Hostile Takeover: Resisting Centralized Government's Stranglehold on America

by Matt Kibbe

  Despite the fact that trillions of dollars in questionable assets were sloshing through the system, it was virtually impossible for the public to access any information on what the Fed was up to. Even Neil Bartofsky, the Special Inspector General assigned to TARP, served up harsh criticism of the Treasury Department and the Fed in his testimony before Congress, where he estimated that the taxpayer liability for bailing out Wall Street reached more than $27 trillion. TARP was only the tip of the iceberg. In all, there were roughly fifty programs working furiously to stabilize Wall Street. While the liability figure is a worst-case scenario that would see none of the Fed’s loans paid back, even a small percentage of it would be a significant burden for taxpayers.

  The Fed’s actions have done little to spark economic growth. Excess reserves—resources that banks are holding that could be lent to new ventures—increased by $490 billion, bringing the total to $1.5 trillion in 2011.50 In other words, banks sat on the cash, facing gross uncertainty about the rules of the game as the Obama administration continued to change them, ad hoc. What, exactly, will a dollar be worth tomorrow? Will the government honor contracts? With a dragging economy and huge new, unquantifiable risks from forthcoming health care, financial services, and environmental regulations, many businesses faced too many uncertainties to make the investments necessary to spur economic growth. Nobel economist Robert Lucas compared economic growth in the United States to growth in Europe, which has typically had a larger regulatory state. Growth rates in Europe have lagged behind those of the United States, and Lucas noted that increases in the size of government and the regulatory state in the U.S. could mean that our growth rates will be more like those in Europe and we may never return to the pre-2008 growth path.51

  Further, the Fed’s spending binge may have paved the way for a next financial disaster. To date, inflation has remained low, ending 2011 at around 3.4 percent.52 But that does not mean there is no threat of inflation. The Fed has to determine how to clear out its own balance sheet, which includes trillions in assets of questionable value. Will it choose Zimbabwe’s path?

  FATAL CONCEIT

  BERNANKE HAS SUGGESTED THAT THE FED HAS THE SKILL TO FINE-TUNE monetary policy at the first hint of inflation, but again, this places the fate of the nation’s economy in the hands of the experts—experts whose track record does not inspire confidence. Does the czar of the federal bank really have complete knowledge of the countless millions of bits of information dispersed throughout the economy? Does he know for certain both the seen and unseen consequences of his actions from the top down? I doubt it. Allan Meltzer, a professor of political economy at Carnegie Mellon University, wrote in 2009 that “the enormous increase in bank reserves—caused by the Fed’s purchase of bonds and mortgages—will surely bring on severe inflation if allowed to remain.”53

  Despite lack of evidence to suggest that the Fed’s actions are boosting economic growth, Bernanke is expanding its efforts to bail out banks—even European banks. Given the adverse publicity associated with the Fed’s previous bailouts, the organization has taken a slightly different approach. Rather than directly bailing out the struggling European banks, the Fed is engaged in currency swaps with the European Central Bank, which can then use the dollars to extend loans to failing banks. As Gerald O’Driscoll noted, “This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light.”54

  The Federal Reserve is the most secretive and least accountable operation of the federal government. Bureaucrats at the bank are unelected and unaccountable to the American people. The first audit ever of the Federal Reserve was conducted in July 2011, almost 100 years after the secretive institution was founded. We finally have a sense of what the Fed has been hiding all these years. The Government Accountability Office conducted a onetime, watered-down audit of the central bank, and it gave the American people their first peek into the Fed’s books but prevented investigators from peering into their deliberations on interest rates and other crucial transactions.

  The central bank handed colossal amounts of cash to its Wall Street cronies without a single vote in Congress. In less than three years, unelected bureaucrats at the Fed “lent” out $16 trillion at 0 percent interest to corporations and banks around the world.55 To help put that massive number into perspective, the national output of the U.S. is only about $14 trillion. Some observers speculate that billions of dollars may even be missing from the bank’s released records.56

  The Federal Reserve was ordered through a Freedom of Information Act request to release 28,000 pages of documents in March 2011, after fighting tooth and nail for more than two years to keep their actions hidden from the American people. Top Fed officials claimed that releasing their loan information to the public would cause “severe and irreparable competitive injury” to borrowing banks.57 What were they hiding in there?

  THE BUFFETT RULE

  THE DOCUMENTS REVEALED THAT FOREIGN BANKS WERE AMONG THE largest recipients of the Fed’s money during the 2008 meltdown. Bloomberg News reported that “the biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record.”58

  The top foreign banks that received money included the Brussels- and Paris-based Dexia SA, Dublin-based Depfa Bank Plc, the Bank of China, and Arab Banking Corp., which received seventy-three different loans in spite of the fact that it was 29 percent owned by the Libyan central bank at the time.59

  The released documents revealed that the Federal Reserve had committed $7.77 trillion to “rescuing” the financial system as of March 2009, according to a study from Bloomberg News.60 The Fed also kept secret which banks were in trouble during the height of the financial crisis while bankers were raking in tens of billions of dollars in emergency loans. Bloomberg has calculated that the secret Fed loans helped banks net a whopping $13 billion.61 All these numbers are staggering—but not exactly surprising. The unelected bureaucrats at the Federal Reserve have fought to keep their dealings behind closed doors for a reason—some of those dealings help their politically connected friends.

  The bailouts of 2008 and 2009 created a fantastic opportunity for moochers to profit from government-backed loans. Among those who lobbied for the bailouts and then profited from them was none other than Warren Buffett. As the markets tumbled and Congress was discussing a bailout, he took to the media to push the plan, calling the financial crisis an “economic Pearl Harbor.”62 While he claimed that the bailouts would be the right thing for America, the Oracle of Omaha also foresaw a massive business opportunity, in the form of government-backed loans. As several news sources later reported, Buffett’s company, Berkshire Hathaway, had the fifth largest total of investments in companies receiving bailout money,63 and its investment in TARP-backed companies reflected “at least twice as much dependence on bailed-out banks as any other large investor.”64

  Like many others who bet on the government bailouts, Buffett profited handsomely, making over $3.6 billion in profits from his investment in Goldman Sachs. And that wasn’t his only winning bet on crony capitalism: Buffett has also profited by $1.2 billion from investments in—why does this not surprise?—the king of all government-subsidized corporations, General Electric.65 More recently, Buffett appears to have placed another bet on the government’s too-big-to-fail policies, sinking $3 billion into the struggling Bank of America. As Tim Carney of the Washington Examiner noted, Buffett’s Bank of America bailout coincided with an announcement that he would be hosting another fund-raiser for President Obama’s reelection campaign.66 America’s wealthiest financier certainly knows how to protect his investments.

  The Federal Reserve is a prime player in the growth of our bailout culture. Fiat money enables the Fed to bail out its friends with little risk, but with massiv
e ramifications for the rest of us. To make matters worse, Bloomberg has reported that we haven’t been told the whole truth about the bank bailouts: “While Fed officials say that almost all the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.”67

  A prime example of the Fed’s close ties to the banking industry it supposedly oversees is reflected in the bailout of the American International Group. When AIG’s credit lines dried up after being downgraded in September 2008, Ben Bernanke decided that the insurance titan was simply “too big to fail.” With the blessing of Treasury Secretary Hank Paulson, Bernanke allowed the New York Federal Reserve Bank (headed by the future Treasury secretary, Timothy Geithner) to extend a credit line of over $80 billion to bail AIG out, and AIG eventually put taxpayers on the hook for over $182 billion.68

  Secretary Paulson justified the decision by saying, “An AIG failure would have been devastating to the financial system and the economy,”69 yet the deal that was reached seemed to have more to do with protecting the assets of certain banks. Beyond putting taxpayers on the hook for a company that had overloaded its holdings with toxic housing securities, the deal negotiated by the Fed allowed companies with significant interests in AIG to recoup 100 percent of their investments instead of the fraction they would ordinarily receive from a bankruptcy settlement. So, instead of protecting AIG’s ability to pay back taxpayers by liquidating its assets, the Federal Reserve protected these outside companies, which included Wall Street giants like Goldman Sachs and Merrill Lynch, essentially granting them a “backdoor bailout.”

  As is so often the case, the story itself is not as interesting as the ensuing cover-up. E-mails disclosed during a congressional inquiry revealed that the New York Fed told AIG officials to keep quiet about payments to the other banks.70 While Tim Geithner, in his testimony before Congress, denied any involvement in the decision making, his evasive answers merely infuriated congressmen of both parties. As Representative Dan Burton told Geithner, “It stretches credulity for us to believe that you had no role in this and didn’t know anything about it when your attorneys and people that worked for you were sending e-mails all around the place.”71 More curious was the fact that former executives from various banks that profited from the bailout were scattered throughout the Federal Reserve system and the Treasury, including Secretary Paulson, who had been the CEO of Goldman Sachs.72

  BAILING OUT THE WORLD

  NOW THE FEDERAL RESERVE AND THE INTERNATIONAL MONETARY Fund (IMF) are working together to bail out spendthrift European countries and banks. With your money. The IMF receives a lot of American cash; U.S. taxpayers contribute an estimated $55 billion, or 17.09 percent of the bank’s total funding.73 The IMF recently borrowed from the Federal Reserve to bail out Greece, Ireland, and Portugal.74 Meanwhile, the Fed may be lending money to the IMF to bail out Italy and Spain in the near future.75

  The Fed’s activities, at home and abroad, pose significant threats to American taxpayers. As John Cochrane of the Hoover Institution noted, “The guarantee/regulate/bailout regime ends eventually, when the needed bailouts exceed governments’ fiscal resources. That’s where Europe is now. . . . And the U.S. is not immune. Sooner or later markets will question the tens of trillions of our government’s guarantees, on top of already unsustainable deficits.”76

  All these nations have been living beyond their means for too long. According to the Organisation for Economic Co-operation and Development, total government expenditures in Greece were 44.8 percent of GDP in 2008.77 Greece’s failure to cut its bloated public sector and lavish welfare programs left it bankrupt. And we were forced to pay for their errors, leaving one to wonder who will be around to pay for our forced errors when they come to fruition. Who will bail out the bailers of last resort?

  Taxpayer-subsidized bailouts to countries with bad economic policies and banks that make risky loans only encourages more reckless behavior. It inflames what economists call moral hazard. To instill greater caution in the bankers who invest, and the politicians who spend, other people’s money—our money—we need to make sure they can fail. We need to expose them to the full costs of their potential mistakes. We need them to live in the same world you and I do.

  FREE MONEY

  “THE CURE FOR INFLATION, LIKE MOST CURES, CONSISTS CHIEFLY IN removal of the cause,” wrote Henry Hazlitt in What You Should Know About Inflation. “The cause of inflation is the increase of money and credit. The cure is to stop increasing money and credit. The cure for inflation, in brief, is to stop inflating.”78

  Remember, in complex market economies, would-be planners never know nearly as much as they think they do. To assume that they do is fatally conceited. So top-down monetary policy cannot be an effective economy management tool to be used by governments. Ideally, there should be no policy aimed at increasing objective exchange values (inflation) or decreasing objective exchange values (deflation). No federal reserve or central bank is required, and many monetary economists endorse competing currencies, the gold standard, and other tools that would provide a stable currency while removing the government’s ability to manipulate the money supply. Whatever the preferred solution, there’s no intrinsic need for a central authority to “manage” the system.

  George Mason University professor Lawrence White advocates a system of competing currencies, which societies have used throughout history. “Much more competition in money has existed in the past,” he writes. “Under ‘free banking’ systems, private banks routinely issued their own paper currencies, or ‘banknotes,’ that were redeemable for underlying ‘real,’ or ‘basic,’ monies like gold or silver. And competition among those basic monies pitted gold against silver and copper.”79

  A sure way to stop inflating would be to end the Federal Reserve. The case for top-down control of something as vital as our medium of exchange has long since lost all credibility. But ending the Fed will happen only when America beats Washington and shreds the cozy web of interests that enjoy a taxpayer-financed safety net for their bad behavior. To be sure, replacing the Federal Reserve with a competitive system that protects the value and stability of our currency is no small task politically. Expect current management to react with unfettered hostility to a shareholder proposal to eliminate their monopoly power over the printing press.

  At the same time, we need to pursue a realistic strategy that forces more transparency and accountability and less self-anointed bureaucratic discretion at the Fed. This is the strategic tack Ron Paul has pursued. A big step in the right direction would be to audit the Fed fully, as Paul advocates. While the results of the limited audit were disturbing enough, just imagine what kind of mischief we would find through a true, comprehensive audit where nothing is off-limits. The Federal Reserve lending trillions to foreign banks may be just the tip of the iceberg.

  Auditing the Fed would inform the American people about what the central bank is doing behind closed doors. The information revealed would likely help convince more Americans that the Fed has done more harm than good. An overwhelming 75 percent of Americans want a comprehensive audit of the Federal Reserve, according to a Rasmussen poll.80 This is a transparency issue that has transcended left-versus-right politics. Fiscal conservatives like Senator Jim DeMint of South Carolina, and a self-identified Democratic socialist, Senator Bernie Sanders of Vermont, have joined the libertarian Ron Paul in these efforts. A true audit should be one of the first things Congress pursues in January 2013.

  The next step would be to downsize the Fed’s mission from “full employment” to a simple mission of stable money. The Fed has expanded its own job description to include maximizing employment, “supervising” banking institutions, “maintaining the stability of the financial system,” and “providing financial services to depository institutions.”81 Congress should direct the Federal Reserve to abandon its dual mandate and focus solely on
providing a stable dollar. As should be painfully obvious, Ben Bernanke is not omnipotent, and the manipulations he has presided over are only making things worse. Much worse.

  And then we should allow for the accountability and discipline that always arise from competition. “Immediately allow private individuals to put themselves on a parallel gold standard if they so choose,” proposes Larry White. “Ron Paul’s HR 1098, the Free Competition in Currency Act of 2011, is one approach: ensure the enforceability of contracts denominated in units other than fiat dollars, remove taxes on gold and silver coins that [Federal Reserve] notes do not face, and remove federal statutes that criminalize the victimless activity of minting distinctive private pieces of metal intended to circulate as money.”82

  Relinking dollars to a valued commodity, preferably gold, would allow the free market to harness the forces of competing currencies to promote stable money. Under the gold standard, it becomes obvious when politicians spend way beyond their means, because they simply run out of gold reserves. Relinking the dollar to gold would decentralize the authority to determine the value of money, which in turn would limit the amount of money that Congress can spend. The Treasury and the Federal Reserve would no longer be able to create money out of thin air, preventing runaway inflation and rising prices of goods.

  Winston Churchill famously said of democracy that it is “the worst form of government, except for all those other forms that have been tried from time to time.” In the same way, no monetary system is flawless. But, as Lewis E. Lehrman, senior partner at L. E. Lehrman & Co., has written, “empirical evidence of two hundred years of American monetary history shows that the true (or classical) gold standard has the least imperfect record as a stable monetary standard, because the dollar convertible to gold acted as the stable gyroscope of rapid economic growth.”83