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Thread: Latest Dr. Michael Hudson: The Federal Reserve

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    Default Latest Dr. Michael Hudson: The Federal Reserve

    http://michael-hudson.com/2012/03/fe...eserve-system/

    An interview with Michael Hudson published on the Russian website Terra America (TA).

    What is the place of the Federal Reserve System in the American financial and economic structure?

    Prior to the Federal Reserve’s founding in 1913, U.S. monetary policy was conducted by the Treasury. Like the Fed, it had district sub-treasuries that performed nearly all the financial functions that the Fed later took over: providing credit to move the crops in autumn, managing government debt, and so forth.

    But after the severe 1907 financial crisis, a National Monetary Commission was reformed. Under the then-Republican administration, it recognized a need for more active government intervention to prevent future financial crises. It also recognized the desirability of moving away from the Anglo-Dutch-American system of “merchant banking” based on short-term lending against collateral in place, or for shipping of goods already produced. The National Monetary Commission’s longest volumes were on the great German industrial banks, and Republican policy aimed at bringing banking into the industrial era, to provide long-term funding after the model of German and other Central European banks.

    However, the leading bankers sought to use the crisis as an opportunity to grab power for Wall Street, away from the Treasury. In this sense, the Fed was founded in large part to take monetary control away from Washington’s elected officials and appointees, and privatize the supply of money and credit.

    So its place in the U.S. financial and economic structure is to allocate credit, primarily to serve Wall Street financial interests. That explains the insistence on the financial class here and abroad in insisting on an “independent” central bank. It means that instead of serving the public interest, it serves the interests of the banking class. The hoped-for transformation of commercial banking into long-term industrial banking was not achieved.

    Can we imagine the global economic system without Federal Reserve today? If yes/no, why?


    As David Kinley’s book for the National Monetary Commission pointed out a century ago, nearly all the financial functions performed by the Fed already were performed by the national Treasury. In more recent times, Milton Friedman and his University of Chicago colleagues suggested that the entire Fed could be reduced to a single desk inside the Treasury. The “Chicago Plan” of the 1930s urged Treasury control, as does Congressman Dennis Kucinich’s current bank reform.

    There is no inherent need for a monetary agency to exist outside of the national government, except to serve the interests of the financial class as distinct from those of government, industry and labor. And the banking sector’s business plan is to load down real estate, labor, industry and the government with as much interest-bearing debt as possible.

    Some people in the US (especially supporters of the congressman Ron Paul) believe that the Federal Reserve is the reason of serious problems within the American financial system. Do you agree with this claim?


    The Fed is a reason for serious problems, but not the only reason. Unfortunately, Ron Paul’s proposal opposes paper credit itself, whether issued by the Fed or the Treasury. He wants to return to the gold standard and clash government spending – in effect, to create an economy without government. So what he actually advocates is not only the end of the Fed, but the end of a functioning credit and tax system. The idea is otherworldly and has no possible chance of being enacted, because it would cause a vast debt default as a result of plunging prices, incomes and employment.

    Contrary to most of European central banks the Federal Reserve is quite autonomous and has some private aspects. Doesn’t it give too much power to this financial structure? Or maybe this power is part of the checks and balances within the American political system? If yes, what is its precise role and place?

    The Federal Reserve is private in name only. Its heads are appointed by Washington, but Wall Street has veto power over it (as it has over the appointment of major Treasury and other regulatory agency officials). So the problem is not that the Fed is technically owned by its stockholders, but that Wall Street has gained overpowering control over government itself.
    The financial sector has sought to dismantle checks and balances, making it protect Wall Street even as financial interests diverge from the promoting of economic growth and rising living standards.

    What is the priority for the Fed leadership: solving national American problems or serving the interests of the global system?


    The Fed is officially supposed to perform two functions: First, to promote “price stability.” This means in practice, fight against wage inflation and preserve sufficient unemployment so that wages will not increase. The “prices” that are supposed to stabilize are the price of labor (wages) and commodity prices.

    Meanwhile, the Fed seeks to inflate asset prices, above all real estate prices. Under Alan Greenspan, the aim of the Bubble Economy was to inflate housing prices by enough so that homeowners could borrow the interest to pay the bankers each year, and even enough to spend on consumer goods that their stagnant wage levels were not sufficient to buy. The result was to vastly increase the volume of debt – and debt service became a rising element of prices throughout the economy. Debt-leveraged housing prices ended up absorbing about 40 percent of typical family budgets, and a rising share of corporate income as well, leaving less for spending on current production of consumer goods and capital goods.

    The second function the Fed was supposed to perform was to promote full employment. Mr. Greenspan made it clear that he believes that this is incompatible with the ideal of price stability. He pointed out before Congress that the virtue of loading down homeowners, college students and others with debt was that they were afraid to go on strike or even complain about working conditions or seek higher wages, for fear of being fired and missing a mortgage payment or credit-card payment. Going on strike or losing as job would threaten them with loss of a home, and an immediate increase in the credit-card interest rates and penalties that they had to pay. So the Fed became the leading administrator in Wall Street’s war against labor.

    Under Mr. Greenspan’s tenure and that of his successor, Ben Bernanke, the Fed has overseen the greatest shift of wealth n American history since the Robber Barons.

    Finally, the Fed has taken over the functions of government by threatening to close down the economy if the government does not bail out the banks at taxpayer expense, and protect the wealthy 1% against losing money.

    How different were the three last Fed chairmen? Who was the most successful?


    Paul Volker came from the Chase Manhattan Bank. In the late 1970s he coped with the U.S. balance-of-payments deficit (stemming mainly from overseas military spending) and consequent the inflationary pressures by raising interest rates to 20%, thereby plunging stock market and real estate prices.

    His successor, Alan Greenspan, was a Wall Street lobbyist and a follower of Ayn Rand. Diametrically opposite from Paul Volcker, he pressed to deregulate the economy and sponsored the financial bubble to pump enough credit (debt) into the economy to enable debtors to pay the banks the interest that was mounting up. As a bank lobbyist in control of the banking system, he “freed” the bank from government control – and promoted the greatest debt bubble in U.S. history.

    Ben Bernanke was an academic, not a banker but sufficiently brainwashed in neoliberal, pro-Wall Street ideology to be trusted by the banks to flood the economy with credit in an attempt to re-inflate the bubble economy so as to pull real estate prices out of negative equity – thereby saving the banks from their bad loans. Instead of writing down debts, the Fed made sure that no bank would lose, or even be prosecuted for the financial fraud that has risen to epic proportions over the past decade. My UMKC colleague Prof. Bill Black calls this phenomenon “criminogenic.” So in effect, Mr. Bernanke is as much a bank lobbyist as Mr. Greenspan.

    In this sense, both Mr. Greenspan and Mr. Bernanke were successful in steering U.S. financial policy to benefit Wall Street by loading down the economy with debt, and then using public credit to bail out the banks and pass the losses onto taxpayers. But this “success” is leaving the U.S. economy debt-ridden and uncompetitive internationally, because its industrial producers face such heavy debt charges that they are priced out of world markets for most products except for military arms, agriculture and high-technology monopoly goods and patented motion pictures and entertainment.

    The existence of the Federal Reserve: does it match with the ideas of the classical liberalism? How liberal is this institution?


    The Federal Reserve is antithetical to the classical liberal aim of using financial and tax policy to minimize the economy’s cost of production. From the Physiocrats and Adam Smith through Ricardo, John Stuart Mill and the Reform Era, the aim was to minimize land rent (by either taxing it away or nationalizing the land), monopoly rent (by price regulation or by keeping natural monopolies in the public domain) and interest or other financial charges that were payments for special privilege.

    Acting on behalf of the banks, the Fed has sponsored the un-taxing of real estate and monopolies, as these have become the major bank customers. And by deregulating Wall Street, the Fed has underwritten the overgrowth of unproductive credit – credit extended not to finance industrial capital formation, but simply to speculate and to transfer ownership of assets already in existence.

    The guiding philosophy of the Fed is to inflate prices of assets in order to expand the market for real estate loans (which account for some 80 percent of bank loans in the United States), corporate takeover loans and speculative “casino capitalist” loans for foreign-currency and interest-rate arbitrage.

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    +1 Hudson is always illuminating.

    More Cognitive Dissonance - FIRE warms its hands at the Bonfire of National Debt while its political minions debate ways to "cut it".

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    If I read the chart correctly, shadowstats says M3 is just south of 15,000 billion. Dividing by US population gives about $45,000 for every man, woman and child in the US. Do you and your family have your fair share? An illogical question to be sure, but it points out the necessity of taxing the wealthy. Not the wealthy as defined by current political newspeak (income over 250K/year), but with accumulated wealth over some millions of dollars. The exact amount would have to be hammered out to avoid destroying family businesses, but would confiscate wealth on the scale of Warren Buffet, Bill Gates, Soros, etc. Yes we need a progressive wealth tax which would destroy large family fortunes and even assets of tax exempt institutions, and even corporate war chests. I would have it start somewhere around 100 to 200 million and reach maybe 50% at one billion or more. It would have to be indexed to inflation and would have to be phased in over five to ten years to avoid as much shock as possible. Along with strict enforcement of anti-monopoly laws maximum corporate size should be reduced to maybe 1000 employees or less. Corporate priveleges should be revisited with a view to reducing them more toward what is allowed real human beings. And corporate charters should always include requirements that stock or shares must be distributed to all employees every year starting at some minimum level. These stocks or shares would not be permitted to be sold unless the employee left the firm. Then the proceeds must be transfered to the purchase of their new employers stocks or shares. Or they could be used to start their own business or rolled into a retirement fund. They would also be exempt from IRS confiscation or being admitted in bankruptcy proceedings. Every corporate employee would have a stake in their employer. The point of all this is to destroy very large concentrations of wealth which always seem to wind up causing harm to society. Smaller business units are less likely to cause external societal harm when they are mismanaged. I will contend that a thousand small corporations working as partners would be more efficient that one General Motors, or General Electric, and even if they are not, that is a small price to pay to avoid the TBTF syndrome. Smaller is better should be the new rallying slogan of free people.
    "I love a dog, he does nothing for political reasons." --Will Rogers

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    aaron is offline iTulip High Commissioner, Select Member
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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Monopolies should be broken up. I think we have (had?) laws on the books to do that. We also have (had?) a tax system that was supposed to prevent families from accruing wealth over generations.
    Yep, the solution is simple: Cut the loop-holes and trusts and off-shore shenanigans and enforce anti-trust laws across the board. But, the government is owned by these entities. Nothing will change until it all comes crashing down and children are starving. As long as the food keeps flowing to the masses, there will not be a force for change from the bottom.

    Hyperinflation, along with blame pointed towards the banksters who run our government, is the only chance for America to survive and thrive again. Bring It On.

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by aaron View Post
    Monopolies should be broken up. I think we have (had?) laws on the books to do that. We also have (had?) a tax system that was supposed to prevent families from accruing wealth over generations.
    Yep, the solution is simple: Cut the loop-holes and trusts and off-shore shenanigans and enforce anti-trust laws across the board. But, the government is owned by these entities. Nothing will change until it all comes crashing down and children are starving. As long as the food keeps flowing to the masses, there will not be a force for change from the bottom.
    There was once a time when economists read Smith rather than the authors from the Chicago School. That time will come again. In some ways, it reminds me of what iTulip keeps coming back to, albeit in a different era with different rules. Capitalism wasn't wrong. Divorcing one half of Weber's Theory of Rationality from the other half and calling it a science was.

    Hyperinflation, along with blame pointed towards the banksters who run our government, is the only chance for America to survive and thrive again. Bring It On.
    I will continue to be called naive here, but I have faith in the American people. They normally come to the right decision - just five to ten years too late. And they get mad about it five years after that. But hell hath no fury...

    The named movements of our time have just begun.
    Last edited by dcarrigg; 03-28-12 at 12:59 AM.

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by dcarrigg View Post
    ....will continue to be called (..) here, but I have faith in the American people. They normally come to the right decision - just five to ten years too late. And they get mad about it five years after that.

    But hell hath no fury
    ...

    The named movements of our time have just begun.
    +1

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by photon555 View Post
    ... it points out the necessity of taxing the wealthy. Not the wealthy as defined by current political newspeak (income over 250K/year), but with accumulated wealth over some millions of dollars. The exact amount would have to be hammered out to avoid destroying family businesses, but would confiscate wealth on the scale of Warren Buffet, Bill Gates, Soros, etc. Yes we need a progressive wealth tax which would destroy large family fortunes and even assets of tax exempt institutions, and even corporate war chests. I would have it start somewhere around 100 to 200 million and reach maybe 50% at one billion or more.
    I don't dislike the idea, but how could it happen? Even if we ignore the political aspects like the government being wholly owned by TPTB, wouldn't the targeted wealthy just leave the country and hide their assets?

    Quote Originally Posted by photon555 View Post
    Along with strict enforcement of anti-monopoly laws maximum corporate size should be reduced to maybe 1000 employees or less.
    This would cause a problem for tech companies (think Cisco), for example, competing with foreign companies without similar restrictions. And are there still US factories employing that many people? I think this would be better if based on the companies' Too Big To Fail status. (TBTF is TBT Be).

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by photon555
    Along with strict enforcement of anti-monopoly laws maximum corporate size should be reduced to maybe 1000 employees or less.
    I don't see all corporations as automatically evil. There seem to be a number which do just fine filling a niche and making money, as opposed to milking the government and taxpayer for subsidies.

    Quote Originally Posted by LazyBoy
    I don't dislike the idea, but how could it happen? Even if we ignore the political aspects like the government being wholly owned by TPTB, wouldn't the targeted wealthy just leave the country and hide their assets?
    Just label them 'terrorists' and the whole can of whup *ss can be opened up on them. After all, the IRS cracked open Switzerland already, and the Caribbean is largely pacified in terms of offshore tax shelters.

    Of course the reason this isn't going to happen is because the people with the cash will pay for the politicians to ensure this doesn't occur.

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    aaron is offline iTulip High Commissioner, Select Member
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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by dcarrigg View Post



    I will continue to be called naive here, but I have faith in the American people. They normally come to the right decision - just five to ten years too late. And they get mad about it five years after that. But hell hath no fury...

    The named movements of our time have just begun.
    Please provide some recent examples (past 30 years is fine).
    Thanks
    Last edited by aaron; 03-31-12 at 02:44 AM.

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by aaron View Post
    Please provide some recent examples (past 30 years is fine).
    Thanks
    I'd say take a look at the book on it. It's packed with data. But just to give a few recent examples off the top of my head:

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    aaron is offline iTulip High Commissioner, Select Member
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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    What are the right decisions in the past 30 years? Your list includes nothing recent except Iraq and Afghanistan? If you really want to count those, wouldn't it be fairer to say we lost the wars, have run out of blood and coin, and are retreating based on necessity?

    I suppose there was some decision made to 'allow' the Internet to go forward. Collectively, we decided that was a good thing.
    I am really struggling for another.

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by aaron View Post
    Monopolies should be broken up. I think we have (had?) laws on the books to do that. We also have (had?) a tax system that was supposed to prevent families from accruing wealth over generations.
    Yep, the solution is simple: Cut the loop-holes and trusts and off-shore shenanigans and enforce anti-trust laws across the board. But, the government is owned by these entities. Nothing will change until it all comes crashing down and children are starving. As long as the food keeps flowing to the masses, there will not be a force for change from the bottom.

    Hyperinflation, along with blame pointed towards the banksters who run our government, is the only chance for America to survive and thrive again. Bring It On.
    Shame on you! No-one except for you wants hyper-inflation as a solution for anything.
    Last edited by Starving Steve; 04-01-12 at 12:13 AM.

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    The right decision for America would have been to stay OUT of Vietnam. The economic mess and slow collapse that we are in now can be traced directly to LBJ and Nixon dragging America into the Vietnam War and staying there forever.......... Not only did the U.S. lose the lives of its boys, it squandered all of its wealth on that war. The leadership of America in the world was squandered, as well..... Now, no-one even knows what the war was about, lest even cares.

    Forward into the '70s came the cheap money, the rising energy prices, and the housing bubble. Into the 80's came a brief hiatus from this inflation, and then the Fed went right back to inflating again. So, we had more housing bubble. The 90's and into the early 21st C. and we had even more of a housing bubble, nothing affordable, energy inflating and everything teetering. Then came the Great Recession from the bursting of the housing bubble. Ben Bernanke is now trying his ZIRP, and energy prices are still inflating to the stars.

    But when you look back several decades, it was the Vietnam War that started this going. Remember, the silver coin disappearing in 1964? Then the inflation shock of the clad-coins in 1965? Then going off of the external gold redemption for the U.S. dollar in 1971? Money being pissed-away, day and night, on the Vietnam War early in the '70s? Then more inflation which led to an inflationary blow-out in 1980? Then came more inflation (Round Two) thanks to the easy-money policy of Alan Greenspan, then his inflation bubbles especially in housing, the bursting of the housing bubble leading to the Great Recession now, Bernanke and his ZIRP experiment, the scary food inflation now, energy prices still going up, and where do we go from here?
    Last edited by Starving Steve; 04-01-12 at 12:47 AM.

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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Quote Originally Posted by aaron View Post
    What are the right decisions in the past 30 years? Your list includes nothing recent except Iraq and Afghanistan? If you really want to count those, wouldn't it be fairer to say we lost the wars, have run out of blood and coin, and are retreating based on necessity?
    Perhaps the disconnect here is that I'm talking about public opinion and not what government does?

    I suppose there was some decision made to 'allow' the Internet to go forward. Collectively, we decided that was a good thing.
    I am really struggling for another.
    Think about what hasn't happened as well as what did happen. The last 30 years have been an arms control miracle from a nuclear perspective (not that anything is perfect). US/Russian public opinion has really come around. The grudge wasn't held as tight as it could have been.

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    aaron is offline iTulip High Commissioner, Select Member
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    Default Re: Latest Dr. Michael Hudson: The Federal Reserve

    Of course, I do not want it. I just think there may be no other option. It is better for it to happen now than later.
    I want the government to work for the people and make correct decisions for the good of the nation.

    If you see that as a possibility, you are far more optimistic than I. I see the continuation of the current system for as long as it can go. Then I see fascism and oppression. Then I see war.

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