Fed's Money Tree

by John M. Curtis
(310) 204-8700

Copyright September 18, 2008
All Rights Reserved.                    

              Rescuing the current U.S. financial crisis, the Federal Reserve Board flexed its muscles, bailing out investment bank Bear Stearns March 15 for $30 billion, taking over mortgage giants Fannie Mae and Freddie Mac Sept. 7 for $200 billion, turning its back on Lehman Bros. Sept. 16 and saving AIG insurance from bankruptcy Sept. 17 for $85 billion, totally a whopping  $315 billion, a staggering sum by anyone’s standards.  Yet the federal budget deficit remains around $440 billion, begging the question of how the Fed accounts for its extravagant purchases.  Fed Chairman Ben S. Bernanke personifies former Fed Chairman Alan Greenspan’s worry of “using the Fed as a magical piggy bank.”  Whether admitted to or not, Bernanke calls his buddy Treasury Secretary Hank Paulson, places his order at the Office of Printing and Engraving for whatever he wants and rescues the economy.

            Some of the this mystery was unraveled Sept. 9, 2007 before the House Oversight and Government Reform Committee, when former U.S. civilian administrator L. Paul Bremer admitted under oath that he couldn’t account for 360 tons or $12 billion of freshly printed C-notes.  Bremer also didn’t know whether the cash came from the Fed or out of the billions allocated by Congress for the Iraq War.  “Who in their right mind would send 360 tons of cash into a war zone?  But that is exactly what our government did,” said Chairman Rep. Henry Waxman (D-Beverly Hills) dumbfounded by the lack of accountability.  Nobody knows today whether taxpayers, in fact, pay for Wall Street’s bailouts or whether Bernanke simply asks Paulson to print money-on-demand.  No one, including the Fed, admits where the money comes from or goes to subsidize the Fed’s pet projects.

               Bernanke ordered Sept. 15 New York Fed president Timothy F. Geithner, vice chair of the Fed’s Open Market Committee, to loan AIG $85 billion for a 79.9% stake in the company.  No one really knows from which account the cash was drawn.  There’s real confusion whether the Fed orders cash directly from the U.S. Treasury or whether such cash bailouts come directly from the Office of Printing and Engraving before they’re assigned to any account, public or private.  “The loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the economy,” said the Fed statement, not accounting for whether the bailout would add to the expected $440 billion deficit.  When Wall Street heard the news, the DOW sold-off 440 points, adding to recent losses.  Fund managers can’t figure out whether to buy or sell.

            Greenspan worried about the Fed playing the nation’s “magical piggy bank,” bailing out the nation’s ailing businesses.  You can’t blame AIG’s losses on the mortgage meltdown that has decimated the investment banking industry.  Trusted names like Bear Stearns, Lehman Bros and Merrill Lynch have been swept up in Wall’s Street’s latest tsunami now threatening the economy.  When the Fed was formed in 1913, it was a consequence of the financial panic of 1907, attempting to introduce “elasticity” and liquidity in the nation’s banking system.  While there are 12 branches across the U.S. with a total of $350 billion in assets, the Fed can expand its asset base at any time by ordering more currency from the Office of Printing and Engraving.  Without maintaining the illusion of a tightly controlled lending system, U.S. currency would risk devaluation, causing runaway inflation.

            Watching financial markets meltdown helped energize Sen. Barack Obama’s (D-Il.) campaign, watching his bounce evaporate after the Democratic National Convention.  Incumbent parties usually take the heat for troubled economic times.  Sen. John McCain (R-Ariz.) faces stiff headwinds because of President George W. Bush’s low approval ratings and sick economy.  “An $85 billion loan is a staggering sum and is just too enormous for the American people to bear the risk, Congress will demand answers to prevent this from happening again,” said House Speaker Nancy Pelosi, unsure whether the Fed’s loan would expand the deficit or the national debt.  “Hearing these plans, you have to stop to catch your breath.  But upon reflection, the alternatives were much worse,” Sen. Chuck Schumer (D-N.Y.) head of the Senate Banking Committee, lauding the Fed’s actions.

            Fed’s recent bailouts prove that there’s no limit to the Treasury’s printing presses, handing Bernanke whatever he wants.  Past government bailouts during the 1980’s savings and loan crisis totaling $160 billion didn’t result in devaluing the currency or massive inflation.  Runaway inflation in the late 1970s had more to do with uncontrolled oil prices, something affecting today’s economy.  When Treasury Secretary Hank Paulson proposed reviving the Resolution Trust Corporation—the agency that retired bad debt in the ‘80s—the Dow rocked up 900 points in two days.  After picking and choosing which companies would live or die, Bernanke’s money tree proves that there’s no real shortage of cash in the U.S. economy.  No one really wants to know the Fed’s secret behind the money supply:  Order more cash from the Treasury’s money tree and pretend it comes from taxpayers.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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