Vipers and Thieves

June 28, 2003

"You are a den of vipers and thieves.
I intend to rout you out, and by the Eternal God, I will rout you out."

President Andrew Jackson,
stated in reference to the wildcat bankers of his day

The Fed is guilty...

...guilty of "swindling the U.S. Treasury...";

...guilty of "conspiring with their foreign principals and others to defraud the U.S. Government...";

...guilty of "having robbed the U.S Government and the people of the U.S. by their theft and sale of the gold reserves of the U.S. and other unlawful transactions...";

...and guilty of "having reduced the U.S. from a first class power to one that is dependent, and...having reduced the U.S. from a rich and powerful nation to one that is internationally poor; and..."

These are but a few of the charges levelled at the Federal Reserve Board on the floor of Congress, by the Honorable Louis T. McFadden...in 1933. The charges remain open and are pending (after all this time) at the Judiciary. So claims a juicy bit of conspiracy theory detritus making its way around the Internet.

Getting information off the Internet is a dubious proposition, at best. It calls to mind the college expression: "beer goggles" - in which a young man goes out to a party, drinks too many beers, and falls instantly in love with the most beautiful woman in the room; only to discover the day after she has buck teeth, a third eye and a particularly heavy 5 o'clock shadow.

Likewise, when you find the right bit of information on the Internet, you think it's the perfect coup de grace for your position... only to discover it's been debunked, discarded and exposed as a hoax by half a dozen critics, whose credibility remains equally in question. It is in the spirit of the "beer Google" in which we offer today's observation. Not that we agree with the litany of conspiracy sites on which we've discovered the legendary tirades of Louis McFadden posted. Rather, the sentiment behind McFadden's lawsuit, crackpot though he may - or may not - have been, seems laudable; praiseworthy even.

The story begins in the days when the neo-cons were still fantasizing about a Trotskyite revolution in America...that is to say, during the Great Depression and the birth of the New Deal.

The unemployment rate was inching its way toward 25% - the worst in the nation's history. Homelessness and starvation, honors usually reserved for the poor, were being bestowed with a quickening pace on those who formerly thought of themselves as 'middle class'.

"On June 10, 1932," explains the economic historian Edward Flaherty, "the House was debating a bill which would expand the types of securities the Federal Reserve could trade when conducting monetary policy. McFadden used this opportunity to launch a twenty-five minute tirade against the Federal Reserve, and in so doing became a legendary champion amongst conspiracy theorists. McFadden began...

"'Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal reserve banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States out of enough money to pay the national debt. The depredations and the iniquities of the Federal Reserve Board and the Federal reserve banks acting together have cost this country enough money to pay the national debt several times over. This evil institution has impoverished and ruined the people of the United States; has bankrupted itself, and has practically bankrupted our Government. It has done this through defects of the law under which it operates, through the maladministration of that law by the Federal Reserve Board and through the corrupt practices of the moneyed vultures who control it.'

"However," Flaherty points out, "just because a claim appears in the Congressional Record does not necessarily mean it is true. Once the hyperbole and histrionics are deducted, there is little remaining of substance in the above quotation."

Flaherty goes on to show that from 1914 to 1931, the Federal Reserve system collectively earned profits totaling $607 million. About $102 million was subsequently distributed to member banks as dividends, and about $147 million was paid to the Treasury as a 'franchise tax.' The Federal Reserve banks kept the remaining $359 million in profits.

"The national debt in 1932 was $19.5 billion," writes Flaherty, "so even if the Federal Reserve had been paying all its profits to the government during this time, it would have been enough to pay only 3 percent of the national debt - a far cry from McFadden's 'several times over'. Moreover, the Federal Reserve's total revenues for the period were $971 million, so if the entirety of the System's revenues had gone straight to the Treasury, it still would not have been sufficient to make McFadden's claim even remotely accurate.

"If McFadden had really been the anti-Fed crusader some people today make him out to have been," Flaherty continues, "then why did he not do anything about the Fed when he had the chance? More likely, he was making political points with his constituents by placing blame for the Great Depression at the door of the Federal Reserve. While this may have been justifiable, he went too far by implying the Fed intended to wreck the economy."

And yet, this week - some 70 years later - the world waited, breathlessly, for word from behind the Fed's closed doors. Would the honorable governors give the people what they craved? Would they cut rates yet again? Would 13 be the lucky number? Pant. Gasp. Whispers from the crowd. Will the recovery never begin?

"History shows that countries who save and invest grow and prosper..." writes the Adventure Capitalist, Jim Rogers, in a foreword he's penned for our book ("Financial Reckoning Day" - due out in September) "...while the others deteriorate and collapse."

"Artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks of the late '90s," Rogers continues. "Now, policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble.

"When those bubbles burst, it's going to be worse than the stock market bubble, because there are a lot more people that are involved in consumption and housing. When all these people find out that house prices don't go up forever, with very high credit card debt, there are going to be a lot of angry people.

"No one, of course, wants to hear it. They want the quick fix. They want to buy the stock and watch it go up 25% because that's what happened last year, and that's what they say on TV. They want another interest rate cut, because they've heard that that's what will make the economy boom..."

A 'quick fix' is just what we expected the Fed to offer up. Throughout its history, the Fed has been capable of doing only one thing: destroying the currency it was purportedly chartered to protect. But your humble editors claim no authorship of that observation...

As is the custom among Daily Reckoning readers, our initial presentation of Flaherty's rebuttal to McFadden's tirade met with more than a little chagrin. "Flaherty's analysis is a bit of a non-sequitur," one astute reader shot back. "McFadden's point, if not explicitly stated, is that the government would never have incurred any debt in the first place if it had not been duped into giving the power of money creation over to the private interests, who are vipers and thieves."

Given the fact that we've just experienced the fastest descent from 'surplus' to 'deficit' in the nation's history, McFadden's observations seem as relevant today as they did 70 years ago.

"Edward Flaherty's rebuttal of Congressman McFadden's speech does not come close to addressing the charges" another equally, if not more, astute reader chimes in. "McFadden did not say they make too much profit. The profit at the Fed is not the problem. The problem is they have deliberately destroyed the currency..."

The latest Fed incarnation - the Greenspan-Bernanke-McTeer triumvirate - has been openly lamenting declining rates of inflation...and are on the verge of giving the price level another "coup de whiskey". But to what end?

"NO serious student of the economy any longer doubts," observes Christopher Byron at the New York Post, "Mr. Greenspan's cheap-money policy of the 1990s led directly to the stock market bubble that popped in the spring of 2000, pushing stocks and the economy into a downturn from which they have yet to recover."

One wonders what Greenspan & Co. actually discuss behind the closed doors at the FOMC meeting. Surely, there must be at least some remnants of "Greenspan, the Randian goldbug" buried deep within his sparsely populated cranium. Yet, as Byron notes, "Mr. Behind-The-Curve" keeps trying to regulate the economy, after the fact, with lame and misguided rate cuts. In the process, he and the other Fed governors have created "the greatest decade of volatility and uncertainty the stock market has known" since...well, since McFadden was all ticked off at another set of Fed ninnies during the Great Depression.

And now, as a follow-up act, "instead of giving the economy a sustainable overall boost," Byron writes, "the Fed's increasingly cheap money keeps pouring into just two sectors - the housing and home mortgage refinance markets - creating what is shaping up as one of the most spectacular sector bubbles in history."

"Meanwhile," Byron continues (forgive me if I quote Mr. Byron at length, but as usual he hits the nail on the head) "his rhetorical waltzing has become utterly shameless, as he intones, in that ponderous way he has perfected, that the housing market has not swelled into a bubble - because, when it pops, the result won't be a 'negative' for the economy, but the disappearance of a 'positive'. Oh, puhleeze, Mr. Greenspan, do you take the whole world for fools?

"It is the speculative bubble in the housing market, fueled by lower and lower mortgage rates, that is alone propping up the economy, and everyone knows it. In this summer of 2003, the national pastime is no longer baseball or going to the beach - it's going to the bank to refinance the mortgage. The amount of money being leeched from the national balance sheet and poured into consumption by this process is simply staggering."

The Mortgage Bankers Association released their data last week showing that nearly all the profits being banked through mortgages are now coming from cash out re-financings (the practice of refinancing your home for more than its worth, so you can afford to make payments on your SUV and meet the minimum monthly requirement on your 8 credit cards!) The Federal Reserves own numbers reveal that cash from refinancing accounted for nearly $700 billion of consumer spending last year.

Banking stocks "from the S&L and commercial banking sectors to mortgage banking, finance and homebuilding, have been pumped up with hype, hope and hot air from Greenspan's failed policy of trying to manage the economy by playing catch up with interest rates."

Who knows WHEN this bubble will go the way of the Nasdaq. But one thing is certain: Nature abhors disequilibrium.

This generation of Fed governors have not only upheld the honorable Fed tradition of destroying the value of the currency they were chartered to preserve, but they've also gone where no Fed has yet dared tread: they've engineered a scheme to aid and abet the nation's homeowners in stripping their homes of equity. A scheme which is threatening to melt-down and destroy them all.

The naturally occurring gold-silver alloy is called electrum.

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