The Coming Economic Crisis

Among the topics discussed in the last Republican debate was Senator Rand Paul’s advocating an audit of the Federal Reserve. Senator Ted Cruz is also cosigning this bill to have Congress exercise its auditing and oversight authority of the Fed, a duty that has been sorely lacking throughout the Fed’s murky history. The Federal Reserve, a major contributor to our highest-ranking debtor status, has become a central banking debt machine that exerts tremendous control over the U.S. economy; yet many Americans are barely aware of its existence or the power it wields.    

Created in 1913 by Congress to combat financial panics, the Federal Reserve is composed of the twelve regional big commercial banks. The controlling board is composed of five members from those banks and seven members, nominated by the president, including his appointed head of the Federal Reserve -- currently, Janet Yellen. This unholy alliance of government and private banks is supposed to help the economy and employment through bank regulation, setting interest rates, and controlling the supply of money. It is no coincidence that the 16th amendment instituting the personal income tax was passed in the same year as the Federal Reserve’s creation as a means to fund ever-growing government debt.     

Today, the Fed banking cartel simply creates money with computer keystrokes and lends this new money to Wall Street banks, which, in turn, lend it to government. The huge national debt is the result of the government’s ability to borrow an unlimited supply of money at low rates. Inflation, the devaluation of the dollar, is caused by the creation of ever more new dollars. Think how little a dollar buys today; most of that inflation has been caused by the Fed’s money-printing. By setting extremely low interest rates, the Fed creates an environment for the misallocation of money, causing financial bubbles that repeatedly burst, such as the 2008 housing bubble. 

In response to the 2008 financial crash and in a doubling-down of its failed policies, the Federal Reserve lowered interest rates to nearly zero and created $4.5 trillion dollars. That money was borrowed by the federal government, used to bail out the big banks, and funneled to Wall Street, where it was spent to buy back company stocks, inflating stock values. This money was not used to grow or improve company infrastructure, hire more employees, or pay higher wages. Almost none of the money was used to help people who were losing their homes or stimulate job growth.

The Fed’s policies of currency creation (inflation) and zero interest rates are responsible for the biggest redistribution of wealth from the middle class to the rich elites in national history. The distribution of money has gone to Wall Street, not the sluggish Main Street economy. Seven years into an economic recovery of the Fed’s financial engineering, homeownership is at its lowest level since 1965; and the median household purchasing power is equal to that of 1989. The Fed proclaims concern about employment and wages, but labor participation is 62.6%, the level of 1977, and real wages are lower than in 2009.  Saver’s earnings are virtually zero, meaning that retirees and those with little capital suffer, or are coerced into risking their IRA’s and savings in the stock market. 

This economic malaise and growing national debt is not limited to the U.S. Central banks in China, the European Union, and other countries have followed the Fed’s program. Global debt increased from $87 trillion in 2000, to $225 trillion in 2014. While debt rises, there is now a major decline in world trade and commodity prices such as oil, gas, and copper, all symptomatic of a slowdown in the global economy that is rolling like a snowball downhill. Recession red lights are flashing in bloated manufacturing inventories, falling sales, and declining transportation of goods.

Now the Federal Reserve is supposedly in a quandary over increasing interest rates in such an environment. Donald Trump has said that Yellen is not raising rates to forestall a financial crisis during Obama’s administration. Fearing its Wall Street bubble will burst, the Fed has only strategically hinted at raising rates. If the Fed does increase rates in December, expect a mere .25 percent, or less, increase that will cause only minimal stock declines. But in truth, the Federal Reserve cannot restrain rates forever nor prevent the bursting of financial bubbles. As history has repeatedly shown, market forces will eventually overwhelm the Fed’s control and spin us into another crisis that the Fed never sees coming. The next financial crisis will be much worse because of overvalued stocks, sky-high debt, and an economy already in recession.     

What weapons does the Federal Reserve have in its arsenal to fight the next economic crisis? Will it lower interest rates into the negatives and require people to pay for bank deposits, or take a percentage of depositors’ checking and savings accounts, IRAs, or 401ks? Will it print more currency, spurring inflation or even hyperinflation? Congress has already passed a law to put taxpayers on the hook to bail out the “too big to fail” banks, which we bailed out the last time, and which now hold more trillions in risky derivative debt than in 2008.             

The Federal Reserve has never been able to foresee or halt a crash, not in 1929, and none in this century. The Fed refused to reveal secret deals, including deals with foreign banks, made during the 2008 crash. We should join Senator Paul and Senator Cruz and demand that Congress calls for this audit and examines the Fed’s activities. Congress created the Federal Reserve and has the power limit the Fed’s control or dissolve it. Interest rates should be set by free market supply and demand, and only the U.S. Treasury should issue currency. The Federal Reserve should be abolished.