reboot the republic daily July 23, 2010 – Free Press Publications

Posted: 23 Jul 2010 04:35 PM PDT

Steve Wynn, a casino resort/real-estate developer who has been credited with spearheading the dramatic resurgence and expansion of the Las Vegas Strip, talks about the Fall of America.

An Agorist Roadmap

Posted: 23 Jul 2010 11:33 AM PDT

From Let A Thousand Nations Bloom

This Guest Post by Kyle Bennett is part of Secession Week 2010: Economic Secession.

So, you want to secede? Your differences with some government or other are irreconcilable, and you want a divorce, but you don’t know how? The usual methods are messy, and involve lawyers. You’ll spend a lot of money and time, years of draining effort, endure painful negotiations, and hope that at the end of it all, you’ve convinced enough of the right people to sign off on your wishes. You’ll have no idea if, when, and at what cost the final victory will come. You may even have to fight a war before it is all over.

Would you like an easier way? A way that puts you in control, that allows you to secede entirely on your own initiative? Do you want to start right now, from where you currently live, without the hassle of figuring out how to divide the house? Do you want to spend your time and money building a new life and a prosperous future instead of buying your ex’s lawyer’s next BMW? Do you want to separate in a way that deprives your ex, the state, of the resources it needs to keep hounding you?

Agorism may just be the answer you are looking for. Think of it as a DIY divorce, free from political and legal wrangling and compromises among competing factions, and without the risk of a power vacuum into which the next up and coming wannabe tyrantcan step. The resources you use remain yours, and build over time. They are not spent on flyers and events and donations, they are invested. They are invested in you.

What is a state, really? It’s a bunch of people, operating under a certain set of rules, perhaps with a shared culture and set of norms. It is a set of mechanisms for enforcing laws, regulating economic activity and money, maintaining geographical integrity, and collecting resources to do all of this via taxation. Some of these things are necessary to any kind of society, others are nothing more than means arbitrarily chosen by a state to try to create the first set of things. They are the wrong means.

The great insights of market anarchism are that rules can be enforced by individuals without centralized law, that markets can self-regulate economic activity and money, that taxes are just theft that allow the non-productive to live off the work of the productive, and that geographical integrity is only necessary to the flawed means chosen by states.

Agorism has a simple answer to freeing one’s self from those flawed means: Just stop. Don’t participate in top down legal enforcement, start enforcing the rules you need for your life from the bottom up, with your own resources. Don’t allow economic regulators to rule your life and your trade and your money, regulate them yourself via markets, relationships, and real money such as silver. Start paying for the things you need yourself, while refusing to pay for those things that others want. Free yourself from the bonds of geographical monopolies and declare that wherever you are, right here and right now, is your own country of one. Let a billion nations bloom.

OK, you didn’t really expect a free lunch, did you? It’s never that simple, except in principle. It takes work, sweat and toil, risk, and planning ahead to achieve the things you want, even those things you have a right to. It’s a process, not a single event. There are basically two processes, done in tandem, and that build upon each other. One is reducing those areas of your life that fall under the control of the state, and removing the remainder from state control. The other is moving those things into another realm, one in which you are in control, you make the decisions, and you reap the rewards. The first reduces the power the state has over you, and over others, by draining resources away from the state that would use them against you. The second builds a new life, the kind we were told as kids was possible in a “free” country where you could be anything you wanted to be. And it creates a society, and a culture, that will already be in place and moving forward on that happy day when states begin collapsing all around us.

Reducing your “lifestyle footprint” in the state controlled sphere frees up your time to act in the free domain. It makes you more agile, more flexible, better able to respond to both opportunities and threats. Are you in debt? Eliminate it, as soon as humanly possible. Debt is the greatest enslaver of mankind. Do you maintain a rich lifestyle dependent on a high income? Cut back as far as you can stand. You won’t have to give those things up for long, you are only reducing them on one side so you can build them up on the other. Is your job tying you down to a fixed schedule, W-4 or 1099 forms, bosses or clients who will never go along with your agorist goals? Re-orient your career to a freelance, or purely entrepreneurial form, or even a different field entirely.

At the same time, begin building yourself up on the free side of life. Learn to handle silver. Just buy a little every so often at first. Learn the pricing structure of bullion and “junk” US Silver coins. Learn how silver feels in your hand, and that satisfying llittle “tink” sound it makes when struck. This is the beginning of your agorist nest egg. Start learning new tradable skills, different than the ones you currently make your living with, to allow a greater range of options. Seek out like-minded people and opportunities to trade. Learn to explicitly assess your trust in them, and to communicate that trust to others in an objective way free of malice or gossip. The most basic infrastructure of agorism is relationships and trust. It is never too early to begin laying those foundations.

Consider your earliest interactions as practice, as opportunities to share in the learning of skills that will be needed as you move to a more and more agorist lifestyle. Make free, unhindered trades for the fun of it, and to learn the details and techniques that make such trade move more smoothly. Use this to build up a network of trusted associates, and maybe some not so trusted. Look for fellow travelers in your community, who may not care about agorism per se, but are willing to work outside the system. Learn to keep your data, communications, and plans secure through encryption, and to selectively reveal them to others based on trust. Learn to think of the pricing of goods and services in terms of silver or gold, rather than dollars.

Most agorists are currently operating in this stage zero of agorism. It doesn’t look like much from the outside, and there is a constant itching to get out there and do something. However, If you have debt, if you maintain a rich lifestyle, the demands these place on you will thwart your efforts to free yourself at every turn. If you don’t have a network of friends and trading partners, you’ll find your opportunities for agorist expansion limited. This is the stage for preparing the ground, laying foundations for future building. It’s a time of learning skills and techniques, of meeting new people who share the agorist vision. It is a time for learning to think and act in a new way, for getting used to ignoring the state and becoming comfortable with the risks and the opportunities that entails. It is a time for learning to think of creative, bottom-up market solutions instead of top-down coercive solutions.

As your abilities and options grow, you will begin to use these networks and skills to get real work done, to build income and capital. You will begin to need some kind of physical and/or formal abstract infrastructure to facilitate your activities. The main categories of infrastructure are in the areas of security, currency, trade, transportation, communication, dispute resolution, and land. Build what you need, as you need it, but don’t build any one area out fully in anticipation of future needs. Let them grow organically, holistically, and in sync with each other, to serve the needs you have at any given stage of your own agorist development. Co-opt existing infrastructure when you can, or when you need to until you can build your own. Also, remember that others will need this infrastructure as well, so there is entrepreneurial opportunity there.

Success will breed more success. Those on the political fence will begin to see greener pastures on our side, misery, fear, and want on the other. The slow trickle of resources being withdrawn from state control will become a stream, then a torrent, then an exodus. Government will become weak, then crippled, then entirely impotent. One day you’ll wake up and realize that the state has withered on the vine, that you have built a new society and a new culture free from its incessant interference in your economic and social life.

We are now approaching six centuries after the printing press freed information and inquiry from the control of the elites in state and church. The world has built societies that those elites could never have imagined. What could we build within a mere six decades of the dawn of the internet and its freeing of information and relationships from the bonds of mass and distance? Would we recognize it if we could see it today?

It won’t take six decades to start to see real results in an agorist life, if we start today. We can begin to see them almost immediately. We can do it, but we can’t do it for you. Each of us has to build that world for ourselves. We can cooperate in the effort, we can mutually benefit from voluntary trade, we can build on each other’s successes and innovations. But we have to build it, we cannot wait for others to build it for us. Those who do wait will find themselves excluded from it, until such a day as it is all around them and they are dragged kicking and screaming into it. It is inevitable, and necessary if the human race is to survive and to continue advancing, to continue prospering. But inevitable does not mean imminent. It won’t happen until somebody picks up the tools and starts the work. It can happen in our lifetimes if we make it happen, but it won’t happen until we do.

Obama Owes Americans the Truth About Afghanistan

Posted: 23 Jul 2010 08:40 AM PDT

From LewRockwell.com

Goodbye fire-breathing Gen. Stanley McChrystal, and your Special Forces “Mafia,” who were supposed to crush Afghan resistance to western occupation.

McChrystal was fired after rude remarks he and his staff made about the White House were printed in the American magazine, Rolling Stone. President Barack Obama should have fired McChrystal when the loose-lipped general went public with demands that 40,000 more troops be sent to Afghanistan

McChrystal was the second US commander in a row in Afghanistan to be fired, an ominous sign that the war was going very badly. He will now likely enter the Republican ranks as a martyr and become a Fox TV critic of Barack Obama.

A more cerebral and political general, David Petraeus, quickly replaced McChrystal.

In Iraq, Gen. Petraeus managed to temporarily suppress resistance due to a mixture of deft bribery, good luck, and Iran’s orders to Iraq’s Shia Mahdi Army militia to temporarily end resistance. Washington hopes Petraeus will do the same in Afghanistan, though the two countries are very different.

Last week, the usually cautious Petraeus vowed from Kabul to “win” the Afghan War, which has cost the US nearly $300 billion to date and 1,000 dead Americans (figures for Afghan dead are carefully guarded). The problem: no one can define what winning really means.

Afghanistan has become America’s longest-running conflict.

The escalating war now costs US taxpayers $17 billion monthly. President Obama’s Afghan “surge” of 30,000 more troops will add another $30 billion. Each time the US reinforces, Afghan resistance grows stronger. The Soviets ran into the same problem in the 1980’s.

The Afghan and Iraq wars – total cost to date $1 trillion – are being waged on borrowed money when the US is drowning in $13.1 trillion in debt. History shows that more empires have been brought down by waging ruinously expensive wars on borrowed money than by foreign invasion. Look, for good example, at the swift collapse of the British Empire after 1945.

Today, America has become addicted to debt and war.

The US Congress, which alone can declare and fund war, ducked responsibility and shamefully allowed Presidents Bush and Obama to usurp the power to make war.

Polls show a majority of Americans now oppose the imperial misadventure in Afghanistan. Yet most politicians, save a courageous few, fear opposing the war lest they be accused of “betraying American soldiers.” Americans are so steeped in militaristic propaganda and jingoism that questioning the gargantuan defense budget and foreign wars can be politically suicidal.

Even so, dissent is breaking into the open.

Last week, Republican National Committee chairman Michael Steele let the cat out of the bag, admitting the Afghan War was not winnable. Steele also went on to absurdly claim that Obama had initiated the war in Afghanistan, ignoring George W. Bush’s role in plunging the US into this morass.

I recall Bush’s mistake vividly, because right after 9/11, I wrote an op-ed column for the Los Angeles Times newspaper in which I warned that military action against al-Qaida be swift and limited, and that US forces should get out of Afghanistan ASAP before they got sucked into a horribly confusing and likely endless conflict.

Not surprisingly, I was deluged by hate mail from legions of sofa samurais and armchair patriots who wanted to fight to the last professional American soldier in Afghanistan.

Back to Steele. Republicans, who seem to cherish war and torture, erupted in rage, all but accusing Steele of high treason. Many of Steele’s most hawkish Republican critics had, like George Bush and Dick Cheney, dodged real military service during the Vietnam War.

Republicans (I used to be one) blasted McChrystal’s sensible policy of trying to lessen Afghan civilian casualties from US bombing and shelling. There is growing anti-western fury in Afghanistan and Pakistan over mounting civilian casualties that have become a primary recruiting tool for Taliban and its allies.

By clamoring for more aggressive attacks that endanger Afghan civilians and strengthen Taliban, and by advocating torture of detainees, Republicans again sadly demonstrate they have become the party of America’s dim and ignorant.

President Obama claimed he was expanding the Afghan War to fight al-Qaida. Yet the Pentagon estimates there are no more than a handful of al-Qaida small-fry left in Afghanistan.

So why is the US in Afghanistan?

Obama owes Americans the truth.

After nine years of war, the immense military might of the US, its dragooned NATO allies, armies of mercenaries and hundreds of millions in bribes have been unable to defeat resistance to western occupation or create a popular, legitimate government in Kabul.

Drug production, which was halted when Taliban was in power, has reached new heights. The US now rules the world’s leading drug exporter of heroine. Americans leading allies in Afghanistan are also kingpins of the heroin trade.

As the United States fêted its independence from a foreign oppressor on 4 July, its professional soldiers were using every sort of weapon in Afghanistan, from heavy bombers to tanks, armored vehicles, strike fighters, helicopter and AC-130 gunships, fleets of killer drones, heavy artillery, cluster bombs and an arsenal of high-tech gear.

In spite of this might, bands of outnumbered Pashtun tribesmen and farmers, armed only with small arms, determination, and limitless courage have fought the West’s war machine to a standstill and now have it on the strategic defensive.

This brutal David v. Goliath conflict brings no honor upon the Western powers waging it. They are widely seen abroad as pursuing yet another pitiless colonial war for resource domination and strategic geography against a small, backward people

Interestingly, the Americans and their allies accused Taliban of “terrorism” and “cowardice.” In my view, as an old soldier and war correspondent, using heavy bombers to attack tribal levies or employing gunships and drones against tribal compounds is cowardly. To Afghans, honorable warriors fight man to man in the field.

It reminds me of the ditty by the Victorian writer Hilaire Belloc morally justifying mowing down natives during the British Empire’s colonial wars because “we have the Maxim guns, and they have not.”

Most Afghans yearn for peace after 30 years of war. But efforts by the Karzai government, Taliban, and Pakistan to forge a peace are being thwarted by Washington, some of its NATO allies, Afghanistan’s Communists, and now the Indian-dominated Tajik Northern Alliance.

India is waging an undeclared struggle to wrest Afghanistan away from Pakistani influence, using the Northern Alliance, a small army of intelligence agents, and $1 billion in bribes to date. Meanwhile, rebellion seethes in Indian-held Kashmir.

It’s a huge and growing mess. Simplistic thinking in Washington does not begin to understand the complexity or subplots in this lethal farrago.

The heretical Mr. Steele was speaking truth when he said this ugly, pointless war is unwinnable. But Washington’s imperial impulses continue. Too many political careers in the US, Canada and Europe hang on this war.

So, too, does the fate of the obsolete NATO alliance that may well meet its Waterloo in the hills of Afghanistan.

No wonder Afghanistan is known as the graveyard of empires.

China May Switch to Currency Basket for Forex Rate

Posted: 23 Jul 2010 08:21 AM PDT

From MarketWatch

LOS ANGELES (MarketWatch) — A top Chinese central bank official suggested switching away from the U.S. dollar as a benchmark for the yuan’s foreign-exchange rate, switching instead to a basket of currencies, according to remarks published Thursday.

In comments posted to the People’s Bank of China Web site, the central bank’s Deputy Gov. Hu Xiaolian said using a basket of currencies from the nation’s top trading partners would allow the Chinese yuan to better reflect trading fundamentals.

“Compared with pegging to a single currency, the exchange-rate regime with reference to a basket of currencies will help adjust exports and imports, current account, and balance of payment in a more effective manner,” she said.

China’s central bank currently sets a “central parity rate” against the U.S. dollar each day, with that day’s trading range confined to 0.5% above or below that level.

But Hu said focusing on the dollar-yuan rate ignored China’s bigger trade picture.

“A floating exchange rate has impact on total imports and exports of an economy,” she said. “Therefore, the floating cannot be aimed to adjust [only the] bilateral trade balance, and it is not advisable to just look at the [dollar-yuan] exchange rate.” See Hu’s full comments in English on the People’s Bank of China Web site.

No Wonder the Outlook for the Economy is “Unusually Uncertain” … The Fed is Killing It

Posted: 22 Jul 2010 08:31 PM PDT

From Washington’s Blog

Fed Chairman Ben Bernanke testified today that the outlook for the economy is “unusually uncertain”.

That’s not surprising.

Nothing has changed since I made the following points last December.

High-Level Fed Officials Slam Bernanke

Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies’] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.

Kansas City Fed President and veteran Fed official Thomas Hoenig said:

Too big has failed….

The sequence of [the government’s] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…

Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….

Many of the [government’s current policy revolves around the idea of] “too big to fail” …. History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger…

The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:

Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***

Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.

But Plosser said that the growth of the Fed’s balance sheet was a key metric.

“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said…

Plosser is bringing the spotlight right back to the Fed’s balance sheet.

“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.

The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:

“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”

And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:

Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.

In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.

The current situation at the Fed seems eerily similar, he said.

“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.

But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:

Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.

“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.

Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.

Global Agencies Slam Bernanke

The Bank of International Settlements (BIS) – called “the central banks’ central bank” – has slammed the Fed for blowing bubbles and then “using gimmicks and palliatives” which “will only make things worse”.

As the Telegraph wrote in June 2007:

The Bank for International Settlements, the world’s most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood…

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system…

The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances …

“Sooner or later the credit cycle will turn and default rates will begin to rise,” said the bank.

A year later, in June 2008, the Telegraph wrote:

A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate…

[BIS economist] Dr White says the US sub-prime crisis was the “trigger”, not the cause of the disaster.

Indeed, BIS slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse. As the 2008 Telegraph article notes:

In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to “clean up” once property bubbles have burst…

Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”

“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” he said.

The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…

“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.

In other words, BIS slammed the easy credit policy of the Fed and other central banks, and the failure to regulate the shadow banking system.

More dramatically, BIS slammed “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.

But Bernanke and the other central bankers (as well as Treasury and the Council of Economic Advisors and Barney Frank and Chris Dodd and the others in control of American and British and French and Japanese and German and virtually every other country’s economic policy) ignored BIS’ advice in 2007 and 2008, and they are still ignoring it today.

Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other “second sets of books”) and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!

“The world’s most prestigious financial body”, “the ultimate bank of central bankers” has condemned Bernanke and all of the other G-8 central banks, and stripped bare their false claims that the crash wasn’t their fault or that they are now doing the right thing to turn the economy around.

As Spiegel wrote in July of this year:

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market…

As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy…

In the restrained world of central bankers, it would have been difficult for White to express himself more clearly…

It was probably the biggest failure of the world’s central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space…In their report, the BIS experts derisively described the techniques of rating agencies like Moody’s and Standard & Poor’s as “relatively crude” and noted that “some caution is in order in relation to the reliability of the results.”…

In January 2005, the BIS’s Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being “fully appreciated by market participants.” Extreme market events, the experts argued, could “have unanticipated systemic consequences.”

They also cautioned against putting too much faith in the rating agencies, which suffered from a fatal flaw. Because the rating agencies were being paid by the companies they rated, the committee argued, there was a risk that they might rate some companies too highly and be reluctant to lower the ratings of others that should have been downgraded.

These comments show that the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments…

The Fed chairman was not even impressed by a letter the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Fed on Sept. 23, 2005. In the letter, MICA warned that it was “very concerned” about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled “This Powder Keg Is Going to Blow,” there was no secondary market for these “nuclear mortgages.”…

William White and his Basel team were dumbstruck. The central bankers were simply ignoring their warnings. Didn’t they understand what they were being told? Or was it that they simply didn’t want to understand?

The head of the World Bank also says:

Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the ‘real economy’ of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.

Economists Slam Bernanke

Stephen Roach (former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia) is one of the most influential and respected American economists. Roach told Charlie Rose recently that we have had terrible Federal Reserve policy for the past 12 years under Greenspan and Bernanke, that they concocted hair-brained theories (for example, that we should let the boom and bust cycle occur, but then “clean up the mess” once things fall apart), and that we really need to reform the Fed.

Specifically, here’s the must-read portion of the interview:

STEPHEN ROACH: And what’s missing in the debate that drives me nuts is going back to the very function of central banking that’s at the core of our financial system. Do we have the right model for the Fed to go forward? And, you know, I think we’ve minimized the role that the custodians, the stewards of our financial
system, the Federal Reserve, played in leading to this crisis and in making sure that we will never have this again. I think we’ve had horrible central banking in the United States for the past dozen of years. I mean, we elevate our central bankers, we probably .

CHARLIE ROSE: From Greenspan to Bernanke.

STEPHEN ROACH: Yeah.

CHARLIE ROSE: Both.

STEPHEN ROACH: We call them maestro, and, you know, we make them
sound larger than life. And, you know, and the fact is, they condoned
policies that took us from one bubble to another. They failed to live up
to their regulatory responsibility granted them by law. They concocted new
theories to explain why these things could go on forever, and they harbored
the belief, mistakenly in my view, that monetary policy is too big and
blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the
mess we’re in right now. We need a different approach here. We really do.

Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed’s entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.

Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:

“I am convinced that the misbehavior of some would have been much rarer — and far less damaging to our economy — if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities …

Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.

“Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior,” Kaufman said. “It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective.”

Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were “too big to fail” have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.

“Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities,” he said. “The Fed failed to rein in the problem.”…

“Much of the recent extreme financial behavior is rooted in faulty monetary policies,” he said. “Poor policies encourage excessive risk taking.”

Economist Marc Faber says that central bankers are money printers who create bubbles, and that the system would be much better now if the Fed hadn’t intervened. Specifically, Faber says that – if the Fed hadn’t intervened – the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced.

Economist Jane D’Arista has shown that the Fed has failed miserably at its main task: providing a “counter-cyclical” influence (that is, taking the punch bowl away before the party gets too wild).

The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:

The Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.

As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.

Unemployment

The Federal Reserve is mandated by law to maximize employment. The relevant statute states:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

However, PhD economist Dean Baker says:

The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed’s disastrous policies. Millions of people are losing their homes and tens of millions are losing their life savings. The country is likely to lose more than $6 trillion in output ($20,000 per person) due to the Fed’s inept job performance.

The Fed could have stemmed the unemployment crisis by demanding that banks lend more as a condition to the various government assistance programs, but Mr. Bernanke failed to do so.

Ryan Grim argues that the Fed might have broken the law by letting unemployment rise in order to keep inflation low:

The Fed is mandated by law to maximize employment, but focuses on inflation — and “expected inflation” — at the expense of job creation. At its most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.

Board members expressed concern “that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation.” That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting…

Suffering high unemployment in order to keep inflation low cuts against the Fed’s legal mandate. Or, to put it more bluntly, it may be illegal.

In fact, the unemployment situation is getting worse, and many leading economists say that – under Mr. Bernanke’s leadership – America is suffering a permanent destruction of jobs.

For example, JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:

[We’ve had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.

The chief economists for Wells Fargo Securities, John Silvia, says:

Companies “really have diminished their willingness to hire labor for any production level,” Silvia said. “It’s really a strategic change,” where companies will be keeping fewer employees for any particular level of sales, in good times and bad, he said.

And former Merrill Lynch chief economist David Rosenberg writes:

The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for 53.9% of the unemployed — again a record high — and this is a proxy for permanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at least six months with no success rose a further half-percent in August, to stand at 5 million — the long-term unemployed now represent a record 33% of the total pool of joblessness.

And see this.

Leverage

The Fed says that we should reduce leverage, but is doing everything in its power to increase leverage.

Specifically, the New York Federal published a report in July entitled “The Shadow Banking System: Implications for Financial Regulation”.

One of the main conclusions of the report is that leverage undermines financial stability:

Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.

And as a former economist at the New York Fed, Richard Alford, wrote recently:

On Friday, William Dudley, President of FRBNY, gave an excellent presentation on the financial crisis. The speech was a logically-structured, tightly-reasoned, and succinct retrospective of the crisis. It took one step back from the details and proved a very useful financial sector-wide perspective. The speech should be read by everyone with an interest in the crisis. It highlights the often overlooked role of leverage and maturity mismatches even as its stated purpose was examining the role of liquidity.

While most analysts attributed the crisis to either specific instruments, or elements of the de-regulation, or policy action, Dudley correctly identified the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system. The body of the speech opens with: “..this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”

In fact, every independent economist has said that too much leverage was one of the main causes of the current economic crisis.

Federal Reserve Bank of San Francisco President Janet Yellen said recently that it’s “far from clear” whether the Fed should use interest rates to stem a surge in financial leverage, and urged further research into the issue.”Higher rates than called for based on purely macroeconomic conditions may help forestall a potentially damaging buildup of leverage and an asset-price boom”.

And on September 24th, Congressman Keith Ellison wrote a letter to Mr. Bernanke and Geithner stating:

As you know, excessive leverage was a key component of the financial crisis. Investment banks leveraged their balance sheets to stratospheric levels by using short-term wholesale financing (like repurchase agreements and commercial paper). Meanwhile, some entities regulated as bank holding companies (BHCs) used off-balance-sheet entities to warehouse risky assets, thereby evading their regulatory capital requirements. These entities’ reliance on short-term debt to fund the purchase of oftentimes illiquid and risky assets made them susceptible to a classic bank panic. The key difference was that this panic wasn’t a run on deposits by scared individuals, but a run on collateral by sophisticated counterparties.

The Treasury highlights this very problem in its policy statement before the recent summit of G-20 finance ministers in London. To address this problem, the Treasury advocates stronger capital and liquidity standards for banking firms, including “a simple, non-risk-based leverage constraint.” The U.S. is one of only a few countries that already has leverage requirements for banks. Leverage requirements supplement risk-based capital requirements that federal banking regulators have in place pursuant to the Basel II Accord, an international capital agreement. While important features of our system of financial regulation, leverage requirements only apply to banks and bank holding companies and therefore have not covered a wide array of financial institutions, including many that are systemically important. Moreover, leverage requirements have generally not captured the considerable risks associated with off-balance-sheet activities.

Of course, the Administration looks to address the shortcomings in the existing regulatory system through a proposal to regulate large, systemically-significant financial institutions as Tier 1 Financial Holding Companies (FHCs). Building upon its existing authority as the consolidated supervisor of all BHCs (which includes FHCs), the Federal Reserve would be responsible for overseeing and regulating the Tier 1 FHCs under the plan. In the legislative draft of the proposal, the Federal Reserve would have the authority to prescribe capital requirements and other prudential standards for these institutions that are stronger than those for all other BHCs. To that point, the text specifically says, “The prudential standards shall be more stringent than the standards applicable to bank holding companies to reflect the potential risk posed to financial stability by United States Tier 1 financial holding companies and shall include, but not be limited to—(A) risk-based capital requirements; (B) leverage limits; (C) liquidity requirements; and (D) overall risk management requirements.”

The application of leverage limits – as advanced by the Treasury’s G-20 policy statement and by the Administration’s financial regulatory reform plan – is a simple and elegant way to limit risk at specific financial institutions (and within the overall financial system). The financial crisis has underscored the importance of leverage requirements and manifested the problems associated with relying upon risk-based capital requirements alone …

Nevertheless, there are some open questions regarding exactly how a leverage requirement should be applied. Some scholars and policy experts have advocated putting in place a leverage requirement for banks and other financial institutions that is set in statute. As Congress moves forward on comprehensive financial regulatory reform, it may consider such a requirement. I would therefore be interested to hear your views regarding the wisdom of such an approach.
As you know, setting capital standards requires decisions regarding what institutions would be covered, how capital would be defined, and what levels the requirements would be set. In light of that, what specific difficulties would you anticipate Congress facing with respect to specifying such a requirement? In addition, would a statutory requirement be too inflexible and place too many constraints on regulators with respect to refining regulatory capital requirements and negotiating with bank regulators from other countries?

On November 13th, Mr. Bernanke responded to Ellison (I received a copy of the letter from a Congressional source):

The Board’s authority and flexibility in establishing capital requirements, including leverage requirements, have been key to the Board’s ability to require additional capital where needed based on a banking organization’s risk profile. One of the lessons learned in the recent financial crisis is the need for financial supervisors to have the ability to react quickly to changing circumstances, as in the capital assessments conducted in the Supervisory Capital Assessment Program. The Board and other federal banking agencies initiated this program to conduct a comprehensive, forward-looking assessment of the capital positions ofthe nation’s 19 largest bank holding companies (BHCs). The Board’s authority to mandate specific levels of capital was critical to this exercise because each BHC had a unique set of risks and circumstances that demanded careful supervisory scrutiny and evaluation in order to identify the amount of capital appropriate for its safe and sound operation. The Board required corrective actions on a case-by-case basis and continues to assess the capital positions ofthese institutions as well as all others under its supervision.

We note that in other contexts, statutorily prescribed minimum leverage ratios have not necessarily served prudential regulators of financial institutions well. Previously, the minimum capital requirements for the housing government-sponsored enterprises Fannie Mae and Freddie Mac (collectively, “GSEs”) were fixed in statute; the risk-based capital requirement for the GSEs was based on a stress test that was also set forth in statute; and the GSE’s regulator, the Director ofthe Office of Financial Housing Enterprise Oversight (the predecessor agency to the Federal Housing Finance Authority) did not have the authority to establish additional capital requirements for the GSEs. This limitation was different from the authority that the federal banking agencies have to set the leverage and risk-based capital requirements for banking organizations. In 2008, Congress enacted the Housing and Economic Recovery Act of 2008, which created FHFA and empowered it to establish additional minimum leverage and risk-based capital requirements for the GSEs.

With regard to the Board and other U.S. banking agencies’ efforts to join with international supervisors to strengthen capital requirements for internationally active banking organizations, the Basel Committee is working on proposals for an international supplement to minimum risk-based capital ratios. While this work is in process, it is likely that these efforts will take the form of a minimum leverage ratio. It will be important for the international regulatory community to carefully calibrate the aggregate effect ofthis initiative, along with other efforts underway that are intended to strengthen capital requirements, to ensure that they protect against future financial crises while not raising capital requirements to such a degree that the availability of credit to support economic growth is unduly constrained. The current authority and flexibility the Board has to establish and modify leverage ratios as a banking organization regulator is very important to the successful participation of the Board in the process of establishing and calibrating an international leverage ratio.

The Supervisory Capital Assessment Program Mr. Bernanke refers to were the infamous “stress tests“. There’s just one little problem: the stress tests were a complete complete sham.

In reality, the Fed has been one the biggest enablers for increased leverage. As anyone who has looked at Mr. Bernanke and Geithner’s actions will tell you, many of the government’s programs are aimed at trying to re-start securitization and the “shadow banking system”, and to prop up asset prices for highly-leveraged financial products.

Indeed, Mr. Bernanke said in February:

In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF).

And he said it again in September:

The Term Asset-Backed Securities Loan Facility, or TALF … has helped restart the securitization markets for various types of consumer and small business credit. Securitization markets are an important source of credit, and their virtual shutdown during the crisis has reduced credit availability for many borrowers.

Has the Fed Manipulated any Markets?

There are allegations that the Fed has manipulated the markets.

Trillions in Unnecessary Interest to the American People

Many people – including former analyst for the U.S. Treasury Richard Cook – argue that credit is too important a function to be left to the private banks. AFL-CIO president Richard Trumka told Congress recently:

If the Federal Reserve were made a fully public body, it would be an acceptable alternative.

Bloomberg News columnist Matthew Lynn writes:

The U.K. government needs to start thinking about what it will do with all the banks it now owns. The answer is simple: Hand them to the people…

Instead of selling the stakes it acquired in the financial system to other banks, or listing the shares on the stock market, it could create mutually owned societies. Royal Bank of Scotland Group Plc could be a people’s bank, owned by everyone.That would ensure more diversity, competition and stability, all goals just as worthy as getting back the money Prime Minister Gordon Brown’s government spent on bank rescues…

Michael Moore recommends that the American people demand:

Each of the 50 states must create a state-owned public bank like they have in North Dakota. Then congress MUST reinstate all the strict pre-Reagan regulations on all commercial banks, investment firms, insurance companies — and all the other industries that have been savaged by deregulation: Airlines, the food industry, pharmaceutical companies — you name it. If a company’s primary motive to exist is to make a profit, then it needs a set of stringent rules to live by — and the first rule is “Do no harm.” The second rule: The question must always be asked — “Is this for the common good?” (Click here for some info about the state-owned Bank of North Dakota.)

As Moore notes, the state of North Dakota already has such a bank, and – because of that – North Dakota is just about the only state which is not running a huge deficit.

PhD economist and candidate for Florida governor Farid Khavari wants to create a Bank of the State of Florida, to create credit without burdening the state and its citizens with high interest charges by private banks. See this for details.

If the power to create credit were taken away from the Federal Reserve system and its private banks and given back to the government (as the Constitution envisioned), then American taxpayers would save hundreds of billions or trillions of dollars in unnecessary interest charges in paying off the national debt, as the government would not have to pay interest to finance its debt (sovereign nations such as the U.S. and England have the power to create credit and money; see this, this, this, and this).

Failure to Disclose Who Received Bailout Money

The Fed continues to fail to fully disclose who received trillions in bailout money. Because the economy will not recover until trust is restored, and trust cannot be restored unless there is transparency, this is a big deal.