The Fed is Stealing Your Money

We’ve had another turn in dollar strength and in the currencies markets. All eyes are fixed today on the Federal Open Market Committee announcement. We’ll see what view they have for us this month.

This has been quite a month so far, with healthcare taking center stage in the national debate. There have been rallies, shouting, fights and town hall meetings with unbelievable attendance. And, a line that I’ll bet the president wishes he could take back.

Addressing that he wants us to believe that private insurance will still be available and that you will still have options, President Obama commented, “If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”

Is that really what he intended to say? Does that really offer any rational support for setting up a government insurance program? He admits that the government-run postal service is failing, while its private competitors are thriving. Now, I know that public speakers are famous for their gaffs, but that one directly contradicts what he’s trying to say!

Support for the plan appears to be at an all-time low — according to a recent poll by a Rasmussen, down to just 42%.

But let’s get to the news and some longer-term commentary for the day. According to a Wall Street Journal poll, 98% approve of Ben Bernanke being re-appointed for four more years at the helm of the Federal Reserve. Citing the importance of continuity, he was given overwhelming support for bringing us through the recent difficult times.



One book I recommend reading is The Creature From Jekyll Island by G. Edward Griffin. It is an excellent treatment of the origin and goals of the Federal Reserve. I am surprised at the number of people who have never even heard of this book. It ought to be required reading in all civics classes — if they even teach that stuff anymore. Actually, I was shocked when a friend who I highly respect in our industry recently commented to me that he was just reading this for the first time.

So if you’ve never read it, get a copy. It’s available in plenty of places online. The book is a large one, and intimidating to those who are only occasional readers. But it is well worth the effort, and a real eye-opener as to why things have played out the way they have over the last year and a half.

Tracing the founding of the central bank in the United States, Griffin clearly demonstrates how and why it was formed, and how it is functioning EXACTLY as planned. The Federal Reserve is not America’s first attempt at a central bank, but all others were eventually shut down because they were recognized for what they really are — an attempt to create a cartel of bankers who, with Congressional support (even though they are not a federal agency), constantly overextend themselves in the pursuit of higher and higher profits. And when the game is up, it uses its Congressional “connection” to foist the losses onto the American taxpayer.

It always occurs with the same themes: “Too big to fail”… or “The first domino to fall in a nationwide/worldwide catastrophe.”

Each successive failure became more massive than the previous one, and a strategy emerged — start discussing amounts of money so big that the average citizen was simply mind-boggled by the size of them. As generations of public dis-education came home to roost, people increasingly believed that economics was the realm of governments rather than markets. And with that fallacy came the ingrained idea that money comes from the government, so it is the only entity able to create the resources to “correct” gargantuan fiscal shortfalls.

Of course what “everyman” missed was that the government’s creation of money out of nothing simply fleeced the citizenry in the form of the hidden tax of inflation.

Let’s take a quick and closer look at this sordid history.

I catalogued for you recently one of the failures of the central bank. It was purportedly established to stop market crashes and end recessions. But we have seen recessions in ’53, ’57, ’69, ’75 and ’81, the crashes of ’21 and ’29, the Great Depression I, Black Monday in 1987 and the current lollapalooza of 2008-?

But one of the Fed’s other foundational reasons for existence was to reduce competition from outside banks, as previously mentioned. It also planned to foster an attitude of easy lending, perpetual indebtedness and constant loan rollovers and interest charges. Then when the jig is finally up, and the indebted families, corporations or nations can no longer even afford the interest payments, the debt burden will be passed to the unsuspecting taxpayer by way of inflation.

Since the inception of the Fed, the game has been managed very well. Smaller banks were allowed to fail, just as they are now. This gives the appearance of “letting the market work.”

Let’s look at some of the worst of the big bailouts, just so you can see get a grasp of what has happened, what will happen and how that affects your money.


Penn Central was the nations’ leading railroad prior to 1970. And it was a pretty egregious example of how far bankers were willing to go to bilk money out of a cash cow.

Penn starting getting deeply into debt. Its loans were rolled over, and more money was forwarded to keep operations going, which included servicing interest on their current debt. But as things got worse, the huge banks who were in on the play, which included Continental Illinois, Chase Manhattan, Chemical Bank, Manufacturer’s Hanover and First National City, agreed to continue the loans only if the banks’ officers were put on the railroad’s operating board.

So essentially, the bankers lent themselves money and were in cahoots with the whole game. Also, they were privy to information about the railroad and its stock far ahead of the public. They used this information for their own private profit as the railroad bit the dust. Public records showed that the top executives saved themselves more than $1 million dollars by the sale of stock ahead of the public. A million saved is a million earned.

After all the banks who were called in to support the railroad with cash funds were given complete assurance that the Fed would guarantee the loans, the bailout was a done deal. Immediately all the unionized employees of the failing enterprise were given 13.5% raises. In the end, the Fed authorized loan guarantees of $125 million.

This was never really intended to solve the problem, and a year later the railroad was nationalized and its passenger service became Amtrak. It is a government-run enterprise to this day and continues to operate at a massive loss… only staying open with further governmental subsidies.

The freight side of Penn Central became Conrail, with the government owning 85% of its stock. Fortunately it was sold in a public offering in 1987, staged an impressive comeback and operates at a profit.

At the same time, defense giant Lockheed was also on the edge of bankruptcy. It was $400 million in debt, and Bank of America, along with several other smaller banks, were anxious to keep the milk flowing. Eventually, they marshaled an army of interested parties and went to Washington. They claimed that tens of thousands of jobs would be lost, along with suppliers and subcontractors who would be forced into bankruptcy if Lockheed were allowed to fail. So the government gave them an additional $250 billion in guarantees. That increased their total indebtedness 60%.

Of course, the government had a not-so-secret desire to see Lockheed pay off these debts, and the only way it could do that would be to earn more money. So the company became the chief winner of no-bid contracts and recipients of other governmental work. In the meantime, other defense contractors suffered, since they were essentially pushed out of the whole process in the rush to save Lockheed.

In the mid-’70s, New York City was pursuing the same path. Waste and overspending abounded in this gigantic welfare experiment. By 1975, NYC had sold so many bonds, the market was flooded with them, and there were no more lenders. Well, almost no more. Chase Manhattan and Citicorp were the banks that were benefiting the most from interest paid on these debt, but when the day finally came that interest payments were halted, both bankers and city leaders put together a caravan to Washington, D.C.

Same game plan: Threats of halting essential services… no firemen… no police… no garbage pickup. Rioting and anarchy in the streets. Spreading disease. In New York City? This could have international repercussions.

Out came the federal checkbook and draft was made for $2.3 billion, double what the city already owed. Even though there were a number of conditions placed upon the loan to balance the NYC budget and get a surplus to pay off these debts, none of them were ever honored. The city remains in debt to this day.

Then there was Chrysler for $1.5 billion.

Unity Bank, which eventually cost taxpayers just under $4.5 million.

Commonwealth Bank of Detroit, which enjoyed a $1.5 billion fed bailout — then was eventually sold to First Arabian Corporation, a firm funded by Saudi princes.

First Pennsylvania Bank was carrying $328 million in questionable loans, $16 million more than the entire stock float of the company. They received a $325 million loan from the FDIC.

Continental Illinois was the nations’ seventh-largest bank. It had assets of $42 billion, thousands of employees around the globe and an annual income of $254 million by 1981. Unfortunately, its stellar growth was based on shaky loans to risky businesses and foreign governments who could not obtain financing anywhere else.

Its stock was doing wonderfully, and it was named one of the five best-managed banks in the country. But as they began to reap the risk they had sown, the worlds’ first electronic bank run began. Customers were blissfully unaware, but the biggest depositors began withdrawing their funds, and the business was rumored to be in trouble. Creditors raised their interest rates to the banks and began withdrawing funds. In just four days, Continental’s withdrawals were so heavy, they were forced to go to the Fed for a $3.6 billion loan to cover them. Several banks extended a 30-day line of credit, but it was of no use. Within a week, the bank’s outflow ballooned to over $6 billion.

In the end, Continental’s liabilities (including those off-book) totaled $69 billion. Only about $3 billion of that was FDIC insured. The final bailout was more complicated than I can go into here. But just know that the bank was bailed out, and the taxpayers were stuck with the bill.

Then comes the subprime fiasco of 2008. Notice the fact beyond debate, that the Fed did not come to the rescue of the subprime borrowers. Nope — it rescued the banks. It was for this purpose that it was designed, and it continues in its mission today.

All in the name of preventing catastrophe, protecting the public and providing “liquidity” to the markets.

The multibillion-dollar bailout engineered last year is only chump change to what it will eventually cost the taxpayer. Protect the banks — fleece the public.

So what does all this have to do with us and options? Allow me to bring it home…


The key point here is that central banks do not exist for the good of economies. They do not exist for the good of citizens. Their sole purpose is to keep the game going, and to profit from it as long as possible. After that, they clear out, leaving the taxpayers to pay off their debts. Their protection and enhancement of economies and citizens is just a means to end. As long as it helps the profits roll in, helping others is fine. But in the end, they will foist responsibility to others.

So we have to expect central banks to do whatever will profit the most and keep the game going. But, of course, in the end, you reap what you sow. It’s true for all men, including central bankers.

The fact that 98% believe that Ben Bernanke should be re-appointed to his post is evidence of the widespread misunderstanding of what he and his predecessors have done.

Bill Jenkins

August 17, 2009

The Daily Reckoning