Vipers and Thieves Too

The world waits, breath bated, for word from behind closed doors at the Fed…will they give the people what they want? Will they cut rates yet again? Will 13 be the lucky number?

Pant. Gasp. Whispers from the crowd. Will the recovery never begin?

“History shows that countries who save and invest grow and prosper…” writes the Adventure Capitalist, Jim Rogers, in a foreword he’s penned for our book (“Financial Reckoning Day” – due out in September) “…while the others deteriorate and collapse.” “Artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks of the late ’90s,” Rogers continues. “Now, policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble. “When those bubbles burst, it’s going to be worse than the stock market bubble, because there are a lot more people that are involved in consumption and housing. When all these people find out that house prices don’t go up forever, with very high credit card debt, there are going to be a lot of angry people. “No one, of course, wants to hear it. They want the quick fix. They want to buy the stock and watch it go up 25% because that’s what happened last year, and that’s what they say on TV. They want another interest rate cut, because they’ve heard that that’s what will make the economy boom…”

A ‘quick fix’ is just what we expect the Fed will offer up. If we were betting men, which we are not, then we might even put a wad down on a 50-basis-point cut…dropping the Fed funds rate to 0.75%, or 600 points closer to ‘almost free’ than when the Fed began this charade 29 months ago. Throughout its history, the Fed has been capable of doing only one thing: destroying the currency it was purportedly chartered to protect. But your humble editors claim no authorship of that observation…

Edward Flaherty: McFadden’s Tirade

Two weeks ago, we looked at the legendary tirade of Louis McFadden (see: “Vipers and Thieves” The Daily Reckoning, 11 June 2003).

The scene was 1932, at height of the unemployment boom during the Great Depression. “The House was debating a bill which would expand the types of securities the Federal Reserve could trade when conducting monetary policy,” we recall our citation of economic historian Edward Flaherty. “McFadden used this opportunity to launch a twenty-five minute tirade against the Federal Reserve, and in so doing, became a legendary champion amongst conspiracy theorists.”

McFadden described the Fed as “one of the most corrupt institutions the world has ever known”…an “evil institution that has impoverished and ruined the people of the United States; has bankrupted itself, and has practically bankrupted our Government.” It has done this through defects of the law under which it operates, through the maladministration of that law by the Federal Reserve Board and through the corrupt practices of the moneyed vultures who control it.” We followed up with an attempt by Flaherty to discredit McFadden’s harangue.

As is the custom among Daily Reckoning readers, our presentation of Flaherty’s rebuttal met with more than a little chagrin. “Flaherty’s analysis is a bit of a non- sequitur,” one astute reader shot back, “McFadden’s point, if not explicitly stated, is that the government would never have incurred any debt in the first place if it had not been duped into giving the power of money creation over to the private interests, who are vipers and thieves.”

Edward Flaherty: The Fastest Descent in History

Given the fact that we’ve just experienced the fastest descent from “surplus” to “deficit” in the nation’s history, McFadden’s observations seem as relevant today as they did 70 years ago.

“Edward Flaherty’s rebuttal of Congressman McFadden’s speech does not come close to addressing the charges,” another equally, if not more, astute reader chimed in. “McFadden did not say they make too much profit. The profit at the Fed is not the problem. The problem is they have deliberately destroyed the currency…”

The latest Fed incarnation – the Greenspan-Bernanke-McTeer triumvirate – has been openly lamenting declining rates of inflation…and are on the verge of giving the price level another ‘coup de whiskey’. But to what end?

“NO serious student of the economy any longer doubts,” our friend (sic) at the New York Post, Christopher Byron observes, “Mr. Greenspan’s cheap-money policy of the 1990s led directly to the stock market bubble that popped in the spring of 2000, pushing stocks and the economy into a downturn from which they have yet to recover.”

One wonders what Greenspan and co. actually discuss behind closed doors at the FOMC meeting. Surely, there must be at least some remnants of “Greenspan, the Randian goldbug” buried deep within Alan’s sparsely populated cranium. Yet, as Byron notes, “Mr. Behind-The-Curve” keeps trying to regulate the economy, after the fact, with lame and misguided rate cuts. In the process, he and the other Fed governors have created “the greatest decade of volatility and uncertainty the stock market has known” since…well, since McFadden was all ticked off at another set of Fed ninnies during the Great Depression.

Edward Flaherty: A Spectacular Sector Bubble

And now, as a follow-up act, “instead of giving the economy a sustainable overall boost,” Byron writes, “the Fed’s increasingly cheap money keeps pouring into just two sectors – the housing and home mortgage refinance markets – and it is creating what is shaping up as one of the most spectacular sector bubbles in history.”

“Meanwhile,” Byron continues (forgive me if I quote Mr. Byron at length, but as usual, he hits the nail on the head) “his rhetorical waltzing has become utterly shameless, as he intones, in that ponderous way he has perfected, that the housing market has not swelled into a bubble – because, when it pops, the result won’t be a ‘negative’ for the economy but the disappearance of a ‘positive’. Oh, puhleeze, Mr. Greenspan, do you take the whole world for fools?

“It is the speculative bubble in the housing market, fueled by lower and lower mortgage rates, that is alone propping up the economy, and everyone knows it. In this summer of 2003, the national pastime is no longer baseball or going to the beach – it’s going to the bank to refinance the mortgage. The amount of money being leeched from the national balance sheet and poured into consumption by this process is simply staggering.”

The Mortgage Bankers Association released their data last week showing that nearly all the profits being banked through mortgages are now coming from cash-out refinancings (the practice of refinancing your home for more than it’s worth, so you can afford to make payments on your SUV and meet the minimum monthly requirement on your 8 credit cards!). The Federal Reserve’s own numbers reveal that cash from refinancing accounted for nearly $700 billion of consumer spending last year.

Banking stocks “from the S&L and commercial banking sectors to mortgage banking, finance and homebuilding, have been pumped up with hype, hope and hot air from Greenspan’s failed policy of trying to manage the economy by playing catch up with interest rates.”

Who knows WHEN this bubble will go the way of the Nasdaq. But one thing is certain: nature abhors disequilibrium. This generation of Fed governors has not only upheld the honorable Fed tradition of destroying the value of the currency they were chartered to preserve…but they’ve also gone where no Fed has yet dared tread: they’ve engineered a scheme to aid and abet the nation’s homeowners in stripping their homes of equity. A scheme which is threatening to melt down and destroy them all.


Addison Wiggin
June 24, 2003

P.S. In Edward Flaherty’s ‘rebuttal’ of Louis McFadden, Flaherty quotes a Senator from Kansas accusing McFadden of coming down with the malady that so often afflicts nap-less children, drink-less drunkards, and the last person in line for chocolate cake: bellyaching. Who was the Senator? None other than Benjamin Strong. At the time, Strong was a Senator from Kansas…but he’s probably best known for suggesting all the Fed needs to do is administer a “little ‘coup de whiskey’ to the stock market.”

Misters Greenspan, Bernanke and McTeer must be green with envy that they didn’t coin the phrase themselves.

P.P.S. We promised to post the legendary tirade of Louis Mcfadden on the website…so here it is, along with a collection of excerpts from other speeches McFadden made and the actual charges he levied at the vipers and thieves at the Fed. The charges remain unanswered…filed in some moldy basement at Judiciary.


“Inflate or Die,” says Richard Russell, summing up the Fed’s choices.

“The Fed will cut rates until there are no rates left to cut,” we recall writing a couple of years ago. That was when most people still believed Alan Greenspan could cure lepers and make the blind see. Had he not done the impossible – make the dollar go up against gold for two decades? Was he not making Americans rich? With the Nasdaq rising 80% in a single year, all they had to do was to put their money into the stock market and they could retire at 40 – even if they were already 39!

And the famous ‘Greenspan Put’ seemed to guarantee that these happy times would continue forever. For at the first sign of trouble, the Fed chief would cut rates…and soon, it would be boomtime once again.

Trouble came on the scene with the new millennium and, beginning in early January 2001, the aforementioned Fed chief took his put and shoved it into the market. Rates were hacked almost every month…and then a 12th time…from 6% down to 1.25%…which leaves not a lot of rates left to cut.

Did the economy come back to life? Not exactly; but the easier money kept many losing positions, bad investments, and marginal enterprises alive. Those who needed to borrow to pay their bills found it cheaper to do so…so both consumers and businesses went deeper into debt in order to keep up appearances.

Did the stock market revive? No, but the bubbly gases created by the Fed intoxicated millions of homeowners. The poor lumps practically fainted at the opportunity to mortgage more of their homes at lower rates. Yes, they owned less of their own homes than ever before. Yes, they were deeper in debt than at any time in history. And yes, they were losing their jobs. But what could go wrong?

Lower interest rates also created a sort of bubble in the U.S. bond market. Yes, the borrower was the biggest debtor in the world…and yes, he also controlled the value of the currency in which the bonds were denominated…and yes, he had promised to make that currency less valuable in the future…even targeting a rate of depreciation very near to the actual bond yields. But what could go wrong?

As the Fed prepares its 13th rate cut – expected to be announced this week – we note a few of yesterday’s headlines:

Mortgage default and foreclosure rates are hitting new records…

Joblessness in Michigan has climbed to 6.7%…

And “Bond prices may be in for a long tumble,” says USA Today.

But Alan Greenspan has no fear…no shame…and no clue. If he does not cut rates now, he will cut them later. Because he cannot raise them. The economy is light-headed with credit, debt and easy money. What can the Fed do but offer more – of which we already have too much?

It is, indeed, “inflate or die.”

Probably both.



Mr. Fry with a word or two from the Street…

– The Dow finished 128 points lower yesterday at 9,073, while the Nasdaq dropped more than 2% to 1,611. The Dow and S&P have both retreated about 3% from the highs they set last Tuesday.

– “It’s about time!” said an annoyed Jay Shartsis to your New York editor yesterday. Shartsis, a battle-hardened options trader and part-time Barron’s columnist, explained that a major stock market selloff is overdue.

– “The bullish sentiment readings are off the roof!” says Shartsis. “In fact, they’re off the moon! We’re getting the kinds of VERY extreme bullish sentiment readings that you would normally see at the tail-end of a 20-year bull market, NOT what you would expect to see at the end of a three-month rally…This is nuts!”

– In other words, investors are embracing the current rally as if it were a bona-fide bull market, rather than the latest in a serious of ill-fated bear-market rallies. They are downright giddy about the stock market’s prospects, which is not a healthy sign. Rampant investor optimism is often a precursor to a severe sell-off.

– “And the other thing I’m seeing,” says Shartsis, “is a rapid diminution of the ‘new highs’ list. They’re way down from the peak June 6 reading,” he points out. “New highs on the NYSE yesterday came in at 60!…That’s down sharply from the peak of 581 new highs recorded on June 6.”

– “Look at this!” said Shartsis, as he led your New York editor to disheveled pile of newspapers and stock research reports. Picking up one of the newspapers, Shartsis continued, “Ya see this? New highs contracted all week…415 last Monday, 386 on Tuesday, 210 on Wednesday, 167 on Thursday, and finally, only 94 new highs on Friday. This is terribly interesting…and instructive…This very rapid diminution of new highs, EVEN WHILE STOCKS ARE RALLYING, is extremely bearish!”

– Shartsis also notes the alarming number of “buying climaxes.”…Hmmm…Sounds pretty titillating. But actually, these climaxes aren’t as delicious as they sound. A buying climax occurs when a stock makes a new 52-week high during the week, but then finishes with a loss. These “reversals,” as stock technicians refer to them, often presage falling share prices.

– “So what are you supposed to do with all this bearish information? Aren’t you supposed to sell a market like this?” Shartsis asked rhetorically. “Everything I’m seeing says to sell this market…

– “I’m not in this for the money anymore,” said Shartsis with a sinister grin, referring to his large bearish bets on the stock market. “I’m in it for revenge.” The crew here at the Daily Reckoning seeks no revenge, other than the ‘revenge’ of living well. But we suspect that living well requires making good choices, like not diving into the late stages of a bear market rally.

– After Shartsis concluded his tirade, your NY editor strolled into the corner office adjoining Shartsis’ trading desk for a brief chat with Robert Tracy of Apogee Research. “What’s up, Robert?” he asked the gimlet-eyed analyst.

– “Well, we’ve got Maximus down again,” said Robert, referring to one of his recent short-sale recommendations. “Maybe stocks are in a new bull market (although I doubt it), but tax revenues are definitely in a bear market, and that’s bad news for Maximus. Check this out…”

– Robert held out an Apogee report detailing the ‘whys’ and ‘wherefores’ of selling short Maximus, a company that relies greatly upon government contracts to generate its revenues and earnings. Sadly for Maximus, government tax receipts are falling.

– As Apogee’s research explained: “An April report from the National Association of State Budget Officers (NASBO) states, ‘Because state revenue growth generally lags behind the end of a recession by as much as 12 to 18 months, state fiscal woes are expected to continue in fiscal 2003 and fiscal 2004.’ And on April 24 the National Conference of State Legislators (NCSL) said that, ‘with only two months left in most fiscal years [which end on June 30], states must still close a $21.5 billion budget gap in order to comply with their balanced budget requirement.’ The NCSL report went on to second NASBO’s projected scenari ‘The situation is not much brighter for fiscal year 2004. As states craft their budgets for the next fiscal year, estimates show 41 states facing a cumulative budget gap of $78.4 billion. Thirty-seven of those states reported a gap in excess of 5% of their general fund, while 19 of those exceed 10%.'”

– “These are some pretty scary statistics,” says Robert. “State governments are cutting spending left and right…and Maximus (MMS) is standing right in the line of fire…Maximus’ income statement is already showing the strain of nationwide fiscal austerity, and I don’t see this situation improving any time soon.”

– [Ed note: For more from Apogee Research, follow the link below to check out Apogee’s latestreport.]


William Bonner, back in Paris…

*** “Dear Editor,” begins a polite and perceptive letter, “I agree with much of the analysis in The Daily Reckoning, and I enjoy reading it. But I was taken aback by the comment in the Dec. 20 issue that ‘even though the dollar is doomed, you, dear reader, are not. You can still do what the Chinese government is doing – build up your own stock of real money, gold – and watch the whole sorry spectacle with a song in your heart and a trace of a smile on your lips.’

“Much as I would like to believe that we can insulate ourselves from the coming economic and social catastrophe, my common sense tells me not to count on it.

“As one of those unfortunates who has to work for a living, much of my investment capital is tied up in 401K and IRA accounts. The former has no provision for buying gold, gold stocks, or gold funds. Although I can and have done that in the latter account, the fact is that whatever I accumulate there is only as safe as the brokerage that administers the account. When the U.S. dollar, U.S. stocks, and U.S. bonds hit the skids, my bet is that more than a few banks and brokerage houses will be doing the same. What happens to our 401Ks and IRAs then? “Of course I have bought some gold coins, but the fact is that like most people, I simply do not have enough ready capital to buy the type of physical gold stash that would see me through a real depression. And that, dear editor, leaves aside the issue of whether the government will let us keep private stashes of gold once the brown stuff really hits the fan. “Moreover, buying gold is an economic hedge. What will protect us from the political fallout of the economic and social crisis? The U.S. government is already using its military power in the pursuit of economic advantage, and is trying to destroy democratic rights in the name of national security.

“History tells us that we can expect a rise in racism, xenophobia, and militarism as the economic crisis develops. I, for one, believe that John Ashcroft wouldn’t hesitate at all to set up concentration camps for opponents of the government if he thought he could get away with it.

“I can understand the temptation to ridicule those who do not see the coming crisis that seems so apparent – especially those in positions of authority and those who presume to instruct the rest of us on economic policy and investing – and I do enjoy some of the snide and snotty asides in the Daily Reckoning. But I really doubt that any of us is going to end up with a smile on our lips 10 years from now.”

Editor’s comment: He may be right. But that is what separates us from so many of our comrades…here at the Daily Reckoning, we are such optimists!

*** Another reader, from Germany, sends a further description of the Great Inflation in Germany of 1919-’23:

“The ongoing inflation disrupted the supply situation of the people. Wages and salaries were not able to compete with rising prices for goods and services. Wages in real terms declined to around 40% compared to the pre-war level; the German middle class literally went into the poorhouse. Cash and assets melted away. Savings of generations were destroyed completely. Fixed income became worthless. The loss of purchasing power caused huge declines in real estate. You could buy houses in real estate emergency sales for a bargain.

“The chaotic monetary system made regular business behavior next to impossible. Daily wage payments became the rule. Everyone tried to exchange cash as fast as possible into real values. Stores opened and closed according to the publication dates for current rates of exchange. In restaurants, bills could double during the meal. Criminals went for the golden teeth of their victims. After Services, priests put out laundry baskets in front of the church instead of collecting money.”

“Best regards from Frankfurt…”

*** And finally…we return to home and hearth…Henry celebrated his 13th birthday on Sunday; his actual birthday falls in July, but Henry wanted to invite his friends over for a party before they all left town for the summer.

The group of 8 boys was quietly playing a video game in the living room when Henry’s father came upon the scene. Entering the room, the boys – neatly dressed, every one of them – rose to greet him. Each extended his hand and introduced himself, looking the old man in the eye and smiling.

“What a well-behaved bunch of boys,” he remarked to his wife.

“Yes, they are no trouble at all,” she replied. “They’re a real pleasure to have around.”

After the video game, the boys were served dinner. But it was not a boisterous dinner of pizza and coke. Instead, Henry and his mother had planned a proper meal, beginning with an appetizer of paté de tête de cochon on lettuce…followed by veal cutlets in a wine sauce…followed by birthday cake and ice cream.

The boys sat at the table and conversed pleasantly. The ‘culture of the moron’ was nowhere to be seen.

But the culture of the 13-year-old was not entirely missing. Later, coming into the dining room to remove the plates, your editor found two boys on the balcony, preparing to drop a water balloon on the head of a neighbor.

The Daily Reckoning