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Wednesday, September 24, 2008

The Real Fraud

According to the NY Post

The FBI has four major US financial institutions in its crosshairs for triggering the potential collapse of Wall Street and the need for a $700 billion federal bailout plan, law-enforcement officials said yesterday.

Citing potential fraud charges, the feds are probing mortgage-finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc., which last night signed papers making its $85 billion federal loan official.

So apparently the United States government is now investigating these companies for possible fraud. Ironically, the biggest fraud ever perpetrated is the creation of the Federal Reserve Bank. Essentially, the Federal Reserve Bank (formed in 1913) was authorized to print federal reserve notes (the paper dollars we use) that were originally fully redeemable for gold. Once the government had the nations' gold in its possession (in exchange for these notes) , FDR outlawed the private holding and import of gold in 1933. The notes were still redeemable in gold but only foreign central banks were able to do so. In 1971, Nixon stopped even this limited practice and the gold standard was officially abolished. So in a 60 year span, the United States government expropriated the nation's gold supply.

Of course, the Federal Reserve Bank buys US Treasury debt which it pays for with fake money that it creates. This is the mechanism by which the government can infinitely deficit spend and by which it inflates the money supply. This process is the root cause of the boom bust cycle and the fundamental economic cause of what we are experiencing (along with the further fraud perpetrated by the government by first forcing banks to lend to low quality buyers and then tacitly backing mortgage backed securities through federally "sponsored" agencies like Fannie and Freddie as well as offering deposit insurance with funds it does not have). The origination of this system and the destruction it has wrought is one of the most heinous crimes imaginable so if the FBI wants to investigate fraud it should walk down the street to the Federal Reserve and the Congress which authorized this unconstitutional expropriation of private gold and the issuance of fiat money.

Incidentally, if you wish to study the economic effects of inflation further, I highly recommend Chapter 9, of Capitalism: A Treatise on Economics by Dr. George Reisman. A fully downloadable and searchable version of the book appears on the author's site and can be downloaded by clicking this link. Dr. Reisman elucidates the destructive effects of inflation including using examples that sound like they were taken out of today's newspaper although the book was written over 20 years ago. For example, he illustrates how a credit crunch can form as a result of inflationary price increases in real estate. I'm not kidding although I wish I was. He also explains how a 100% gold reserve standard could immediately put an end to this crisis, stop inflation, and return the banking system to rationality and solvency.

1 comment:

Tito Tinajero said...

Your analysis work work logically if the current crisis was cause by the Mortgage business, but it is not. The Mortgage was the match the set the pile of gasoline soaked kindling. The the pile of was gathered and soaked not by Fannie and Freddie or any other Mortgage securities, rather it was the toxic and UNREGULATED CDS markets. http://www.time.com/time/business/article/0,8599,1723152,00.html
The major problem with objectivism and many of the libertarian philosophies is a foundational flaw in understanding humnan nature. By believing in the myth of rational self-interest without distinguishing "self" or "interest," Objectivism is a romantic fantasy with little conmection to reality. There is a reason the found text of Objectionism are fictional novels. If we are to get out of this mess, we need to be ground in good old fashion American Pragmatism.