Why Bernanke Is in Panic Mode

by Gary North
by Gary North
Recently by Gary North: Mass Layoffs: The Continuing Devastation

Bernanke video: He stutters; he stammers; he is in visible panic mode over Ron Paul's bill to audit the Federal Reserve. Watch it. You'll love it! Then send it to your friends.

Usually, when Ben Bernanke is interviewed, he has the demeanor of a college professor in the presence of freshman students. Of course, as a full professor, he did not have to teach freshmen. That is for untenured assistant professors to do. Stammering and stuttering are therefore a real departure for him. There is a reason for this.

For the first time since 1914, there is a public debate in Congress over the Federal Reserve's power. Never before has a majority of the House of Representatives called for what should always have existed: Congressional scrutiny over the FED's money. Bernanke says that Ron Paul's bill to audit the Federal Reserve is a bill to audit Federal Reserve policy. Yet the bill says nothing about auditing policy. So, what is he talking about?

Bernanke says that Congress can have access to an audit at any time. Sure it can – an audit vetted and sanitized by the FED, where no one knows which banks got what bailout money. This is an audit in the way a CIA audit is an audit. The main differences are these: (1) the CIA legally operates only outside the borders of the United States; (2) the CIA can assassinate any uncooperative Congressman who insists on a full audit. The FED does not have the second power, but it is not limited by the first restriction.

What has Bernanke panicked is this: the Federal Reserve has bailed out the biggest banks and has let almost 100 little ones die. This is crony capitalism at its most notorious.

The threat is that Congress will discover what should be obvious: the biggest banks last October almost went bankrupt. Bernanke and Paulson admitted this to Congressional leaders. This is how they got the leaders to authorize the Treasury bailout. This is why the FED swapped marketable Treasury debt for unmarketable toxic debt at face value with the biggest banks.

Which banks? The FED refuses to say.

This is the heart of the matter. This is what has Bernanke in a panic. If Congress compels a full audit – a real audit, not a FED-controlled audit – individual members of Congress will discover that the American financial system is a house of cards. A few of them will release the results of the audit to the public. This will include Website publishers, who will go over the audit, line by line. The mainstream media will face being scooped by newsletter writers, so they will try to publish first.

The public will find out which banks are not safe. This is what has Bernanke in panic mode.

The public will pull deposits out of the biggest, least safe banks and open new accounts at banks that look safer. That will bust some very big banks.

There is no way that the FDIC could cover the losses of even one of these giant banks. It is down to $12 billion in assets, mostly T-bills. It would have to come to Congress for the line of credit that Congress has extended: $500 billion.

The banking cartel would face a breakdown. Why? Because the public would finally learn which big banks got how much money, how much Treasury debt for toxic assets, and on what terms.

KEEPING DEPOSITORS IN THE DARK

Bernanke says this bill is all about criticizing Federal Reserve policy. Not really. It is all about exposing policy to the public, and letting them decide where to deposit their money.

This thought of depositors finding out which banks are at risk is what the Federal Reserve was created in 1913 to prevent. The banking cartel must prevent bank runs from spreading. If the public had explicit information on what the FED did and why, the public would be in a position to pull their money out of illiquid, economically insolvent large banks.

Bernanke feigns a fear of Congress setting policy. What he is afraid of is depositors setting policy. He does not want depositors to see which banks are at risk.

The bankers live in fear of their depositors. Depositors can bust a bank in a matter of days. All they need to do is write a check or send a bank wire transfer from their present bank to a different bank. If too many depositors pull money out of Bank A to send to Banks B, C, or D, Bank A goes under. The FDIC has to have a Friday afternoon emergency session where it absorbs the bad assets of Bank A and opens bidding for the good assets.

The big banks love this when they are not the targets of the bank run. They can buy up millions of dollars of good assets, while palming off the bad assets to the FDIC. If the FDIC can't cover the losses, then Congress picks up the tab. A sweet deal for the surviving banks!

But what if the surviving banks are being held together with accounting gimmicks. Example: the FED "lends" Treasury bills (marketable) at face value to big banks that are sitting on a hundred billion dollars in unmarketable assets: bad real estate loans. The receiving banks list the Treasury bills as their capital. The government auditors are then instructed to evaluate the solvency of the banks in terms of the quality of their loans – in this case, T-bills. No problem!

But these assets are borrowed from the FED. In theory, the FED can force the banks to swap back at face value. At that point, the banks are technically bankrupt. These assets have no liquid market.

The solvency of the American banking system rests on smoke and mirrors. Bernanke knows this. Congress is ignorant. Congress thinks things are probably OK. But a majority of House members want to be safe. They don't want the folks back home to believe that they are asleep at the wheel, which Congress has been since 1914 with respect to the Federal Reserve. So, a majority of House members co-sponsored Ron Paul's bill to audit the FED.

Barney Frank understands the threat. He has bottled the bill up in committee. This way, members who support the bill can tell the folks back home that it's not their fault. If they are asked about this, they can say, one by one, "I am really sorry. I did my best, but the bill is bottled up in committee. There is nothing I can do."

Of course there is something they can do. They can vote to bring the bill to the floor for a vote. There, they will be exposed to the folks back home. Did they vote "yes" to audit the FED? By co-sponsoring the bill, they can tell the folks back home, "I'm with you on this." By letting Frank bottle it up in committee, they can plead powerlessness. Nice.

It's all smoke and mirrors. It's all about not letting depositors find out how their banks are doing.

BERNANKE IS CONTEMPTUOUS OF CONGRESS

Bernanke said this on-camera: "The public does not want Congress to set monetary policy." If that really is the case, then it is odd what the United States Constitution says about this. Consider Article 1.

Section 1. All legislative powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.

Then Article 8 spells out the powers of Congress. These include:

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

To provide for the punishment of counterfeiting the securities and current coin of the United States.

That surely appears as though Congress does have lawful power over money. That in turn seems as though the public can ask Congress to fulfill its duties. That seems as though Congress has the legal right to audit or set policy for the private agency – the Federal Reserve Bank of New York – that executes the monetary policy of the government agency, the Board of Governors of the Federal Reserve System.

The way that the public kept both Congress and the commercial banks under control was through the silver standard, up until about 1815, and then by the international gold coin standard until late 1913, when the Senate rushed through the Federal Reserve Act when most members had gone home for the Christmas recess. President Wilson signed the bill into law that evening: a very fast track.

When Dr. Bernanke showed contempt for Congress in the name of the American people, he forgot to mention an alternative to both the Federal Reserve and Congress: the gold coin standard. That system lodged the power of the veto in the hands of the public. That was why commercial bankers, central bankers, and politicians joined forces to ridicule both the gold standard and the earlier silver standard.

A precious metal coin standard – coins payable at a government-fixed price on demand for paper money – gives the public too much authority over monetary policy. This gives them too much authority over government tax policy: no inflation tax.

The Federal Reserve Act transferred legally sovereign power over money from Congress to the Board of Governors of the FED. The Board of Governors labored under the restraint of the gold coin standard domestically until Roosevelt unilaterally abolished it in 1933. Then Nixon unilaterally abolished the last remaining traces of the international gold standard in 1971. That left the Federal Reserve System with nearly uncontested power over money, with only the infamous and much-denigrated "bond vigilantes" possessing an independent veto over FED policy.

Bernanke is adamant: any attempt by Congress to monitor the activities of the FED is an assault on Federal Reserve sovereignty. The Constitution lodges such sovereignty in Congress, but Congress delegated this sovereignty to the not-yet operational Federal Reserve in late 1913.

Ron Paul's bill is the first bill ever to gain widespread support in the House to transfer the right to audit the FED to Congress. This is the first time since 1914 that any Congressman has persuaded a majority of his colleagues to assert the legal sovereignty that the Constitution delegates to Congress with respect to money. This is why Bernanke is in panic mode.

This is the first chink in the FED's armor since 1914. This bill is a nightmare for the FED. Yet the FED's staffers are going to get paid their above-market salaries and keep their fully vested pensions, with or without an audit by Congress.

PANIC IN THE BOARDROOMS

The real panic is in the boardrooms of the largest banks. This bill will allow Congress to see the specifics of the sweetheart arrangement that big banks have had with the FED. Congress will get the statistical facts, and newsletter writers will interpret them for subscribers – rich subscribers.

The big bankers know that their banks would be insolvent without Federal Reserve bailouts, Treasury Department bailouts, and smoke-and-mirrors accounting. They know that any light thrown on the system's smoke-and-mirrors accounting will reveal the insolvency of the biggest banks.

The directors of these banks do not want the public to be able to get access to these facts by means of a full-scale audit of the Federal Reserve System. The paper trail, meaning the digital money trail, leads to their banks. This terrifies them. It should.

The big bank bankers are now in full defensive mode. They see the threat. They dare not go public with warnings about letting the public gain access to full information about the bailouts since last September. This would appear to be self-serving, which it would unquestionably be. So, they let Bernanke be their spokesman, as if Bernanke and the Board of Governors were not enforcers of the fractional reserve banking cartel.

This puts Bernanke on the spot. He dares not tell his interviewers that the United States Constitution lodges in Congress legal sovereignty over the money of the United Stares. He does not want to remind the public of this Constitutional fact. So, he denigrates Congress as incompetent to set monetary policy. He is therefore contemptuous of the Constitution, but he dares not let this slip out. That would not be prudent.

If Ron Paul's bill is kept bottled up, this will be grist for the mill of a growing number of Americans who have only recently learned about the existence of the Federal Reserve System. From the beginning, the Federal Reserve was designed to be a mystery to the public. This strategy succeeded for over 90 years. But Ron Paul's Presidential campaign at long last began to gain attention for the FED. The campaign took place in 2008. That was the year of the crash and the desperation bailouts. This was bad timing for the FED. This bad timing led this year to widespread member support in the House of Representatives for an audit of the FED. Worse yet, the bill was sponsored by Ron Paul – the FED's greatest Congressional opponent in this generation. This is very bad news for the banking cartel. It took place on Bernanke's watch. He is in panic mode.

CONCLUSION

The Federal Reserve has lost a lot of its legitimacy. It has also lost a lot of its secrecy. By opposing the audit, Bernanke is positioning himself as an anti-democratic representative of the Wall Street banks. Of course, this is what every FED chairman has been. But this is the first time since 1914 that any FED chairman (or his equivalent) has had to adopt this positioning in full public view.

This is bad news for the Federal Reserve. When the economy gets worse, as it will, the FED will receive its share of the blame, which is considerable. Bernanke is the primary visible agent of the FED. He will no longer get a free ride. The critics are at long last getting a hearing by the informed public – the people with lots of money deposited in large banks. This is why he has been going on television to present his case. No other FED chairman in history has been forced to do this. This is a sign of the degree of panic in the boardrooms.

The more often Bernanke goes on TV, the more people will think: "Methinks he doth protest too much."

This is a very good thing.

August 1, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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