If you and your friends bought a controlling interest in a corporation, would you not expect to control it for your benefit? If you bought the entity that controlled credit, would you not expect to know in advance when credit would be decreased or increased, so you could sell assets that would suffer during the corresponding economic decline, and buy depressed assets before the corresponding economic advance? Such is the case of the Federal Reserve Bank and all other central banks, and why you and your friends now own nearly everything.
"Business cycles" are caused by credit cycles caused by central banks, like the Federal Reserve System (1). By increasing the permissible rate of loans to assets for all banks, central banks encourage lessor banks to offer cheap loans, which encourage individuals and businesses to directly invest in new homes, buildings, equipment, tools, labor or indirectly invest by way of stocks. Economic activity increases by a factor of five for each dollar loaned due to the velocity of money. The assets acquired by the loans as collateral for them increase the amount available for new loans, feeding a vicious cycle of artificial economic growth, i.e. a "bubble."
Of course, all of this credit in addition to the cash printed by the Treasury devalues the dollar.
By decreasing the fractional reserve rate, central banks discourage lessor banks from offering cheap money, and influence the interest rate on variable rate loans. Unable to sustain the earlier investment with more expensive loans, or unable to pay the more expensive interest, businesses fail, employees are laid-off, and people default on their loans, feeding a vicious cycle of artificial economic decline, asset sales and loan defaults, i.e. the bubble pops. The lessor banks foreclose and keep the payments made as well as the assets. Informed of an impending credit contraction, the friends of the central bank profit from the sale of their assets at the peak of the economic boom, and hold the cash until the bottom of the bust, so they can buy more assets for a fraction of their original value.
Since the demise of the first two National Banks, big bankers like J.P. Morgan have used this credit cycle since the mid-1800s to transfer the fruits of all untaxed productive labor of individuals to the banks and their friends. To extend and make more complete their control, a cabal of such bankers used their cycles to justify the sordid birth of the Federal Reserve System (Charles Layne) of which they are the primary shareholders and with which they have extended and completed their control of the American economy (1918 Federal Reserve Bank Statement). Similar techniques were used to install central banks in every country. The Bank of England was their progenitor.
Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy is an excellent read on the origin of the Federal Reserve Bank as is The Historical Fight For Honest Money in the U.S. by Dr. Martin A. Larson.
Ludwig von Mises predicted it. Milton Freidman analyzed it. Federal Reserve Chairman Benarake admited it: "Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." -- yeah, right.
Ron Paul discredits it in The Money Monopoly: How the Federal Reserve Rips You Off. See also "Why Does The United States Need Constitutional Money?" Six Questions On Monetary Reform by money expert Edwin Vieira, Jr.
Trade Like Warren Buffet by James Altucher
Interview with Zake Ashton
ZA: "We did various things like risk metrics, which was a big risk-control package that JP Morgan developed.
I lived in Europe foe about five years, most of it in Germany, and spent some time in Italy and Switzerland."
JA: "What were you doing there?"
ZA: "Basically consulting work, building and installing these risk-management systems for the treasuries of large banks."
"Buffet wasn't through yet and the December 2001 issue of Fortune [itallics] reprinted a speech he had given at the July 2001 Allen & Co. Sun Valley Conference. In it he stated his reasons for being somewhat bearish on the market for the next 17 years ..." [So recovery not until 2018.]
Warren Buffet: "In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset."
In a misguided effort to encourage savings to increase the assets of banks for loans, the federal government created the Federal Deposit Insurance Corporation (FDIC), which discouraged depositors from monitoring their banks and encouraged bank managers to recklessly invest, because taxpayers would be forced to pay for bank failures.
In an enlightened but misguided effort to reduce the crime and property value loss caused by government housing, the federal government sought to encourage home ownership by allowing home interest to be deducted from income taxes, creating Federal Home Loan Mortage Corporation, Fannie Mae and Freddie Mac to guarantee veteran and other risky loans, denigrating banks with rational loan policies, cheering banks with relaxed loan policies, and in some cases mandating ridiculous loan policies.
The consequent demand for new homes increased the demand for land, which was limited by government land ownership and zoning regulations. This rapidly escalated the cost of homes, creating panic buying. The cost and panic was further escalated by greedy State, County and City governments that increased their fees and demands on developers for open space, parks, schools and affordable housing projects to the extent that one third of the cost of a home in San Diego was government fees and regulations. The compelled attendance and compelled payment State schools restricted attendance to residence district, encouraging parents to buy unaffordable homes in the better school districts.
Consequently, speculation increased to the extent that individuals engaged in flipping houses for profit. Banks that sold their loans had no self-interest in assuring its repayment, and were inclined to inflate the value of the asset. Fannie Mae, Freddie Mac and other financial institutions packaged and sold loans as investments. The packages were combined and sold as other investments. Loan and investment guarantees were packaged and sold as investments.
Just as they did during the ".com boom", the central bank share holders happily fed the demand for credit until it was time to profit from it. Credit needed to be tightened very little to cause the latest housing bubble to burst, enabling they and their friends to acquire banks and all of their assets as well as individual assets. Their control over politicians forced taxpayers to make real the imaginary value of the financial assets.
How soon the previous housing bubble was forgotten:
The History of Money by Jack Weatherford, 1997, page 224:
"By 1989, home mortgages guaranteed by federal programs accounted for nearly 40 percent of all home mortgages in the United States, and the sum of government-subsidized and -guaranteed debt reached $1 trillion. By this time, the financing of mortgages, although it was still done through local banks, which made a consistent profit from it, had essentially become a government business. Government involvement allowed millions of Americans to own [make payments on] a home when they otherwise might not have been able to afford one [qualify for a loan]. The same policies, however, created the greatest inflation of residential property price in American history and contributed to the highest rate of homelessness in the developed world. They also resulted in a financial debacle when the real estate bubble burst in the 1990s and caused the collapse of banks and savings and loan associations across the United States."
Control of Government
The central bank Federal Open Market Committee (FOMC) also controls the rate at which federal government bonds are sold by setting their rate of return. Since the Treasury Department can only print money as the bonds are sold, the central bank owners thereby control the rate cash is injected into the economy. This in addition credit control, provides complete control over economic activity. The ability to increase and decrease economic activity enables central bank owners to keep an administration in power with high economic activity, and invoke low economic activity to replace an administration. That keeps politicians and bureaucrats beholden to and fearful of the central bank owners, which is likely why the Federal Reserve (Ron Supinski) has never been audited, or otherwise investigated.
To fund wars, voter bribes (pork), or otherwise artificial stimulations of the economy with government spending for their benefit, politicians will borrow from the central bank, increasing the demand for taxes to pay the interest as well as the principle of the bonds. Taxes are the means by which hyperinflation is avoided and the system perpetuated, because hyperinflation often leads to revolt. By taxing money from the economy as well as burying it with bogus government accounting (water districts, CIA numbered accounts in the Virgin Islands, etc.), money can be removed from the economy at the rate necessary to devalue the money at a rate tolerated by the populous. Those holding non-monetary assets are unaffected by the devaluation.
The stated intent of the Federal Reserve is to "maintain stable prices." Given the billions of dollars invested in capital to improve productivity, which would normally reduce prices, this policy requires that the entire productivity increase must be inflated away at the expense of savings and wages. While impoverishing the retired, currency devaluation nullifies the wage increases demanded by unions and any minimum wage increases, which percolate through the economy as compensation for the price increase caused by the increased cost of labor. Higher labor costs motivate businesses to invest in labor-saving equipment. The net result is fewer jobs and a permanently unemployable class of workers who cannot breach the job entry barrier caused by minimum wage laws.
1913 was a very bad year. The 16th Amendment, 17th Amendment, Revenue (Income Tax) Act and Federal Reserve (Davvy Kid) Act (Tim Southern) were enacted as a package deal under dubious circumstances. They respectively created the politics of envy, eliminated the primary constraint on federal spending, enabled the politics of envy, and enabled unlimited federal spending. Congressman Louis T. McFadden told it like it was in 1934. Carmen Pirritano elucidates. Voices from the French Revolution by John A. Pugsley
See the lecture by G. Edward Griffin given in 1998 entitled "The Creature from Jekyll Island,'' which is also the title of a book by Mr. Griffin.
Free banking and unmonitized specie is the voluntary cure for this disease. E.C. Riegal's New Approach to Freedom is another approach I am only now reading.
Current Credit Cycle by the Charts
Control of Countries
The IMF and World Bank offer governments credit for major infrastructure projects in exchange for entire utilities as collateral. The U.S. contractor overestimates the benefits and under estimates the costs, the the projects are invariable unprofitable and the company gets the collateral.
Read Confessions of an Economic Hitman. Watch interviews with the author, John Perkins: Part 1 and Part 2.
Government Economic Leaders Surprised that Real World Isn't Responding to their Magic Pixie Dust. Key phrases in Greenspan video "huge overhang of federal debt we've never seen before ... once in a century event." Such situations without a history is what is discussed in the second video on its psychology, which doesn't really begin until 8:30 minutes.
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