Guest Post: The Perils of Credit Money Systems Managed by Private Corporations

In this instance the 'paper money' system would be analagous to money created by private banks by means of expanding credit. The Second Bank of the United States is the predecessor to the Federal Reserve Bank System which was established in 1913.

"The paper system being founded on public confidence and having of itself no intrinsic value, is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.

The corporations which create the paper money cannot be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business.

And when these issues have been pushed on from day to day until the public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given; suddenly curtail their issues; and produce an unexpected and ruinous contraction of the circulating medium which is felt by the whole community.

The banks, by this means, save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which, within the last year or two, seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry. It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country.

But if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption which will find its way into your public councils and destroy, at no distant day, the purity of your government. Some of the evils which arise from this system of paper press, with peculiar hardship, upon the class of society least able to bear it...

Recent events have proved that the paper money system of this country may be used as an engine to undermine your free institutions; and that those who desire to engross all power in the hands of the few and to govern by corruption or force are aware of its power and prepared to employ it. Your banks now furnish your only circulating medium, and money is plenty or scarce according to the quantity of notes issued by them. While they have capitals not greatly disproportioned to each other, they are competitors in business, and no one of them can exercise dominion over the rest. And although, in the present state of the currency, these banks may and do operate injuriously upon the habits of business, the pecuniary concerns, and the moral tone of society, yet, from their number and dispersed situation, they cannot combine for the purpose of political influence; and whatever may be the dispositions of some of them their power of mischief must necessarily be confined to a narrow space and felt only in their immediate neighborhoods.

But when the charter of the Bank of the United States was obtained from Congress, it perfected the schemes of the paper system and gave its advocates the position they have struggled to obtain from the commencement of the federal government down to the present hour. The immense capital and peculiar privileges bestowed upon it enabled it to exercise despotic sway over the other banks in every part of the country. From its superior strength it could seriously injure, if not destroy, the business of any one of them which might incur its resentment; and it openly claimed for itself the power of regulating the currency throughout the United States. In other words, it asserted (and it undoubtedly possessed) the power to make money plenty or scarce, at its pleasure, at any time, and in any quarter of the Union, by controlling the issues of other banks and permitting an expansion or compelling a general contraction of the circulating medium according to its own will.

The other banking institutions were sensible of its strength, and they soon generally became its obedient instruments, ready at all times to execute its mandates; and with the banks necessarily went, also, that numerous class of persons in our commercial cities who depend altogether on bank credits for their solvency and means of business; and who are, therefore, obliged for their own safety to propitiate the favor of the money power by distinguished zeal and devotion in its service.

The result of the ill-advised legislation which established this great monopoly was to concentrate the whole money power of the Union, with its boundless means of corruption and its numerous dependents, under the direction and command of one acknowledged head; thus organizing this particular interest as one body and securing to it unity and concert of action throughout the United States and enabling it to bring forward, upon any occasion, its entire and undivided strength to support or defeat any measure of the government. In the hands of this formidable power, thus perfectly organized, was also placed unlimited dominion over the amount of the circulating medium, giving it the power to regulate the value of property and the fruits of labor in every quarter of the Union and to bestow prosperity or bring ruin upon any city or section of the country as might best comport with its own interest or policy.

We are not left to conjecture how the moneyed power, thus organized and with such a weapon in its hands, would be likely to use it. The distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands cannot yet be forgotten. The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States.

If such was its power in a time of peace, what would it not have been in a season of war with an enemy at your doors? No nation but the freemen of the United States could have come out victorious from such a contest; yet, if you had not conquered, the government would have passed from the hands of the many to the hands of the few; and this organized money power, from its secret conclave, would have directed the choice of your highest officers and compelled you to make peace or war as best suited their own wishes. The forms of your government might, for a time, have remained; but its living spirit would have departed from it.

The distress and sufferings inflicted on the people by the Bank are some of the fruits of that system of policy which is continually striving to enlarge the authority of the federal government beyond the limits fixed by the Constitution. The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States; and the evil consequences which followed may warn us of the danger of departing from the true rule of construction and of permitting temporary circumstances or the hope of better promoting the public welfare to influence, in any degree, our decisions upon the extent of the authority of the general government. Let us abide by the Constitution as it is written or amend it in the constitutional mode if it is found defective.

The severe lessons of experience will, I doubt not, be sufficient to prevent Congress from again chartering such a monopoly, even if the Constitution did not present an insuperable objection to it. But you must remember, my fellow citizens, that eternal vigilance by the people is the price of liberty; and that you must pay the price if you wish to secure the blessing. It behooves you, therefore, to be watchful in your states as well as in the federal government.

The power which the moneyed interest can exercise, when concentrated under a single head, and with our present system of currency, was sufficiently demonstrated in the struggle made by the Bank of the United States. Defeated in the general government, the same class of intriguers and politicians will now resort to the states and endeavor to obtain there the same organization which they failed to perpetuate in the Union; and with specious and deceitful plans of public advantages and state interests and state pride they will endeavor to establish, in the different states, one moneyed institution with overgrown capital and exclusive privileges sufficient to enable it to control the operations of the other banks.

Such an institution will be pregnant with the same evils produced by the Bank of the United States, although its sphere of action is more confined; and in the state in which it is chartered the money power will be able to embody its whole strength and to move together with undivided force to accomplish any object it may wish to attain. You have already had abundant evidence of its power to inflict injury upon the agricultural, mechanical, and laboring classes of society, and over whose engagements in trade or speculation render them dependent on bank facilities, the dominion of the state monopoly will be absolute, and their obedience unlimited. With such a bank and a paper currency, the money power would, in a few years, govern the state and control its measures; and if a sufficient number of states can be induced to create such establishments, the time will soon come when it will again take the field against the United States and succeed in perfecting and perpetuating its organization by a charter from Congress.

It is one of the serious evils of our present system of banking that it enables one class of society, and that by no means a numerous one, by its control over the currency to act injuriously upon the interests of all the others and to exercise more than its just proportion of influence in political affairs. The agricultural, the mechanical, and the laboring classes have little or no share in the direction of the great moneyed corporations; and from their habits and the nature of their pursuits, they are incapable of forming extensive combinations to act together with united force. Such concert of action may sometimes be produced in a single city or in a small district of country by means of personal communications with each other; but they have no regular or active correspondence with those who are engaged in similar pursuits in distant places. They have but little patronage to give the press and exercise but a small share of influence over it; they have no crowd of dependents about them who hope to grow rich without labor by their countenance and favor and who are, therefore, always ready to exercise their wishes.

The planter, the farmer, the mechanic, and the laborer all know that their success depends upon their own industry and economy and that they must not expect to become suddenly rich by the fruits of their toil. Yet these classes of society form the great body of the people of the United States; they are the bone and sinew of the country; men who love liberty and desire nothing but equal rights and equal laws and who, moreover, hold the great mass of our national wealth, although it is distributed in moderate amounts among the millions of freemen who possess it. But, with overwhelming numbers and wealth on their side, they are in constant danger of losing their fair influence in the government, and with difficulty maintain their just rights against the incessant efforts daily made to encroach upon them.

The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control; from the multitude of corporations with exclusive privileges which they have succeeded in obtaining in the different states and which are employed altogether for their benefit; and unless you become more watchful in your states and check this spirit of monopoly and thirst for exclusive privileges, you will, in the end, find that the most important powers of government have been given or bartered away, and the control over your dearest interests has passed into the hands of these corporations.

The paper money system and its natural associates, monopoly and exclusive privileges, have already struck their roots deep in the soil; and it will require all your efforts to check its further growth and to eradicate the evil. The men who profit by the abuses and desire to perpetuate them will continue to besiege the halls of legislation in the general government as well as in the states and will seek, by every artifice, to mislead and deceive the public servants. It is to yourselves that you must look for safety and the means of guarding and perpetuating your free institutions. In your hands is rightfully placed the sovereignty of the country and to you everyone placed in authority is ultimately responsible. It is always in your power to see that the wishes of the people are carried into faithful execution, and their will, when once made known, must sooner or later be obeyed. And while the people remain, as I trust they ever will, uncorrupted and incorruptible and continue watchful and jealous of their rights, the government is safe, and the cause of freedom will continue to triumph over all its enemies.

But it will require steady and persevering exertions on your part to rid yourselves of the iniquities and mischiefs of the paper system and to check the spirit of monopoly and other abuses which have sprung up with it and of which it is the main support. So many interests are united to resist all reform on this subject that you must not hope the conflict will be a short one nor success easy. My humble efforts have not been spared during my administration of the government to restore the constitutional currency of gold and silver; and something, I trust, has been done toward the accomplishment of this most desirable object. But enough yet remains to require all your energy and perseverance. The power, however, is in your hands, and the remedy must and will be applied if you determine upon it."

Andrew Jackson, Farewell Address, March 4, 1837

NY Fed Cited in Cover-Up By SIGTARP's Barofsky - Possible Criminal Charges

It's never the crime, it's always the cover up.

This is beyond a doubt the story of the week. Neil Barofsky has been a thorn in the side of the Treasury Department and the Fed since he first took office.

I doubt there will be criminal charges filed against Turbo Tim personally, since in his case the clueless CEO defense may obtain some traction. Unless, that is, they have wiretaps and/or emails showing collusion with some of the bailed out banks, in either insider trading or the manipulation of assets for extraordinary gains.

It is a boiling scandal, and emblematic of the hidden corruption that has pervaded financial regulation in Washington for the past ten years at least. It did not start with Obama, but it may still bring down key members of his Administration.

Reform the financial system, audit the Fed.

Bloomberg
Barofsky Says Criminal Charges Possible in Alleged AIG Coverup
By Richard Teitelbaum
28 April 2010

April 28 (Bloomberg) -- ...That tense relationship [between Treasury and Barofsky] has grown out of Barofsky’s mandate to monitor and root out fraud and waste in the management of TARP, the $700 billion program passed in October 2008 to remove toxic debt from the banks. The special inspector general, in a series of reports, interviews and congressional hearings, has heaped criticism on the Treasury Department’s operation of the program.

Barofsky’s most recent broadside came on April 20, when a SIGTARP report labeled a housing-loan modification program funded with $50 billion of TARP money as ineffectual.

...The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York.

The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.

In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment
bank on April 16.

...Barofsky and Geithner’s offices have gone toe-to-toe over AIG, alleged lax oversight of TARP funds and even over the question of whom Barofsky reports to.

Barofsky, a former federal prosecutor who was once the target of a kidnapping plot by Colombian drug traffickers, says he’s also looking into possible insider trading connected to TARP. He says his agency would want to know if bankers bought stock in their companies before it was made public that their institutions would get TARP
money, for example.

“There was a time when, if you got that word the stock price would go up, and if you were to trade on that information prior to the public announcement, that would be classic insider trading,” Barofsky says.

A Democrat named by a Republican president, Barofsky says missteps by both the George W. Bush and Barack Obama administrations are to blame for TARP’s failures.

“There’s a reason there are Tea Partiers out there, and when you look at it, anger at the bailout is one of the first things they talk about,” says Barofsky, referring to the anti- Obama political movement. “This Treasury Department and the previous Treasury Department bear some of the responsibility for not being straightforward with the American people.”

Barofsky criticized Geithner’s predecessor, Paulson, in an October 2009 report, saying Paulson publicly described the initial nine TARP bank recipients as healthy when he knew that at least one of them risked failure.

...SIGTARP has more than 40 agents, including former Secret Service, Federal Bureau of Investigation and Internal Revenue Service investigators, who sport blue windbreakers emblazoned with the SIGTARP seal.

They are authorized by Congress to carry guns -- Barofsky does not --make arrests, and subpoena and seize records.

In its late-January report, SIGTARP said that the banks rescued by TARP remained “too big to fail.” They still have an incentive to make risky wagers in order to generate the profits that will reward their executives, the report says.

“The definition of insanity is repeating the same actions over and over again and expecting a different result,” Barofsky says. “If the goal of TARP was to make sure we don’t have another financial collapse, well, obviously it’s made the likelihood of that much, much greater.”

....In a December report, Barofsky showed how insurance giants Hartford Financial Services Group Inc. and Lincoln National Corp. bought tiny thrifts -- one with just $7 million in assets -- to qualify for the TARP Capital Protection Program, which is designed to encourage bank lending. Hartford and Lincoln used the more than $4.3 billion in TARP funds they received almost entirely to finance insurance operations,
according to the report.

“Treasury didn’t have to approve that,” Barofsky says.

Allison wrote SIGTARP that buying troubled assets from insurance companies was part of TARP.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., says Barofsky hasn’t been aggressive enough. She says SIGTARP should be running criminal probes of the bankers who underwrote and managed the collateralized debt obligations that were at the center of the financial meltdown.

CDOs are bundles of mortgage-backed bonds and other debt sold to investors. Tavakoli says the CDO managers sometimes replaced relatively high-quality securities with new ones that were more likely to default.

“It is securities fraud if you take securities and package them and knowingly pass them off with phony labels,” she says.

Barofsky says investigations related to the underwriting and sale of CDOs are ongoing.

...Barofsky says he’s battling an entrenched culture of secrecy in the Treasury and elsewhere.

“One of the important lessons that I hope will be learned from this entire financial crisis is that the reflexive reaction against transparency, that disclosure will bring
terrible things, has not been proven true,” he says.

He offers the AIG bailout as an example. For more than a year, the New York Fed kept key aspects of the AIG bailout secret, including details of its own involvement and its decision to have AIG pay the insurer’s bank counterparties 100 cents on the dollar on the credit protection they’d bought against about $62 billion in CDOs.

In a November report, SIGTARP criticized Geithner’s failed efforts to obtain discounts from the banks.

After the banks had been
paid in late 2008, a lawyer from the New York Fed sought to have AIG keep the banks’ identities under wraps, as well as data about the CDOs that would have revealed which firms had underwritten the toxic bonds and which ones had managed them.

“There’s a lot of things about AIG that were not disclosed, based on the assumption that the sky would fall,” Barofsky says. “Transparency does a lot more good than bad.”

Barofsky says the question of whether the New York Fed engaged in a coverup will result in some sort of action.

“We’re either going to have criminal or civil charges against
individuals or we’re going to have a report,” Barofsky says. “This is too
important for us not to share our findings.”

He won’t say whether the investigation is targeting Geithner personally.

In a statement, the New York Fed said: “Allegations that the New York Fed engaged in a coverup of its intervention in AIG are not true. The New York Fed has fully cooperated with the Special Inspector General.”

Currency Wars: Markets Shudder on Downgrade of Spain

There was unusually heavy put buying yesterday in NY markets on the Spanish stock index ETF.

Lzst month a group of US hedge funds were investigated for collusion in planning short selling assaults on the euro. Having exhausted the developing world, which has largely tossed them out, have the economic hitmen finally turned on the developing world as we forecast in 2005 that they would?

This is not to say that Greece, Portugal, or Spain are without problems or fault. There is a general crisis in many of the developed country fiat currencies, including the United States. The rising price of gold and silver, despite the heavy handed manipulation by a few of the banking centers, is a sure sign of a flight from paper controlled by central banks.

The US financial interests have been shown to exercise a disconcerting amount of control over the three US-based Ratings Agencies. I wonder how long it will be before any of the US states will have their credit ratings downgraded, and how those attacks might be structured. I am sure the government would then act to curtail their naked shorting and market manipulation activity.

As the NY based stock tout crowed on Bloomberg this morning, "The US can inflate its way out of this crisis much more easily than can any other country." Well, it is an advantage to own the printing press, and to control key elements of the global financial system.

And it makes one wonder how long the economic predators will be given free rein by the co-opted regulatory agencies and government in the US, which cannot even pass a motion to debate financial reform to the floor of its Senate. I would suggest that the debate, even when it moves forward, will not produce anything sufficient to promote a sustainable recovery. That is why this debate must move now to the floors of Parliaments and legislative bodies in the rest of the world. And there has to be much more openness compelled from their central banks with regard to private dealings with the US Federal Reserve. It is now a matter of national priority.

Wall Street Journal
Euro Drops To New One-Year Low On Spain Downgrade
By Bradley Davis
April 28, 2010

NEW YORK (Dow Jones)--The euro dropped to a new one-year low Wednesday as a ratings agency downgrade of Spain sent a rush of fear through markets that a sovereign debt crisis was spreading across the euro-zone periphery.

The euro dropped to $1.3129, its lowest level since April 2009, on Standard & Poor's downgrade of Spain's long-term debt, which was accompanied by a negative outlook. The downgrade follows S&P's slicing of the ratings of Greece and Portugal Tuesday, which sent the euro plummeting.

"The deep-seated nature [of the euro-zone sovereign debt crisis] is only now being realized by the markets," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J, "and we're looking at a potential funding crisis" of government and corporate debt in the euro-zone periphery "in the not too distant future."

Other ratings agencies are likely to follow with additional downgrades, analysts said, which will send the euro even lower...

US Equity Markets Feel an Unfamiliar Twinge of Fear

There was a bit of a spike in the Volatility Index to go with an increase in volume today as the markets recoiled from their familiar complacency, urged in part by the deterioration of the debt ratings of Greece and Portugal. This sent markets reeling and gold flying.



The rally from the bottom has had a 61.8% retracement, which makes traders nervy. This is the point where the stock index must show its hand, and either keep moving higher and strike its bullish brand, or flounder in what may have been a protracted bounce from a deeply oversold bottom. It does not necessarily collapse from here, as a prolonged sideways consolidation is always an option. The Banks' trading algorithms love a sideways chop that skin both bulls and bears.

Watch the VIX and the volume.



Technical Indicators have not yet flashed a firm sell signal.



It will take at least another big down day with heavy volume to start the indicators rolling over.



When will the markets break for us, up or down,

S’io credesse che mia risposta fosse
A persona che mai tornasse al mondo,
Questa fiamma staria senza piu scosse.
Ma perciocche giammai di questo fondo
Non torno vivo alcun, s’i’odo il vero,
Senza tema d’infamia ti rispondo.

Or until human voices wake us, and we drown?

Ο ανήφορος φέρνει κατήφορο

Let us go then, you and I...