have just written a success manual. Actually, it’s a book on
the world’s oldest, best, yet least implemented success manual.
I posted it on-line this week. It’s free — a bonus for my readers.
You can be
a success, just not at zero price. The price is high. The manual’s
price isn’t. It’s in the public domain. But the cost of implementation
is personally much higher than most people are willing to pay.
It’s a lot
easier to sell a success manual than a failure manual. To sell a
manual based on a record of personal failure, you must first gain
the reputation of being highly successful. That isn’t easy. But,
as I shall show, it’s doable.
a slogan: "Nothing succeeds like failure." You must believe
this with all your heart.
Next, you need
a verifiable track record of failure: a career-long series of failures
which nevertheless gains you the reputation for being an extraordinary
success. You need to be like the pointy-haired manager in "Dilbert."
He survives, no matter how much havoc he creates.
Reserve System surely qualifies. I can see the headline in a full-page
Wake up the
financial idiot inside you! How you can cash in big-time on your
are the bullet teasers.
heard the phrase, "a license to print money." How
to get one.
- How to
plant your very own tree that everyone says money doesn’t grow
- How to
get the reputation of being a brilliant rescue specialist when
you actually caused the disasters, some of them catastrophic.
- How to
get all the money you want and then decide how much to pay the
government at the end of the year.
- How to
silence your most dangerous potential critics by hiring them
or else by buying them off with money that costs you nothing.
- How to
get your few unbought critics labeled by the media as conspiracy
- How to
bamboozle Congress in full public view at least four times a
year, decade after decade.
When you read
the ad, you think, "This is some kind of joke." Indeed,
it is: a practical joke — the most successful practical joke in
modern history. It’s highly practical for central bankers. The joke’s
The Bank of
England pioneered this failure-guaranteed system in 1694. It was
a privately owned bank that had the right to issue currency and
buy the government’s debt. As its powers were expanded by Parliament
over the years, its notes became legal tender. Creditors had to
accept them in payment of debts.
It was only
at the end of the 19th century that central banking became
universal. It took until December 22 (House) and 23 (Senate), 1913,
when most of Congress had gone home for the Christmas holidays,
for the Federal Reserve System to be enacted into law. President
Wilson signed the bill that same day. All the Democrats voted for
it. The Democrats had traditionally opposed central banking. Republicans
tended to oppose it, they who had always favored central banking.
Bryan, who had been the Populist opponent of Eastern bankers and
banking, was President Wilson’s agent for getting the Federal Reserve
Act passed. As Secretary of State, he lobbied Congressmen to vote
for the bill. Years later, he said this had been his greatest mistake.
It is always
All it took
was a name change. It is called the Federal Reserve System. The
work "bank" is nowhere to be seen. It has 12 regional
banks, so as to confuse the rubes. The New York FED was for decades
the main decision-maker, not the Board of Governors. The New York
FED is the only permanent regional bank with membership on the Federal
Open Market Committee, which decides to buy or sell debt.
My point is
simple: all it took was a name change and the creation of insignificant
regional reserve banks to gull the rubes in 1913. Today, no one
This is the
central fact: no one cares.
of all views (except the Austrian School, and even some of them
do) accept the idea of central banking. Economists are employed
by the hundreds by the system. The freshman college economics textbooks
are all favorable. So are all the upper division textbooks on money
There is no
other agency of government that has universal acceptance, yet all
but the Board of Governors are not part of the government, as their
websites’ addresses indicate. They are all "org."
The FED is
the most powerful privately owned monopoly in the United States
and therefore the world. Yet anyone who points this out as a negative
factor is dismissed as a crackpot or a conspiracy theorist or both.
No other organization
in the United States is equally immune from criticism in the Establishment
When you find
any idea or organization that is immune from criticism from the
major institutions, you are inside the temple. This was the title
of William Greider’s book on the FED, Secrets
of the Temple: How the Federal Reserve Runs the Country
(1987), which was unwilling to call for its abolition.
a 1988 review in The Washington Monthly, a liberal magazine,
the author made the point: nobody cares any more.
the Federal Reserve had its philosophical roots in the populist
uprisings of the late 1800s, when farmers and small businessmen
rose up against the power of the big banks. But the bankers managed
to frame the new institution in a way that gave them effective
control. Reforms made in the 1930s diluted the power of the banks
over the Fed but left intact an unusual, hybrid government institution
with little direct accountability to the public. The president
appointed Fed governors, but they held 14-year terms that assured
their independence. The chairman held only a four-year term, but
that term was set so that one president could saddle his successor
with an uncongenial central banker.
arrangement went unnoticed by most people. As Greider points out,
the "money question" was the subject of great debate
during most of the nineteenth century, when William Jennings Bryan
stirred thousands with his famous "cross of gold" speech,
calling for an abandonment of the gold standard. But in the twentieth
century, the Fed succeeded in convincing the public that monetary
policy was an arcane undertaking that need not concern the average
American. Never mind that the Fed had the power to bankrupt thousands
of small businesses, to erode a lifetime’s savings, or to throw
millions of people out of their jobs.
Maybe the most
accurate book title on the FED is this: The
Federal Reserve: An Intentional Mystery. It was published
over two decades ago by Praeger, an Establishment publisher.
The plan worked.
No one cares.
disasters have been the recessions, above all, the great depression
of the 1930’s, which was a consequence of the FED’s monetary policies
in the 1920’s. The best book on this is Murray Rothbard’s America’s
Great Depression (1963). It’s
the FED has escaped blame. The only exception was Milton Friedman’s
attack on the FED for its policies in the 1930’s (A
Monetary History of the United States, 1963), which he argued
could have been solved with more FED-money creation. He did not
blame the FED for the fiat-money funded boom of the 1920’s.
The FED is
praised when the economy booms. The bubbles are an unfortunate side
effect. What is a side effect? An effect we don’t like.
The FED is
criticized when it fails to intervene with more fiat money in any
liquidity crisis brought on by the FED’s slower rate of money creation
in the post-bubble period. The critics say that the FED must take
action to lower interest rates. The FED always does.
Then the praise
resumes. Price inflation accelerates. Debt accelerates. Bubbles
reappear. All this is blamed on speculators.
The FED has
the reputation of being the man on the white horse: the rescuer
of last resort.
Here is the
program: (1) Create a problem. (2) Solve the problem. (3) Get praise
for having solved the problem. (4) Make sure the solution leads
to the next problem. Repeat forever.
TO PRINT MONEY
much better than this. It’s a license to print digital money — so
much digital money that nobody except illegal immigrants use printed
money exclusively. They send it to relatives back home. So, there
can never be a run on the banks. Any money withdrawn from one bank
winds up in another bank. Digital money can’t go in your pocket.
Nobody who speaks English and who has a bank account uses paper
money to make most of his transactions.
This has been
the fulfillment of bankers’ dreams for five centuries: no more bank
runs by the public. No more lines in front of banks.
today is all those hedge fund managers and mortgage brokers, who
packaged mortgages and other collateralized debt obligations (CDO’s),
and who are now facing default by the borrowers. There is no guaranteed
market for these new, creative, and untested forms of debt.
2007, the markets for billions of dollars worth of these supposedly
marketable securities simply disappeared at anything like a retail
price. Henry Liu comments.
In a financial
crisis, there may simply not be enough credit-worthy borrowers
at any interest rate level and the number of sellers stay stubbornly
larger than the number of buyers because sellers need to sell
precisely because they do not have credit worthiness to borrow
even at low interest rates and buyers stay on the sideline waiting
for even lower prices.
This is the
problem facing the FED and other central bankers. The outfits that
have run up the debts to the banks are no longer credit-worthy.
They now face bankruptcy. They cannot unload their assets at anything
like book value. The commercial banks lent hundreds of billions
of dollars to them, and in a panic meltdown, these assets fall in
value. The FED can pump in money, but in a panic, banks will buy
T-bills, not the assets that are threatened.
This is why
the FED has announced that it will accept subprime mortgages as
collateral. But this still means mass inflation if it has to buy
all of them. The FED must create monetary base money to buy this
junk, and then commercial banks expand their loans to take advantage
of the FED’s increased reserves. They will not loan to struggling
hedge funds and similar sinking ships.
Fed adds liquidity directly into the banking system through the
discount window, it injects high-power money into banks by making
interest rate for overnight interbank banks loans within its set
target. The theory is that banks will in turn be able to make
loans at interest rates deemed appropriate by the Fed, thus relaying
the added liquidity to the market in multiple amounts because
of the mathematics of partial reserve.
This will inflate
the economy. It will not provide solvency for highly leveraged hedge
global financial markets, central bank capacity for adding liquidity
to the banking system is constrained by its need to protect the
exchange value of its currency. For the US, which depends on foreign
central banks to fund its twin deficits, any drastic fall of the
dollar will itself create a liquidity crisis from foreign central
banks shifting out of dollar in their foreign exchange reserves.
If the dollar
falls in relation to other currencies, the Treasury will have to
raise interest rates to attract replacement money. That money may
come from newly liquified American banks, but that does no good
for the liquidity squeeze of the private capital markets. Here is
what the FED is facing:
challenge is one of returning an abnormal economy of excess liquidity
to an economy of normal liquidity without extinguishing the flame
of liquidity entirely. The period of stress will be the time it
will take to work off the excess liquidity, to turn the liquidity
boom back to a fundamental boom. It is not possible to preserve
abnormal market prices of assets driven up by a liquidity boom
if normal liquidity is to be restored. All the soothing talk about
the fundamentals of the economy being strong notwithstanding the
debt bubble is insulting to the thinking mind.
FED tried from February, 2006 to mid-August, 2007, to move the economy
from excess liquidity to "normal" liquidity. But that
is what the FED has tried to do ever since 1920. It never sticks
to the program because of the resulting liquidity crisis and recession.
Will the stock
market hold up, once it is clear that the FED’s money is insufficient
to re-liquify credit-unworthy borrowers? Will the economy remain
positive? Liu does not think so.
This is a
debt economy fed by a liquidity boom. When the liquidity boom
turns to bust, all the strong fundamental indicators such as corporate
earnings will wilt from a debt crisis. Asset value cannot be held
up by simply adding excess liquidity forever without creating
hyperinflation. Also, some liquidity problems, such as those caused
by a loss of market confidence, cannot be solved by merely injecting
money into the financial system which in fact will only add to
the problem. Restoring market confidence requires a rational restructuring
of the economy to absorb excess liquidity.
solved the age-old problem of bank runs by depositors, the commercial
bankers are now facing massive default by their borrowers. If it’s
not one thing, it’s another.
The stock market
faces a problem. So does the corporate bond market. "When debts
are not repaid, financial value is destroyed which will be expressed
in falling asset prices. This loss of value will need to be reckoned
in the economy."
The FED loaned
$2 billion to the four largest U.S. banks on August 22. This was
through the discount "window." Why lend to banks? Why
not lend directly to faltering hedge funds? Liu has an explanation.
the Fed’s actions reflected a shift of the focus of concern from
hedge funds towards banks who loaned the hedge funds money to
trade with leverage. Banks are also exposed to the problem of
having committed credit lines to financial institutions with subprime
exposure, such as mortgage lenders or specialist investment vehicles.
Banks have also arranged loans to risky firms such as buy-out
groups, which they had planned to sell into a debt market that
had evaporated overnight. An estimated $300 billion of unsold
loans are sitting on bank balance sheets, gobbling up funds pushing
up reserve requirements.
If he is correct
about $300 billion of unsold loans, then the FED faces a true disaster.
I think Bernanke’s
attempt to wring liquidity out of the system was successful. The
FED is now running like mad to reverse this policy.
The FED keeps
intervening to make things better, and the result seems to be systemic
vulnerability. This is the fate of government intervention generally.
It produces the opposite of what the planners promised.
succeeds like failure, then the FED may soon be able to add a spectacular
chapter to its success manual.