Deuteronomy 23:19 Thou shalt not lend upon usury to thy brother;
By Barbara L. Minton (see all articles by this author)
April 29, 2008
On March 31st, Treasury Secretary Paulson announced a plan to police the financial markets to curtail the possibility of future financial disasters such as the sub prime mortgage meltdown now rocking America. And he did it with a straight face. This plan, that sounds so good on the surface, in fact lays the groundwork for the next big financial bubble, heralds a new era of hyperinflation, and assures further runs on the U.S. dollar.
Commentary on the plan centered on the extension of the powers of the Federal Reserve to supervise non-bank financial houses like stock brokers, derivative dealers, insurance companies, private banks, and even hedge funds. At least this is how it is being packaged for the public. The cynical point out that this restructuring and massive increase in the powers of the Fed is like locking the barn door after the horse is gone.
What is not being pointed out to the public are the revolutionary implications of the Fed's new supervisory position. For as it stands above these financial institutions as regulator, the Fed now also stands beneath these institutions as lender of last resort.
Financial Institutions standing on the precipice
In the middle of March, America faced a systemic collapse of its financial system that threatened to quickly spread to the rest of the developed world. Secretary Paulson and Fed Chairman Bernanke crafted a quick fix for Bear Stearns and other troubled brokerage houses, but this was an emergency action which could only postpone disaster, not prevent it.
A chance at long-term survival of these institutions requires a lender of last resort with enormous resources. But even the 800 billion dollar balance sheet of the Federal Reserve is not enough to anesthetize the credit explosion in the real estate market alone, which stands at around 12 trillion dollars. To say nothing of the commercial real estate, auto loan, and credit card markets.
Paulson turns to the American people as the only viable lenders of last resort
What the Treasury and the Fed have realized is that in the last 40 years, they have pumped so much money into the system that excessive leverage has become a way of life. Almost every individual, and institution holds assets of which their real ownership is minimal. In other words, everybody is in debt up to their eyeballs.
Most of this debt has been packaged into derivatives by the wizards who operate in the back rooms of the capital markets. The result of this huge leverage is that the government no longer has the funds to avert a systemic financial disaster. The sort of money it would take to do that could only be captured from the future earnings power of the American people and the debasement of their currency.
Paulson's plan is being sold to us as a responsible act of government looking out for us, in an attempt to save us from our own irresponsibility. We like government to look out for us and save us from ourselves. We don't want to be forced to accept the consequences for creating this huge debt overhang, so we are all too willing to accept his plan without looking behind the curtain.
If we did take a look, we would see that Paulson's plan is really a huge mortgage on our future and the future of our children. In the final analysis, the Fed is financed by the Treasury, which is financed by borrowing, taxing Americans, and robbing them by the debasement of their currency.
In the words of Peter Schiff in his column Paulson's 'Civic Robbery' To Finance Hyper-Inflation, "Instead of allowing the free market to punish speculators, Paulson is now asking Congress to force the American people to stand as a lender of last resort, via the Fed, for the speculators on Wall Street, insurance companies, derivatives, and most amazingly, the most speculative of all rich investors hedge funds!"
How to trick the public into accepting Paulson's idea
The best way to trick people is by getting them absorbed in something else so they are not paying attention to what you are doing. So how will the government divert our attention while they crank up the printing presses?
Going green might be particularly politically correct. We could search for new alternative energy sources. In fact, this movement is already underway. Or maybe there will be another terrorist attack.
Then you will begin to see the announcing of massive government programs to the tune of several trillion dollars as hyperinflation really kicks in. Maybe something like the WPA of the 1930's.
What to Expect
While these programs get rolling, look for direct aid to continue being doled out by the Fed to the needy on Wall Street.
This will include loosening of the requirements for financial institutions to 'mark to market' their investment portfolios. The mark to market process means that at the end of each day, the values of these portfolios must be calculated based on market closing prices that day for each of the securities held. Marking to market and publishing the values daily insures investors an accurate and timely accounting of their investments. When this process is allowed to be discontinued, the result will be that technically insolvent institutions will be able to continue to rake in profits from operations.
The investor, particularly the small investor who is not privy to inside information, will be left in the dark as to the true value of his investments. In other words, the small investor will be left holding the bag. When prices for securities are not calculated and publicized daily, an investor has no way of knowing what the securities he holds are worth, so he has no way of knowing if he is getting a fair price for them.
Expect further erosion in the value of the U.S. dollar as interest rates continue to be lowered by the Fed in its attempt to save up from economic collapse. As hyperinflation picks up steam as a result of the printing of money needed for the institutional bailouts, few buyers for the dollar will emerge, see (http://www.naturalnews.com/022662.html) .
If you are lucky enough to have any money to invest and can tolerate high risk, look to the companies that create the products that are required for the government sponsored diversion. If it is going green, you might look to the companies that make green products. If it is a terrorist attack, look for the same sort of companies that profited after the 2001 attack. When you figure out what the diversion will be, go for the products involved.
But if you choose to be an investor in anything, be aware that the markets are now stacked against you. Effective July 6, 2007, the uptick rule was eliminated by the Securities and Exchange Commission. Established following the great stock market crash of 1929, the uptick rule was designed to restrict short selling by permitting short sales only following a trade where the traded price was higher than the previously traded price (uptick). The purpose of this rule was market stabilization and the prevention of a downward spiral in prices. Without this rule in place, hedge funds and speculators can repeatedly short a stock, commodity or any exchange traded instrument until they create a self serving price crash.
The markets are now stacked against the average investor like never before.
Whether Congress will fund this bail out soon enough to avoid the current recession turning into a depression remains to be seen. However, it is clear that the plan is to leave the bill for the reckless conduct of Wall Street and the American consumers to future generations.
Courtesy Natural News
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