Vince Dhimos answered a question at Quora.
WHAT WILL BE THE ROLE OF THE BANKS IN REVIVING THE ECONOMY POST-CRISIS
To understand the machinations of the Federal Reserve Board and why they are tolerated by a once-free people, we need to look at history.
The US Constitution in Article 1, Section 8, Clause 5 plainly states that the Congress shall have the power to “coin money and set the value thereof...”
But way back in 1913, the US Congress betrayed this constitutional principle and the US people by empowering a group of bankers that they dubbed the Federal Reserve Board, which usurped this constitutional role reserved strictly to the Congress. It was the biggest sell-out of all times, and within less than 20 years, the policies written by this group of thieves had unleashed the biggest depression the world had ever seen thanks to an easy money policy that gave loans to stock market speculators with little or no collateral required. This scam was intended to boost the banking business, but was sold to the public as a means of making America great by boosting the stock market. It was the first example of the now-accepted principle of financializing the economy. Finance and economics used to be two separate disciplines, and by rights, they should remain separate, but the thieves of the Fed cunningly conflated the two, making it seem as if finance could make America prosper. The concept has grown wings since then, as Trump touts a dangerously ballooning stock market bubble as a sign of prosperity.
This was a direct result of turning over the constitutional power of the people via their elected Congress to a group that was unaccountable to Congress. The drafters of the Constitution were absolutely right to want the power over the monetary system kept safely under the control of Congress. But Congress gave away its power to a group intent on asserting its own interests.
The Federal Reserve Board is already responding to the pandemic by doing the only thing it knows how to do, issue unbacked dollars by the trillions, a patently irresponsible practice that creates more unpayable debt on top of already-unpayable debt. So far, it has issued an additional $3 trillion on top of the $22 trillion debt, which was already threatening the credibility of the US dollar. The Fed calls such printing sprees Quantitative Easing (QE).
The Fed’s policy is based on a belief in a hare-brained theory called Modern Monetary Theory (MMT), which postulates that it doesn’t matter how much unbacked currency a world power like the US issues because the rest of the world has placed its full faith and trust in the US and will never stop believing in it. This, of course, defies common sense and creates a distortion. But nature abhors a distortion and will always seek to eliminate it. Irresponsible money printing destroyed the Weimar Republic and Zimbabwe. Of course, those were not world powers, so the Fed says that these models are not relevant to our times. Based on this untested theory (MMT), the Fed fired off several QEs after the 2008–9 crisis, which crisis, by the way, was caused by the Fed’s own ineptitude when it pursued a reckless policy of issuing subprime mortgages, allowing customers to buy homes with little or no down payment at rates below the prime lending rate – for the ostensible purpose of helping the poor buy homes, but for the underlying purpose of allowing banks to profit from a scam. This lax lending policy was promoted both be GW Bush and by prominent Democrats.
The reason banks had traditionally required buyers to make down payments on properties was that home prices fluctuate, and if the buyer fails to make a down payment, then if the home loses value, the buyer can simply walk away from the mortgage and leave the bank holding a bad debt. The only recourse for a bank in the case of default is to foreclose and sell the home at auction. But if the home is no longer worth what it was sold for, and the buyer paid no down payment, the bank loses money. Thanks to this reckless easy money policy for home buyers, such default inevitably happened countless times across America and banks were left holding the bag. So the big bankers came up with the bright idea to bundle mortgages, including tranches of bad debt, tranches of moderately bad debt and some tranches of debts that were still collectible. The whole package was worthless, but the bankers managed to sell these stinky packages as “mortgage-backed securities.” Unsuspecting banks, mutual fund managers and individuals were lured into buying these MBSs and billions of dollars were lost. It was a scam and the unscrupulous sellers should have gone to jail. But bankers came up with a euphemism, ie, Too Big to Fail, meaning the banks that bought and sold these slimy mortgages, which would have failed and gone bankrupt in the good old days of honest banking, were bailed out by the Fed, which “lent” them trillions to keep them afloat in a practice dubbed “bailouts.” Some repaid the loans, others did not. This practice of bailing out businesses that made bad investments was added to the repertoire of “remedies” for various emergencies (like today’s pandemic) and has become accepted by the brainwashed grassroots and, of course, by elected officials in the highest echelons of government.
But it was a nail in the coffin of the free market, which had once been based on the righteous principle of sink or swim for businesses. No market is free once the government – or a quasi-government enterprise like the government-supported Fed– intervenes to favour incompetent investors. Traditional capitalism weeded out bad investors to keep the economy healthy. But now bad – or stupid – investors are rewarded in the new predatory capitalism or government-backed corporate capitalism that has become entrenched in America. (BTW, During WW II, this unsavoury blend of government and business was known as fascism).
This practice is, in the final analysis, a form of corruption because it robs from the taxpayer to support business malpractice by cronies. The people who granted subprime mortgages should have been held accountable, ie, should have been allowed to fail. The scumbags who bundled these bad mortgages with good mortgages to create worthless securities should have been held accountable as frauds under criminal law. Instead, they were rewarded with bailouts under the concept of “Too Big to Fail.” Thus criminal activity was legalized and rewarded by stealing the sustenance of the working class to pay big racketeers who had usurped the reins of government and quasi-government, ie, the Fed.
As for the concept of Modern Monetary Theory behind which perpetrators of quantitative easing are hiding, there are two facts that no one in the Fed or the US government wants you to talk about, and these are:
1—After the first volley of wild rampant trillion-dollar issuance following the outbreak of the 2008-9 Great Recession caused by the issuance of subprime mortgages and their irresponsible sale under the guise of aiding the poor, and the fraudulent issuance of MBSs as a “remedy,” there was talk in the mainstream financial media of a “recovery.” But in fact no real recovery ever happened. It was all talk. Thus, the pre-pandemic Trump economy, thought touted as prosperous, was in a state of unrecovered crisis.
2—After the QEs went into effect, and even before, due to the increased amount of Treasuries on the market, it became impossible to sell enough US Treasury bonds, the instruments that enabled the US government to operate. The bonds had always been bought by individuals, mutual funds and whole countries, like Saudi Arabia, Japan and China. The biggest “buyer” was the US tax payer, who unwillingly and often unwittingly “bought” the bonds using cash from the social security fund into which working individuals had paid. But now, with these sources depleted, the Fed had to establish a permanent practice of buying back its own bonds with money created from thin air. In plain language, this is fraud and intuition tells us it will ultimately fail.
Modern Monetary Theory did not take these 2 facts into account. Therefore the older models on which the theory was based are no longer relevant.
And worst of all, MMT did not account for the possibility of a Black Swan event such as the current pandemic. Eastern countries like Russia and China do not play such kiddy games with their currencies. Instead they resort to the traditional method of preparing for emergencies by keeping reserves on hand, mostly in precious metals.
The US is now in the most precarious position of its history and has no reserves to fall back on. What if MMT proves to be a house of cards, as I think it will? Money printing was the last resort. There are no other options available to the Fed.
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