"We should quickly consider how to appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system, ...so they can carry out the role our nation has come to expect."
"We must limit the perception that some institutions are either too big to fail or too interconnected to fail. If we are to do that credibly, we must address the reality that some are."
Marvellous stuff this, quoted straight from a speech given by US Treasury Secretary Paulson on June 19 urging the US Congress to get busy on the legislation necessary to give the Fed the NEW POWERS it might need to deal with the current "problem" in the US financial system.
Was it only a couple of weeks ago that the head of that august institution, Ben Bernanke, was informing us all that the risks to the US economy were now "fading"? My goodness, how time does fly. Was it only three months ago, in mid March this year, when the Fed was arrogating to itself powers that it had no mandate for at all in order to rescue the financial system from the death throes of Bear Stearns? Surely, those powers and the Fed's unbridled use of them, which continues to this day, had "fixed" the problems? Well, maybe not, else why would Mr Paulson be "lobbying" Congress for still more powers?
Whenever a high government official starts calling for more or increased power to regulate/interfere with a "system", one's first safe assumption is that the "system" in question is in trouble and that the official asking for increased powers knows it.
And how bad are the potential problems that Mr Paulson can see looming? Well, this quote from the head of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair, gives an insight:
"I believe we need a special receivership process for investment banks that is outside the bandruptcy process, just as it is for commercial banks and thrifts. The bankruptcy process focuses on protecting creditors. When the public interest is at stake, as it would be here, we need a process to protect it."
Forget about protecting the creditors, we need to protect the "public interest". And just what is this "public interest"? Well, that is defined by whoever is using the term. It is certainly in the interest of the US Treasury and the Fed and, for that matter, the FDIC that no US financial institution ever has to go belly up. No matter how insolvent that institution might be and how many creditors, not to mention depositors, might have been ruined in its attempts to stay "solvent".
Ask the clients and stockholders of Bear Stearns how this one works.
Here you see, in stark detail, what ultimately happens when an entire financial system is taken over and "run" by the government. The US Treasury prints debt paper which it calls bills, notes and bonds. The US Fed prints debt paper which it calls US Dollars. The two then get together, with the Treasury producing the "reserves" (the Treasury debt paper) behind the Federal Reserve "notes" (aka US Dollars) which are legal tender in the US. Legal tender means that it is against the law to refuse to accept US Dollars as "money" inside the US.
Without that legal tender status, the US Dollar could never have been debased to the extent it has been since the Fed was born in 1913.
Having then gained a monopoly over the entire US financial system (and its "free" markets), these two government entities then recruit the US (commercial and investment) banking system to pump new "money" into the system. This is done via credit expansion. When the government wants to spend more "money", it tells the Fed to accelerate the credit expansion. This it does my manipulating interest rates, by lowering the "reserve" which the banks have to deposit with it, and by accepting more and more different types of debt paper as a legitimate part of those "reserves".
The complexities of the system are not the fundamental issue here, although complex they most certainly are. The fundamental issue is that because every financial entity is "regulated" by government, the failure of one can - and often in history has - led to the failure of all. In an unregulated market system, the failure of one commercial entity affects those who deal with that entity. In a wholly regulated banking system, the failure of any banking or investment or financial entity affects the entire system.
In a financial system based on a sound money in which the banking sector is exposed to no more or less than a rational system of LAW, a "systemic" failure is an impossibility. In any rational system of law, the creation of "money" out of thin air is ILLEGAL. In any rational system of law, the lending of money which does not belong to the lender or which the lender has not given permission to lend is ILLEGAL. In any rational system of law, there is no "national interest", there are only the rights and voluntarily entered into contractual obligations of the individual citizens of the nation.
There is no room for force or fraud in a free nation, that is why the LAW is so important. But laws are made to protect the individual freedom, liberty and property of the citizen. They are the antithesis of the rules, regulations and POWERS constantly sought by those in government.
Is it the case, as Mr Paulson asserts, that the Fed needs more powers so that it can ..."carry out the role our nation has come to expect"? Are you an American? Have you come to expect the Fed to bail out the large financial institutions of your nation no matter what devastation they cause? Or would you prefer a return to LAW, and specifically in this context to the US Constitution, the LAW which GOVERNMENT must obey?
Apparently, Mr Paulson does not expect Congress to give the Fed the new powers it needs - this year. Interesting that, since regardless of the outcome of the Presidential elections in November, it is exceedingly unlikely that he will be Treasury Secretary after the new President is inaugurated next January. Barring "complications", however, Mr Bernanke will still be in charge of the Fed. We await his contribution to the "debate", if any, with (you should pardon the expression) interest.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in three large "spurts" since then, the most recent taking it all the way down below the $US 855 level - Gold closed at $US 850.90 on May 1. A month ago, with Gold at $US 925 on the chart, half the post March 17 fall had been regained. Gold has spent most of the time since then bouncing between about $US 870-875 and $US 900. As you can see, the upturn on the chart has now come when Gold closed back above the $US 900 level on June 19..
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March. But then came the big Gold sell-off - in two stages.
| |||||||||||||||||||||||||||||||||||||||||||||||||