Skip to comments.ROOT CAUSES OF THE ECONOMIC MELTDOWN
Posted on 10/04/2008 6:04:13 PM PDT by CK Young
ROOT CAUSES OF THE ECONOMIC MELTDOWN
1) THE CREATION OF THE FEDERAL RESERVE [FED]. This is centralized banking as practiced in the U.S. The birth of the FED was signed into law by President Woodrow Wilson (D) on Dec. 24, 1913. Reflecting on this he later said, I am a most unhappy man; unwittingly I have ruined my country . The FED is a private consortium of bankers the heads of which are appointed by the executive branch of government. Many people believe that their first loyalty lies with bankersincluding Wall Street bankers and foreign bankersmore than with the American people. All money in the U.S. originated as gold or silver coin, including former Federal Reserve Notes [FRNs]. Originally, gold or silver was held in reserve against dollar bills, or notes. The FED creates all U.S. money in the form of FRNs, but today there is no actual reserve and these Notes are no longer redeemable in gold or silver, which is in clear violation of the U.S. Constitution: nothing but gold and silver coin shall be used as tender (Art. II, Sec. 10, Cl. 1).
2) THEFT OF THE PEOPLES GOLD by Franklin Delano Roosevelt (D) in 1933. This is arguably the greatest plunder in the history of the world, including the escapades of conquistador Cortez, and the sacking by the Mongol warlord Genghis Khan. FDR threatened American citizens with 10 years in jail and a $10,000 fine if they did not turn in their gold savings to the government. Due to inflation, $10,000 is $425,000 in todays money, an increase by a factor of 42.5. After seizing the peoples gold, Roosevelt paid 20 paper dollars per ounce, and then promptly revalued the gold to $34. His edict and subsequent larceny took gold out of circulation in America and artificially drove its value down due to its absence of circulation. Nevertheless, at this writing, gold is $850 per ounce, and even at this, it is likely undervalued minimally by a factor of eight. See: (4). FDRs violations of the U.S. Constitution: The right to contract shall not be impaired, and, gold and silver coin as tender, see: Art. II, Sec. 10, Clause 1. A further transgressed Right: to be justly compensated when private property is seized by the government. Initially, the Supreme Court would not support Roosevelts treason. However, in response to FDRs threats to pack the court with many new judgesjudges to be handpicked by him to support his crimethe Supreme Court capitulated and conspired with him in the exploitation of the American people. NOTE: Historically, there have been many countries whose fiat paper currency (unbacked by gold or silver) crashed as an inevitable result of inflation leading to hyperinflation. Not infrequently, the government itself collapsed along with its junk currency as a result of the ensuing violence. Notable examples are the German Weimar Inflation of 1921 where German Marks depreciated 3 trillion to 1 against gold, and Zimbabwe today, where a roll of toilet paper costs more than 500,000 of their dollars, and where savings, pensions, and other financial assets have been completely destroyed.
3) INFLATION IS CAUSED BY GOVERNMENTSIT IS TAXATION IN STEALTH. The FED prints Federal Reserve Notes [FRNs]. The only reserve is the electricity to run their printing presses, and an adequate supply of blank paper and ink. While the electricity is on, there is no practical limit to the supply of paper money that can be printed. Since 1971, FRNs (AKA dollars), are pure fiat currency fabricated by the government. FRNs are not real money. They are government counterfeit certificates. They are certified by the authority of a gun wielded by the police of a nation. The FEDs printing presses are the floodgates of paper money that inundate the American economy with crisp new dollars of constantly diminishing value. Unbacked paper dollars are a Ponzi scheme in and of themselves. More and more need to be printed to support the ever-increasing distortions in the political economy. Currency that is not a consistent store of value destroys the efficient allocation of resources. Merely printing fiat paper and calling it money is destructive of that efficient allocation. Consequently, in such a monetary system, every aspect of human commerce is not reliably quantifiable and is therefore corrupted. Inevitably, the system will crumble as it succumbs to the poisons of its own toxic excesses. Why and where does all this phony money go? It feeds the insatiable appetite of Congress pork projects and the unchecked expenditures of the executive branch that counterfeit money sponsors. It slides into the pockets of politicians in the form of campaign contributions; it is skimmed by investment bankers from the obscene profits of financial derivatives. NOTE: For almost 100 years, from 1835 to 1933 (ending with FDRs gold confiscation) prices remained virtually stable under the gold standard.
4) EXCESSIVE SPENDING BY POLITICIANS to curry favor with the electorate. Politicians promise the moon to get elected. By selfishly placing their own political interests above the welfare of their country, these costly and fatuous promises continually increase the national debt. Over a prolonged period of time deficit spending enormously reduces the value of the dollar. The dollar in 2008 is worth approximately 2.35% of what it was worth in 1933. This is the percentage ratio of gold at $20 per ounce and at $850. The true ratio is undoubtedly much greater due to the governments manipulation of the price of gold, and that gold is no longer used as a medium of exchange, i.e., as backing for paper money. Otherwise, a more realistic figure would be 0.33% with gold priced at $6,000 per ounce in todays moribund dollars. Foreign nations, aware of the monetary fraud perpetrated by the U.S. government, began demanding gold in exchange for the bags of depreciating paper dollars filling their vaults. They did not want to be victimized by the inflation tax. As a consequence, the supply of gold at Fort Knox was slowly evaporating like summer rain on a hot roof. In 1971 with the French in particular demanding gold for paper dollars, Richard Nixon (R) had little choice in the matter since American gold reserves were running a bit thin. He dug in his heels and just said no to French President Charles de Gaulle who was demanding gold for dollars. At this point, paper currencies of various countries simply began to be traded for paper currencies of other countries with no good way to keep government spending in check. While printing money may be an effective way to tax people in stealth, there is no free lunch forever; imbalances began to appear, and pressures began to build. If, to illustrate, one nation begins to counterfeit currency more rapidly than another, the more monetarily conservative countries will reject that currency. Then hyperinflation will ordinarily follow in the profligate country. Thus continual deficit spending by politicians inevitably results in the destruction of their countrys fiat currency and ultimately leads to government insolvency, i.e., total bankruptcy and the death of that currency.
5) THE MAINLINE MEDIA DOES NOT ADVISE THE AMERICAN PEOPLE of our unsound financial situation, i.e., our governments reckless spending and the potential consequences thereto. The media could, but does not, print the names of those in Congress who attach their pet pork projects to otherwise important bills. Thus, with printing press money, in contrast to real money (gold, or gold backed), there are few constraints to deficit spending, and Congress inflation tax. Without media exposure and attendant accountability, the spending practices of the rule-makers, which is causing the destruction of the dollar, continues unabated.
6) THE COMMUNITY REINVESTMENT ACT In 1977, President Carter, in company with Congressional Democrats, passed a bill with noble intentions: the Community Reinvestment Act. Over strong industry objections, it mandated that all banks and savings institutions make loans to lower-income individuals in the broad outlying areas in which they had branches. In 1995, President Clinton imposed even stronger regulations and performance tests that coerced banks to substantially increase loans to low-income, poverty-area borrowers, or face fines or possible restrictions on expansion. These revisions included securitization of these subprime mortgages by Fannie Mae and Freddie Mac which collapsed fourteen years later resulting in a mandated 75 billion dollar bailout by taxpayers. By 1997, pioneered by Bear Stearns, good loans were bundled with poor ones and sold as prime packages to institutions here and abroad. That shifted risk from the loan originators, freeing banks to begin pyramiding and making more of these highly profitable subprime products. Under two, presumably well-intentioned presidents, big-government plans and mandates played a significant role in the current subprime mortgage crisis and its catastrophic consequences for the U.S. and international economies. Source: http://www.communityinvestmentnetwork.org/nc/single-news-item/lexis-single-news-item/article/age-and-experience-carters-catastrophes/?tx_ttnews%5BbackPid%5D=1684&cHash=834b8060f0&type=98
7) REPEAL OF THE 1933 GLASS-STEAGALL ACT. In 1929 the stock market bubble burst ushering in the Great Depression. Then, as today, enormous amount of money was created, which in turn powered the stock market feeding frenzy just as blood in the water draws sharks. Learning from the debacle, and hoping to prevent this devastation from ever revisiting our country, Congress created the Glass-Steagall Act to separate less regulated investment banks, from more tightly supervised commercial banks which are required to have a higher percentage of reserve currency in order to meet unexpected setbacks. Senator Phil Gramm (R), and Congressman James Leach (R) introduced the bill to repeal the Glass-Steagall Act. On Nov. 12, 1999 President Bill Clinton (D) signed this bill into law. This permitted banks to agglomerate into monopolist new super-banks with less regulation. Reckless lending inspired by greed proceeded forthright.
8) ALAN GREENSPAN KEPT THE FEDS RATE OF INTEREST ARTIFICIALLY LOW, well below the rate of inflation, for too long. He probably was afraid to end the house-flipping party on his watch by raising interest rates to protect the dollar believing the American people, who for the most part do not understand economics, would blame his successor, or the President, for the problem he created. This encouraged people to spend rather than save as their money in savings accounts was being consumed far more rapidly by the governments corrupt practice of deficit spending (inflation) than moldy wood is consumed by termites. There are reputedly 200 PhDs in economics working at the FED. Greenspan had to know what was going to happen when the interest rates were necessarily raised to protect the dollar from decimation. Greenspan acted in an absolutely irresponsible, deplorable, and extraordinarily selfish manner.
9) BANKERS GREED. Standard & Poor, Moodys and Fitch were being paid by the bankers to rate the mortgages that they were selling. These mortgages were bundled in groups of differing qualities, i.e., from ostensibly the very safe (AAA) to dont ask dont tell. The rating agencies bestowed the highest rating (AAA) on all of these bundled mortgages. This was criminal fraud and the FBI should pursue this. The banks, with the bogus high ratings on their investment instruments, were then able to sell these packaged mortgages for a premium, both domestically and internationally, to buyers who trusted them and the rating agencies. The bankers, of course, charged a fee for fleecing the trusting purchasers of these defective instruments. Its a twist on old fashioned bank robbery; in this instance it was an inside job.
10) LACK OF SUPERVISION BY CONGRESS AND THE EXECUTIVE BRANCH of bankers lending and investing practices. Oversight of investment banking operations was virtually non-existent. Some of this lack of oversight was undoubtedly due to ignorance of basic economics by those in government, or lack of time. But one does wonder what part ignorance played, and what, if any part, was engineered by conspirators with vested interests. Part of the lack of oversight apparently was not ascribable to innocent neglect, but the avarice inspired by campaign contributions, and the reciprocity thereto. See: http://www.youtube.com/user/TheMouthPeace Be that as it may, because lending standards were ignored in conjunction with the rate of interest being held unrealistically low, the Ponzi-scheme of flipping houses dramatically accelerated. The situation that was developing was patently obvious, and could not go on for ever. But before it popped, the largest financial bubble the world has ever seen was created. The collapsing housing bubble not only is devastating the value of the paper dollar, it is also destabilizing commerce, domestically as well as internationally.
11) CITIZEN SLOTH INDUCED IGNORANCE. American citizens hope that the government will perform due diligence and look out for them. Most people would rather spend their time watching TV, or playing computer games, or taking drugs than studying economics or keeping abreast of world events. The average citizen, when asked on the street, or in stores, and restaurants if he or she knows what the root cause of inflation is (The government printing money), or even what the population is of the country, not more than one in fifteen will know. In their naiveté, most citizens believe that the government is here to protect them, rather than the primary concern of most government operatives is to protect their own interests. Now, in these perilous economic times, more citizens are beginning to pay attention to the political environment, as they come to see that things are getting out of control.
12) BERNANKE RAISED INTEREST RATES. In an effort to prevent people, and especially foreign banks, from abandoning the dollar, which would quickly lead to hyper-inflation, (Google: Zimbabwe inflation). Bernanke hoping to preserve a modicum of respect and value for the dollar, raised interest rates to partially offset the theft by the inflation tax. This of course popped the housing bubble, but also contributed to the collapse of the economy that Greenspans froth, and the investment bankers created.
13) THE COMMERCIAL BANKS that are authorized to issue money to other banks are (as mentioned) required to maintain a cash (FRN) reserve in order to lend money. Due to bad mortgage loans (and associated derivatives) caused by the collapsing housing market, many banks are under water. As a consequence, these banks do not have an adequate reserve, cannot lend money, and are failing. While many banks have no money to lend, others do not want to lend to other bankseven on a short term basisfor fear that the borrowing bank may go bankrupt, sucking the lender into a black-hole of insufficient funds and bankruptcy. As a result, banks are collapsing round the world. The bailout, (in politically correct spin, rescue package) is an attempt to pump more Federal Reserve Notesthey call it liquidityinto various FRN starved banks. This highly inflationary practice is what has lead us to financial chaos in the first place. It is akin to giving a meth addict down in energy, more meth to reinvigorate him.
Therefore, when the term root cause is used in reference to the slumping house sales, or lack of credit, and the economic meltdown that began in 2005, it is not the root cause, but rather a symptom, a branch high up on the tree. It is a overmature tree of many branches with roots of greed, corruption, ignorance, and naive thinking rotting far below. CK Young
The FED is a business cartel in the mode of the 19th century trusts. Except this cartel can call on the federal government to enforce its proscriptions.
socialism - it is what’s for dinner!
So it took 95 years for the collapse to happen? What signs of the collapse are you seeing?
So what we have here is the collapse of the Ponzi. That can only be remedied by massive devaluation of the dollar. However the main goal of the FED is to “save the banks” screw us. They must be holding down the price of gold somehow.
If the 2005 Fanny Mae and Freddy Mac reforms had passed.. we would have had a recession in 2006 or 2007 and this was avoided by letting the Sub-Prime thing go wild for just 12 additional months. That was enough using the bizarre derivatives that were allowed in the CRA and non-reforms that were adopted to "help" Fanny Mae to see the fuse on this mess.
But, worse, Wall Street insiders have their hands all over this and they are backing Obama.. why? WHY? Why is Obama getting information from Paulson's office via Goldman Sachs?
You’re missing a key component: a loss of confidence on the INSTRUMENTS for Mortgage Backed Securities.
This is so important but it seems that no one is talking about this.
Didn’t these INSTRUMENTS come into play because were trying to hedge their risky loans that the gov’t was forcing them to make??
And your deposits were then put in junk investments and now thinks to congress and their great foresight the bankers get their cake and eat it to. But a bunch of them should be going to jail.
“So what we have here is the collapse of the Ponzi. That can only be remedied by massive devaluation of the dollar.”
Actually what’s happening is a massive devaluation of assets vis a vis the dollar. Have you checked your house or stock value recently? You need a lot less dollars to buy them today than you did one ot two years ago!!!
“Didnt these INSTRUMENTS come into play because were trying to hedge their risky loans that the govt was forcing them to make??”
It’s a snow-ball effect, I’m afraid ie government mandates were definitely a factor. The loans by themselves aren’t resulting in high foreclosure rates.
“The total foreclosure losses are currently less than 1% of the value of outstanding mortgages, which is far less than the market losses caused by the disruption of the credit markets.”
As noted is not a matter of too many units being built, either.
“The demand for new homes collapsed after the MBS market declined, freezing the availability of a substantial proportion of the capital for home loans. The builders, and ultimately their employees, investors and lenders have all been impacted by the flawed MBS instruments and the paralysis of the financial markets these faulty instruments have created.”
Lets look at these MBS:
“we need to be clear about why the flawed MBS instruments failed:....
# The typical MBS instruments do not segregate individual mortgages into individual units of each tranche. This led to the unenforceability of the underlying security as previously discussed. It also led to the lack of information about the presence of impaired loans in any specific unit of each tranche of the MBS instruments.
# The incomplete information about impaired loans led investors to significantly undervalue each unit of tranches of MBS instruments. The market value of MBS securities has fallen 30 50% (or more) even though the overall mortgage foreclosure rate has resulted in losses of less than 1% of the value of outstanding mortgages.”
What we have here appears to be the collaps of the “Debt Reserve Note”, or the dollar which is only a dollar because Peter owes us a dollar, and he has to pay Paul, so that is basically a dollar. Peter borrowed ten dollars, so he owes us twelve dollars, so we have in fact twelve dollars, although we have nothing. Actually.
“The Federal Reserve is not the cause. This is lame.”
I totally agree. The cause is very simple:
- The banks were making loans to people that they knew would never be able to repay them.
Why would they do something that stupid? Because they didn’t keep the loans for the most part - they sold them to dumb investors who believed the AAA ratings that Moody and other rating agencies attached to them.
It was a total, massive breakdown on the part of the banks, credit rating agencies and investors.
To distill it even further - it was lack of due diligence - even if just one of the three participants (banks, rating agencies and investors) had done their due diligence, we wouldn’t be where we are now.
Point #12 is HS. The problem was not that Bernanke raised interest rates, but that Greenspan kept them artificially low for 20 years and expanded credit beyond anyone’s wildest imaginings. The ballon was going to burst sooner or later. It did with the dotcom burst but Greenspan then created the real estate bubbble.
Good post, good link (I especially liked William Becker’s comment on May 2, 2008).
Very good thread. Thanks to all posters.
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