The Nerve of the Federal Reserve

A. Scott Piraino

In 1981 the United States entered the worst economic downturn since the Great Depression. With the country mired in recession President Reagan proposed a novel solution: Cut taxes for the wealthiest Americans so they could spend and invest more money.

As if by magic, the recession of 1981 ended the following year. Not because of Reagan’s tax cuts of course, but because the Federal Reserve lowered interest rates. Paul Volcker, the Fed Chairman at that time, was determined to crush the rampant inflation of the 1970’s once and for all. His draconian solution was to send interest rates soaring to over twenty percent.

This caused the recession of 1981 and the Reagan administration knew it.

But that did not stop them from using the recession as an excuse to pass the biggest tax cut in US history. Quasi-economic terms like “supply side” and “trickle down” were used to give Reagan’s proposal an academic veneer. In fact Reaganomics was nothing more than intellectual camouflage to reduce taxes for the rich.

Although Paul Volcker coordinated the recession of 1981 with the Reagan Administration, he can perhaps be excused for jarring the US economy to a halt. He had to stifle the real, chronic, double digit inflation that plagued the country during the oil shocks of the 1970‘s.

Alan Greenspan on the other hand, has not concerned himself with real inflation, but with “wage inflation” and “employment costs”. More quasi-economic terms, but these are simply euphemisms for “pay raise”. And his battle against wage inflation has been a success.

The decade of the 1990’s saw the longest economic expansion in US history. Worker productivity increased at its fastest pace in thirty years, while inflation remained at historically low levels. Yet US workers today earn less than they did twenty years ago, after adjusting for the miniscule rate of inflation. Per capita income has climbed only because a handful of our wealthiest citizens have made obscene profits.

Throughout the tech boom of the 1990’s, Alan Greenspan’s monetary policy prevented the US economy from growing so fast that employers would have to pay higher wages.

He has lowered interest rates, but to bail out the global economy, not to ensure rising incomes for Americans. When the Asian markets collapsed in 1998, Mr. Greenspan quickly came to the rescue of global financiers by lowering interest rates. He even helped negotiate a bailout of East Asia’s economies at US taxpayer expense.

At the same time Alan Greenspan made a speech where he languidly described the plight of blue collar workers by saying, “workers should move from the steel districts of western Pennsylvania to a vibrant Silicone Valley“. He went on to call wage-challenged American workers “victims of progress”. Of course Alan Greenspan supports manufacturing, but only in low-wage nations where global corporations can make higher profits.

While Greenspan was fighting a battle against non-existent inflation, the economy has been undermined by a far more dangerous economic stimulus, speculation. Nearly seven trillion dollars in investors wealth has disappeared since the stock market meltdown began in spring of 2000. Investment banks are already reeling from the collapse of stock prices, but they are stifling worries about the biggest speculative bubble of all.

Derivatives are hedge funds, or bets based on the fluctuations of various markets. These funds avoid regulation by limiting their clientele to only the wealthiest and most sophisticated investors. Their operations and balance sheets are secret, unknown to regulators, and the rest of the financial system. Billionaire investor Warren Buffet has called derivatives “weapons of mass destruction”.

Mr. Greenspan recently expressed concern over the stability of the 142 trillion dollar derivatives market, but he cannot raise the alarm too loudly. He would incite the very panic that he fears. JP Morgan alone has 25 trillion dollars invested in derivatives, that’s a portfolio twice the size of the US economy. The implosion of one of these huge funds would set off a chain of financial failures, precipitating a monetary crisis.

Five years ago the Federal Reserve took the unprecedented step of bailing out a derivative fund to prevent its collapse. Long Term Capital Management received a 3.5 billion dollar bailout orchestrated by Mr. Greenspan. The firm had leveraged that small sum into 1.25 trillion dollars worth of derivatives.

In addition to rampant speculation, the Fed must be wary of our debt. Thanks to Reaganomics, the national debt stands at 6.5 trillion dollars. Thanks to President Bush’s tax cuts, that debt is growing again. Both our trade and budget deficits will surpass $400 billion this year, new record highs.

At this weeks meeting of the G-7 Nations, central bankers expressed concern about the soaring deficits in the United States. There is now an international consensus that the US dollar must be devalued, but Treasury Secretary John Snow is seeking to avoid the inevitable. He traveled to China last week seeking to remove that country’s artificial exchange rate, and pressured the European Community to lower interest rates, all of which would bolster the sagging dollar.

The recent instability of the dollar in world markets represents investors real fear for the stability of our economy, and our ability to finance our deficits. In the event of a financial panic, the Fed could be forced to monetize, or create the money, to pay our debts. And this brings us to the real purpose of the Federal Reserve.

The Government and people of the United States do not print their own currency, only debt. The US Treasury prints bonds, which the Federal Reserve buys for dollars. The interest we pay on those bonds is our national debt.

Not even war stops the Federal Reserve, and this process of debt creation.

After the September 11th attacks the US government enacted a 55 billion dollar emergency spending measure. At the same time Alan Greenspan ensured the stability of the banks “through an extraordinary infusion of funds”. The day after the attacks the Fed purchased 61 billion dollars worth of bonds in exchange for cash and distributed $41 billion to the banks.

While the people of the United States go further into debt to fight the War on Terror, the banks create money for free. The Federal Reserve prints currency in exchange for bonds, but other banks also expand the money supply by extending loans, in both cases creating debt. This ability to create money for free, while increasing the public debt is the insidious truth behind our private banking system.

When economists and media pundits discuss the Federal Reserve, the subject is always the Fed’s control of interest rates. By lowering interest rates, the Fed is simply giving banks incentive to create new loans, and increase economic activity. Alan Greenspan has engineered twelve interest rate cuts since the market meltdown in 2000, in an attempt to stimulate the economy.

But stimulate what? Manufacturing is now done in nations where our corporations do not have to pay American wages, (see the trade deficits above). At least the capitalists of past boom and bust cycles built factories and infrastructure in this country. Today’s oligarchs are not concerned with creating or distributing wealth, but in siphoning that wealth to themselves.

Alan Greenspan works for those oligarchs. He is more concerned with ensuring that the assets of the wealthy are not devalued by inflation, than in ensuring rising wages and income for the majority. He has endorsed more tax cuts for our wealthiest citizens and trade agreements that give corporations more power than governments.

The United States faces a financial reckoning, either by currency de-valuation, or by the Federal Reserve being forced to monetize our debt. Whatever the outcome, Alan Greenspan deserves his share of the blame. Because he knows exactly what he is doing.

Published on February 1, 2006 at 12:22 am  Leave a Comment  

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