The Creature from Jekyll Island

For the last two weeks, I’ve been reading The Creature from Jekyll Island, G. Edward Griffin’s book about the Federal Reserve System.  I knew, before I read the book, that the Federal Reserve is the US’s central bank, that its origins and operations were shrouded in mystery, and that people rail against it because the US dollar has lost 95% of its purchasing power in the century since the Federal Reserve Act was passed.  And I considered that, if we were as strong and prosperous a country now as we were a century ago, having a currency that rots by 3% per year as the price of that strength and prosperity wouldn’t really be such a bad deal after all.

Some of my other reading suggested that the Federal Reserve, in its original plan, was actually a good idea: since previous busts and panics had their origin in banks getting caught short: a lender of last resort that the banks could turn to would be useful.  Today, the Federal Reserve has taken on the task of pumping up asset bubbles to maintain the illusion of prosperity.  So somewhere along the line, perhaps it lost its way.

No, that wasn’t it at all.

Griffin asserts and documents that the many of the turning points of American history were organized and engineered by what we now call ‘the banksters.’  They had a hand in the Civil War, which in its origins wasn’t really about slavery at all.  (My mother used to tell me, as if reciting from her lessons years before, that the Civil War was primarily about economics, and secondarily about secession and slavery.)  They led us into both World Wars and the Great Depression,  And well before the events of 2008, they had scored multi-billion-dollar government bailouts of failed businesses.

And then I have to wonder:

  • I’ve been led all these years to believe that there was an America past in which free enterprise reigned and a man could succeed or fail on his own wits.  Was that ever really true, or was it all an illusion?
  • I’ve railed against our current President for what I believe are wrongheaded decisions.  And the Republicans rail against him, too.  But I don’t see that the Republicans are actually doing anything to try and stop him, although they have the ability.  And so I wonder: does it really matter who the President is?

5 thoughts on “The Creature from Jekyll Island”

  1. The Federal Reserve fails for the same reason that Keynesian economics does. No one likes to do the unpleasant part of the solution. If you are going to have a “banker’s bank” that is a lender of last resort, that bank needs to price for the risk of lending to a borrower who can get no other credit, which translates to rates of 20% or more rather than rates of under 2%. Similarly, Congress doesn’t like to raise taxes in supposedly prosperous times to pay back the deficits incurred in bad times. I will not get myself started on how the best that we can hope to do with “economic stimulus” is to pull forward normal demand, or the merits of having a tax policy that minimizes deficits.

    You might enjoy “The Great Deformation” by David Stockman, even though it is a doorstop of a book.

    We need to go back to Eisenhower’s warning about the military-industrial complex for some insight. In some very real ways, who is president doesn’t matter, because it would take so long to effect any sort of meaningful change. Add Johnson’s Great Society initiatives, expansion of Social Security to disability benefits without adequately funding the program and you begin to see the impossibility of reducing the various sorts of transfer payments. After Citizens United, elections can be bought much more directly.

    One thing that people didn’t notice is that before the various rounds of quanitative easing, treasury auctions were beginning to fail (i.e. received total bids that would buy less than 100% of the amount of bills and bonds for sale). There would be buyers of Treasury instruments at some higher interest rate, but not at the interest rates that the U.S. is able to pay when you consider that all of our debt is simply rolled over, and we are borrowing more every year. It’s a great deal for the government to both get its interest payments back from the Fed AND depress interest rates that other lenders receive.

    Retirees and people who want to be able to get a few cents on the dollar per year on a liquid investment cannot. In the 401(k) world, they are starting to talk about how fidicuaries need to emphasize investing or savings, not both. Return OF investment is getting to be more important than return ON investment.

  2. You had recommended The Great Deformation a while back, and I found it most enlightening. From reading that came the thought that the Fed started out as simply a ‘banker’s bank,’ but suffered mission creep to the point where it is now trying to frantically inflate asset values to stave off disaster. But now I understand that that was the mission from the beginning.

    And the Fed doesn’t need to lend at 20% interest, I now understand, because any losses are foisted off onto the taxpayers.

    But what’s particularly scary, now that I think of it, is that in the 1920s, the Fed was doing its thing, pushing interest rates this way and that, inflating a huge asset bubble in the process. And in mid-1929, they realized that they were reaching a point of diminishing returns, and so they stood back and let the 1929 stock market crash happen. We’re at about the same spot now, with stock prices climbing skyward with nothing (save the Fed’s pluffing) to support them.

    Eisenhower was able to push for reductions in the defense budget–and make it stick–because he was an honest-to-goodness war hero. So in his case, he was able to make a difference. Then, in the 1960s, we were able to fight the Vietnam War and the war on poverty and go to the moon because many more people were paying into Social Security than collecting benefits… and the excess was lent to the rest of the government, which promptly spent it. I have to conclude that LBJ made a difference, too. But the military-industrial complex, and the poverty-benefits complex, and all the other complexes have since become entrenched.

    I actually believe that the Citizens United decision is correct: if you try to say that one can’t write commercially about political issues, so as not to manipulate elections, where do you draw the line? Even a kid’s movie like Cloudy with a Chance of Meatballs could be deemed to be a political message subject to regulation. My bigger concern is that fewer and fewer candidates for office seem to be actually worthy of it. More and more of them are open to being bought.

    And whether the effort is called ‘quantitative easing’ or not, the Fed is the designated buyer of last resort for Treasury notes. They’ll keep at it… until it’s too late.

    And if we’ve gotten to the point where ‘return of principal’ is what really matters, why bother with a bank at all? That’s what mattresses are for.

  3. You can take your choice between mattresses and burglar-resistant safes. The larger point is that the fiduciary responsibility of people who are managing investments or dispensing financial advice has been largely unenforced. People wind up in investments that are wrong for them given their investment horizon or risk tolerance to chase return on investment because they can’t afford to save enough money in lower-risk investments. This exposes them to losses that they would otherwise not incur, and also presumes that people can afford to save for retirement (or for any other reason) at all.

    We have grown to lack respect for the president and Congress, and this is a factor in the divisiveness of divided government. The risk is that we will be sucked in by some charismatic leader or strongman. I never saw the attraction of Obama (or Hillary Clinton for that matter) or any of the Republican candidates back in 2008. The big deterrent for more worthy candidates to run for national office is the cost. I read the other day that it costs only $100 to get your name on the New Hampshire presidential primary ballot. After that, the cost goes way up.

  4. Back when we had a productive economy, there were gradations of risk and return, and they were pretty well understood. Today, we live in a pluffage economy, and the rules of what makes a good investment are different. But I suspect that the usual sort of investment advisor hasn’t caught up.

    In the past, with non-zero interest rates, there were many plausible alternatives for actually earning a return on your money with minimal risk. Not anymore. ‘Zero interest rates’ is in fact an accommodation by the banksters to the reality that the Federal government (with whom they live in symbiosis) will never get out of debt, nor even make real headway in reducing the deficit.

    When I was thirteen, I imagined myself becoming a novelist. I gave it up, and went into engineering, because I realized that in order to get published, I would have to get people to like me. (Also, working with machines is way cooler than working with words.) Although I’ve been a leader and a manager, and was generally good at it, I don’t believe that I have the temperament to be a politician. There’s something about it that brings out the (for lack of a better word) assholes of the world. And while part of that is the necessity of fund-raising, that isn’t the whole problem. Candidates for NYC Mayor eligible for 6:1 matching funds (six dollars from the government for every dollar they raise from their own efforts), but the candidates aren’t any better than other elections. (Our previous Mayor, Mike Bloomberg, being independently wealthy, turned down the matching funds and financed his own campaigns.) Another hurdle is that if you do have a plan to fix whatever the problem is, it had better fit into eight seconds, or the public won’t be bothered listening. They’d rather vote for the guy who promises to lower your taxes.

  5. Now, we buy stocks because they are going up. You could buy the most-shorted stocks and wait for a short squeeze. Of itself, trend-following isn’t bad, but most people can’t live with much volatility in their investments. I remember observing back around 2000 that the stock market was the economy, and that the government would take a drop in revenues in 2001 because the four-year plan to convert IRAs into Roth IRAs would expire in 2000. This ignored that the law allowed a partial conversion to a Roth at any time, but the tax would be due that tax year.

    The big push about retirement plans has distorted the way that we think about saving and investing. We’ve been trained to chase the-short-term tax breaks. The drawback of 401(k)s is that they turn gains that should be taxed at the lower capital gains rate into ordinary income, given the length of time that the investments are likely to be held.

    I remember readng “The Gamesman” by Michael Maccoby when I was in business school and thinking that I was doomed because it’s not my nature to puff muyself up and play the various games that are required to get ahead. Had I succeeded in my original goal of becoming a doctor, I may well have wound up in pathology because it’s the questions that interest me.

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