Bernanke: Fed Bailout Creates Two Societies

Bernanke: Fed Bailout Creates Two Societies

A State of the Economy Report in Four Parts

PART ONE: The Greatest Bank Robbery Ever Told

In a rare interview with 6o Minutes’ Scott Pelley on Sunday, Federal Reserve Chairman Ben Bernanke explained the widening income gap in the U.S. between rich and poor has created two societies. The irony is that the Fed’s own actions are primarily responsible for this shift in wealth over the last few years. Never mind that Grandpa Ben looks a kindly old Santa Claus. He is Kris Kringle only for Wall Street—not children.

The Federal Reserve is under attack due to two recent events: the plan to add $600bn of liquidity to the economy through a U.S. Treasury bond purchase and the disclosure of how trillions of dollars of taxpayer money were spent during the financial crisis.

Last week under Dodd-Frank regulations, U.S. taxpayers received answers to the question we have asked for 2 years: Where did our money go? Apparently, it went everywhere—except to the American People.

It seems that $3.3 trillion dollars of our hard-earned and yet-to-be earned money went to those who needed it most: the haves and have mores.

American investment banks and securities firms like Goldman Sachs, Morgan Stanley, and the now defunct Merrill Lynch apparently received many more billions than previously revealed. While Goldman claimed it was well-funded on its own, it dipped into the Federal Reserve treasure trove 84 times from 2008 through 2009, borrowing $24bn in addition to the $10bn “forced” on them in the initial TARP bailout and the $13bn received through the backdoor of AIG’s rescue.

Morgan Stanley’s subprime mortgaged-backed securities frenzy turned into a bailout nightmare. The formally conservative firm lost its shirt and its pants too borrowing from the Fed an astonishing 212 times. A quick refresher: Morgan Stanley like the rest of the big banks was long on subprime, CDOs, and CMBS (commercial mortgage real-estate securities). When Goldman’s mortgage desk shorted subprime, Morgan Stanley’s Howie Hubler was on the other side of the trade. The ill-fated Hubler, who is reported to have deliberately put customers into dubious trades, lost a cool 9 billion for the old white shoe firm. The Fed picked up the tab.

Bank of America was promised a $97bn backstop, and the unhappy marriage with the former Merrill Lynch cowboy bankers gave them a dowry of $45bn more. Citigroup was sucking up money so quickly from its limitless CDO losses, the Fed had to jump in with a $300bn guarantee. JPMorgan Chase, Suntrust, Wells Fargo and every other American bank under the Sun, Moon and Stars got oodles of greenbacks for their wayward ways. Fannie Mae and Freddie Mac, the government-backed mortgage lending joy riders, received $154bn more—a total that could rise to $1trillion. And no one can ever forget the gift that just keeps on giving –the $180bn (to date) “rescue” of money pit AIG.

The shock of shockers in last week’s disclosures was that the Fed also bailed out European banks including Germany’s “subprime shorter” extraordinaire Deutsche Bank, and Lehman hustling British Barclay’s, who refused to buy the banking giant for anything less than the $2bn bankruptcy price—a steal if there ever was one! Sneaky Swiss Bank UBS was indicted by one federal agency while borrowing $75bn from another. Banks from Belgium, Japan, Korea, Ireland, Germany, France, Switzerland, Canada, and the UK (including the Bank of England) lined up to fill their pockets with Federal Reserve gold. The errant Royal Bank of Scotland received a bailout from the British government and the U.S. government too!

Perhaps even more remarkable were the corporate recipients of the Fed bailouts. General Electric was on the take for $16bn federal dollars to carry them through the storm. We know the car companies Ford, Chrysler and GM held their hands out for cash. Credit card companies American Express, Discover, and Capitol One who were borrowing federal freserve funds like crazy and hitting taxpayers with extra charges on their bills. IBM, Verizon, Caterpillar, Toyota, Harley-Davidson and McDonald’s (yes it’s true) were also receiving massive public aid. These are just a few of the 21,000 Federal Reserve transactions since 2007 of government favoritism.

So much for Capitalism

PART TWO: America: The UnBeautiful

The poetic beauty of American radicalism established by our Founders lies in the basic premise that all men are created equal and endowed by their maker with the inalienable rights to life, liberty and the pursuit of happiness. This promise infused our political and legal evolution for the last two centuries. It was an ideology that shocked the 18th century monarchal world and required brave men and women to give their lives for the cause.

Despite the current fantasy espoused by certain “Tea Partiers” of capitalism entwined with democracy from the nation’s birth—it just isn’t so. The concept of “private and free” enterprise was first introduced by Adam Smith the same year as the Declaration of Independence and has been debated ever since. Jefferson, Hamilton, Washington, Adams, and Madison argued the positives and negatives of government’s role in enterprise much the same way we do today – yet they never mentioned capitalism or its treatise, “The Wealth of Nations.” (This reference is a relatively modern phenomenon.)

Jefferson supported the separation between banking and state; Hamilton pushed for the merging of banking with state. Nowadays, bankers want it both ways. Like Hamilton, they want government supported private banking. Like Jefferson, they want government to keep its meddling paws of their publicly-funded cash. That it clearly doesn’t work both ways is revealed in Chairman Bernanke’s increasingly desperate acts. How does the saying go—you can’t have your cake and eat it too? Someone should remind the big banks and the Federal Reserve of this folksy wisdom.

The Federal Reserve itself was modeled not on capitalism at all- but indirectly fashioned after the Bank of England. Our first Treasury Secretary Alexander Hamilton was enamored with British political and economic systems—so much so that he wanted Washington to declare himself ruler for life. Washington declined, yet did acquiesce to Hamilton’s insistence on building an American version of the royal British banking system—ultimately the template for the first Bank of the United States and later influencing the Federal Reserve Act of 1913 which officially merged private and public banking.

The essence of this view was to pool public monies through private hands. Who better than the “money men” to care for the nation’s pocketbook? Weren’t they rich for a reason? This Hamiltonian rationale resurfaced in the deregulatory frenzy of the past three decades.

The fight for a more democratic egalitarianism was fought by no less than Thomas Jefferson and his revolutionary colleague James Madison. Jefferson believed that creating a “moneyed aristocracy” would subvert democracy and lobbied fiercely against it.

The first American financial crisis occurred in 1792 – according to Jefferson as a direct result of the “money elite.” William Duer, Assistant Secretary of the Treasury, and a small group of cronies plotted to manipulate the price of the Treasury bonds and the stock of the first Bank of the United States resulting in a severe financial panic.

Jefferson declared, “The credit and fate of the nation seems to hang on the desperate throes and plunges of gambling scoundrels.” According to historian Steven Fraser in Every Man a Speculator(HarperCollins 2007), “Business came to a standstill leaving in distress not only an inner circle of merchant-financiers, but ‘shopkeepers, widows, orphans, butchers, cartmen, gardeners, market women and even the Bawd, Mrs. Macarty.”

So here we are again. Business is at a standstill for many small and medium-sized companies who without access to capital and credit are struggling to survive. While the Federal Reserve saved the big banks and corporations presumably to serve public interest, it essentially created two economies—one for the moneyed aristocracy and another for the rest of us.

The Chosen Few who collected trillions were theoretically obligated to circulate these funds around the financial system. As we know with the absence of laws and conditions that didn’t happen. And why would it? As the phrase goes there is no honor among thieves. The gambling scoundrels who created this mess have stuffed themselves silly with taxpayer gold that was practically free for the taking. (For example on a $300bn guarantee, Citigroup paid a fee of $50m.)

The Feds response is to throw more money-$600bn- at the same people who received a lifeline already—the banking and securities industry. Again with no strings attached – laissez-faire and heaven knows what.

So much for Democracy…


Bailout Report Part 3 & Part 4 Continues Tomorrow!

Don’t miss Part Three: Federal Reserve Hypocrisy and Part Four: The Solution   Thursday December, 9, 2010


Monika Mitchell
Executive Director
Good Business International, Inc.
Economy of Trust Blog