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What Does The Fed Do?

Tyler Durden's picture


A simple enough question it would seem. As Jim Grant so eloquently begins his oratory (describing how the Fed operates in contrast to how it was meant to operate per its founders) at Ron Paul's Fed Lecture Series from earlier in the year: "If one reads the Federal Reserve Act, you will be struck by how little the 21st Century model resembles the projected central bank - as in fact the founders advocated for a De-Centralized system." Note the specific wording at the end of the Act: " establish more effective supervision of banking in the United States; AND for other purposes." It is the 'other purposes' that provide the jumping off point for everything that has come since...


(h/t Sovereign Speculator)


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Wed, 06/13/2012 - 23:08 | 2524428 stinkhammer
stinkhammer's picture

fuck u ben bernanke

Wed, 06/13/2012 - 23:14 | 2524437 ACP
ACP's picture

"Other purposes" are the key words...

...other purposes, other assets...


Wed, 06/13/2012 - 23:25 | 2524466 CIABS
CIABS's picture

Similar story with the creation of the CIA, if I recall correctly.  It's a template.  FBI, too.

Wed, 06/13/2012 - 23:41 | 2524503 SMG
SMG's picture

The fed (and all other central banks for that matter ) were created to steal from and enslave their host country. That's why all modern central banks were created.

I want to be free.

Thu, 06/14/2012 - 00:50 | 2524534 Pinto Currency
Pinto Currency's picture


Grant is confusing.

As if any central bank, especially one owned by the commercial banks could:

(a) regulate its own shareholders without being corrupted, or

(b) operate with a debt-based money system, or

(c) at any level determine interest rates.

And penalizing officers of the banks is not the issue - central banks are always corrupted.  The money interests  change the laws, change the regulations, buy off the politicians and the regulators.

This guy is very disappointing to me given the knowledge that he is supposed to have.  Almost seems like he is positioning himself for a job.

The Fed was designed as a foot in the door to eventually allow for complete control of the economy and the monetary system.  It was no surprise that it evolved as it did.

Also, Grant says the Fed had no idea that a collapse was coming in 2007 / 2008 - he ought to read "What Does Alan Greenspan Really Think" which is an analysis of a speech that Greenspan gave in Belgium in 1997.  Link here:

Greenspan, the bank CEOs and the Fed knew exactly what was going happen; it was everyone's job to say "Who knew?" when the whole thing blew up.

Grant seems like a very nice guy but he is disappointing.

Thu, 06/14/2012 - 00:50 | 2524602 Michael
Michael's picture

Chart of who "owns" the Federal Reserve

The Federal Reserve is a private corporation. The more it loads up on toxic assets on behalf of its member bank owners, the more worthless its private banking cartel becomes, thus paving the way for its own destruction.

QE to infinity and beyond I say Ben. 

Thu, 06/14/2012 - 01:11 | 2524624 Caviar Emptor
Caviar Emptor's picture

In Japan it was all about nuclear-mutated monsters from the Pacific. That's what they feared. For us it's all about QE-mutated zombie banks. Our sci-fi 

Thu, 06/14/2012 - 05:11 | 2524764 economics9698
economics9698's picture

Central banks give the owners the ability to outbid the peasants for goods and services.  Wall Street and Washington.  If the peasant gets $100 print $200.  If the peasant gets $200 print $400.

Thu, 06/14/2012 - 07:53 | 2524931 ATM
ATM's picture

Heads they win, tails you lose.

Thu, 06/14/2012 - 08:48 | 2525065 Sabremesh
Sabremesh's picture

I think you will find that Grant is very well aware of what the truth is. However, there is a boundary between things that can be said and cannot be said in public - at least by people who don't want to be shredded by TPTB/mass media-managed "public opinion". Grant is very sensible in keeping the right side of that boundary.

The sad truth is that it doesn't matter if you are telling the truth - if the mass media manage to make you an object of public ridicule, you cannot come back from that, even if it is later proved that you were right. People only remember the ridicule.

Thu, 06/14/2012 - 10:41 | 2525569 bankruptcylawyer
bankruptcylawyer's picture

People fail to understadn this time and again. THERE IS A DIFFERENCE BETWEEN WHAT YOU SAY IN PUBLIC AND PRIVATE MORONS. 


THE SAME GOES FOR YOU ASSHOLE 9/11 TRUTHERS. people are too stupid to get this time and again. it amazes me. It gets tiring explaining to the moron peons  who think they own the world and can go around doing and saying as they please , precisely why you cannot do and say as you please. You would think most adults would understand what the difference is between 'the truth' talkied about in private, and 'the truth' talked about in public. but this distinction is lost. and to be honest, at some point, the people who ignore this distinction are really setting themselves up to be shunned and to be an underclass because ---even the people who might agree with them in private----do not have an obligation to spend all their time educating and explaining to these people how to conduct themeslves, precisely when that explanation itself becomes a point of contention.

there is an underclass , and it's because different people behave and think differently about how to go about saying and doing and behaving in public. it's not all about capitlism or religion-ism or some other ism. blame it on biology, choice, culture, social contagion, whatever you want------but there are a lot of idiots out there.

anyone complaining about jim grant being 'dissapointing' is a FUCKING MORON and would be caught complaining about the pope being disspointing as a figure head for not giving a truthy enough public speech/support for  ultra-arch-crazy secret heretical offshoots of the catholic church. That person clearly doesn't know what the pope's job is and is someone who should shut up or be ignored.

and there are a lot of people who need to shut up or be ignored.



Wed, 06/13/2012 - 23:09 | 2524432 CPL
CPL's picture

They are incredibly busy on a molecular level.

Thu, 06/14/2012 - 00:34 | 2524590 xtop23
xtop23's picture

They are incredibly busy on a fecal level.


Wed, 06/13/2012 - 23:12 | 2524435 sbenard
sbenard's picture

It PRINTS! When all you have is a hammer...

Thu, 06/14/2012 - 00:46 | 2524600 Michael
Michael's picture
Chart of who "owns" the Federal Reserve

The Federal Reserve is a private corporation. The more it loads up on toxic assets on behalf of its member bank owners, the more worthless its private banking cartel becomes, thus paving the way for its own destruction.

QE to infinity and beyond I say Ben. 


Thu, 06/14/2012 - 04:06 | 2524745 i-dog
i-dog's picture

Be careful what you wish for! ... Many of those toxic assets are collateralised by people's property and persons (student loans, car loans, home loans, etc). The FED/TPTB will be holding notes against a massive proportion of the [formerly free] population ... to work off in a FEMA camp, or kiss their favourite possessions goodbye.

I suspect TPTB have a motive, such as the above, rather than it being an 'unforseen circumstance'. TPTB will not be giving up without making a claim against every one of the "useless eaters" (as they think of us ... never forget that they are a different species -- not 'lizard people', but psychologically a quite different species nevertheless).

Wed, 06/13/2012 - 23:19 | 2524440 3MonthsZHober
3MonthsZHober's picture

The Interest Rate Observer is pissed!


Not much to observer at static sub 1%.

Wed, 06/13/2012 - 23:26 | 2524470 TruthInSunshine
TruthInSunshine's picture

The funny thing about things that people expect to go on forever is that they don't, and more often than not, they tend to reverse in a rather dramatic, sudden manner.

I can think of 4 such things that played out on a macro economic level in such a way in just the past 12 years, and I suspect there are about at least as many pending travesties in the making as I type this (that will inevitably bust, and sooner rather than later).

Wed, 06/13/2012 - 23:23 | 2524447 Duke of Con Dao
Duke of Con Dao's picture

all the members of the Fed what this hood ornament on the

front of their cars...


a limited edition from the Squid

Wed, 06/13/2012 - 23:20 | 2524453 earleflorida
earleflorida's picture

jim grant for treasury secretary!

Thu, 06/14/2012 - 00:28 | 2524580 RobotTrader
RobotTrader's picture

Paul Krugman for Fed Chairman

All of our problems will be over.

Thu, 06/14/2012 - 01:39 | 2524640 rufusbird
rufusbird's picture

The absubdity of your comment gave me the first belly laugh I have had in five hours....isn't that what we already have?

Wed, 06/13/2012 - 23:21 | 2524457 ReactionToClose...
ReactionToClosedMinds's picture

I just posted this on the Goldie 'flow' post; more applicable here under Grant:

some good posts tonight on top of another great catch & post by ZH.

Now don't start to attack me when you read this ..... a lot of thought (?) went into this:

Why is Ron Paul so seemingly comfortable with Romney? Why did Rand almost enthusiastically endorse Romney?

I have NO facts, but am very good at reading how & why people behave as to bely what they are actually doing versus saying.

Romney is going to put reform of the Wall Street dominated Federal Reserve Bank very high on his top 10 to do list. Ron P ( and maybe Rand) will spearhead it ... do the bloody part.

Romney knows finance ... but he is not a Wall Streeter. he had to deal with 'real' companies .. .manage them, operate them, run them, deal with rank & file, deal with unions, deal with vendors, .... deal with investors.

He knows the Fed Reserve as we know it has become a tool for Wall Street over Main Street and primary co-option of the WashDC political & media class. Main Street can no longer function under these conditions. It is obvious and has been obvious since Robert Rubin took over Treasury. The NY Fed has to be emasculated without cutting off flow of information and cooperation. The NY Fed has to lose it's predominancy within FRS at a minimum.





Wed, 06/13/2012 - 23:51 | 2524509 CompassionateFascist
CompassionateFascist's picture

Romney will do nothing of the kind. Obama in whiteface, except he is largely bankrolled and encapsulated by a clot of warmongering Zionist neo-conz. And since the Fed exists to debt-finance the warfare/welfare state, he will - absent system collapse - maintain it as is. Ron Paul? Sold out to secure his son's political future, nothing more.  

Thu, 06/14/2012 - 04:19 | 2524753 i-dog
i-dog's picture

Agreed. I pointed out on here at least 6 months ago that Ron Paul was not even trying and just going through the motions of running a "campaign". It was patently obvious in an interview he did with Alex Jones, where AJ was having to put words in RP's mouth while RP was responding by saying that it would "be OK" if Perry won! WTF!!!

RP is very well connected with the religious conservative right, yet none of them supported him. It has been a deliberate divide-the-ticket tactic from the start ... to ensure either an Obama or other puppet win. TPTB couldn't care less, since they control them all and control the vote count too.

The whole sham has just been to make the election seem, to the unsuspecting rubes, like it actually mattered!!!

Thu, 06/14/2012 - 07:14 | 2524864 Snidley Whipsnae
Snidley Whipsnae's picture

i-dog... Nothing new at all. After Hitler came to power and eliminated all competition from other political parties, elections and plebicites continued... one example of many I could list.

The population must continue to believe that they have a hand in decision making... even though they don't.

A read of Machiavelli's 'The Prince' gives one a near perfect plan of how a person/government can rule through tyranny or, better yet, a democracy, where all continue to believe that they are 'free'. The structural parts of a democracy can remain in place while they are ignored by the government in power...


Thu, 06/14/2012 - 00:21 | 2524564 r00t61
r00t61's picture

I think this proposition is as absurd and Hopium-laced as when Charles Hugh Smith opined that Obama was continuing the bailout madness, early in his term, in a clever ploy to give the bankers enough rope to hang themselves with (

I mean, my God, just look at Mittens' top campaign contributors (

Goldman Sachs $573,080


JPMorgan Chase & Co



Bank of America



Morgan Stanley



Credit Suisse Group



Citigroup Inc


Do you need to see any more?

Rand P. sold out to Romney to get some political capital.  Interestingly enough, Ron. P has not...yet.  But if Ron. P eventually loses in Tampa, and then comes out in support of Romney, whose record he has previously challenged on topics such as Romneycare in Massachusetts, Romney agitating for war in Iran, Romney expressing his approval and support for TARP, etc., then this just proves that even a man like Ron P., who has seemingly been a straight shooter for 30 years, can eventually become corrupted by Potomac fever.

Thu, 06/14/2012 - 00:34 | 2524589 CompassionateFascist
CompassionateFascist's picture

Chickenfeed. Sheldon ZOGwar Adelson just handed Romney's PAC $10 million.

Thu, 06/14/2012 - 02:41 | 2524694 All Risk No Reward
All Risk No Reward's picture

Ron Paul always protected the Federal Reserve System by covering up the FACT they lie about their mandate to keep monetary and credit aggregates commensurate with the nation's production potential in order to covertly take monetary and credit aggregates parabolic to actualized production capacity known as GDP...

Paul also pretends that the Fed are composed of "intellectual idiots" instead hard core, lying, criminal, murdering pieces of trash.

Where is Ron Paul demanding criminal prosecution of banksters?

That's the main reason I couldn't join the Paul love fest...  you don't get the criminals down right, you don't get my support.


Thu, 06/14/2012 - 08:31 | 2525013 my puppy for prez
my puppy for prez's picture

I have come to the conclusion that RP is simply a clever shill.  I have been fighting that gut feeling for awhile, but some things just don't add up.  Have you ever seen this quote from him that is in the Congressional Record?

Here is just one quote from the beginning of a longer piece:

"There's nothing to fear from globalism, free trade and a single worldwide currency. But a globalism where free trade is competitively subsidized by each nation, a continuous trade war is dictated by the WTO, and the single currency is pure fiat, fear is justified. That type of globalism is destined to collapse into economic despair, inflationism and protectionism, and managed by resurgent militant nationalism."

Granted, it's important to read the whole piece for contextual meaning, but I really have a problem with his premise of a global currency and such.  I don't care if it IS backed by gold!  And his supposition that if we could just have a global gold standard currency without middlemen and manipulators, then all would be hunky dorey!  That is simply pie in the sky utopianism.  Who is going to oversee and manage this "global currency backed by gold"?  Someone has to!

This doesn't sit right with me.  I encourage all to read the whole piece and decide for yourselves.  

Thu, 06/14/2012 - 10:57 | 2525638 bankruptcylawyer
bankruptcylawyer's picture

yes you see , what all the anti-globalists want to believe is that somehow -------you can ignore the continual competition of the world's human beings ( and countries) . you cannot. anti-globalists are just people who want to isolate themselves, and when you choose not to compete as a nation, you simply choose to lose. and losing means economic subservience and possible military conquest of your nation in the long run. 

the reason this is the case is becasue TRADE ties the rest of the world (the external) to the internal ( the soverign state ) TRADE is the external factor that cannot easily be controlled and that always injects chaos from the outside to the inside of the country. if a country fails to embrace this, than trade dies , and the country cannot obtain what it wants from the outside world, nor market its own goods to the rest of the world. 

look at the countries that DO NOT trade. they are all losers. and the countries that have their wealth forcibly taken from them, they are losers. 

when there is a hieraarchy of the whole world, you cannot choose to NOT be in the hierarchy. you CAN try and establish a stable niche that isolates yourself from the volatility of the competition , but that's not easy to do ,and it's usually impossible to maintain a homestatic balance between the two. the world is chaos. trade is the ultimate effectuator of this chaos. 

what Ron Paul correctly points out is that TRADE is unstoppable and generally good, but that WARFARE BY MONEY MANIPULATION, AND BY MILITARY FORCE-----IS BAD AN UNSUSTAINABLE AND LEADS TO A SINGULARITY ( GLOBAL DEPRESSION AND WAR) . 

Ron Paul is not an isolationist because he's not an idiot. Unfortunately Many of the people who consider themselves libertarians or liberty minded happen to be ignorant of the fact that liberty does not operate in a vaccum and that the technologies that have made the world smaller and that have increased trade and communication cannot be 'Undone" . the genie is out of the bottle, you cannot simply put it back in the bottle. we cannot go backwards in time without simply ignoring that the world is a different competitive landscape right now. and that other countries have industrialized. You can however make the choice to be ok with ones ignorance and embrace policies that would lead to social collapse and war---which I think is stupid, because if you are going to embrace war and collapse, you best be doing it with a plan for something to come afterwards. and that plan cannot be based on ignorance. it will lose. 

American can lose, and by that I mean American can very well one day end up as two slices of coastal bread with a sandwhich of third world country in the middle. 

Thu, 06/14/2012 - 00:32 | 2524571 xtop23
xtop23's picture

I'm curious how he will pay for that new fleet of rail-gun warships?

Thu, 06/14/2012 - 00:31 | 2524585 Cosimo de Medici
Cosimo de Medici's picture

I don't know why, but I cannot help but think that as you wrote your post, you were wearing "The Garment".

Wed, 06/13/2012 - 23:34 | 2524460 Demogorgon
Demogorgon's picture

Cliffs notes on his introduction by the lady up front: Ummmm. Ahhhhhh. Ummmmm. Ahhhh. Welcome, Jim Grant!


After that, good stuff...although now that I've noticed it, due to her stumblings, I'm focusing on all of the of the ummms and ahhs from Jim. Fuck!

Wed, 06/13/2012 - 23:23 | 2524463 q99x2
q99x2's picture

The owners of the central banks are in the process of taking over the physical world. I think that is their main goal--to own everything and do as they choose to do.

Thu, 06/14/2012 - 01:53 | 2524651 newworldorder
newworldorder's picture

Bravo - 1000% agreement on this comment.

The instrument they have chosen to do so is called debt based fractional reserve fiat banking, which is being used in almost every country in the world.

Politicians are contolled either thourgh bribery or the threat of taking away the punchbowl which keeps almost all governments and therefore by extention the masses satiated and happy.

The masses are either too uninformed, uneducated or simply dont give a sh*t to care. As long as they are getting their daily needs met (whatever that means,) then pitchforks and torches stay in the cupboard unused, away from idle hands with the need to fix things.

Wed, 06/13/2012 - 23:24 | 2524464 veyron
veyron's picture

Jim Grant is the Bill Nye of the financial world

Wed, 06/13/2012 - 23:26 | 2524469 Newsboy
Newsboy's picture

Complex systems collapse to the highest level of complexity which is inherently stable under the new conditions.

What does that mean for the fed and money?

Wed, 06/13/2012 - 23:30 | 2524477 Manthong
Manthong's picture

I will watch the whole thing, but let me guess first..

Answer: Manipulate and intervene in the capital markets for the benefit of the financial elites and their lackeys, the politicians.

Wed, 06/13/2012 - 23:34 | 2524482 Soda Popinski
Soda Popinski's picture

I imagine Ben Bernanke sitting at the table with the consultants, kind of like that scene from Office Space. 

"What would you say ya do here?"

"Well look, I already told you! I deal with the goddamn customers so the bankers don't have to! I have people skills! I am good at dealing with people! Can't you understand that? What the hell is wrong with you people?"

Wed, 06/13/2012 - 23:36 | 2524492 Zgangsta
Zgangsta's picture

Nikkei has bounced back into positive territory.  Is Europe fixed again?

Wed, 06/13/2012 - 23:37 | 2524493 Jim in MN
Jim in MN's picture

They really, really blew it with the real estate bubble. The dotcom bubble was like a tulip craze: just wish it away and it's all done with stocks and credit. Losses, yes, but so what?

With the low interest rates goosing housing up and up, it was different. The bond market came along for the ride. Now they can't blink and have it not be real. It looks like the dotcom bubble on a chart of the S&P 500, but it's deadly serious and nothing at all like the dotcom fluff.

Stupid. Now they have not only John Doe out of cash/credit for twenty years (no one will ever save a $100K down payment for a house from scratch, for like twenty years, with flat to declining real disposable personal income), but in addition the entire health and life insurance complex, plus the pension complex, are potentially fatally compromised via bond holdings. Not to mention the actual banks, elite scum, and oh yeah the sovereigns holding plenty of 'bag'. All are effectively out of the game in terms of new cash to exchange for each others' rotten, useless toxic paper. Except for the truly deluded oil producers and China, to a degree that doesn't really change the dynamic.

FedFlow doesn't happen in a vacuum. The underlying credit conditions and velocity of money are very fucked right now. How would Fed induced flow affect a (sadly entirely hypothetical) healthy economy? Probably a whole lot less. Frankly the goal should always have been to strive for a system where the Fed is obsolete. Instead the dumbasses in charge have destroyed any chance for normal economic flow and substituted this zombie nurse with a methadone kit.

Pull the fucking plug already. They're just making it worse and worse. Bond haircuts or bust....literally!!!

Thu, 06/14/2012 - 00:31 | 2524578 xtop23
xtop23's picture

Great post +1

Thu, 06/14/2012 - 01:24 | 2524631 Caviar Emptor
Caviar Emptor's picture

Bond haircuts or bust....literally!!!\

Yup. It's been that way since the great freeze up of 2008. Default would have been the great forest fire that would have left the ground fertile for new entrants, true competition and an invigorated economy. Instead we have kept all the rotten limbs alive so the tree is beginning to suffer. 

Thu, 06/14/2012 - 02:35 | 2524688 All Risk No Reward
All Risk No Reward's picture

They didn't blow anythiing - this is EXACTLY what they want to do!  This is asymmetrical warfare when one side has no idea that there is a war going on...  As Sun Tzu said, war is all about deception - and there is no better war deception than when those you are assaulting HAVE NO IDEA THEY ARE BEING ASSAULTED!

The prupose of war is to take your chit.  The Fed is orchestrating the world's largest "take your chit" event and pretending to be idiots while the Fed's controllers roll up everyone's chit under their front corporations.


“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. The one aim of these financiers is world control by the creation of inextinguishable debt.”
~Henry Ford

“Under the Federal Reserve Act, panics are scientifically created. The present panic is the first scientific one, worked out as we figure a mathematical equation.” (Congressman Charles A. Lindbergh, The Economic Pinch, 1921.)

They are going to use austerity to destroy the economy, bankrupt the debtors, roll the debtor assets up under their front corporations and then, after society is muppet r*ped, they will hyperinflate to "balance their books" and call it even.

It isn't complex, folks, it is Psychopathic Economics 101.

The real question is...  once they have almost everyone chit rolled up under their [D]elite control, WHAT'S NEXT?

Thu, 06/14/2012 - 05:01 | 2524760 i-dog
i-dog's picture

+ infinity!

I'm glad there is at least one other person on here who isn't fooled by the whole "let's rearrange the deckchairs again" routine! ... neither with an idiotic "bring back Glass-Steagall...that'll fix everything" nor with a stupid "vote for Ron Paul...he'll fix everything" suggested panacea. Just the plain truth: This has been the inevitable and well-planned end-game of a sequence of events that was begun a very long time ago. They haven't won yet, but they are damned close!

The ruling class has been trying for well over a century to regain their undisputed "god-given right to rule" that was taken away from them by the rise of a wealthy middle class during the industrial revolution.

That middle class has now been progressively and essentially destroyed by unrepayable debt - both individually and collectively - with only a few remaining wealthy holdouts that will be picked off one-by-one by financial snipers (aka HFT algos and missing-in-action regulators).

The bankers and their backers all need to be told to "jump you fuckers ... I ain't payin'" while local communities need to start again from the ground up by re-taking control of their own governance ... 'cos this global ponzi has only months left to run before TPTB attempt their long-planned final coup de grace.

Thu, 06/14/2012 - 07:59 | 2524938 my puppy for prez
my puppy for prez's picture

You are so right, i-dog!  This is just the ol' Hegelian Dialectic playin' out:  the antithesis is ALWAYS scared, desperate, and hungry people who are screaming for salvation.  The synthesis....well, you know what THAT will be!

Hegel didn't invent the dialectic method, he just formalized it.  Now you have a bunch of ivory tower douche bags who spend every waking moment debating as to how they can better implement the dialectical process!

Thu, 06/14/2012 - 10:53 | 2525473 grid-b-gone
grid-b-gone's picture

The Fed, and modern banking in general, is the updated, electronic equivalent of the company store, right down to the detail of creating their own currency and tactically blocking workers' attempts to maintain financial freedom.

This process has not changed since the beginning of time and mimics exponential expansion and eventual colony collapse in the natural world.

Slaves vs. owners, dictators vs. their population, unions vs. management. Just look at Egypt and Africa, two of the oldest human entities and still struggling to get it right.

At the core is human psychology that corporations tap into today using psych tests to match individual personalities to job descriptions.

Robo-signers are hand-picked to accept any lame answer when they ask, "Why am I signing someone else's name?"

Some people are wired to put in their 40 hrs per week, content to earn shelter, food, a weekend 12-pack, and occasional NASCAR tickets. Others relentlessly pursue the best school, the next promotion, and the Mc-iest McMansion.

We know we're pretty deep into this cycle because some people are resigned enough to lock in cash for five years for 2%. Contrast that with hedge funds looking for 70% to buy roads and municipal buildings to lease back to the people who just collectively owned them.

If you want a somewhat cheesy documentary of how quickly the docile can switch to copy the cunning, view The Wild and Wonderful Whites of West Virginia (2009). If you watch the piece, look past the salacious aspects and consider how disruptive and effective their crude, almost instinctive response to the status quo is. Imagine our original thirteen colonies' response to that system of entrenched greed and monopolization. Also consider how even a moderate level of wealth sharing by bankers and coal interests could have avoided the mahem. Finally consider that the bankers and coal interests were so wired to pursue control, wealth and power consolidation that sharing the spoils of that resource-rich area was never a consideration. Winners don't cut up the trophy.   

Most humans are not sophisticated enough to properly determine the value of a derivative, but they know when they are being taken advantage of. Type A's don't change much. They'll always push for growth, work harder for more exclusive meals and neighborhoods, and believe their intellect entitles them to use the complacent to leverage more benefit for themselves.

It's the average, the masses that will temporarily change their natural disposition to get by and get along when conditions approach untenable. 

For this reason, few company stores survived for long. Even the entrenched financial institutions of today must keep limits in mind to survive, but they won't because those at the helm are wired to push, always push. And that ensures eventual push-back.

Wed, 06/13/2012 - 23:56 | 2524523 jimmyjames
jimmyjames's picture


"The ability of interest rate manipulations to herd human beings in a desired direction"


The big one-

Thu, 06/14/2012 - 00:06 | 2524546 exiledbear
exiledbear's picture

They watch porn, like everyone else does. What did you think they do?

Thu, 06/14/2012 - 00:25 | 2524576 world_debt_slave
world_debt_slave's picture

to be or not to be, that is the question, yeah, fuck the Fed!

Thu, 06/14/2012 - 00:27 | 2524577 RobotTrader
RobotTrader's picture

Sheesh, what's wrong with Jim Grant?


Man, somebody give that guy some food, please!!

Before he starves to death!!

Thu, 06/14/2012 - 01:40 | 2524641 GMadScientist
GMadScientist's picture

Too much Chipoltopolie.

Thu, 06/14/2012 - 01:43 | 2524645 rufusbird
rufusbird's picture

Thin people live longer.

Thu, 06/14/2012 - 05:48 | 2524740 TWSceptic
TWSceptic's picture

Actually he looks quite healthy and young for his age. Just because someone doesn't look like an overfed pig like you're used to seeing in the US...

Thu, 06/14/2012 - 06:33 | 2524812 Zero Govt
Zero Govt's picture

the US over-produces food to the tune of 30% per annum 

..these fatties are in fact patriots eating up the excess agriculture!

Thu, 06/14/2012 - 08:48 | 2525064 spanish inquisition
spanish inquisition's picture

Don't give people the wrong idea about food. What the US makes is genetically altered industrially processed nutrition added byproducts cleverly marketed as food in cute packaging.

Thu, 06/14/2012 - 00:45 | 2524597 slewie the pi-rat
slewie the pi-rat's picture

the FED has the job description which frankenDodd gave it almost 2 whole years ago

you can look in the 2300 pages yourself for little clues as to what is going on

or you can just not think about what is actually going on for another few years and pretend rPaul wasn't a pretender

the woman in the intro said that the constitution says that  gold and silver should be our money

good thing the founding fathers didn't say money should be beads tobacco or salt, huh?

then we'd hafta do every click-bait bullshit imagineable on every misunderstanding ever generated about salt or beads as money by somebody doing prowash for aCongo con-man about that crap, too?  you know, b/c the founders thought salt should be money...  so it would be very important to talk about that quaintness too and the kinds of fears they must have known to think such things about salt b/c of living thru salt panics and inflation and foreign salt counterfeiters and unfair discounters...  and rain and floods and the levees failing and...  salt's really gonna be OUR money just b/c the founders thought it should be?

what arrogance on their part! 


Thu, 06/14/2012 - 05:15 | 2524765 i-dog
i-dog's picture

Well said, Slewie. Some just don't 'get it', in their scrabbling attempts for a simple 'one step' solution to a well-planned hundred-and-fifty-year dismantling of the hard-won freedoms of humanity in general, and the western world in particular. The [formerly free] world needs to embrace a new paradigm ... and soonish!

Thu, 06/14/2012 - 08:07 | 2524954 my puppy for prez
my puppy for prez's picture

My question is, Slewie, how is a gold standard going to solve the problem of manipulation?  After all, it is ridiculously obvious that gold and silver are manipulated by TPTB, and always has been.  After all, the true elites own MOST of the gold in existence.  I am just afraid we are falling into a clever trap by believing that a gold standard will free us.

Aren't the real problems fractional reserve lending and interest-profit going to a monopolistic banking cartel?

I am just doing this very philosophical thing right now and questioning every assumption I've ever had.  What do you think about the ideas of this guy?:

Thu, 06/14/2012 - 00:46 | 2524598 traderjoe
traderjoe's picture

The Fed provides the cover for fractional reserve banking - the true evil of it all.

Thu, 06/14/2012 - 01:42 | 2524643 mcguire
mcguire's picture

good answer..

Thu, 06/14/2012 - 08:15 | 2524952 ootofthehoos
ootofthehoos's picture

Cover? I don't see any cover. The Fed has no reserves, and thus is more fractional reserve than individual banks. It is a bank.

Thu, 06/14/2012 - 07:47 | 2524911 my puppy for prez
my puppy for prez's picture

Well isn't that the absolute truth?!

I would add that a system based on usury for profit has also been very damaging.  It is interesting that the early monotheistic religions forbade usury as a tenet.  Then came the moneychangers!

The trap that all fell for was the convenience of the banking system for the average person.  Now we are inextricably ensnared in a system that is inherently destructive.  

How to get free?  That's a big question!

Thu, 06/14/2012 - 01:27 | 2524633 q99x2
q99x2's picture

Nice presentation. If the banks that were bailed out are also owners of the FED then it was a major oversight not to state that. In my opinion.

Thu, 06/14/2012 - 01:47 | 2524649 localpacific
localpacific's picture

The Fed will beat up the USD tremendously In the inerim the configuration plays out...

Daily Market Review

Thu, 06/14/2012 - 01:56 | 2524659 dunce
dunce's picture

"For other purposes", presuposes that the bankers knew more about banking than a bunch of politicians, usually a certainty, today with Giethner and Bernanke, fumbling and stumbling along behind their blind leader, that idea may no longer be valid.

Thu, 06/14/2012 - 02:09 | 2524670 mick68
mick68's picture

The FED:

Takes an interest payment from every dollar that moves and they give back nothing we couldn't do better without them. The FED are a bunch of thieves and liars who need to be hung ASAP.

Thu, 06/14/2012 - 02:28 | 2524684 All Risk No Reward
All Risk No Reward's picture

So where is the mention that the Fed lies about its mandate (int ain't dual, people - it is singular) so that they could covertly break their mandate and run the worlds largest credit bubble / bust societal asset stripping operation on behalf of the international banking cartel crowd who control the Federal Reserve?

Read Section 2A of the Federal Reserve Act and then look at what these criminals did...

Is this mass delusion that everyone doesn't call out the Fed as the black letter law criminals they are?  Even Rono Paul covers for their criminal activity by playing the role that they are stupid and ignorant instead of criminal.

As for the fraudulent debt money tyranny system...  here it is in all its graphical glory...

We've been conned, people.

Jackson was right...

Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out!

Ford was right...

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. The one aim of these financiers is world control by the creation of inextinguishable debt.” Henry Ford

Lindbergh was right...

“Under the Federal Reserve Act, panics are scientifically created. The present panic is the first scientific one, worked out as we figure a mathematical equation.” (Congressman Charles A. Lindbergh, The Economic Pinch, 1921.)

I could go on and on... but we still don't get it...  still want to play like this isn't warfare and we aren't the targets.

What psychological block is keeping people from recognizing something as obvious as water is wet?

"The brave man inattentive to his duty, is worth little more to his country, than the coward who deserts her in the hour of danger."
~Andrew Jackson

Thu, 06/14/2012 - 07:41 | 2524906 my puppy for prez
my puppy for prez's picture

I think most people suffer from several things that keep them from acting, amongst those are  self-absorption and dumbing down.  They are not taught about the global banking system, from the local branch to the BIS, they have never studied the philosophy of money, and in short, they are addicted to the bread and circuses to such a degree that it numbs them from caring about anything of substance.  Cognitive dissonance.  Stockholm Syndrome.  Feeling too small to do anything about it.  

And then those who do understand and care have vastly different ideas on what should be done.  No consensus.  Additionally, it is very diffficult to dethrone a dominant system that has literally taken over the globe like a cancer.  

Feeling  overwhelmed and "outgunned" is the enemy of courage.

Thanks for your good quotes.  Always refreshing to read such truth. 

Thu, 06/14/2012 - 08:39 | 2524739 TWSceptic
TWSceptic's picture

Couldn't someone tell him to get the microphone closer to him and further away from the paper?


Edit: how can you possibly junk me for this, just silly.

Thu, 06/14/2012 - 04:22 | 2524754 PaperBear
PaperBear's picture

"other purposes" ?

Blank cheque anyone ?

Thu, 06/14/2012 - 06:39 | 2524819 New_Meat
New_Meat's picture

Founders finally shot down Alexander Hamilton and the "Bank of the United States."

Thu, 06/14/2012 - 07:00 | 2524840 Zero Govt
Zero Govt's picture

The Feds 2 primary mandates are to ensure a healthy US Banking system and to supervise it

they failed miserably on both counts in 2008

in fact you simply cannot imagine a worse supervised or less stable US banking system, the WS Banks look like gambling junkies on acid with the most high-risk, highly leveraged and toxic portfolios in US history

what was the point of Congress giving the Fed a license again?

Fri, 06/15/2012 - 01:36 | 2528427 All Risk No Reward
All Risk No Reward's picture

>what was the point of Congress giving the Fed a license again?<<

To give the private banking cartel legitimacy while they slowly, but surely, rip off off society's Muppet face.

1. Debt Money Tyranny systematically asset strips society and conveys wealth to the criminal [D]elites.

2. The "free market" overlay means this ill gotten wealth can then be used to dominate society via every big institution it determines to bid on - including government "officials."

3. They promise goodies to keep the ignorati at bay while they stack the deck.

4. They take our ignorant *sses down and impoverish us as they roll all our assets up under their mega front corporations.

5. The average American has no idea they are in a war, just that they've lost and been impoverished.

Thu, 06/14/2012 - 06:58 | 2524843 nmewn
nmewn's picture

Quite the debt-money laundering operation goin on over there...see something say something?

Thu, 06/14/2012 - 07:34 | 2524897 goldinpenguin
goldinpenguin's picture

The FED is going own end up with title to a hell of a lot of Spanish vacation villas, it will take Bloomberg et al years to force FOIL disclosure thru the courts but it's gonna happen.

There is nothing that the Fed can do in the US to stabilize economy and employment that will be nearly as effective as pulling out a big bazooka and pumping loads of money into the Euro zone thru Spain and Italy (early), we can borrow at 1% and lend at 3% and Ben Shalom will be the biggest landowner in Spain and Italy.

The US doesn't want a messy bust up of the Euro zone and as Italy joins Spain on the receiving end there simply won't be enough check writers left. A messy Euro bust up will expose the weakness of our banks - especially after morre accurate accounting of Spanish bank real estate losses casts a spotlight on the misaccounting of our TBTF bank RE losses.

Thu, 06/14/2012 - 08:29 | 2524945 falak pema
falak pema's picture

WHy are we where we are today in this financial crisis. The best answer I know was written by this guy in Feb 2008 !

Here is the first installment.  #1 :


The next bubble:

Priming the markets for tomorrow's big crash

By Eric Janszen 

A financial bubble (1) is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.


1. I will use the familiar term “bubble” as a shorthand, but note that it confuses cause with effect. A better, if ungainly, descriptor would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self- reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away.


Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.


That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.


Such transformations do not take place overnight. After World War I, Wall Street wrote checks to finance new companies that were trying to turn wartime inventions, such as refrigeration and radio, into consumer products. The consumers of the rising middle class were ready to buy but lacked funds, so the banking system accommodated them with new forms of credit, notably the installment plan. Following a brief recession in 1921, federal policy accommodated progress by keeping interest rates below the rate of inflation. Pundits hailed a “new era” of prosperity until Black Tuesday, October 29, 1929.


The crash, the Great Depression, and World War II were a brutal education for government, academia, corporate America, Wall Street, and the press. For the next sixty years, that chastened generation managed to keep the fog of false hopes and bad credit at bay. Economist John Maynard Keynes emerged as the pied piper of a new school of economics that promised continuous economic growth without end. Keynes’s doctrine: When a business cycle peaks and starts its downward slide, one must increase federal spending, cut taxes, and lower short-term interest rates to increase the money supply and expand credit. The demand stimulated by deficit spending and cheap money will thereby prevent a recession. In 1932 this set of economic gambits was dubbed “reflation.”


The first Keynesian reflation was botched. To be fair, it was perhaps impractical under the gold standard, for by the time the Federal Reserve made its attempt to ameliorate matters, debt was already out of control.2 Banks failed, credit contracted, and GDP shrank. The economy was running in reverse and refused to respond to Keynesian inducements. In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not.


2. Historians argue whether the Federal Reserve and Congress did enough soon enough to slow the rate of debt liquidation at the time. Most agree that once the inflation rate turned negative, monetary stimulus via short-term interest-rate management was ineffective, since the Fed could not lower short- term rates below zero percent. The Bank of Japan found itself in a similar predicament sixty years later.


A few weeks after D-Day, the allies met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to determine the future of the international monetary system. It wasn’t much of a negotiation. Western economies were in ruins, and the international monetary system had been in disarray since the start of the Great Depression. The United States, now the dominant economic and military power, successfully pushed to peg the currencies of member nations to the dollar and to make dollars redeemable in American gold.


Americans could now spend as wisely or foolishly as our government policy decreed and, regardless of the needs of other nations holding dollars as reserves, print as many dollars as desired. But by the second quarter of 1971, the U.S. balance of merchandise trade had run up a deficit of $3.8 billion (adjusted for inflation)—an admittedly tiny sum compared with the deficit of $204 billion in the second quarter of 2007, but until that time the United States had run only surpluses. Members of the Bretton Woods system, most famously French President General Charles de Gaulle, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars. Opposed to the exercise of such “exorbitant privilege,” de Gaulle demanded payment in gold. With the balance of payments so greatly out of balance, newly elected President Richard Nixon faced a run on the U.S. gold supply, and his solution was novel: unilaterally end the U.S. legal obligation to redeem dollars with gold; in other words, default.


More than a decade of economic and financial-market chaos followed, as the dollar remained the international currency but traded without an absolute measure of value.

Inflation rose not just in the United States but around the world, grinding down the worth of many securities and brokerage firms. The Federal Reserve pushed interest rates into double digits, setting off two global recessions, and new international standards and methods for measuring inflation and floating exchange rates were established to replace the gold standard. After 1975, the United States would never again post an annual merchandise trade surplus. Such high-value, finished-goods- producing industries as steel and automobiles were no longer dominant. The new economy belonged to finance, insurance, and real estate—FIRE



FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals. With FIRE leading the way, the United States, free of the international gold standard’s limitations, now had great flexibility to finance its deficits with its own currency. This was “exorbitant privilege” on steroids. Massive external debts built up as trade partners to the United States, especially the oil-producing nations and Japan, balanced their trade surpluses with the purchase of U.S. financial assets.3



3. The motivation was in part political: the Saudis, Japanese, and Taiwanese hold a great portion of U.S. debt; not coincidentally, these nations receive military protection from the United States.



The process of financing our deficit with private and public foreign funds became self- reinforcing, for if any of the largest holders of our debt reduced their holdings, the trade value of the dollar would fall— and with that, the value of their remaining holdings would be decreased. Worse, if not enough U.S. financial assets were purchased, the United States would be less able to finance its imports. It’s the old rule about bank debt, applied to international deficit finance: if you owe the banks $3 billion, the bank owns you. But if you owe the banks $10 trillion, you own the banks.


The FIRE sector’s power grew unchecked as the old manufacturing economy declined. The root of the 1920s bubble, it was believed, had been the conflicts of interest among banks and securities firms, but in the 1990s, under the leadership of Alan Greenspan at the Federal Reserve, banking and securities markets were deregulated. In 1999, the Glass-Steagall Act of 1933, which regulated banks and markets, was repealed, while a servile federal interest-rate policy helped move things along. As FIRE rose in power, so did a new generation of politicians, bankers, economists, and journalists willing to invent creative justifications for the system, as well as for the projects— ranging from the housing bubble to the Iraq war— that it financed. The high-water mark of such truckling might be the publication of the Cato Institute report “America’s Record Trade Deficit: A Symbol of Strength.” Freedom had become slavery; persistent deficits had become economic power.


The bubble machine often starts with a new invention or discovery. The Mosaic graphical Web browser, released in 1993, began to transform the Internet into a set of linked pages. Suddenly websites were easy to create and even easier to consume. Industry lobbyists stepped in, pushing for deregulation and special tax incentives. By 1995, the Internet had been thrown open to the profiteers; four years later a sales-tax moratorium was issued, opening the floodgates for e-commerce. Such legislation does not cause a bubble, but no bubble has ever occurred in its absence.




Thu, 06/14/2012 - 09:01 | 2525122 Seize Mars
Seize Mars's picture

To you fuckers bashing Ron Paul, fuck yourselves, you are fake. How delicate is your personality, if the guy's son says something you don't like, then the guy is bad? Holy fuck get a grip.


Thu, 06/14/2012 - 10:41 | 2525159 falak pema
falak pema's picture

installment #2 Eric Janszen article : Page 4 sur 11The next bubble: Priming the markets for tomorrow's big crash—By Eric Janszen (Harper's Magazine) 10/02/10 16:09


I had a front-row seat to the Internet-stock mania of the late 1990s as managing director of Osborn Capital, a “seed stage” venture-capital firm founded by Jeffrey Osborn,4 with positions on the boards of more than half a dozen technology companies. I observed otherwise rational men and women fall under the influence of a fast-flowing and, it was widely believed, risk-free flood of money. Logic and historical precedent were pushed aside. I remember a managing partner of one firm telling me with certainty that if the company in which we’d invested failed, at least it had “hard assets,” meaning the notoriously depreciation-prone computer equipment the company had received in exchange for stock. A year after the bubble collapsed, of course, the market was flooded with such hard assets.

4. Venture-capital firms are defined by when, not where, they place their investments; a “seed stage” firm usually puts the first money into very young firms and takes an active role in that investment. Jeffrey Osborn was a senior executive at commercial Internet provider UUNet before and after the legislation passed. Prior to the legislation, bookings were less than $4 million a year; a few years later they were greater than $2 billion.


Deregulation had built the church, and seed money was needed to grow the flock. The mechanics of financing vary with each bubble, but what matters is that the system be able to support astronomical flows of funds and generate trillions of dollars’ worth of new securities. For the Internet, the seed money came from venture capital. At first, Internet startups were merely one part of a spectrum of enterprise-software and other technology industries into which venture capitalists put their money. Then a few startups like Netscape went public, netting massive returns. Such liquidity events came faster and faster. A loop was formed: profits from IPO investments poured back into new venture funds, then into new start-ups, then back out again as IPOs, with the original investment multiplied many times over, then finally back into new venture-capital funds.

The media stood by cheering, carrying breathless profiles of wunderkinder in their early twenties who had just made their first hundred million dollars; business publications grew thick with advertisements. The media barely questioned the fine points of the new theology. Skeptics were occasionally interviewed by journalists, but in general the public was exposed to constant reiterations of the one true faith. Government stood back—after all, there was little incentive for lawmakers to intervene. Members of Congress, who influence the agencies that oversee market- regulation functions, have never been unfriendly to windfall tax revenues, and the FIRE sector has very deep pockets. According to the donation-tracking website, FIRE gave $146 million in political donations for the 2008 election cycle alone, and since 1990 more than $1.9 billion—nearly double what lawyers and lobbyists have donated, and more than triple the donations from organized labor.



Part of my job was to watch for the end-time, to maximize gains and guard the firm against sudden losses when the bubble finally popped. In March 2000, the signal arrived. One of our companies was investigating the timing of an IPO; the management team was hoping for April 2000. The representatives of one of the investment banks we talked to gave us a surprisingly specific recommendation that ran counter to advice offered by banks during the IPO-driven cycle of the preceding five years: they warned the company not to go public in April. We took the advice in the context of other indicators as a clear sign of a top, and over the next few months we liquidated stocks in public companies that we held as a result of earlier IPOs. Shortly thereafter, millions of investors with unrealized gains in mutual funds sold stock to raise enough cash to pay taxes on their capital gains. The mass selling set off a panic, and the bubble popped.

In a bubble, fictitious value5 goes away when market participants lose faith in the religion—when their false beliefs are destroyed as quickly as they had been formed. Since the early 1980s, the free- market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.


5. Fictitious value is the delta between historical- trend growth and growth brought on by asset hyperinflation. As an anonymous South Sea Bubble pamphleteer explained: “One added to one, by any rules of vulgar arithmetic, will never make three and a half; consequently, all the fictitious value must be a loss to some persons or other, first or last. The only way to prevent it to oneself must be to sell out betimes, and so let the Devil take the hindmost.”



The technology industry represents only a small fraction of the U.S. economy, but the effects of layoffs, cutbacks, and the collapsing stock market rippled through the economy and produced a brief national recession in the early part of 2001, despite a concerted effort by the Federal Reserve and Congress to avoid it. This left in its wake a crucial dilemma: how to counter the loss of that $7 trillion in fictitious value built up during the bubble.

The Internet boom had been a matter of abstract electrons and monetized eyeballs— castles in the sky translated into rising share prices. The new boom was in McMansions on the ground—wood and nails, granite countertops. The price-inflation process was traditional as well: there was way too much mortgage money chasing not enough housing. At the bubble’s peak, $12 trillion in fictitious value had been created, a sum greater even than the national debt.


We certainly should have known better. Historically, the price of American homes has risen at a rate similar to the annual rate of inflation. As the Yale economist Robert Shiller has pointed out, since 1890, discounting the housing boom after World War II, that rate has been about 3.3 percent. Why, then, did housing prices suddenly begin to hyperinflate? Changes in the reserve requirements of U.S. banks, and the creation in 1994 of special “sweep” accounts, which link commercial checking and investment accounts, allowed banks greater liquidity—which meant that they could offer more credit. This was the formative stage of the bubble. Then, from 2001 to 2002, in the wake of the dot-com crash, the Federal Reserve Funds Rate was reduced from 6 percent to 1.24 percent, leading to similar cuts in the London Interbank Offered Rate that banks use to set some adjustable-rate mortgage (ARM) rates. These drastically lowered ARM rates meant that in the United States the monthly cost of a mortgage on a $500,000 home fell to roughly the monthly cost of a mortgage on a $250,000 home purchased two years earlier. Demand skyrocketed, though home builders would need years to gear up their production.

With more credit available than there was housing stock, prices predictably, and rapidly, rose. All that was needed for hypergrowth was a supply of new capital. For the Internet boom this money had been provided by the IPO system and the venture capitalists; for the housing bubble, starting around 2003, it came from securitized debt.

To “securitize” is to make a new security out of a pool of existing bonds, bringing together similar financial instruments, like loans or mortgages, in order to create something more predictable, less risk-laden, than the sum of its parts. Many such “pass-thru” securities, backed by mortgages, were set up to allow banks to serve almost purely as middlemen, so that if a few homeowners defaulted but the rest continued to pay, the bank that sold the security would itself suffer little—or at least far less than if it held the mortgages directly. In theory, risks that used to concentrate on a bank’s balance sheet had been safely spread far and wide across the financial markets among well-financed and experienced institutional investors.6

6. As happens with most bubbles, a perfectly good idea is taken to an extreme. In the case of the housing bubble, the new securitized debt product that drove the final stage—which has come to be known as the “subprime meltdown”—was the collateralized debt obligation (CDO). A CDO is a class of instrument called a credit derivative; specifically, a derivative of a pool of asset-backed securities. Parts of pools of asset-backed securities that were, for example, rated at a moderately high risk of default—junk grade, such as BB—were modeled, packaged into CDOs, and rated at lower risk-investment grades, such as AAA. These were used to finance the more creative mortgages— stated-income or “liar loans”—which we now hear are not quite living up to the issuers’ hopes.

The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults. Even after the faith that supported a bubble recedes, false beliefs continue to obscure cause and effect as the crisis unfolds.

Consider the chemical industry of forty years ago, back when such pollutants as PCBs were dumped into the air and water with little or no regulation. For years, the mantra of the industry was “the solution to pollution is dilution.” Mixing toxins with vast of the industry was “the solution to pollution is dilution.” Mixing toxins with vast quantities of air and water was supposed to neutralize them. Many decades later, with our plagues of hermaphrodite frogs, poisoned ground water, and mysterious cancers, the mistake in that logic is plain. Modern bankers, however, have carried this mistake into the world of finance. As more and more loans with a high risk of default were made from the late 1990s to the summer of 2007, the shared level of credit risk increased throughout the global financial system.

Think of that enormous risk as ecomonic poison. In theory, those risk pollutants have been diluted in the oceanic vastness of the world’s debt markets; thanks to the magic of securitization, they are made nontoxic and so pose no systemic risk. In reality, credit pollutants pose the same kind of threat to our economy as chemical toxins do to our environment. Like their chemical counterparts, they tend to concentrate in the weakest and most vulnerable parts of the financial system, and that’s where the toxic effects show up first: the subprime mortgage market collapse is essentially the Love Canal of our ongoing risk-pollution disaster.

Read the front page of any business publication today and you can see the mess bubbling up. In the United States, Merrill Lynch took a $7.9 billion hit from its mortgage investments and experienced its first quarterly loss since 2001; Morgan Stanley, Bear Stearns, Citigroup, along with many other U.S. banks, have all suffered major losses. The Royal Bank of

Scotland Group was forced to write down $3 billion on credit-related securities and leveraged loans, and Japan’s Norinchukin Bank suffered $357 million in subprime- related losses in the six months prior to September 2007. Even more of this pollution will become manifest as home prices continue to fall.

The metaphor is not lost on those touched by debt pollution. In December 2007, Chip Mason of Legg Mason, one of the world’s largest money managers, said that the U.S. Treasury should put $20 billion into a “structured investment vehicles superfund” to boost investor confidence.

As more and more risk pollution rises to the surface, credit will continue to contract, and the FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s. Because all asset hyperinflations revert to the mean, we can expect housing prices to decline roughly 38 percent from their peak as they return to something closer to the historical rate of monetary inflation. If the rate of decline stabilizes at between 6 and 7 percent each year, the correction has about six years to go before things stabilize, leaving the FIRE economy in need of $12 trillion. Where will that money be found?

Bubbles are to the industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly—the NASDAQ, for example, at 5,048 in March 2000, had recovered only half of its peak value going into 2007. When those trillions of dollars first die and go to money heaven, the whole economy grieves.


The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.

Our economy is in serious trouble. Both the production-consumption sector and the FIRE sector know that a debt-deflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.


There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. Wired magazine, returning to its roots in boosterism, put ethanol on the cover of its October 2007 issue, advising its readers to forget oil; NBC had a “Green Week” in November 2007, with themed shows beating away at an ecological message and Al Gore making a guest appearance on the sitcom 30 Rock. Improbably, Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob. Other ventures—Lazard Capital Markets, Generation Investment Management, Nth Power, EnerTech Capital, and Battery Ventures—are funding an array of startups working on improvements to solar cells, to biofuels production, to batteries, to “energy management” software, and so on.


The candidates for the 2008 presidential election, notably Obama, Clinton, Romney, and McCain, now invoke “energy security” in their stump speeches and on their websites. Previously, “energy independence” was more common, and perhaps this change in terminology is a hint that a portion of the Homeland Security budget will be allocated for alternative energy, a potential boon for startups and for FIRE.

More valuable than campaign rhetoric, however, is legislation. The Energy Policy Act of 2005, a massive bill known to morning commuters for extending daylight savings time, contained provisions guaranteeing loans for alternative-energy businesses, including nuclear-power technology. The bill authorizes $200 million annually for clean-coal initiatives, repeals the current 160-acre cap on coal leases, offers subsidies for wind energy and other alternative-energy producers, and promises $50 million annually, over the life of the bill, for a biomass grant program.

Loan guarantees for “innovative technologies” such as advanced nuclear-reactor designs are also at hand; a kindler, gentler nuclear industry appears to be imminent. The Price-Anderson Nuclear Industries Indemnity Act has been extended through 2025; the secretary of energy was ordered to implement the 2001 nuclear power “roadmap,” and $1.25 billion was set aside by the Department of Energy to develop a nuclear reactor that will generate both electricity and hydrogen. The future of transportation may be neither solar- nor ethanol-powered but instead rely on numerous small nuclear power plants generating electricity and, for local transportation, hydrogen. At the state and local levels, related bills have been passed or are under consideration.

Supporting this alternative-energy bubble will be a boom in infrastructure— transportation and communications systems, water, and power. In its 2005 report card, the American Society of Civil Engineers called for $1.6 trillion to be spent over five years to bring the United States back up to code, giving America a grade of “D.” Decades of neglect have put us trillions of dollars away from an “A.” After last August’s bridge collapse in Minnesota, it took only a week for libertarian Robert Poole, director of transportation studies for the Reason Foundation, to renew the call for “highway public-private partnerships funded by tolls,” and for Hillary Clinton to put forth a multibillion-dollar “Rebuild America” plan.

Of course, alternative energy and the improvement of our infrastructure are both necessary for our national well-being; and therein lies the danger: hyperinflations, in  the long run, are always destructive. Since the 1970s, U.S. dependence on foreign energy supplies has become a major economic and security liability, and our superannuated roadways are the nation’s circulatory system. Without the efficient transit of gasoline-powered trucks laden with goods across our highways there would be no Wal-Mart, no other big-box stores, no morning FedEx deliveries. Without “energy security” and repairs to our “crumbling infrastructure,” our very competitiveness is at stake. Luckily, Al Gore will be making principled venture capital investments on our behalf.

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations7: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion.


7. To create these valuations, I first examined the necessary market capitalization of existing companies; then, using the technology and housing bubbles as precedents, I estimated the number of companies needed to support the bubble. The model assumes the existence of nascent credit products that will eventually be deployed to fund the hyperinflation. While the range of error in this prediction is obviously huge, the antecedents—and more important, the necessity—for the bubble remain.


In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.


Eric Janszen is the founder and president of iTulip, Inc. He formerly served as managing director of the venture firm Osborn Capital, CEO of AutoCell, Inc. and Bluesocket, Inc., and entrepreneur-in-residence for Trident Capital.


Post scriptum (FP) : Eric Janszen's superb analysis of 2008 anticipates a new bubble in the making; aka Alternative Energies. In fact the REAL NEW Bubble in the making will be the 2010 Euro Sovereign Debt Bubble that the market will take ONE year to recognise; after Merkel's dictat of "we won't go joint and several on this national bond issues" that she decreed in early 2009 ! 


Thu, 06/14/2012 - 09:23 | 2525211 spanish inquisition
spanish inquisition's picture

A while back I guessed the FED wanted to keep the Dow at around 12.5K. We have crossed it a few times in the last few years. I guess it's possible to create a graph using Dow crossing 12.5K as a datapoint and see how everything has changed around it in the last few years. Fx, debt, metals, oil. I am guessing there may be some interesting trends that may shed light on the situation (i.e. "you are being fucked in this orfice"). I don't have any financial software and can't think of anything but manually pulling everything and putting it into a spreadsheet.

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