June 4, 2009
by Ron Holland
BFI Capital
Remember earlier in the year when the establishment media constantly warned about the credit meltdown, the banking and stock market collapse, and the free fall in real estate values. They said it would truly be Armageddon unless Congress acted immediately!

At the time, the Federal Reserve and its activities received scant coverage, if it were even mentioned at all. Still the establishment trumpeted the coming economic Armageddon and risk of another Great Depression until Congress and the taxpayers were scared into the trillions in bailouts on the backs of future generations.

However, once the flow of bailout money was assured, everything changed. The news media and financial experts immediately switched from doom-and-gloom to an upbeat positive assessment on the manufactured stock market rebound, the expected turnaround in financial stocks and the housing market.

Are Americans Finally Getting "Fed" Up With the Fed?

Many Americans are now waking up to the fact that the entire scenario was just a set-up for taxpayers and future generations to bailout Wall Street and the major banks. As a result, there is now the beginning of a backlash in America over the activities of the Treasury and the Fed.

Maybe it is the growing threat to the AAA status of US treasury debt or the underlying fear of future hyperinflation and a run on the Dollar. But I believe much of the credit should go to the Ron Paul Campaign (http://www.campaignforliberty.com/) and the Ludwig von Mises Institute (http://www.mises.org/). Together, their successful educational efforts are now paying off almost 100 years after the Fed was established. They are now making the secretive Fed and its disastrous policies an open issue and topic for debate in mainstream American politics.

Congressman Ron Paul´s bill to audit the Federal Reserve (HR 1207) called the Federal Reserve Transparency Act now has 179 co-sponsors. Although an actual audit of the Fed is unlikely, this number of co-sponsors is unheard of in the history of the institution and represents a paradigm shift in public opinion away from almost total disinterest to growing opposition and awareness.

Americans want to trust their government, respect their legal and financial institutions, and believe the Fed is working in their interests, but this trust has been shattered beyond repair by the bailouts and economic crisis. We view this new awareness as a positive long-term development for the United States.

Clueless in DC

Opponents of the bill will say the Fed is already audited. But you only need to watch the YouTube video of Federal Reserve Inspector General Elizabeth Coleman responding to Representative Alan Grayson´s questions about the trillions of Dollars loaned out or the $8 trillion in off-balance sheet transactions to know she is totally clueless about her job responsibility, much less the Federal Reserve.

If Coleman is the Federal Reserve watchdog, then the legitimacy and accountability of the Fed and the US banking system is in jeopardy and Ron Paul is right. They desperately need to audit the Fed. Watch the video and be amazed at the incompetence and lack of basic comprehension of the situation (http://blip.tv/file/2104758). As if this wasn´t bad enough, there is now even scarier news from the White House.


A Fox in the Hen House is Not the Answer

The Obama Administration is now proposing that the Federal Reserve serve as the new, all-seeing "Über-Regulator" to detect activities that could pose risks to the entire financial system. Surely, the Fed will know a lot about such matters, as their earlier policies helped create the worst financial and economic crisis since the Great Depression. The Fed is the last institution that should be placed in such a position.

The U.S. regulatory environment must to be revamped to limit cronyism like the Madoff Ponzi scheme and excesses of Wall Street and the banking industry. However, the solution is a professional, independent regulatory environment responsible to the people to protect investors instead of the cozy, incestuous relationship that now exists between regulators and the financial industry in the United States.

Financial regulators should seek to protect the public from questionable investments and activities rather than defend the industry from criticism at home or foreign competitors abroad.

In addition, few in the banking and Wall Street establishments would question the necessity today for a nation to have a central banking institution to regulate their economy and deal with currency issues. The self-regulating benefits of a gold standard instead of the present fiat currency system would be our preferred alternative. But certainly this, along with a truly independent central bank responsible to Main Street rather than Wall Street for monetary policy, would take money creation and credit expansion away from politicians and the financial establishment. This would be a major step in the right direction and provide with a situation similar to what Switzerland has.

The Swiss National Bank is a good study in contrasts to the American Federal Reserve System. First, the Fed is owned by member banks and it pays a 6% dividend to the stockholders with the remaining profits going to the "bottomless pit" of the US Treasury. It is interesting to note that the original 1913 Federal Reserve Act stated that private individuals and companies were prohibited from owning more than $25,000 of Federal Reserve stock. But surprisingly, we can´t find any record of private ownership. It would be interesting to see some enterprising Americans or Ron Paul subscribers attempt to buy stock in the Fed as this would be a great education for the wary American public.

It couldn´t be more different in Switzerland. The shares of the Swiss National Bank are actually listed on the Swiss Stock Exchange (SIX) and although about 55% of the shares are held by Swiss banks, private investors can also purchase shares. You´ll find it interesting that the dividend is also 6% of profits, but 2/3 of all remaining profits then go to the Swiss cantons (comparable to American "states") instead of the Swiss federal government, in keeping with the Swiss decentralized confederation model of government.
The independence of the Swiss central bank is guaranteed in the Swiss Constitution and in the act creating the bank. None of the shares are owned by the Swiss government, the bank can not provide loans to the government, and the bank is prohibited from taking direction from government bodies or undue political pressure.

Beware of the New FASB Accounting Rules - All Smoke and Mirrors

Following tremendous lobbying pressure from Washington and Wall Street, the Financial Accounting Standards Board (FASB) recently relaxed the earlier "mark to market" valuation where mortgage values were based on current market prices of similar investments trading on the open market.

In other words, prior to the new accounting rules, banks and financial firms had to regularly give market prices to securities they held which resulted in loan backed securities dropping dramatically in value. This forced banks to write down billions during the worst of the financial meltdown. The drop in market value with the toxic assets caused many large American financial institutions to become insolvent in what had been accepted accounting terms.

The preferred Wall Street establishment solution was not more capital but rather a government bailout followed by a sudden change in accounting rules. This is supposed to magically transform toxic, almost worthless assets in the eyes of investors into highly valued, secure assets.

For example, on Friday, May 29th, just days before the long-awaited General Motors bankruptcy, GM bonds maturing in 2033 were trading appropriately at almost 10 cents on the Dollar. This would have been the value under "mark to market". But with the new FASB rules, similar bonds would be valued at par, ten times the current market value as if the notes were held to maturity. This is what the banks have done with all their bad assets. They can now separate market-related losses from credit losses as long as the bank can somehow prove they can hold the security until maturity at a date in the distant future.

This change in accounting rules suddenly allowed formerly insolvent banks to announce fantastic profits at the end of the first quarter as they took back losses posted in prior quarters, thus fueling the recent stock market rally led by financial stocks. But it is all smoke and mirrors.

The struggling banks may stay in business longer but it doesn´t change the real value of their assets. As a result, the losses will be even greater in the future when they do ultimately fail. The problem is that the stock market rally engineered by the accounting change will further decimate the portfolios of many investors sucked into the false rally, while solvent institutions will find their ability to raise capital curtailed.

A good example is Bank of America. Their stock price went from a low of near $3.00 to almost $15.00 during the 6-week period when insiders knew the accounting change would take place. Did the value of bank assets or the ability to turn a profit increase by 500% during the period? Of course not. Don´t get sucked into this government-created bear market rally trap - nothing has really changed in the long run but the accounting rules and the toxic assets are still owned by the banks.

Forget Questioning the Validity of the National Debt!

The exploding Treasury debt burden of the United States and their ability to service this debt, along with the desperate need for foreign investors and central banks to continue buying it, are linked together with the corresponding threat to the future of the Dollar. All of this is combined in a maelstrom of misinformation and propaganda designed to hide the fact that there is very little difference except for a timeline in the credit worthiness of General Motors, AIG and the United States government.

Americans are prohibited by Section 4 of the 14th Amendment to the Constitution from even questioning the validity of the national debt: "The validity of the public debt of the United States, authorized by law....shall not be questioned".

This section was passed with little debate or publicity following the War Between the States, just as the creation of the Federal Reserve and the Income Tax were imposed on the American people back in 1913...or just as the recent bailout actions occurred earlier in the year.

Note that the total federal government debt today is in excess of $64 trillion, calculating to around $550,000 per household in the U.S. Go to: www.usatoday.com/news/washington/2009-05-28-debt_N.htm.

TrackBack URI for this entry

Name

Email

Website

Title

Comment

smaller | bigger

Subscribe via email (registered users only)

I have read and agree to the Terms of Usage.

Add Comment