Previously by Jacob Steelman: A Fateful Turn

The crisis continues in the new world financial order with no end in sight and no real solution being put forth. Ben Bernanke, the head of America's central bank, admitted as much in comments before Congressional committees last week. Austrian economists, investors and analysts have been saying this since before and after the global financial crisis hit the world in mid-2007. More government regulation and more fiat currency will not fix what ails the world economy notwithstanding any of Bernanke's comments to the contrary.

"We are ready and will act if the economy does not continue to improve, if we don't see the kind of improvement in the labor market that we are hoping for and expecting." Bernanke said in comments before the Financial Services Committee of the United States House of Representatives. This comes as concern continues in the halls of Congress of a Democratic bloodbath in November's mid-term elections. The politicians are not concerned about the world economy and its impact on consumers and investors. The politicians and their staffs are concerned about their jobs, power and influence as unemployment continues to remain at 9.5% (using a broader government index the rate is 16.5%), the housing industry remains in a slump, the economy slows and fears of a double-dip recession accelerate notwithstanding the Federal Reserve and US government having spent $3.7 Trillion since July 1, 2009. Some international politicians have already been shown the door for their inability to handle the global financial crisis. Gordon Brown in the UK and Kevin Rudd in Australia are two major examples and the off-year elections in America indicate no better fate for many Democrats in Congress come November. Various governments in Europe are also under threat as the crisis spreads to governments which are effectively insolvent.

The GFC is a crisis in the ruling elites' government-run and -supported financial system which threatens the world economy but it is not a crisis of the free market as so many pundits in the media suggest in their effort to place the blame other than where it belongs — government warfare and welfare expenditures, taxation and intervention in the financial system through central banks and fractional reserve banking. After having created and spent trillions of fiat dollars, pounds, euros and yen on bailouts, nationalizations and stimuli it still has not worked. Bernanke's only tired solution is more of the same. The market wants a correction of the malinvestments caused by the excessive debt and spending which caused the problem in the first place. This is why unemployment remains high, the recovery is very slow and the threat of a double-dip recession looms on the horizon.

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The global financial crisis is the correction of the credit bubble's malinvestments. In early August 2007 when the correction commenced (and before the Federal Reserve had time to actively intervene) the markets began an immediate correction — commodity prices began to fall dramatically, the stock market began to fall and the value of some overvalued currencies such as the Australian dollar began to fall. We will never know how rapidly and in what form the unfettered real correction would have taken place since the Federal Reserve and then other central banks preempted the functioning of the market when they actively intervened. The slide (correction) in stock markets, commodity prices and overvalued currencies stopped. What appeared to be a “recovery” for the financial community (but not for the consumer) took place. Commodity prices soared and the stock market went sideways. All the experts cheered but not the consumers. Oil reached new all-time highs as it approached US$150 per barrel (some predicted it would hit $200 per barrel or more) on international markets and gasoline topped $4 a gallon while hitting a high of A$1.65 per liter in Australia. The swift correction and real recovery demanded by the market was deferred and replaced by central bank and government intervention. Over the next 14 months the Federal Reserve lowered the target federal funds rate seven times, dramatically increased the money supply and intervened 34 times in the financial markets, primarily providing U.S. Treasury securities (for which there is a market) to investment banking firms in exchange for those firms' holdings of mortgage-backed securities (for which there was no market).

The sub-prime meltdown spread like a wildfire throughout the financial industry in September 2008 with what were then unprecedented central bank and government interventions and bailouts attempting to put out the fire storm. Trillions of dollars, pounds, Euros and other currency were wiped off the value of share markets and the holdings of shareholders around the world in just one week (in addition to the values that were wiped out since August 2007). Despite the intervention the market was not to be denied the correction it demanded and soon the first major steps toward unwinding of the malinvestments began to occur — the correction was underway notwithstanding the efforts of central bankers and governments. Events unfolded like a chapter out of Ayn Rand's popular novel, Atlas Shrugged. Countrywide Financial was taken over by Bank of America and Bear Stearns was taken over by J P Morgan in March 2008 with some help from their friends at the Federal Reserve Bank. Bear Stearns was a major participant in the private derivatives market (the risk market) of credit default swaps (referred to in the industry as CDS, private contracts “insuring” against the defaults of securities). When it became apparent that Bear Stearns could not cover the risk it insured and that its default would thereby bring down the house of cards, the Federal Reserve stepped in and pushed Bear Stearns into the arms of J P Morgan. The politicians and bureaucrats as well as their organs of propaganda, the establishment's news media, told us not to worry. Congress passed a new housing bill to provide relief to hundreds of thousands of mortgagees thereby raising the debt ceiling $800 billion to $10.6 trillion. Then in early September Freddie Mac and Fannie Mae were hastily restructured from being quasi-nationalized to being completely nationalized.

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Then in September 2008 Lehman Brothers was allowed to fail and go into bankruptcy (another government created procedure for reorganizing companies) and within a week the bankruptcy court allowed Barclays Bank to acquire the core assets of the 158-year-old Lehman Brothers. Merrill Lynch an icon of the American financial industry for 94 years was taken over by Bank of America. Then American International Group (AIG) also in the business of insuring against defaults similar to Bear Stearns pleaded for a lifeline of $40 billion from the Federal Reserve to save it from bankruptcy (and more importantly as we later learned to save Goldman Sachs from bankruptcy since it was at risk for billions were AIG to fall into bankruptcy). The next day the Federal Reserve generously bailed out AIG with much more than AIG requested. Halifax Bank of Scotland (HBOS) was pushed by the British government (Prime Minister Gordon Brown personally intervened) into the arms of Lloyds TSB as HBOS' stock crashed. In reaction to the AIG bailout Goldman Sachs whose stock was in free fall issued a note to its clients indicating that “The rescue package for AIG could mean that systemic concerns are going to moderate from very elevated levels.” With hindsight we now understand the significance of Goldman Sachs' statement — significant to Goldman Sachs' survival.

But the Federal Reserve and the US Treasury were only getting warmed up. Trillions of more fiat dollars were created to act as capital for the insolvent new world financial order's banks and financial institutions, thereby avoiding a run the likes of which the world had never seen. Then General Motors and Chrysler were nationalized as was the US health care industry at a cost of billions more and the United States continues its military efforts in Iraq and is poised to increase its military efforts in Afghanistan, the world's largest producer of poppies. Europe is bailing out the governments of Greece, Spain, Portugal and who knows what other governments despite these governments having all breached their prior budget agreements with the EU. Nothing has changed except the billions have morphed into trillions of fiat dollars created by central bankers around the world and still there has been no real recovery from the GFC. One can only speculate on the outcome three years later had the market correction and liquidation of the malinvestments which started in August 2007 not been thwarted by the intervention of governments around the world.

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As chief banker to the government Mr. Bernanke should have advised the Congressional committees last week that continuing along the same path as he and the other central bankers have done is not working and that an alternative solution should be applied — dramatically reduce government welfare and warfare expenditures, shelve the nationalized health care program, end the participation of the United States' involvement in the wars in Iraq and Afghanistan, dramatically reduce federal taxes, sell the shares the government holds in nationalized businesses, return the United States dollar to a gold standard, allow private currencies to trade freely in the marketplace with Federal Reserve notes, eliminate the Federal Reserve's banking and financial cartel and end the deposit insurance system.

As Frank Shostak, the eminent Austrian economist from Australia, has pointed out in Mises Daily government and central bank intervention through taxation and inflation destroys savings (wealth) and shrinks the pool of savings available for real investment in real projects (versus the malinvestments created by central banks inflation) demanded by consumers. What is needed is more savings to create more wealth for more investment and the cessation of the theft of savings and wealth through government taxes and central bank depreciation of the currency. More savings and wealth is what is needed for a recovery to begin not more central bank and government intervention.

Many popular books and documentaries have been released about the GFC and its causes. They all tend to have the same theme; the crisis was caused by the failure of the free market to function as promised by the regulators. Inadequate government regulation and Wall Street greed are to blame they say never pointing a finger at the Federal Reserve or other central banks' creation of trillions of fiat dollars and other fiat currencies. They do not have any understanding of the root cause of the crisis or they do but as part of the ruling elite's propaganda ministry are compelled to shift the responsibility away from the root cause. The politicians and bureaucrats love this — crisis and conflicts and government intervention is the game in which they thrive as they take on “responsibility to solve the problem” (the problem government caused in the first instance). An overhaul of the financial industry is needed they say and so they pass another law. More power is given to the central bank and government. Except for the Austrian economists, libertarians and Ron Paul few if any place the responsibility where it belongs — government intervention in the marketplace. So what more should governments and central banks do to aid in the correction and recovery? Absolutely nothing Mr. Bernanke!

July 27, 2010

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