burr” and Keith Olbermann named him the “Worst Person in the World” because he told his wife to withdraw $500 from an ATM.  They said it showed Republicans do not have a plan and that it was unpatriotic to pull his money out of the bank.  Burr said that he does not have any cash at home, and after a briefing that basically told him that banks would be out of cash, he panicked adn told his wife to take out the money.  Like $500 in his account is going to make a difference, anyway.

My plan is not to just take your money out and put it under your mattress in fear of failure.  It is a protest against the big, national banks that are on life support, sucking up billions of our tax dollars a day.  We should embrace our local banks, that know the local economy and community.  They will make prudent decisions and not take unnecessary risks trying to please Wall Street and investors.  Instead of making clever signs and protesting with our words on Tax Day, we should give the banks a vote of “no confidence.”  Only with our actions and our money will we show the government that we do not support the bailouts, or the banks and institutions they are propping up.

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The Problem with Tea Parties

April 13, 2009

There is going to be a Tea Party in Santa Ana, which is close to my hometown of Huntington Beach.  There is a series of speakers, one of which is Dana Rohrbacher, who is my Congressman.  He’s been in the House since 1988.

My big problem with this is that he was in Congress during the Bush years, when the Federal Government grew to the largest it’s ever been.  Now, all of a sudden he’s outraged?  Where was he speaking out against the budgets and taxes under the Bush Administration?

There is a political theory that when a party is out of power, they go back to their core principles, only to abandon those principles and grow the government when they go back into power.  How true is this of the Republican party?  They pushed for the biggest growth in government spending in the history of our country when they were the majority, but now that they are in the minority, they are all about fiscal responsibility again.  We need to see this for the fraud it is and not fall for this trap again.

Also, many of these figures act like they support limited government, but all they want to do is trim a program here or there and shift the tax brackets around.  We need more than these little, inconsequential tweaks right now.  We need real change and a political revolution.

We need to start to question the need for central economic planning, led by the Federal Reserve and the monopoly it has on our money supply.  We need to question our fiat currency, and if local currencies backed by gold might be a better way to manage our money.  The first step would be to repeal legal tender laws and to eliminate capital gains taxes on gold money.  Ron Paul has laid out this plan to open up our money supply to competition of gold backed money and fiat money.  This needs to be discussed at any Tea party.

We also need to not just be mad at our money being used for bailouts, but we need to be mad that the government, as Rothbard put it, “legally plunder” from us.  Why is the government entitled to a third of our hard earned money?  We should not just be mad about our money going to bail out Wall Street, but we need to be mad that it is going to build bombs, fight foreign wars, build foreign bridges and roads, and support our welfare state.  In order to truly reform our government, we need to take as much out of the hands of Washington as possible.  Our Constitution lays out the framework for a limited central government and strong local and state power.  We have moved so far from this vision that we have a tyrannical government that has overriding rule over all.  This is what we should be revolting about!

The anger and frustration over the bailouts is a good way to start to build energy towards a revolution, but we can’t keep our scope so limited.  Every one of these Tea Parties need to go beyond the bailouts and taxes and to the Constitution and the vision of our Founding Fathers.  They should have speakers who believe in eliminating the Federal Reserve, cutting or ending the income tax, ending our empire, and drastically reducing the size of our government.  We need to move beyond the symptom, which is the recession we’re in and the bailouts, and really fix our country.

Good or Bad News?

April 10, 2009

Today, a source close to the Treasury Department said that no banks failed the government mandated “stress test” and would have to be shut down.  He went on to say that some banks would still need more capital injections.  The story is linked here.

While to the layperson, this looks like good news, to a supporter of the free markets, this is just more bad news.

First, the banks administered the stress tests themselves, and then submitted their results to the Treasury.  How are we to be certain they were being honest?  Of course, they would not want to show that they were going to fail, so why do we put any faith in this report?  If a bank came out and said, “we failed,” their stock would plummet and depositors would immediately withdraw their money.

Second, in the same statement, the source said some companies would still need more government aid.  So, doesn’t that mean these banks that need aid failed?  If they passed, they should not need any more propping up by the Federal Government.  If they still need more money, they can still fail, stress test or not.  That’s just common sense.

And finally, how can we be in the midst of one of the worst banking crises in the history of the US, and only a handful of firms have failed?  We have Lehman, Bear, Wachovia, and WaMu.  That’s it!  We need to weed out the bad apples, now.  We can’t keep propping up everyone.  The government is going about this all wrong, pre-emptively saving banks.  If the government should get involved, it should be after the banks fail, helping clean up the mess.  At least this way the rotten firms and bad assets would be liquidated, and we would be able to move on.

There is always more to the story than what the media and government reports.   Initially, the story might sound like good news, but if you read between the lines and put two and two together, you see that it is just a positive spin on more bad news.  The solution to our crisis is simple:  let the bad banks fail and liquidate the bad debts.  The sooner we allow this to happen, the sooner we will return to prosperity.

Another Look at Our Banking System

April 7, 2009

With Wall Street and the Banking System at the heart of our current economic meltdown, I think it would be good to take another look at our banks in terms that are not normally used.  I’m not an economist, so this might be pretty crude, but it really is important to think about banks as businesses, and not failsafe financial institutions.

First, when you put your money in a savings account, you are not a “depositor.”  You are actually the lender, letting the bank borrow your money to invest.  Your return on this investment is the percent yield you earn on your account.  Banks then will lend this money to businesses or people who want to buy a home.  They charge these people a higher amount of interest than they are paying you.  This is called leverage, which is using borrowed money to make money.

The big question now, is why don’t we look at a bank’s finances and what they are planning on doing with our money when we put it in a savings account?  If we went to get a loan, they would look at all of our records and make sure we had a sound plan for the money.  We just deposit our money into any old bank without a question asked.

The main reason for this is the FDIC, which used to only insure interest bearing accounts (savings) but now insure non-interest bearing (checking) accounts as well.  They also just upped their limit from $100,000 to $250,000.  The reason the FDIC exists is to protect us, the depositors in a bank, in case it goes under.  As long as we have less than $250,000 in that bank, we know the Federal Government will make sure our money is safe.

The unintended consequence of this insurance is that the bank can basically gamble with the first $250,000 of every savings account.  They can put it in all sorts of speculative products because they know if all their investments go bust, the goverment will be there to pick up the tab.  It’s like me going into a casino knowing that if I lose my first thousand dollars, the casino will give it back to me.  The real world does not work this way.  Why then, do we think it’s alright for the people who are supposed to be keeping our money safe to do this?

If banks were not backstopped by the Federal Government, they would have to take less risks, or no one would deposit their money with them.  Without depositor money, a bank cannot make loans to make a profit.  Rather than just putting our money in Any Bank USA, we would make sure that they were making safe investments and know the risks that are involved.  This would weed out the speculative and aggressive banks before the seeds of a banking collapse are sown.

The idea of the FDIC sounds great to the consumer if we think of banks as the keepers of our money.  If we view them as borrowers and business partners, we see the FDIC program makes no sense.  It just allows the banks to gamble with our money and make the taxpayer pick up the tab when their bets go bad.  We need to stop relying on government institutions to protect us and to start making informed decisions of what banks we will lend our savings.  This will help stop bank speculation and keep them honest, and be a part of preventing a crisis like this from happening again.

Why Does Our Financial System Need Reform?

March 28, 2009

Treasury Secretary Tim Geithner and the Obama Administration are pushing for powers to regulate all aspects of the financial system.  These areas include hedge funds, private firms, and derivatives.  They also want the power to intervene with any company to make sure their collapse will not bring down the financial system.

While these ideas sound great, especially in the middle of the crisis we’re in, they are misguided attempts to intervene, when intervention is the last thing we need.  The perfect example of the need to get involved when it was not necessary was the Sarbanes-Oxley Act after the Enron case.  Everyone wanted regulation, so we strapped every publicly traded company with the huge burden of archiving every piece of data for 7 years.  However, the executives that were in charge of Enron were found guilty of fraud, and the company was bankrupted and dissolved.  The system for weeding out Enron worked, but our government felt the need to act, so they did.

In the current crisis, if we did not bail everyone out, would we need to regulate hedge funds, private equity firms, and derivatives?  Those were fringe investments to begin with, but since the Federal Reserve made credit cheap and easy to obtain, they became too large.  Warren Buffet even called the derivatives market the “financial weapons of mass destruction.”  If we let them fail and liquidate their assets, they would go back to being fringe investments only for specialty firms or the super rich people of the country.

By propping them up, we now have the need to regulate them.  By regulating them, we are acknowledging their existence as a major part of the financial system, when they should only be bit players.  Our system needs to be cleansed of these bad investment vehicles and instead we are implementing rules to legitimize them.

Also, the power to intervene with any company by the Treasury Department is setting a dangerous precedent for the future.  They want the power to take over a company and sell off assets before the company collapses.  Looking at how well the bailouts and toxic assets plans have gone, I question whether they really know what is best for our system to begin with.  Why not just let the companies go bankrupt and liquidate their assets letting the market set the prices?

Also, I question whether these reforms and protections will really help.  We all knew the derivatives market was a problem waiting to happen, and all of the financial geniuses who are now calling for regulation just sat back and watched.  The SEC had rules to prevent things like Enron from happening, but it still happened.  Madoff kept a ponzi scheme going for decades and the SEC couldn’t figure it out.  How can we expect our government to regulate when they have failed us so far?  If another bank does commit fraud or crooked accounting and it slips through the cracks, can we sue the government for their lack of oversight?

These broad government regulations just give us a false sense of security because we think the government is looking out for us.  That gives us the impression that they are watching what funds are doing, and they know that their investments are legitimate.  We fail to do our own due diligence because we think the government already has for us.  Then we will again be burned when the government fails to regulate like they promised.

We need to let the market liquidate the bad investments and let the companies that made these decisions fail.  Once that happens, we can see how widespread the problem was and if there is a need for sweeping regulations.  If anything, we need to regulate the Federal Reserve to make sure that our boom-bust economic policy comes to an end.  We can treat the symptoms (hedge funds, private equity and derivatives) only after we treat the cause of the cancer, which is the Federal Reserve.

If You Can’t Dazzle Them With Brilliance…

March 25, 2009

There’s a saying, “If you can’t dazzle them with brilliance, baffle them with bullshit.”

To me, this quote best sums up Treasury Secretary Geithner’s one trillion dollar, toxic asset plan.  I haven’t read one article on the internet on any news site that can spell out the basics.  We know it is going to be a public/private partnership, and that the government is going to insure the assets if they go bust.

I also read things about five funds being established to serve as vehicles for investment.  They would take the private investment and government money to buy toxic assets.  These funds would be led by managers who Geithner selected.  These funds will undoubtedly overpay for the toxic assets, giving the financial firms a reward for their irresponsible behavior.

I don’t know if it is part of this legislation or not, but Geithner also wants the authority to intervene in the business of any non-financial institution.  Supposedly this would have allowed them to stop the AIG bonuses, but it will infringe on the rights of every business in the United States.

Of course, after Geithner announced his plan, the stock market jumped.  This is because his plan allows Wall Street firms to buy toxic assets and then have the government insure all the risk.  There is no downside for the Street.

What you don’t read anywhere, is how this plan is going to screw over the American taxpayer.  Geithner knows that if he can distract us with a small stock market rally, we’ll forget about how horrible this plan is for the country a few years from now when we see how much of that trillion dollars the government has thrown away.

This is the perfect plan for Geithner to help bail out his Wall Street and hedge fund buddies in New York (he was the head of the NY Federal Reserve, which dealt directly wiht Wall Steet), and stick the bill on the taxpayer.  His plan was just smokescreen for a huge transfer of wealth from the taxpayer to a small group of financial institutions.  We need to see through it, and call him on this bullshit.

All in the Name of Financial Stability

March 24, 2009

So far, we’ve approved a $750 billion bailout package, a $800 billion stimulus package, and set aside $750 billion for more bailouts.  Also, the Federal Reserve has expanded its balance sheet by over a trillion dollars of printed money, and the FDIC has changed its rules to insure hundreds of billions more than before.

All of this has been done in the name of “Financial Stability,” but the economy has been anything but stable since the Federal Government started getting involved.  They keep talking about the disaster that will happen if they don’t intervene.  Do they not realize we are in the worst recession since the Great Depression?  Their constant meddling and half-baked plans have prolonged the recession and could lead to the demise of our economy.

Now, we have Treasury Secretary Tim Geithner announcing some new plan where the government will form a public/private partnership with investors to buy $1 trillion in bad debts from banks.  Supposedly, for every $100 in bad loans, the government will put in $7, a private investor will put in $7, and the FDIC will provide insurance or loans for the other $86.

The big problem is that we still have not set a price for these securities, and that will be a big factor in how this plays out.  If we they are bought at an inflated price, the government and the taxpayers will definitely be footing the bill.  Geithner has crafted this plan exactly how his Wall Street and hedge fund buddies want – no risk for them and unlimited risk for the taxpayer.

Today, Geithner also plans to ask Congress for new powers, allowing the Treasury to intervene in “troubled” businesses early on, restructure them and sell assets, all in the name of “financial stability.”  Who knows what “troubled” means?  Does it mean their favorite firms?  Does it mean letting their old competitors fail?  Will the books of every company be open to the Fed to review whenever they want?  This is a dangerous power grab by the Executive Branch, and Congress, led by blowhard airheads Pelosi and Reid, is sure to just roll over.

Geithner’s partner in crime, Fed Chairman Ben Bernanke is also calling for more regulation to prevent excessive bonuses and to prevent another recession, in the name of “financial stability.”  Why must we always place regulations after the fact?  Just like after the Enron debacle, we created Sarbanes-Oxley, which put an enormous burden on US companies, and made a few big software companies a ton of money.

There are already ways to discourage the kind of behavior that led to the crisis we’re in.  They’re called bankruptcy and fraud.  If we let firms fail, businesses in the future will know they cannot take excessive risks and invest in all sorts of complicated investments.  If we let them fail, then the government can get involved cleaning up the mess, not trying to prop up and save a sinking ship.  The bankruptcy system works!  It allows us to get rid of debt that will not be repaid and cleanses the system of all of these “toxic assets.”

Also, we need to charge all of these executives of big banks, ratings agencies, and hedge funds for fraud.  How did all of these subprime loans end up rated AAA?  How did all of these complex derivatives get sold and rated?  Because all of the players were in bed together.  We hear Obama talk all the time about how greed got us here, and that’s true.  Some of this greed was illegal, and we need to bring those to justice, not punish the taxpayers!

If we keep going about the bailouts the way we are now, we will keep throwing our money away.  We’ve already wasted trillions of dollars in the name of “financial stability” and it has made our economy worse.  We need to let firms fail and bring those who were responsible for this to justice.

If we do this, firms in the future will not make these bad decisions again.  Since we are just letting everyone get away with it, though, we are creating a moral hazard where those that made bad decisions get all the help.

The path we are going down will do anything but lead to “financial stability” and the unintended consequences are going to lead to more power for the executive branch and less freedom and liberty for the American people.

It’s Impossible to Remove Toxic Assets

March 21, 2009

Information came out yesterday and today that the Obama administration is about to unveil their plan to buy up toxic assets from banks.  They plan to use up to a trillion dollars from the previous bailouts, help from the Federal Reserve and a form of a public/private partnership to accomplish this.  After the uproar over the AIG bailout and bonuses, the administration does not want to go to Congress for more money.

However, it does not matter what kind of plan the Obama team comes up with for one key reason:  Banks will not sell any of their toxic assets.  They will not sell because the second they do, they will have to revalue their assets to the market value, and that will lead to failures across the board.

They would rather sit with billions of dollars of toxic assets on their books, not try to get rid of them, and collect billions from the government.  The only way banks will sell their assets is if the government suspends the mark-to-market accounting rule.

Mark-to-market means that banks have to value assets for their market value.  This is similar to how things operate in the real world for you and I.  Previously, they could use “mark-to-model” accounting, which meant they could value their assets using a computer model to determine their value.

For example, if we bought a home for $500,000, and we want to refinance or pull out equity, the bank will look at the value of our home if we sold it, or the market value.  If it’s value has dropped to $450,000, we have to adjust our plans for the new value.

You will hear some “economists” argue that banks should not have to use mark-to-market because there is no market right now and prices are artificially depressed.  There is a market right now, it’s just that no one will price assets that low because it will trigger all the other banks having to write down their assets.

If the value of these assets was artificially depressed, people should be buying them because their true value is really higher.  Just because it involves millions of dollars and the banking industry does not mean that the rules should be different.

If we suspend mark-to-market it will only lead to inflated prices for worthless assets.  Then the government will buy them and lose all their money and the losses will be stuck on the American taxpayer.  Sounds like a great idea to me.

There is a very simple alternative to all the bailouts and failed schemes – let the banks fail and let the bad debt be liquidated.  Only one politician has been a proponent of this, Ron Paul, and only a small handful of economists have called for this alternative.  It is amazing how the debate is limited to how many billions we should give away and how mad we should get for less than 1% of those billions being handed out in bonuses.

If you talk about bank failures, you are bound hear about Lehman Brothers and how disasterous that was.  I would argue though, that the Lehman failure has nothing to do with the crisis we are in.  Sure, lots of people lost money, but it was pretty orderly, proving the bankruptcy system worked.   Shareholders got wiped out, bondholders settled for 20 cents on the dollar, and the derivatives settled for about $6 billion.

Are we still talking about Lehman?  No.  Are we still talking about another firm that failed but had a government negotiated failure, Bear Sterns?  No.  The government got involved and arranged for a way to settle the debts and found a buyer.

Are will still talking about firms the government has tried to rescue through all the bailouts?  AIG?  Fannie and Freddie?  Bank of America?  Citi?  I know this is anectdotal evidence, but it seems that firms we let fail have gone by the wayside, and those that we’ve saved have just kept causing more trouble.

The point is that spending more taxpayer money and coming up with more schemes to help the banks are futile attempts to put humpty back together again.  The banks will not cooperate and liquidate their debt when they have the promise of government overpaying for worthless assets.  However, we will keep these insolvent institutions alive by giving them money to offset the writedowns on their bad debts.  It is an endless cycle with no light at the end of the tunnel.

The only way to move through this is to let the insolvent banks fail, liquidate their debts, and let the healthy or new institutions fill the void.  Until we do this, the current crisis will continue and eventually lead to the failure of the dollar and our economy as a whole.

Why We Need to Abolish the Fed

March 18, 2009

The Federal Reserve, led by Ben Bernanke is going to kill America.

We had been inching ourselves closer to the abyss, but today’s announcement by the Federal Reserve has put us right on the brink.

The Fed is going to buy $300 billion in long-term US treasury bonds, and $750 billion in mortgage backed securities from Fannie Mae and Freddie Mac.  Their goal is to drive down interest rates to stimulate the economy.  The unintended consequence of their actions is the destruction of the dollar and life as we know it.

With our previous stimulus packages, we have been selling Treasury bonds to foreign countries to fund our spending.  China, Japan, and Saudi Arabia have been acting as our creditors.  Even though we were going deeper into debt, at least there was a method to the madness.

The new program by the Fed uses money created out of thin air to buy bonds from our government.  If that sounds fishy to you, it should!  What happened to our creditor nations?  Did they cut us off?  Is there something more going on here?

Most empires end with the collapse of their currency and the bankrupting of the nation.  Many times this has to do with a bloated foreign military presence as well.  This is exactly what is happening right now.  We are borrowing from ourselves with printed money.  At what point will inflation explode and our dollars become worthless?

Our standard of living is going to be compromised and we will no longer be the leading economy in the world.  We will have to get used to less growth and more of the same malaise we’re in now.

However, the silver lining to the impending collapse could be the return of sound money, savings, and production in the United States.  Maybe this is really a blessing in disguise that will destroy our consumer based economy and replace it with a production and capital based one.  Maybe that’s wishful thinking, but I’m trying to find a silver lining here.

If there was ever a reason to take the controls of the printing press away from the Fed, this is it.  We need to abolish the Fed now and let sound economic principles guide the way, not the whim of a Harvard professor.  This is a critical point in the history of our nation, and we are making all the wrong choices.

Obama’s Reassurance Rings Hollow

March 14, 2009

Earlier today (3/15), President Obama tried to reassure the rest of the world that the US was still worth investing in.  Here’s a portion of what he said today:

“There’s a reason why even in the midst of this economic crisis, you’ve seen actual increases in investment flows here into the United States,” Mr. Obama told reporters. “I think it’s a recognition that the stability not only of our economic system but our political system is extraordinary.”

He added, “Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States.”

While China’s Premier, Wen, had a legitimate reason to be worried about his country’s holdings, the Obama administration just repeated the same line about the US being a good place to invest.

There’s a problem with Obama’s response.  He is talking about investing inside the United States.  China is worried about investing in the United States government.

China supposedly holds almost 4 trillion US dollars and treasury bills in reserve.  Every dollar the Federal Reserve prints and the government spends decreases the value of the Chinese holdings.  They are our main creditor, and without them, we would have to find new creditors or dramatically cut spending.

We need to assure the rest of the world that our money is sound and that we are in control of our spending.  We can not keep printing money forever and expect everyone to just take our word for it.  We need to show the rest of the world that we are concerned about debasing our currency and that the dollar could collapse if we don’t start to control the printing press.

As a nation, we can not keep believing that just because we are the United States that things will always be good.  The end of almost every empire in the history of the world has been because the government went bankrupt.  I really believe that the end of our empire is near if we do not change our ways.

We could easily assure the rest of the world that the dollar is strong by having Congress place rules on the Fed.  Ron Paul has introduced a bill to audit the Fed, which is long overdue.  They need to go a step further and put a limit or cap on how many dollars they can print.  This would instantly bolster the dollar.  If these means are successful, then they could tie the cap to gold, and put us back on a standard of real money.

The key though, is to limit the Federal Reserve and limit the spending by our government.  If we do not, it won’t matter what we say.  The world will know that the dollar is being devalued and they will stop lending us money.  We need to take our creditor’s concerns seriously, and not believe that our country is invincible.