The Fed and the looming capital market meltdown, by Tuomas Malinen

Massive fiat debt issuance is just digging the hole deeper. From Tuomas Malinen at gnseconomics.com:

The Federal Reserve system made a future financial panic or currency panic impossible. It made stable for the first time in the history of the United States the credit system of the people of the United States. – Senate Documents, 64th Cong., 1st Sess., December 6, 1916

We have been watching the “shock-and-awe” bailout of the financial system by the Federal Reserve with astonishment.  Never before has a central bank tried single-handedly to rescue both the financial system and a large proportion of U.S. corporations. We were taken aback then by Fed actions and are now just as worried about what it has given birth to.

We are unfortunately now in a situation where we cannot speak of “markets” anymore. The Fed has nurtured a dangerous, centrally controlled financial system, á la the Soviet Union. Like its ‘role model’, monolithic systems always fail, as the complexity of financial interactions and the economy will eventually overwhelm the central planners.

Alas, we fear that we are approaching the breaking point of the modern financial order.

The Federal Reserve

After the collapse of banks of the families Peruzzi and Bardi in 1343 and 1346 (the first financial crisis of the Middle Ages), a discussion about a ‘liquidity back-stop’ of the banking system began. The idea of the modern central bank emerged.

For the same reasons, the ‘Panic of 1907’ was a game-changer in an attempt to create a central bank in the US. To put a stop to the bank runs, a coalition led by the illustrious banker J.P. Morgan repeatedly intervened to restore the solvency of several New York banks, which in turn gave more impetus to demands that the U.S. banking system required a permanent institutional source of liquidity.

However, the creation of the Federal Reserve system, in 1913, was beset by worries that it would lead to the “socialization” of the economy. To calm these fears, the authority of the Fed to issue legal tender (or “currency”) was restricted by both the ‘real bills doctrine’ and the distribution of financial power.

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