Rogue Government Traders

Tyler Durden's picture

Submitted by Mike Krieger

Federal employees whose compensation averages more than $126,000 and the nation’s greatest concentration of lawyers helped Washington edge out San Jose as the wealthiest U.S. metropolitan area, government data show.  The U.S. capital has swapped top spots with Silicon Valley, according to recent Census Bureau figures, with the typical household in the Washington metro area earning $84,523 last year. The national median income for 2010 was $50,046...The flow of federal dollars in and around the nation’s capital helped the region weather the economic slump better than most areas and is contributing to its recovery. The unemployment rate in the Washington metro area in August was 6.1 percent, compared with 10 percent in San Jose, according to Labor Department figures. Nationally, joblessness was 9.1 percent in September for a third straight month.  “The region did experience a shorter, shallower recession than San Jose,” said Sara Kline, a Washington analyst at Moody’s Analytics Inc. in West Chester, Pennsylvania. “The federal government stepped in to take efforts to dampen the recession. It was focused to some extent in the D.C. area as well, given the presence of federal workers there and contractors. That insulated it from more of a downturn.”

- Bloomberg article from yesterday

As a result of an amendment by Sen. Bernie Sanders to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Government Accountability Office completed its second audit of the Federal Reserve. This report focuses on the enormous conflicts of interest that existed at the Federal Reserve during the financial crisis. 

Here is what the GAO found:

-    The affiliations of the Federal Reserve's board of directors with financial firms continue to pose "reputational risks" to the Federal Reserve System.

-    The policy of the Federal Reserve to give members of the banking industry the power to both elect and serve on the Federal Reserve's board of directors creates "an appearance of a conflict of interest."

-    The GAO identified 18 former and current members of the Federal Reserve's board affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis including General Electric, JP Morgan Chase, and Lehman Brothers.

-    There are no restrictions on directors of the Federal Reserve Board from communicating concerns about their respective banks to the staff of the Federal Reserve.

-    Many of the Federal Reserve's board of directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. These board members oversee the Federal Reserve's operations including salary and personnel decisions.

-    Under current regulations, Fed directors who are employed by the banking industry or own stock in financial institutions can participate in decisions involving how much interest to charge to financial institutions receiving Fed loans; and the approval or disapproval of Federal Reserve credit to healthy banks and banks in "hazardous" condition.

-    The Federal Reserve does not publicly disclose its conflict of interest regulations or when it grants waivers to its conflict of interest regulations.

-    21 members of the Federal Reserve's board of directors were involved in making personnel decisions in the division of supervision and regulation at the Fed.

-  The Sanders Report on the GAO Audit on Major Conflicts of Interest at the Federal Reserve. 


Rogue Government Traders

Everything that is happening around the world right now reminds me of the  movie “Rogue Trader.”  In case you haven’t seen it, it is the 1999 film where Ewan McGregor plays the role of Nick Leeson, the Barings Bank trader whose trades gone bad brought down Barings Bank, the oldest merchant bank in London at the time.  The reason why this story is so compelling and why I recommend everyone go watch it is because it demonstrates what can happen when a small loss or mistake is ignored and then covered up in a futile attempt to get back to where you were.  In this case, Nick Leeson started losing money trading futures in Singapore and rather than cutting his losses he kept trading more and bigger.  Pretty quickly, the losses became so enormous he knew he would be forced to close them out if someone noticed and he might even be fired.  So what did he do?  He decided to transfer the losses to a hidden account.  The 88888 account.  He figured he would hide the losses there and then close the hidden account when he got back to even.  He never got back to even and Barings went bankrupt. 

Any of this sound familiar?  Yes of course it does.  Unfortunately for all of us, the story of Barings bank and Nick Leeson is merely happening on a global scale.  However, rather than one trader making bad bets what we are dealing with is a gigantic credit bubble ponzi scheme created by TBTF banks, or as Bill Black more appropriately refers to them, Systemically Dangerous Institutions (SDIs) that now needs to be covered up.  This ponzi first started unraveling back in 2008 and rather than deal with it the best we could, global “leaders” decided to bail them out with taxpayer money and guarantees.  What did we get for this act of kindness?  A dead economy, monstrous unemployment, 15% of Americans on food stamps and a frightening reality that shows Americans are having a much harder time than the Chinese putting food on the table.  See this article Meanwhile, what did the banksters get?  They consolidated even more power over their Washington D.C. puppets because now establishment politicians are “in” the doubled down Nick Leeson bet with Wall Street and of course they got record bonuses and no one was prosecuted.  

So here is the world as I see it at the moment.  You have a gigantic credit/derivatives ponzi scheme created by SDIs that cannot be settled or unwound without a lot of pain.  The banks know this but of course they don’t tell the serfs.  They did tell the governments this back in 2008, but with the caveat that if the politicians saved them they would save the economy and be considered heroes.  Given the financial ignorance, stupidity and massive egos floating around that cesspool called Washington D.C. they fell for it line hook line and sinker.  Well, nothing improved except for bank bonuses and now people are unsurprisingly out in the streets all over America.  Now what?

Well since the politicians are now “in the bet” with the banksters they are just doubling down and doubling down on past mistakes and making things worse and worse.  Except this time they won’t just blow up an old bank.  They will blow up the entire planet.  I mean did you see what Bank of America just did?  They purposely moved their derivatives in with the FDIC insured deposits subsidiary and away from the Merrill unit.  The FDIC is apparently not into this but the FED thinks it is a good idea.  They are purposely putting a nuclear bomb in bed with customer deposits so they have a gun to the head of everyone again.  Aren’t you glad we bailed them out?  Read this and this

No Solution Announced in Europe.  Why?

One of the most hilarious and disturbing things that has dominated market related news lately is the lack of any “solution” in Europe but rather commentary/rumors every other day about some master plan that is to be unveiled any moment.  Of course nothing is ever unveiled and then they say oh it will be “next week.”  It’s always next week.  Just like every bankrupt country on the planet is supposedly going to have miraculous budget surpluses in 2020.  They are lying folks.  No solution has been announced in Europe because there is no solution.  I think it is actually pretty simple.  The extent of the debt problem is so enormous when you include Italy (which you need to do as yields reach back up to 6% on the 10 year bond and people are getting violent in the streets) that any “solution” would have to be so huge and involve a lot of new money/credit creation in the Eurozone that it would pass the buck entirely to Germany and lead to extremely high inflation in the Eurozone.  This is why Germany rightly has not agreed to the bazooka approach that France and Tiny Timmy Geithner is trying to shove down their throats.  While things may not be great in Germany, I don’t think they want a situation where their people have a harder time eating than the Chinese.  That is what Americans have gotten as a reward for pulling out the bazooka in 2008 and bailing out the criminals at the government-ward banks. 

Here is the other problem with the whole thing.  Germany seems to be pushing for greater private sector write downs on Greek debt.  The number floating around is 50%.  While this is the responsible thing to do it isn’t really workable as a “solution.”  Why?  Because why would ANY other nation ever perform austerity and agree to pay their debt burden after that?  They just saw that all you have to do is cheat and riot and the EU will give in because they will to do anything to save their precious little Euro project.  So if Greece gets away with not honoring its debts no nation will ever honor them and then you will either see the biggest chain reaction of debt default in human history or the biggest money printing episode since Zimbabwe.  This is completely binary and there are no good outcomes.  That is why nothing has been announced.  I still think the chance of Germany pulling itself out has a much higher probability than people realize.  To see some of the friction between Germany and France read this quick piece from yesterday

Life in a Looted United States of America

Let this message serve as a warning to Germany.  If you follow the path to mutually assured destruction with the rest of Europe you will end up with what we have here in America.  In a post looted America, the landscape is dominated by criminal oligarchs running around spouting lies via the media to the ignorant sheep.  You see states like Louisiana apparently banning cash for certain transactions.  You see Washington D.C., home of nothing productive or creative but rather a nest of immoral parasites take over as the highest household income from San Jose, home of companies like Apple and Cisco.  You have the only good news from our Nobel Peace Prize winner President this year being the murder of two people.  Osama Bin Laden (which I believe was a totally fake story) and now today Gadhafi.  Wow, America really is number 1.

This is how a nation descends from one of productivity and innovation to ruthless, corrupt feudalism in a very short period of time.  My message for Americans follows up from my email of two weeks ago.  The reason the liberal mainstream corporate media demonized the Tea Party is because it threatens the status quo.  The reason the conservative corporate mainstream media demonizes Occupy Wall Street is because it threatens the status quo.  These are textbook divide and conquer strategies being used on the American people.  Do not fall for it.  Yesterday I read a really interesting gallup poll that stated: “Not surprisingly, Americans who consider themselves supporters of the Occupy Wall Street movement (26% of all Americans) are more likely to blame Wall Street than the federal government for the nation's economic problems. Supporters of the Tea Party movement (22% of Americans) are overwhelmingly likely to blame the government.”  What is most compelling to me is that 26%+22% = 48% so basically almost a majority.  All we need to do is teach people that Washington D.C. and Wall Street are now the same corrupt entity.  They are one gigantic rogue trader sucking the lifeblood out of America.  If we can unite these forces, which I can say with certainty agree on the important issues, we can put an end to the status quo and free ourselves of this bondage. 

Peace and wisdom,

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yabyum's picture

Divide and conquer, the way of the 1%.

topcallingtroll's picture

But there is a big issue dividing tea party and OWS but I am open to ideas how to solve it.

OWS believes the solution involves even bigger government and more spending. I cant support that.

Quixotic_Not's picture

Deception by leaders, the way of the 99%.

"Associate yourself with men of good quality if you esteem your own reputation for 'tis better to be alone than in bad company...Guard against the impostures of pretended patriotism." ~ George Washington

Deadpool's picture

all the really cool kids are in the 1%

AldousHuxley's picture

Tea Party + Occupy Wall Street = revolution


Democrats + Republicans = same old shit


some cool kids in 1% but 0.1%, you got the most spoiled entitled arrogant basturds who have only inheritance holding them up.

MillionDollarBonus_'s picture

You better believe it – this IS the beginning of the progressive socialist revolution, and it is UNSTOPPABLE because the truth is on our side. The trendiest brightest young people out there know what the deal is. This economic crisis demonstrates a complete FAILURE of capitalism and freedom. Free market prices are a dated idea, and the younger generation is breaking new ground by supporting tighter regulations, higher taxes and more departments with smart, trustworthy regulators. Many of the government regulators saw this crisis coming well in advance but were unable to act because of ideological free marketers refusing to vote for more government controls over the economy. It is a tragedy that the smartest economic minds in this country are ready to tackle our problems by regulating this economy, but are unable to do so because of the legal blockades that are placed in their way by ignorant capitalists.

akak's picture

Your shtick was cute at first, but is getting a bit stale now.

TruthInSunshine's picture

Off Topic but astounding (and credible evidence, viewed in the correct context, that TPTB really do want and need PEPRETUAL debt slaves - both individuals and nations):

In 2000, economists were projecting that the U.S. would pay off its national debt.

At least, that's what we know now, thanks to a secret report called "Life After Debt" obtained by NPR's Planet Money through the Freedom of Information Act.


The Clinton Administration Was Terrified About What Would Happen If It Paid Off The Entire National Debt


Debt slaves; it's the same as it ever was. Those now in control, just like in times past, find it the most lucrative business of all to keep nations and people in perpetual debt. Allowing nations and people to free themselves of debt would ruin this most lucrative of businesses.

Don't let the tone of the article linked above fool you; the only reason we didn't and won't pay off our national debt is because our political "leaders" are bought and paid for whores, who carry water for their masters.

The House of Red Shield lives, bitchez.

macholatte's picture

Although brilliant and charasmatic, Clinton was/is a very bad dude.  The Center for American Progress was the offspring of Hilary & Soros.  Much of the foundation for the destruction of America was laid during the Clinton years. Most noteably the repeal of Glass-Steagal. With the perspective of hindsight, it is now possible to see that there was little difference between Bush 1 and Clinton. Both were globalists & Progressives. Bush 2 was a real disaster because of the complete failure to regulate. Obama has continued that tradition to an extreme with the complete impotentcy of Eric Holder and a banker as his Chief of Staff. The fix is in, boys and girls.


I started rooting - you know, sticking up joints - with some older guys. By now I had gotten a taste of what the racket world really was - the glamour, the way they dressed, the way they always had a pocketful of money.
Mickey Cohen

This American system of ours, call it Americanism, call it capitalism, call it what you will, gives each and every one of us a great opportunity if we only seize it with both hands and make the most of it.
Al Capone

I loved the Godfather. I thought that was the best interpretation of our life that I've ever seen. 
Sammy Gravano

We're not children here. The law is-how should I put it? A convenience. Or a convenience for some people, and an inconvenience for other people.
Paul Castellano

Bring the Gold's picture

Progressive? How in the world are those guys progressive unless you mean progressively making things worse? I thought Progressive meant trying to you know, give more people civil rights and that sort of thing. Sometimes I'm kind thrown by the use of terms around here that have always meant one thing, but become their polar opposite on ZH.

jeff montanye's picture

another idea, mistaken imo, that is popular here (see original post) and elsewhere, is that the outcome of the current crisis is binary: constant bailout or lehman style collapse.  this is not true.  

there is also orderly restructuring where the shareholders, bondholders and management take the haircut/clawback and depositors and counterparties are paid.  derivatives can be unwound with netting out and maybe some aren't paid in full (better this than the lehman case of weakest link attacked first so the gross amount becomes the killer).  i'm no econ phd but this guy is, and a good one:

Dumpster Fire's picture

smart, trustworthy regulators my boy and all but you're letting go of the rope here a bit.

Quixotic_Not's picture


When you see that in order to produce, you need to obtain permission from men who produce nothing; when you see that money is flowing to those who deal not in goods, but in favors; when you see that men get rich more easily by graft than by work, and your laws no longer protect you against them, but protect them against you... you may know that your society is doomed. ~ Atlas Shrugged

¿Tienes plata gringo?

greenfire's picture

Ideology-bound folks who have cemented that one, and only one, neural pathway in their brain, will be of NO USE.  They tend to often be haters, intolerant of other views and generally not adaptable. The free market utopia of the libertarian is just as impossible, as that of the communitarian.  We will need to take the more cogent TPers and #OWSers and weave a majority that sweeps the elites from power.  Look at the way they strain to separate us now.  

From the right: "Dirty, smelly hippie communist socialist, etc."

From the left: "Racist, ignorant hillbilly, gun-toter"

Meanwhile, deeply esconed in the center are the elites, with all who are most vested in the current paradigmn, protected by the sheeple frozen with fear, that just want to get back to the World Series.  The center cannot hold.  It is rotten deep within, and we hear the creaking and groaning.....What will be the spark that ignites a fire?

Don't get me wrong.  I most enjoy those who have read and studied enough to have an ideology, but those seeking purity will never find it.

MillionDollarBonus_'s picture

Totally right man. What the purists don't get is that the world is not black and white. This means that ALL universal principles are invalid, everywhere all the time. You can NEVER come up with a universal principle, because the world comes in shades of grey. This is what purist libertarians fail to understand, and is the reason why it is morally valid and necessary for experts to manage the economy.

GoinFawr's picture

Hehe, I saw what you did there. 

'If I always lie it would be impossible for me to tell you that I am a liar'

OTOH, economics is a pretty 'grey' science IMO, if it can be considered one at all.

Goolie's picture

<<This is what purist libertarians fail to understand, and is the reason why it is morally valid and necessary for experts to manage the economy.>>

Experts?  What experts?  There is no such thing.  The free market is the expert.  It's the collective wisdom of all participants.

GoinFawr's picture

can you say, 'facetious'? There ya go...

Chump's picture

Junked for not finding a new and creative way to include "nerdy libertarians" this time.

Gadfly's picture


We (the bankers) must proceed with caution and guard every move made, for the lower order of people are already showing signs of restless commotion. Prudence will therefore show a policy of apparently yielding to the popular will until our plans are so far consummated that we can declare our designs without fear of any organized resistance.

Organizations in the United States should be carefully watched by our trusted men, and we must take immediate steps to control these organizations in our interest or disrupt them.

At the coming Omaha convention to be held July 4, 1892, our men must attend and direct its movement or else there will be set on foot such antagonism to our designs as may require force to overcome.

This at the present time would be premature. We are not yet ready for such a crisis. Capital must protect itself in every possible manner through combination (conspiracy) and legislation.

The courts must be called to our aid, debts must be collected, bonds and mortgages foreclosed as rapidly as possible.

When, through the process of law, the common people have lost their homes,
they will be more tractable and easily governed through the influence of the strong arm
of the government applied to a central power of imperial wealth under the control of the leading financiers.

People without homes will not quarrel with their leaders. History repeats itself in regular cycles. This truth is well known among our principal men who are engaged in forming an imperialism of the world. While they are doing this, the people must be kept in a state of political antagonism.

The question of tariff reform must be urged through the organization known as the Democratic Party, and the question of protection with the reciprocity must be forced to view through the Republican Party.

By thus dividing voters, we can get them to expend their energies in fighting over questions of no importance to us, except as teachers to the common herd. Thus, by discrete actions, we can secure all that has been so generously planned and successfully accomplished.

 From The Politics of Common Sense

The above was taken from the "Banker's Manifesto", for the private circulation among leading bankers only, taken from the "Civil Servants' Year Book, "The Organizer" of January, 1934. The Banker's Manifesto ties in with U.S. Senate Document No. 43, 73rd Congress, 1st Session (1934)

Some things never change.  Anyone on this website who still thinks this is a Democrat versus Republican issue, or conservative versus liberal, or government versus private enterprise, still doesn't get it.

Quixotic_Not's picture

Some things never change.  Anyone on this website who still thinks this is a Democrat versus Republican issue, or conservative versus liberal, or government versus private enterprise, still doesn't get it.

1000% TRUE!

11b40's picture

This is the drum I have been pounding on this site since I arrived. 

The left/right, conservative/liberal, Dem/Repub paradigms are employed by our masters to keep us distracted and at war with one another.  This war was put on steroids when the "conservative" (whatever that is suposed to mean)/Christain right married the traditional Republican Party and Social Issues were thrust to the forefront of every political debate.  Even now, with the entire economy about to fall down on top of us and with our military involved in multiple wars, what is Congress doing?  Well, how about this...there have been 7 bills drafted to restrict women's reproductive rights this year alone.  That's almost one per month.  You can probabaly guess that they are coming from the charlatans who captured the Tea Party.

Now, please don't start ranting about the evils of homo's or abotionists.  It's not the point.  In fact, if you do so, it only re-enforces the point, which is, these people we have representing holding office in Washington are screwing America royally.  Truly, fiddling as Rome burns.  I support both OWS & the Tea Party in principle.....and it's got nothing to do with Socialism, Communism, or anything except the message from the money masters, which, if we need a label, let's call "up 'ur assism", 'cause that is where they are sticking it to the rest of us.

Raging Debate's picture

Million Dollar Bonus is shilling for either Fascism or Communism. We had ample of both the last 100 years. I am going to shill for actually trying capitalism. Where's the next control freak shill? Need more better chess players you people are boring me.

11b40's picture

MDB is trolling for mental stimulus.  His posts are brilliantly designed to poke the most ingrained beliefs we have, and to piss us off.  He has few equals here.

Now if you are bored, why don't you go outside and play in the street?

greenfire's picture

No different that the free market purity trolls, too blinded to the the opportunity, who come out in 3...2...1.....

greenfire's picture

No different that the free market purity trolls, too blinded to the the opportunity, who come out in 3...2...1.....

gorillaonyourback's picture

why you little suck dick minion,  just because some boy has been takin nietzsche a little to seriously  AND is probably a test dummy for the video game industry , test piloting the new supraman video game,  does not mean he has ANYTHING OF VALUE TO SAY.  In fact ,if you enjoy his/her percieved pedantic mumblings so much, please by all means get his number and go sucks his limp little dick.

11b40's picture

Guess it's obvious that MDB pulled your chain pretty good.  Now go take your meds like a good little boy.

prains's picture

You better believe it – this IS the beginning of the progressive socialist revolution, and it is UNSTOPPABLE

MllionsofNumbNuts YOUr system went socialist the minute Gdubya bailed out his buds with YOUr cash and YOUr kids cash (although on many levels i hope you can't/won't/be uable to procreate). Schtick or not you don't strike me as someone who swings much of a dick. Chinese size i suspect.

Oh regional Indian's picture

Well past time for OWS to GO HOME.

They are being played for suckers. Like in every revolution past...

OWS Watch and Learn and GO HOME.....

ClassicalLib17's picture


What,  now you favor the TeaParty?  GFY

Henry Chinaski's picture

OWS has a decidedly collectivist bent.  That they refuse to articlate their demands indicates that thier demands would be abhorrent to the 60-70%.  They certainly don't "represent" the 99%.

FinalCollapse's picture

Yes and No. The OWS is not a bunch of commies or nazis, as FOX would like you to believe. It is a legitimate anger, that has multiple outlets. Are you for the Greenspan's no regulation nonsense, or are you for enforcing stricter regulations, and putting the Wall Street criminals behind bars?


Tsar Pointless's picture

To your point. I saw one of the "Commies" here at the Occupy Pittsburgh site with a "Ron Paul 2012" sign this morning.

Leftist socialist scum!

FL_Conservative's picture

And you'd also see others having sex under a tree and yet another dropping a large one on the hood of a police car.  Sorry, these folks are the furthest thing from the tea party and are being legitimized by Obama, the liberal Dems and the thug union leaders who look at the Sheeple as supporters for the class warfare that Obama wants to wage.  The leftist-statist cast sees an entirely different America that those that subscribe to the Ron Paul political ideology.  If they were a bunch of Ron Paul supporters, the crowds would behave similar to the tea party know the ones that Obama and all the liberal elite attacked?  Whatever geniune intent may have been mixed in to the OWS throngs has been thoroughly co-opted by the Marxists that have piled into the situation.  If you believe otherwise, you're just flat out wrong.

Quixotic_Not's picture


Anyone that doesn't support Ron Paul 2012 is either a fascist, socialist, anarchist, et al...

Dr. Paul isn't perfect, but he's the strongest AMERICAN political leader running for POTUS!

Beware those that speak ill of him...

FinalCollapse's picture

Accidentaly, Ron Paul was the only GOP candidate to defend OWS. When OWS demands prosecution of WS criminals, it is also Libertarian/Ron Paul agenda. Bear it in mind. Btw - there is no need to agree 100% on everything.

Smiddywesson's picture

I haven't been to an OWS march, but I can guarantee that the people who are reporting on the marchers are the same people who have been lying to you your whole life.  The MSM doesn't like them.  CNBS doesn't like them.  The Republicans don't like them, and the Dems don't like them.  And yet, the movement grows.

That should be a clue to everyone that something special is going on.  Whether that power is harnessed by the forces of good or evil is something we cannot predict.  Right now, it's up for grabs.

Quixotic_Not's picture

I'm not part of the (D) & (R) Free Crap Empire™ - I'm a decendent of the Sons of Liberty - And I don't want to see the OWS DECEPTION  hoodwink the USofA about what the majority of OWS are pursuing:


Good luck with your attempt at getting others to join your circle jerk...

stirners_ghost's picture

You are a boring nationalist turd who fails to see the obvious contradiction at the foundation of his secular religion. Rule of Law and Individual Liberty are not in the least bit compatible--they are polar opposites. To be ruled by law you must--submit to it; you must sacrifice your own values to those of the hive. Tell me, where does individual liberty enter this picture? Liberty to do that which is allowed? That which your master has granted you the "right"? Congratulations, you have achieved the freedom to act obediently, just like every other slave and prisoner who has ever existed. Most of them, though, were not so ignorant about the realities of their situation.

akak's picture

An interesting argument, not often made.


The-Dirty-Scurd's picture

I think Ron Paul is good stuff for the most part. There shold have been and should be a bunch of his type in govt. I believe it is way to far gone and way to little, to late. There will be no man or woman stop or fix what is happening. When I vote I will vote for Ron Paul(because I take some responsibility in USA and voting is part of our duty to country) but to look at things objectively Ron Paul is not enough. It's just another distraction from the ultimate truth of all this and another false hope.

Deadpool's picture

To know what is wrong with the Federal Reserve, one must first understand the nature of money. Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.

The Federal Reserve has caused every single boom and bust that has occurred in this country since the bank's creation in 1913. It pumps new money into the financial system to lower interest rates and spur the economy. Adding new money increases the supply of money, making the price of money over time—the interest rate—lower than the market would make it. These lower interest rates affect the allocation of resources, causing capital to be malinvested throughout the economy. So certain projects and ventures that appear profitable when funded at artificially low interest rates are not in fact the best use of those resources.

Eventually, the economic boom created by the Fed's actions is found to be unsustainable, and the bust ensues as this malinvested capital manifests itself in a surplus of capital goods, inventory overhangs, etc. Until these misdirected resources are put to a more productive use—the uses the free market actually desires—the economy stagnates.

Enlarge Image



Fed Chairman Ben Bernanke

The great contribution of the Austrian school of economics to economic theory was in its description of this business cycle: the process of booms and busts, and their origins in monetary intervention by the government in cooperation with the banking system. Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.

In many respects the governors of the Federal Reserve System and the members of the Federal Open Market Committee are like all other high-ranking powerful officials. Because they make decisions that profoundly affect the workings of the economy and because they have hundreds of bright economists working for them doing research and collecting data, they buy into the pretense of knowledge—the illusion that because they have all these resources at their fingertips they therefore have the ability to guide the economy as they see fit.

Nothing could be further from the truth. No attitude could be more destructive. What the Austrian economists Ludwig von Mises and Friedrich von Hayek victoriously asserted in the socialist calculation debate of the 1920s and 1930s—the notion that the marketplace, where people freely decide what they need and want to pay for, is the only effective way to allocate resources—may be obvious to many ordinary Americans. But it has not influenced government leaders today, who do not seem to see the importance of prices to the functioning of a market economy.

The manner of thinking of the Federal Reserve now is no different than that of the former Soviet Union, which employed hundreds of thousands of people to perform research and provide calculations in an attempt to mimic the price system of the West's (relatively) free markets. Despite the obvious lesson to be drawn from the Soviet collapse, the U.S. still has not fully absorbed it.

The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed's monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed's actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market's neck.

The Fed's quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so. But it will do something, we know, because the pressure to "just do something" often outweighs all other considerations.

What exactly the Fed will do is anyone's guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.

Mr. Paul, a congressman from Texas, is seeking the Republican presidential nomination.

earleflorida's picture

be careful,... very careful when you deliberate your thoughts as heartfelt idealism as that of empirical truism -

washington's closest confidant, advisor, and personal friend was hamilton,... whose sole 'grandeur' was that of implementing a central bank -

jefferson, madison were not in alliance   




SilverDosed's picture

"Anyone that doesnt support Ron Paul is a socialist, fascist, blah blah blah..."

Shut the fuck up and quit letting the ignorant bullshit flow out of your mouth. You sound like a fucking tool.


Signed, a Ron Paul supporter.


Tsar Pointless's picture

Class warfare.

You mean the kind that allowed the average CEO - such as the former one at the bank at which I work, who took home a paltry $18 million last year - to make roughly 440 times the average American's salary?

And the kind that allowed him to get a $30 million golden parachute upon his ouster - er, resignation (LOL) - which represents $20,000 for each of the 1,500 announced layoffs here at this bank?

You mean THAT class warfare?

LawsofPhysics's picture

Yes, crash the fucking system already so that compensation can finally return to people who are actually worth a shit.

bnbdnb's picture

Paying every working person in the world $8/hr would be a cost of $54 trillion/yr