The Federal Reserve In Emerald City

The Federal Reserve in Emerald City

The Federal Reserve is the wicked witch of the US economy. Candidate Ron Paul has pledged to “End the Fed” when he is elected. But the truth is that the Fed has already dumped a bucket of corrosive acid on itself, through its own actions on behalf of special interests. The Fed has few options left but to yell “I’m melting, I’m melting”.

Currently, the Federal Reserve still acts all-powerful. Its chief wizard still appears before Congress and puffs smoke, then goes behind the curtain and sends out flying monkeys (or helicopters) full of money to all the too-big-to-function banks. Unfortunately for ‘helicopter Ben’ Bernanke, most of the population of Emerald City is now wearing Internet-colored glasses, and can see right through the curtain.

According to a partial GAO audit released on July 21, the Fed gave out up to $16 trillion in short-term loans to banks, often at below-market interest rates. A November 28^th report from Bloomberg News based on documents obtained via the FOIA states that “Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009”. Bloomberg further calculated that banks made at least $13 billion by borrowing at near-zero interest rates and then simply buying government bonds with the money.

The Fed, like all regulatory agencies, was created by and for the industry it supposedly regulates. Ever since its creation in 1913, it has favored certain large banks over smaller competitors. Far from bringing monetary stability, it has inflated and deflated in turn (the US dollar ended the 1800s stronger than it entered… but lost 97% of its value since 1913 under the Fed). Bernanke himself famously admitted that the Fed “caused the Great Depression”. Now it has caused and maintains the Great Recession.

In the 2008 collapse, it forced small banks with some assets to be taken over by large banks that had negative net worth. In the ultimate perversion of the laws of bankruptcy, the bad received the assets of the good. Taxpayers ended up stuck with the worthless subprime paper, which was purchased from the politically connected large banks by the Federal Reserve. The Fed is still sitting on that worthless paper, and homes in foreclosure limbo still litter the countryside like so many Kansas tornado victims.

But the subprime crisis is only a symptom. The disease is the monetary instability created by the Fed’s flying monkey, I mean money supply. It has raised the base money supply from 800 billion dollars to ~2.7 trillion since 2008. Fear of what that means for the future value of the dollar has caused commodity markets to swing wildly, and made businesses too terrified to hire permanent workers.

Once the dollar was the reserve currency of the world. There are hundreds of billions of dollars overseas. The value of those dollars is shrinking, risking a scenario where most of those overseas dollars will fly home very fast. That would cause a price inflation Americans haven’t seen since the Confederate dollar.

Overshadowing all the other monetary failures is debt. The Fed has made it unnecessary for Congress to balance budgets. In 2011, the official US debt soared above our GDP. It is now over $15.1 trillion dollars. The US debt is now like that of Greece or Italy… so big that we may not even be able to pay the interest.

So the Fed is at the end of the inflation-bricked road. There are no more foreign investors stupid enough to buy US bonds, it can’t print any more money without hyperinflating, and voters of all parties are through with subsidizing big companies and banks. In short, Bernanke is out of flying monkeys.

We still have an important choice. We can click our heels together and end the Fed by subjecting it to audit and oversight. A transparent and rule-based “Fed” would no longer have the power to give favors to the politically connected. Without secrecy, the Fed would no longer have any incentive or ability to cause massive changes in the money supply.

There are many successful examples of such transparent “currency boards”; Hong Kong had a currency board for decades before it was taken over by China. The Wicked Fed of the East could become just another minor alphabet agency based in Kansas; we could call it GLINDA Mae, or something.

Or we can “End the Fed” the way Weimar Germany, Zimbabwe, and many other countries have: by simply pretending that nothing is wrong. Just keep voting for politics as usual, and the Fed will end itself… along with the US economy and our children’s future.