KILL BEN

Ben Bernanke is on yet another self-serving mission to save his job. Please consider The right reform for the Fed an op-ed by Ben Bernanke in the Washington Post.

Here is Bernanke’s entire article (in italics) with my comments interspersed in plain type. Most of my comments are made straight to Ben Bernanke, but they apply in general to all central bankers.

Bernanke: For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change.

Mish: Ben, the reason people are calling for a change is that you and the Fed wrecked the economy. You did not see a housing bubble, nor did you foresee a recession. I would also like to point out your selective memory loss about your role in bailouts. To refresh your memory, please refer to Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America “Turd in the Punchbowl” for details.

Bernanke: Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

Mish: No Ben, we need a system that works differently. You have proven beyond a shadow of a doubt that you and the Fed are incompetent and cannot be trusted.

Ben here is a compilation of your own statements made from 2005-2007 proving you have no idea what you are talking about.

Bernanke: These matters are complex, and Congress is still in the midst of considering how best to reform financial regulation. I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions.

Mish: Hello Ben, exactly what is that core function? Is it a dual mandate of price stability and full employment by any chance? Pray tell exactly how badly did you blow that? Did you succeed at either? Is it mission impossible in the first place?

Bernanke: Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.

Mish: What Global consensus? Other Central bankers? What about the consensus of those who saw this coming? Pray tell why should anyone listen to those who were wrong every step of the way?

John Hussman has the right idea in Bernanke Sees A Recovery – How Would He Know? “We continue to expect a fresh acceleration of credit losses as we enter 2010. It would be best if we faced these challenges with more thoughtful leadership.”

Bernanke: The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

Mish: Ben, you sound like an arsonist taking credit for helping put out a fire, before the fire is even out, after you lit the match and tossed on the gas in the first place. For all the problems you have caused, don’t you at least have the decency to show a little humility?

Bernanke: The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

Mish: Ben, that is your self-serving assertion that you saved the world. Care to debate the subject?

All the Austrian economists would disagree.

Many others disagree as well. Please see Hussman Accuses the Fed and Treasury of “Unconstitutional Abuse of Power” for one such example.

Bernanke: Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again.

Mish: Ben, it takes a lot of gall to say that while you are doing nothing to dismantle too big to fail enterprises such as Goldman Sachs, JPMorgan, Citigroup, etc. Moreover, given that you could not see the housing bubble come or the internet bubble coming, and given that you still believe that bubbles are best dealt with after they blow up, your words are meaningless.

Bernanke: The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.

Mish: Ben you acted the way all regulators act: Doing nothing while Rome burns, then attempting to prevent Rome from burning after it has already burnt to the ground.

Ben, in case you did not notice, the market already shut down subprime mortgages, pay option ARMS, HELOCs, and excessive credit card debt. Your feeble cries are too little, too late. At best your efforts would prevent the last problem, but not the next one. The market has already prevented the last problem privately, even as Fannie and Freddie are once again taking on excessive risk as government entities.

The first thing any regulator in his right mind would do would be to shut down Fannie and Freddie, yet you and the Fed feed the beast, bloating your balance sheet with garbage in the process.

Bernanke: Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

Mish: Ben, wake me up when you decide to eliminate Fractional Reserve Lending because until you do, you can never eliminate the problem.

Bernanke: We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the “stress tests” of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system. There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

Mish: Stress tests?! You are actually bragging about stress tests?! Those stress tests that predicted a worst case scenario of unemployment of 9.8% in 2010 when I called for that in August of 2009?! How many times have you had to revise your stress test estimates? 3 times and counting by any chance?

Bernanke: This expertise is essential for supervising highly complex financial firms and for analyzing the interactions among key firms and markets. Our supervision is also informed by the grass-roots perspective derived from the Fed’s unique regional structure and our experience in supervising community banks.

Mish: Your expertise is needed to supervise community banks?! Oh really? Let’s consult the latest FDIC Quarterly Banking.

“The number of insured institutions on the FDIC’s ‘Problem List’ rose from 416 to 552 during the quarter, and total assets of “problem” institutions increased from $299.8 billion to $345.9 billion. Both the number and assets of ‘problem’ institutions are now at the highest level since the end of 1993.”

Pray tell how bad would that have been if you were not an expert in such matters?

Bernanke: At the same time, our ability to make effective monetary policy and to promote financial stability depends vitally on the information, expertise and authorities we gain as bank supervisors, as demonstrated in episodes such as the 1987 stock market crash and the financial disruptions of Sept. 11, 2001, as well as by the crisis of the past two years.

Mish: Ben, did it ever occur to you that your handling of this crash is a repeat of the Fed’s mishandling of the 2001 recession?

I guess not, but it is. The Greenspan Fed, of which you were a part, blew an enormous housing/credit bubble to bail out banks from stupid loans made to dotcom companies and Latin America.

You are back at it once again, only bigger.

Your policy is and always has been to blow repetitive bubbles of increasing amplitude, each bigger than the last, hoping to bail out the system. You have learned nothing from 2001, from, Japan, or from the Great Depression.

You are a complete disgrace in your inability to learn anything from history, and unfortunately the US is held hostage to your foolish policies.

Bernanke: Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs.

Mish: Cutting interest rates aggressively helped create the housing bubble, something Bernanke still has not figured out.

Bernanke: Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates.

Mish: Ben, you are at your most disingenuous self when you harp about inflation. The ONLY source of inflation is the Fed and fractional reserve lending. To eliminate inflation, all that is required is to get rid of both. But you don’t want that do you?

No! You want a target of 2% inflation while ignoring asset bubbles because that is what the banks wants. You know and I know that inflation is a tax on the middle class for the direct benefit of the government and those with first access to money (banks and the already wealthy).

Ben, have you ever looked at a chart of two percent inflation over time? Here it is:

Inflation Targeting at 2% a Year

click on chart for sharper image.

Ben, Inflation targeting “works” until the ponzi scheme blows up when interest on the debt is no longer payable, the pool of greater fools runs out, attitudes towards debt and credit change, or some other stress such as global wage arbitrage and job losses interferes with the ability of consumers and businesses to take on more debt. In this case, all of the above happened.

Ben, you remain in Academic Wonderland with formulas that long ago stopped working.

Bernanke: Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.

Mish: Ben, please stop lying through your teeth. If the Fed is as transparent as you say, you should not be fearing an audit. Furthermore, Ron Paul’s amendment specifically bars Congress from intervening in any aspect of monetary policy.

Your mission, is to make sure no one can ever hold you accountable for your illegal actions or to find out exactly what junk is on your balance sheet (and what it is really worth).

There is a difference between “independence” and “secrecy”. The Fed is not accountable to anyone right now and you know it.

Bernanke: We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

Mish: Indeed, we have come a long way thanks to Ron Paul’s Audit the Fed bill. There still is a long way to go. It is time to put in a plan to phase out fractional reserve lending and phase in a dollar backed by something rather than nothing before the Fed can do any more damage to the economy.

My Plea For Everyone

I ask everyone to read Murry N. Rothbard, The Case Against The Fed.

It is a short 151 pages, and easily understandable by all. Here is an online PDF of The Case Against The Fed and it is free courtesy of Mises.

The book covers many topics including Why Fractional Reserve Lending is Fraudulent, The Genesis of Money, The Optimum Quantity of Money, FDIC, and What Can be Done.

From the Introduction …

Money And Politics

By far the most secret and least accountable operation of the federal government is not, as one might expect, the CIA, DIA, or some other super-secret intelligence agency.

The CIA and other intelligence operations are under control of the Congress. They are accountable: a Congressional committee supervises these operations, controls their budgets, and is informed of their covert activities. It is true that the committee hearings and activities are closed to the public; but at least the people’s representatives in Congress insure some accountability for these secret agencies.

It is little known, however, that there is a federal agency that tops the others in secrecy by a country mile. The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nation’s vital monetary system, is accountable to nobody—and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue. …

Stop The Power Grab

It is imperative to stop the Fed’s power grab. The Fed bailed out banks and the bondholders of banks, illegally, at taxpayer expense. Moreover, the Fed would do it again in a flash. While the bondholders were made whole (the same applies to Fannie and Freddie), taxpayers are footing the bill.

Moreover the Fed has expanded its balance sheet by $trillions and no one really knows exactly what is in it, how much it is worth, or how much taxpayers might be on the hook for it.

While making claims of transparency, the Fed has fought to kill mark to market accounting at banks and the Fed certainly does not mark its own books to market. The whole thing is a huge shell game. The FDIC and the entire banking system is insolvent.

Bernanke’s self-serving mission is to make sure the Fed is not accountable for its actions and my uphill battle mission is to help move along Ron Paul’s bill so that Bernanke does not succeed.

Please contact your legislative representative once again, and let them know you want a complete accounting of the Fed, what is on the Fed’s balance sheet, and exactly what that garbage is worth, marked to market.

You can get Phone, Fax, and Email numbers from the Online Directory for the 111th Congress.

Please take this post and send it to anyone you think might read it.

Mike “Mish” Shedlock

ROTTEN SOULS

The “Goldman Conspiracy” is the perfect B-school case study of Wall Street’s secret contagious pathology, with insiders like Lloyd Blankfein, Henry Paulson and others pocketing billions more of the firm’s profits than shareholders, evidence the new “mutant capitalism” has replaced Adam Smith’s 1776 version which historically endowed the soul of American democracy as well as our capitalistic system.

Sadly for America Goldman’s disease is rapidly becoming a pandemic spreading beyond Wall Street’s too-greedy-to-fail banks, infecting our economy, markets and government as it metastasizes globally.

What are the symptoms of this growing “soul sickness,” this “pathological mutation of capitalism” Bogle fears? Recently we reviewed the consequences of this “soul sickness.”

Today we’ll paraphrase news reports about 15 symptoms spreading “soul sickness” beyond the boundaries of this Goldman case study: These are the 15 signs of a moral pathology undermining not just banking but American democracy and capitalism.

1. Gross denial of any moral damage caused by their rampant greed

Seeking Alpha: “Goldman is America’s most hated corporation.” We cheer as Rolling Stone’s Matt Taibbi calls Goldman “a giant vampire squid wrapped around the face of humanity.” Banks triggered a global crisis. Main Street suffers. Greedy bank CEOs raid the Treasury then stuff $30 billion in their bonus pockets, up 60% from last year. They are our 21st century General Motors, convinced “What’s good for Goldman is good for America.” We saw how that arrogance ended. Wall Street has similar suicidal symptoms.

2. Narcissistic egomaniacs with secret ‘God complexes’

London Times’ John Arlidge interviewed Goldman CEO Blankfein: “He paid himself $68 million in 2007, now worth more than $500 million, yet insists he’s a blue-collar guy. He says banking has a ’social purpose,’ just a banker ‘doing God’s work.’” When I was at Morgan Stanley in the 1970s the firm ran an ad: “If God Wanted To Do a Financing, He Would Call Morgan Stanley.”

Today, all of Wall Street is dual diagnosed: They’re morally blind money addicts who believe they’re “God’s chosen.” AA would say: They haven’t “bottomed,” won’t recover from their disease till a disaster hits, with another market meltdown and the “Great Depression 2.” Then maybe they’ll “quit playing God.”

3. Paranoid obsessives about secrecy, guilt and non-disclosure

Bloomberg: “New York Fed’s Secret Deal: Taxpayers paid $13 billion more than necessary when government officials, acting in secret, made deals with banks on AIG, buying $62 billion of credit-default swaps from AIG.” The government would eventually cover about $180 billion in AIG swaps backing toxic CDOs when Paulson and Ben Bernanke double-teamed to bailout Goldman, saving them from bankruptcy.
4. Power-hungry need to control government using Trojan Horses

Wall Street Journal: “For a year Goldman said it wouldn’t have suffered damage if AIG collapsed. But a new report kills that claim. TARP inspector general found that then New York Fed Chair Tim Geithner gave away the farm. If AIG had collapsed, Goldman would have had to cover the losses itself. They couldn’t collect on the protection of AIG swaps.” Yes, Goldman was bankrupt. But friends in high places always save them.

5. Borderline personalities who regularly ignore conflicts of interest

New York Times: “Before becoming Treasury secretary in 2006, Hank Paulson agreed to hold himself to a higher ethical standard than his predecessors. He specifically said he’d avoid his old buddies at Goldman where he was CEO. Later Congress saw many conflicts of interest, not just meetings but favorable treatment for his buddies at Goldman.”

6. Pathological liars incapable of honesty even with own investors

McClatchy News: “Goldman secretly bet on the U.S. housing crash after peddling more than $40 billion of securities backed by 200,000 risky home mortgages. But they never told their investors they were also secretly betting that a drop in housing prices could wipe out the value of those securities.” Paulson knew, stayed silent. “Only later did their investors discover Goldman’s triple-A investments were junk. Did Goldman’s failure to disclose its bets on an imminent housing crash violate securities laws?” Boston University Prof. Laurence Kotlikoff says: “This is fraud, should be prosecuted.” But it won’t be in the new “mutant capitalism.”

Members of AA say you know when an alcoholic is lying: Their lips are moving. Same with Wall Street: Think liar’s poker. It’s in their DNA. They’re compulsive liars trapped in a culture of secrecy. They lie, the lies cascade, memory slips, more lies are necessary, they cannot stop lying. Goldman sure can’t … look, their lips are moving again.

7. Sole fiduciary duty to insiders, not investors, never the public

New York Examiner: “Goldman was at the heart of the subprime market, selling subprime junk as no-risk AAA bonds, then gambling, hedging, shorting their investors. Goldman traded like Enron. That set up the meltdown. The Fed and Goldman’s ex-CEO at Treasury saved Goldman. Taxpayers got stuck with the bill. Bailout overseer Elizabeth Warren called this reckless gambling. Trend forecaster Gerald Celente calls it mafia-style looting.

8. Moral issues are PR glitches, violations of ‘don’t get caught’ rule

USA Today says “Goldman Sachs should be celebrating. Yet, the mood at the investment bank seems to be one of crisis about the public backlash over employees’ bonuses.” So Goldman’s on a PR blitz in a bid to undo the damage. They canceled their Christmas party. Also launched a $500 million program for small businesses. Get it? They can’t see their moral failings, only a PR problem, so they hire PR agents and crisis managers first.

9. Charitable donations are tax and PR opportunities, not moral issues

New York Times: Examined Goldman charitable foundation’s tax filing: Thick as a phone book with more than 200 pages of trades. “Never seen anything like it,” said Verne Sedlacek, president of Commonfund, a $25 billion fund for universities and nonprofits. The money to Goldman’s foundation is dwarfed by insiders’ bonuses. The foundation got $400 million, gave away $22 million. Bonuses were 20 times more. Even the New York Post said “Goldman’s Born Again Image is Laughable.” They’re sleaze-ball cheapskates.

10. When exposed in a massive fraud, feign humility, fake an apology

CBS MoneyWatch: “Blankfein now says he’s ’sorry for the role Goldman played in the housing crisis: We participated in things that were clearly wrong.’” Wrong? Sounds more like he’s admitting to something “clearly criminal.” Reread: Isn’t he admitting guilt to a fraud; cheating millions of homeowners, shareholders, taxpayers? Then laughs at us with phony “restitution,” a fund of $100 million annually for five years to small-business owners. Financial Times says “$100 million is the profits from one good trading day. In 3Q ‘09 they had 36 days better than that.” Unfortunately, these crooks will get away with it.

11. When bankruptcy threatens, bribe friends in ‘Happy Conspiracy’

Barron’s: While Geithner was “showcasing what a great investment Washington made in Goldman, the 23% return on the $5 billion of the taxpayers money, Warren Buffett’s deal made him a fabulous 120% return. Goldman’s stock ran up to $180 from $115, a gain of $2.8 billion. Add 8% discount on warrants, another $3.2 billion to him.”
12. Engage co-conspirators to cover up, distract, do your dirty work

Reuters: “Former Merrill Lynch CEO John Thain was fired after a scandal over the billions in Merrill bonuses. He says big insider bonuses don’t cause excessive risk-taking nor the financial crisis.” He blames “poor risk management, excessive leverage and too much liquidity for too long. But even if they tie bonuses to long-term performance, that won’t prevent the next collapse.” Why? They’ll find new ways to break the moral code.

13. As money-hungry vultures they will prey on vulnerable Americans

McClatchy News: “An obscure Goldman subsidiary spent years buying hundreds of thousands of subprime mortgages, many from the more unsavory lenders. They repackaged them as high-yield bonds. The bottom fell out. Now, after years of refusing to disclose they owned the mortgages, the secret is out and Goldman has become one of America’s biggest, greediest foreclosers.” Yes, the vampire squid wants pounds of flesh.

14. Treat everyone not in the ‘Happy Conspiracy’ with tough love

HuffPost’s Leo Leopold warns: “Each day reveals how we’ve traded away our sense of decency and the common good in exchange for pure greed. Unemployment means hunger. The Agriculture Department reports 49 million Americans don’t have enough food, up 13 million over the last year, highest number ever.” Wall Street treats anyone not in the “Happy Conspiracy” as morally defective capitalists in need of “tough love.”

15. Addicts consumed by money: ‘Jesus would throw them out …’

New York Times’ Maureen Dowd: “Goldman’s trickle-down catechism isn’t working. We have two economies. In the past decade Wall Street’s shared little with society. Their culture is totally money-obsessed. There’s always room for a bigger house, bigger boat. If not, you’re falling behind. It’s an addiction. And Washington’s done little to quell it. Geithner coddles wanton bankers. Obama’s absent. ‘Saturday Night Live’ was tougher. And as far as doing God’s work: The bankers who took taxpayer money, pocketing obscene bonuses: They’re the same greedy types Jesus threw out of the temple.”

Warning: Washington, Main Street, none of us has “clean hands.” We’re all in bed with the “Happy Conspiracy,” touched by greed, turning a blind eye to Wall Street’s rapidly metastasizing moral and spiritual pathology: So ask yourself, do you believe America’s widespread “lack of a moral compass” will eventually trigger another, bigger market and economic meltdown, pushing America into the next “Great Depression II?”

Paul B. Farrell

THE UNEMPLOYMENT PROBLEM

I’d like to make you a business offer. Seriously. This is a real offer. In fact, you really can’t turn me down, as you’ll come to understand in a moment…

Here’s the deal. You’re going to start a business or expand the one you’ve got now. It doesn’t really matter what you do or what you’re going to do. I’ll partner with you no matter what business you’re in – as long as it’s legal. But I can’t give you any capital – you have to come up with that on your own. I won’t give you any labor – that’s definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you’re allowed to operate your business. That’s my role in the affair: to tell you what to do.

Now in return for my rules, I’m going to take roughly half of whatever you make in the business, each year. Half seems fair, doesn’t it? I think so. Of course, that’s half of your profits. You’re also going to have to pay me about 12% of whatever you decide to pay your employees because you’ve got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you’re my partner. It’s only “fair.”

Now… after you’ve put your hard-earned savings at risk to start this business and after you’ve worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you’d like to cash out – to finally live the good life.

Whether or not this is “fair” – some people never can afford to retire – is a different argument. As your partner, I’m happy for you to sell whenever you’d like… because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know… I know… you put up all the original capital. You took all the risks. You put in all of the labor. That’s all true. But I’ve done my part, too. I’ve collected 50% of the profits each year. And I’ve always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business. Oh… and one more thing…

Even after you’ve sold the business and paid all of my fees… I’d recommend buying lots of life insurance. You see, even after you’ve been retired for years, when you die, you’ll have to pay me 50% of whatever your estate is worth. After all, I’ve got lots of partners and not all of them are as successful as you and your family. We don’t think it’s “fair” for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children. All in all, if you’re a very successful entrepreneur… if you’re one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public… you’ll end up paying me more than 75% of your income over your life. Thanks so much.

I’m sure you’ll think my offer is reasonable and happily partner with me… but it doesn’t really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I’ll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail. That’s how civil society is supposed to work, right? This is Amerika, isn’t it?

That’s the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs…

Porter Stansberry

THE GOLDEN AGE

A MUST

The latest by Jeremy Grantham.

WHEN WILL THEY LEARN?

The 1930s has become the sole object lesson for today’s monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there’s been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.

Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.

While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy’s relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy’s relapse in 1937.

In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That’s not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.

But the tax hikes didn’t stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.

Because of the number of states and their diversity I’m going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I’m sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, ‘31 and ‘32 respectively.

The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

In addition to all of these tax issues, the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.

The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.

By mid-1932 there were public fears of a change in the gold-dollar relationship. In their classic text, “A Monetary History of the United States,” economists Milton Friedman and Anna Schwartz wrote, “Fears of devaluation were widespread and the public’s preference for gold was unmistakable.” Panic ensued and there was a rush to buy gold.

In early 1933, the federal government (not the Federal Reserve) declared a bank holiday prohibiting banks from paying out gold or dealing in foreign exchange. An executive order made it illegal for anyone to “hoard” gold and forced everyone to turn in their gold and gold certificates to the government at an exchange value of $20.67 per ounce of gold in return for paper currency and bank deposits. All gold clauses in contracts private and public were declared null and void and by the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That’s one helluva tax.

The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that’s the story.

The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.

My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits.

Arthur B. Laffer

STILL NO WORDS FROM CFTC ABOUT THE ELEPHANT IN THE ROOM

Here is a regulatory development update. Yesterday, the Commodity Futures Trading Commission issued a statement that it was pulling the exemption from position limits from two entities trading wheat, corn and soybean futures. The exemptions were previously granted back in 2006, via “no-action” letters.

http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5695-09.html

 One of the entities denied a continuing exemption was DB Commodity Services LLC, the trading arm for the Deutsche Bank-sponsored DBA agricultural commodity ETF. The fund will now have to reduce its positions in those markets to no more than the Federally-mandated maximum speculative position limits. Thus, the CFTC appears on its way to fulfilling what it had said it was going to do in official statements and during the recent public hearings on position limits. Talking the talk has now become walking the walk.

 Bravo to Chairman Gary Gensler, who had this to say in the announcement:

 “I believe that position limits should be consistently applied and vigorously enforced,” CFTC Chairman Gary Gensler said. “Position limits promote market integrity by guarding against concentrated positions.”

 I believe Chairman Gensler “gets it” when it comes to this issue. I believe he will do what he says he will do about position limits. If he will take on Deutsche Bank, a financial powerhouse and no pushover, I believe he will let no one stand above the law. All that remains to be seen is if he will apply the principles he articulates to the short side of the silver market. I hope and believe that he will.

Ted Butler

I think that Mr. Butler is overly optimistic about that outcome. Until now the new CFTC Chairman has still to emit a breath about the elephant in the room, the blatant manipulation occurring in commodities trading, the real and clear crime, i.e. the incredible concentration of short contracts in the silver future market, where just two banks hold almost 80% of all the short positions, where not more than 3-4 banks have the permission to sell (naked) silver that match the whole annual world supply (it’s happened!).

Until now all the noise from him has targeted political sensitive energy and food commodities, with the emphasis exclusively on the long side of the question. So it looks more like an attempt for an indirect and innovative price control than a real will to level the playing field for the commodities futures market.

Therefore I’m not holding my breath: I’ll believe it when I’ll see it!

If I’ll be proved wrong, that will the most bullish event possible for the silver price.

THE SILVER PRICE MANIPULATION

Still wondering why you have to pay that hefty premium everytime you want to buy the physical stuff….?

“During our research into the inventory lists of the iShares SLV and London-based ETFS physical silver funds, we discovered multiple anomalies which cannot be easily dismissed. These included the presence of internal duplicates, rough internal duplicates, weight duplicates, statistical clustering, and cross-reference duplicates. Taken together, these anomalies are cause for concern, and we suggest that more capable teams conduct further research into these issues, as they effect price discovery within the precious metals market, as these ETF shares are being used for settlement and possibly price suppression on the COMEX.

If these problems are caused by accounting errors, they are disturbing and perhaps profoundly incompetent, and we suggest both these funds should have their senior management replaced.

 In our opinions, the only way for all of these anomalies to occur together as noted in this paper, is via systemic fraud or gross accounting error bordering on jaw-dropping incompetence.”

Full report.

WILL CHINA SAVE US ALL?

“Despite everything, the Chinese economy has shown incredible resilience recently. Although its biggest customers — the United States and Europe — are struggling (to say the least) and its exports are down more than 20 percent, China is still spitting out economic growth numbers as if there weren’t a worry in the world. The most recent estimate put annual growth at nearly 8 percent.

Is the Chinese economy operating in a different economic reality? Will it continue to grow, no matter what the global economy is doing?

The answer to both questions is no. China’s fortunes over the past decade are reminiscent of Lucent Technologies in the 1990s. Lucent sold computer equipment to dot-coms. At first, its growth was natural, the result of selling goods to traditional, cash-generating companies. After opportunities with cash-generating customers dried out, it moved to start-ups — and its growth became slightly artificial. These dot-coms were able to buy Lucent’s equipment only by raising money through private equity and equity markets, since their business models didn’t factor in the necessity of cash-flow generation.

Funds to buy Lucent’s equipment quickly dried up, and its growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough, until it came time to pay back the loans.”

Vitaliy Katsenelson

Here the whole article…

ABOUT THE CURRENT EARNING SEASON

“….the situation today is comparable to changing the grading curve for a class of students so that managing to drink water without slopping it down the front of your shirt would earn you a hearty “Well done!” and a passing grade.

Doug Casey