Federal Reserve Typifies What’s Wrong with Economy

 

Updated Feb. 1, 2012 

There’s a troubling schism in U.S. politics, monetary policy and management of the economy.

Sure, at first blush, I agreed with a former GOP presidential candidate who raised eyebrows with his criticism of sacred cows. Rick Perry said Social Security is an “illegal Ponzi scheme” and he equates the Fed’s monetary policy with treason. He’s since self-destructed with his political approach.

He took a lot of heat for it before he dropped out of the race. Google his name and you’ll see 20,600 search results – mostly condemnation and sarcasm.

Cliff Schecter, an author and liberal PR activist, wrote a sarcastic blog for Al Jazeera, “Beware of Rick Perry, the French cuff cowboy.” Mr. Schecter‎ advised Democrats to minimize Mr. Perry’s chances for the high office – to ridicule him: “That he’s as fake as a three-dollar bill, all hat and no cattle, or to put it in a language Perry can understand – he’s Blazing Saddles, not The Unforgiven.”

Aside from such silly rhetoric, what about the facts?

Granted, Social Security is indeed a lifeline for millions of Americans. But it’s been well-documented that Congress has played games with the payroll-tax fund, and diverted billions of dollars to underwrite other underfunded initiatives.

Consequently, there has been an upsurge in published reports about Social Security running out of money. Of near-term consequence, to conserve cash flow, Social Security has been late in mailing checks to retirees the past two months.

The shenanigans with Social Security do make it a Ponzi scheme.

Federal Reserve mismanagement

As for the Federal Reserve, it gets worse. Bloomberg published a shocking story: “Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed.”

In a nice piece of forensic financial reporting – only made possible by a series of Freedom of Information appeals – Bloomberg reporters Bradley Keoun and Phil Kuntz revealed how the Fed secretly gave the financial institutions the outrageous loans totaling more than a trillion dollars in public funds. They examined nearly 30,000 pages of secret documents.

The reporters found the Fed furtively funneled $107.3 billion to Morgan Stanley, $99.5 million to Citigroup, and $91.4 billion to Bank of America. Nearly $300 billion – $298.2 billion in public funds were doled out from Aug. 2007 through Aug. 2010. Moreover, the secret bailouts were three times larger than what was publicly acknowledged by the other controversial bailout, the Troubled Assets Relief Program (TARP).

That’s right. The $1.2 trillion was in addition to the $160 billion in the TARP bailout funds.

Ironically, in 2006, and  just before the secret loans, Bloomberg reported Citigroup and Bank of America garnered $104 billion in profits.

Fifteen of the borrowers were European banks.

These huge sums of money totaled 25 times more than the $46 billion loaned by the Fed just after the 9/11 crisis.

The Fed’s justification for the secret loans: To prevent a depression.

However, for a different perspective, consider:

“While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed,” wrote the reporters.

More Fed failures

Other indications of poor discernment at the Fed include:

Fed dissenter: Economy’s biggest problem is distrust of Washington …. In this piece written by Peter Schroeder on thehill.com, the headline appears to be accurate. He quoted Richard Fisher, the president of the Federal Reserve Bank of Dallas.

In a mind-boggling statement, Mr. Schroeder cited Mr. Fisher’s opinion: “…businesses have ample access to credit from banks, but that a growing distrust of the nation’s political institutions is keeping them on the sidelines.”

It’s true about the mistrust of Washington. But the rest is preposterous. The big banks’ chicanery during that period helped cause the problem and the financial downturn – for dubious reasons, 38 percent in credit-card interest rates charged to small businesses and individuals – plus, canceled credit lines and denials in loan applications.

As a result of the resulting poor credit, many businesspeople simple do not qualify for loans. That’s the reason for relatively little in loan demand. In a column, I posed this question: Does the Federal Reserve Understand Small Business? The answer is absolutely not.

My sense, for many months, has been: The Legal War on Wall Street Chicanery Isn’t Finished.

You might recall another Fed-bailout beneficiary was Goldman Sachs. Investors were shocked by a published report, Goldman Sachs CEO hires criminal defense lawyer.

Meantime, despite all this secretive wheeling and dealing, this business portal has repeatedly warned about the dangers from public policies and mismanagement as we head toward a double-dip recession.

While writing this piece, I received an email from a frequent reader who complains about the “ruling class” of public officials who continually tax and waste resources. He sent a link for an ABC News video that shows waste by the Fed. You won’t believe what you see.

So instead of sarcasm about presidential candidates who question the Fed and other sacred cows, let’s get pragmatic and take off the blindfolds. It’s time for sober discernment and productive action.

From the Coach’s Corner, here’s more about the poor stewardship of the economy:

Only Fiscal Sobriety Will Prevent Further Fiscal Chaos

Do We Really Honor the Declaration of Independence?

After Taking Us for a Ride, A Vacation Is Warranted for Obama

“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

— Henry Ford

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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?

Top Economist: Obama Bank Tax Is a Con

 

It’s a challenge to put it politely – one of the nation’s leading economists says the bank tax promoted by President Obama is a sham.

“President Obama is at it again-pandering to rich and powerful political supporters, while portraying himself the guardian of the exchequer and champion of the little guy,” asserted Dr. Peter Morici in a commentary. “The president says his proposed tax on the capital of the largest banks and financial institutions is intended to recoup the TARP money that has not or will not be repaid.”

Dr. Morici believes it amounts to a public relations gimmick to confuse voters in two ways:

“First, the banks the president would tax are repaying their TARP money with interest to the Treasury,” he explained. “Though not all of the TARP money given to the banks has yet to come back, the government will get it all back with a significant profit because the government was paid such generous interest under the terms of the TARP.

“Second, the president misused the TARP money by investing in GM and Chrysler, and GMAC, and that is where the government will lose money,” he added.

Noted authority

If you do an online search of his name, you’ll see Dr. Morici is a widely quoted business professor at the University of Maryland and former chief economist at the U.S. International Trade Commission in the Clinton Administration.

 “If President Obama were to tax anything to recoup lost TARP funds, it should be cars,” he said. “However, that would anger the UAW, staunch supporters of the president and Democrats running for Congress.”

What I enjoy about this economist is that he understands the numbers, explains the impact of events and does it candidly.

“The bank tax is in response to public outrage over the $150 billion in bonuses paid in 2010 on 2009 bank earnings,” Dr. Morici contended. “The tax would only raise $9 billion in 2010 – a pittance compared to the bonuses.”

He points out the Wall Street bonuses were supposedly earned when the firms were bailed out by loans with interest rates at “near-zero.”

“The bankers are screaming about a death wound when the tax is merely a paper cut,” he said.

“The tax is a bad idea,” the economist maintained. “It won’t fix the banks, who continue trading complex derivatives, energy futures and repackaging old mortgage-backed securities instead of making new loans to worthy homeowners and businesses.”

Disingenuous developments

Here’s the first of two more disturbing and disingenuous developments:

“The president’s tax would let the bankers, who contribute mightily to campaigns of congressional Democrats and President Obama, keep their bonuses after they nearly wrecked the global economy with irresponsible risk taking on the public’s tab,” said Dr. Morici. “This is horrible public policy and demagoguery.”

Secondly:

“The proposed bank tax is meaninglessly small, serves no purpose toward reforming the banks, and is merely an attempt by the president to appear on the side of the auto industry and against the banks, when he is really on the side of union organizers and the bankers,” he wrote. “As with the union exemption from the Cadillac tax in the proposed health care reform compromise, the president is putting his political debts ahead of public purpose.”

Dr. Morici indicated the president would be well-advised to push for a 50 percent tax on bonuses exceeding a quarter of a million dollars, as is the case with British Prime Minister Gordon Brown.

“Instead, the president lets the bankers keep their money, and sends Democrats calling for contributions,” he concluded. “It’s all very insidious.”

From the Coach’s Corner, for more of his insights: Peter Morici’s Curriculum Vitae.