As of Sunday it appears that Congress will pass a Wall Street bailout bill with expenditures potentially totaling more than $700 billion. After a week of fear tactics put forth by the executive branch and the Federal Reserve, the Congress has apparently caved.
According to Treasury Secretary Henry Paulson, the billions will be spent to shore up credit markets by buying “illiquid” assets that are weighing on the balance sheets of foreign and domestic banks.
This is just the latest in a series of bailouts performed by the Federal Reserve and the treasury in which billions of taxpayer dollars have been put at risk. Since March, the Federal Reserve has loaned out more than $100 billion to rescue failed financial institutions.
Recently the Fed became worried that its own balance sheet was being depleted and the U.S. treasury came to the rescue, effectively bailing out the federal reserve by auctioning debt on behalf of the Fed. Add to this $200 billion for Fannie Mae and Freddie Mac, and the total new liabilities for the U.S. taxpayer are more than $1 trillion.
This robbery of the American people has been performed under the guise of preventing a recession, although more frightful language is often used by supporters of the bailouts. The fear generated by the actions and words of Federal Reserve have scared Congress into adding more fuel to the fire of the recession which will inevitably occur as a result of our the failed monetary policy pursued by the Fed itself.
Understanding the Fed and its language — termed “fedspeak” — is often difficult, perhaps purposely so. It is important to first understand that the Federal Reserve System is made up of Federal Reserve Banks, which are private banks whose shareholders include such Wall Street titans as JP Morgan Chase, Goldman Sachs, and Citibank.
From its inception in 1913, the Federal Reserve has crafted monetary policy which has resulted in alternating periods of inflation and deflation of the money supply. The most recent inflation of U.S. housing prices is just another example of the effect of Fed policy.
In 2001, the Fed lowered its benchmark interest rate from a high of 6.5 percent to below 2 percent and maintained this level for more than two years. This change in the mandated interest rates for interbank loans resulted in an oversupply of “cheap” money which resulted in malinvestment. This malinvestment took the form of overdevelopment of commercial and residential real estate, sub-prime mortgages, and many other forms of irresponsible lending.
As a result, millions of Americans were lured into accepting adjustable rate mortgages to pay unaffordable prices for overvalued houses. When the Fed raised interest rates, housing loans became less affordable and the prices of housing fell along the demand for these loans.
While some prospered from the booming real estate prices, the overwhelming effect of the Fed’s monetary policy was to inflate a housing bubble that drove millions of Americans further into debt while investment banks posted billions of dollars in profits from creating and trading debt instruments backed by these loans.
These same debt instruments have now become “illiquid” after the realization that the housing bubble had burst, and the underlying collateral backing these debt instruments had lost value. These assets are said to be illiquid because banks are not willing to sell them for the prices currently being offered by the market.
Now thanks to the lobbying efforts by the Chairman of the Federal Reserve, which is owned by Wall Street banks, and Henry Paulson, a former banker at Goldman Sachs, the American people are now completing the cycle, moving further into debt, while the bankers benefit.
On top of this, all the cheap money flowing through the system has caused our dollar to steadily lose value against world currencies. This has driven up the price of oil, food, and all essentials of life. As a result of dollar devaluation, all the stock market averages, which are valued in dollars, have been falling for years. Valued in 2001 dollars, our Dow Jones Industrial Average would be well below the 8000 level. Yet we continue to tell ourselves that we are not in a recession.
Adding to our national debt will only further this inflation problem. We must realize that we are already in a recession and not be swayed by fear-mongering from Wall Street. Instead we must clean house and remove these bankers from the halls of our government.
Congress has failed us for now, but the people still have the power. We can change this system any time. We only have to declare our independence from the banking system. We can all vote with our dollars buy removing them from the banks and converting them to gold, silver, or other currencies which are out of reach of devaluation by the Fed.
If you’re as outraged as me about this situation, let’s get together on the steps outside Lobby 7 this Friday at 5 p.m. to show the bankers at the Fed that MIT students have declared our independence!
Matthew Davidson is a graduate student in the Departments of Physics and Nuclear Engineering.