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Cross posted from Real Economics.

Hat tip to Zero Hedge for featuring a thirty-three minute presentation by David Stockman denouncing the September 12 decision by the Federal Reserve's Open Market Committee to begin a new round of "œquantitative easing."  Fed chairman Ben Bernanke announced that the FOMC will buy $40 billion of mortgage-backed securities each and every month, until the employment rate begins to improve. That is really a staggering amount of one particular type of asset class for the Fed to be buying up. Stockman declares that this will being the final death blow to the capital markets and the financial system. I don't quite agree with him, but I don'™t disagree either. In my three decades of watching and writing on the financial manipulations that have come to dominate the economy, I have been repeatedly surprised by inventive and ingenious gimmicks and contortions the Masters of the Universe have pulled out of their butt-holes. Not to mention the unbelievable depths of denial American officials - and the American people - will plunge to in order to avoid admitting that American capitalism is seriously flawed.

Stockman'™s speech is one of the best examples of this societal denial. While he is brilliant in describing the symptoms of the problem, Stockman is unwilling or unable to openly discuss the causes of the problem. The listener is left with the impression that the problem is the Federal Reserve as an agency of the national government. What you should keep in mind is that Stockman is speaking before the Mises Circle of Manhattan. In fact, the person who introduces Stockman is Llewellyn H. Rockwell, Jr., the founder of the Ludwig von Mises Institute in Auburn, Alabama. The von Mises Institute has consistently opposed the Federal Reserve since its founding – but the key to the charade is that the von Measles Institute has also consistently portrayed the Federal Reserve as a government entity. Von Measles acolytes insist that the Federal Reserve is "government control of the money supply," when the fact is that it is Wall Street and the nation's largest banks that outright own the Federal Reserve system. That's the fact: the Federal Reserve is  is a semi-private institution wholly owned by the banksters. The Chairman and the Board of Governors are appointed by the President, but the Federal Reserve system is actually composed of twelve regional Federal Reserve banks that are private banks owned by the largest banks in each region. Literally. In his entire 33 minute talk, Stockman devotes only one minute to discussing this crucial fact, when he mentions that "œWall Street is cheek by jowel with the Fed." And as the Huffington Post revealed in October 2009, the Federal Reserve has completely corrupted the economics profession.

So it is clinically interesting to watch how Stockman carefully avoids impugning the theological belief that "gubmint is the problem" that is at the core of the von Measles philosophy. In fact, "œthe problem" are the very people in the room. The people listening to Stockman -“ Rockwell begins by boasting how some of the "best performing" hedge fund managers are in the room and helped sponsor the event - who are the cause of the problem. These are the financial traders, hedge fund managers, and other useless usurers, who make up the core of that nebulous "œmarket" that must ever be pacified and coddled lest it plunge the nation into financial panic in a few minutes of trading. Now these same people are paying hundreds or thousands of dollars to hear David Stockman declare Bernanke the most dangerous enemy of capitalism ever. Stockman declares that "the financial system is being destroyed from the center outward." The people in the room listening to Stockman may not be at the exact epicenter of the financial system, but I can damn well guarantee you they are a lot closer to the center than you or I will ever be.

Stockman is correct: the financial system IS being destroyed from the center outward. The real cause of the destruction is that these people have been unable and unwilling to apply value judgments to their investment choices, to separate productive investments from mere speculative bets. The very idea of a hedge fund - that rich people may be allowed to "œinvest" their money in investment "œopportunities" that the rest of Americans simply do not have access to - is fundamentally antagonistic to the idea of a republic in which all are equal before the law. The most glaring example of how hedge funds enjoy a different legal approach than the rest of us, is that hedge fund managers and investors have been given such infamously favorable tax treatment.

Stockman brilliantly describes the financial system as being completely unconnected to reality - "œOur system is simply riddled with trading windfalls, arbitrage of the next move, next signal, next slight variation" - but he refuses to point the finger at the people in the room listening to him as being the very culprits who helped create this system of speculative frenzy, who profit from it, who live off it, and who demand that it be somehow preserved.

Stockman presents statistics on the steep acceleration of debt loads since Ronald Reagan became president, to our current $53 trillion. This has increased the economy's leverage from the 1.5 historical norm that held from 1870 to 1980, to today's 3.5. Stockman even manages to note that this debt is both public AND private. What he does not take time to explore is that almost all the increase in this debt is private. See here, and here.

Private vs Public Debt

For the past three decades, a small number of critics have been warning of the destructive nature of the shift in the U.S. economy from industrial capitalism to financial capitalism. Stockman warns that financial markets are now broken and can no longer perform their vital function of providing price signals, rendering interest rates, yield curves, and asset prices, all now meaningless. But Stockman misleads by blaming the Fed and the Fed only. It is the financialization of the economy, which opened the door to usury, speculation and rentier finance, which has destroyed the economy, causing it to be deindustrialized and decapitalized. It is this decapitalization and financialzation that has destroyed the financial system. The Federal Reserve has simply been the leading institution for this process.

Watch closely how Stockman carefully avoids attacking this crowd'™s theological belief in the evil of government. The closest he gets to an open assault on their beliefs is "œthe central issue is NOT printing too much money."

As a counterpoint to Stockman is David Leonhard'™s New York Times commentary on September 29, Obamanomics: A Counterhistory. Note that not once does Leonhardt single out Wall Street and the financial system themselves as the major causes for the crippled economy. Not once are the problems of usury or runaway speculation mentioned. Which is to say, that it does not matter which end of the political spectrum you turn to, the game is rigged and the real culprits are protected by simply not being considered as culprits.  

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Comment Preferences

  •  My understanding is that the Fed (0+ / 0-)

    is not a government agency. It actually represents the banking industry. The only thing the government does is appoint the Chair. Otherwise it is totally independent. And, of course, it is the embodiment of the banks. No surprise that the Fed takes good care of the banks, is it?

    For if there is a sin against life, it consists perhaps not so much in despairing of life as in hoping for another life and in eluding the implacable grandeur of this life. - Albert Camus

    by Anne Elk on Mon Oct 01, 2012 at 09:54:48 PM PDT

    •  The Fed is an odd duck (2+ / 0-)
      Recommended by:
      DBunn, basquebob

      Which is not so surprising since is a privately-owned agency that is doing the work (creating the money supply) that the US Constitution says must be done only by the government.  Throw is the symbolic appointment of the Fed Chairman by the President, and it no damn wonder that the overwhelming majority of Americans believe the Fed is part of the government.

      What is even worse is that the Fed insists that they not be controlled by mere elected officials—the famed Fed independence.  So not only is the Fed not a part of the government, there is practically no way that there will ever be democratic control over it.

  •  Good diary, couple of points (3+ / 0-)
    Recommended by:
    Jim P, JohnnySacks, hlsmlane

    1) can't help but chuckle at the multiple mentions of " Von Measles" society, accident or intentional? 2) the whole purpose of the existence of the Federal Reserve system is to "stabilize" the financial system when things get out of wack. So, the guys complaining must be the ones on the loosing end of the bet, cry me a river. Don't take me wrong, I loath the whole scheme and how the regular folk are the ones that always get screwed regardless, but the whole thing is a man made construct and hearing the big boys complain when the rules get changed is laughable to say the least. The system was designed to change the rules "as needed". What really sucks is how the rest of us are forced to live under their scheme. Some say it is a necessary evil and maybe it is until we figure a better way, but to hear these guys complain is, simply put, a joke in bad taste.

    Also, the current Finance minister of Spain, Mr. Guindos, also the former top guy for Lehman Brothers in Spain and Portugal, is a huge Von Mises acolyte. He is testing his "little experiment" in Spain with disastrous results. Just this weekend it was announced by a think tank that Spain's GDP is expected to shrink for a whole decade under the current austerity measures. Great job "Von misfits".

    Thanks for the diary NBBooks.

    "The great enemy of the truth is very often not the lie -- deliberate, contrived and dishonest, but the myth, persistent, persuasive, and unrealistic. Belief in myths allows the comfort of opinion without the discomfort of thought." -John F. Kennedy

    by basquebob on Mon Oct 01, 2012 at 11:04:43 PM PDT

  •  David (1+ / 0-)
    Recommended by:

    is trying to make amends for something he was a part of during Reagen's first term , back when he was part of the group of banker's HANDLING Reagen..remember those guys ? Casper , Regan,  Baker Schults..e.t.c.  David was known as the boy wonder...Some say, that he was the architect of the law that began income inequality...I don't believe it was his plan, but he certainly could figure out what this unremarkable bipartisan  little law would end up doing..and, I think if you ask him why income inequality seems to have begun under Ronnie in 83 ,he might tell you...and if he don't, well, sooner or later I'll explain ...

  •  So these privately held Fed Reserve Banks (0+ / 0-)

    does anyone know who exactly owns them? Okay, the Board Members are easy to find, but who is the ultimate director of these. And which Boards do they sit on?

    I have this reoccurring fantasy where I'm allowed to ask the candidates for President: "Everyone knows the largest financial institutions in the nation and the world have paid fines for drug-money laundering, terrorist-money laundering, fraud in every facet of mortgages and their derivatives, and reckless speculation. How would you recognize a "Corrupt Organization," and do you know what the "CO" in "RICO" stands for?

    But then I'd probably disappear off to Bagram or Poland or wherever we do these kinds of things these days.

    Maybe David Stockman has an answer for that question.

    The Internet is just the tail of the Corporate Media dog.

    by Jim P on Tue Oct 02, 2012 at 12:59:48 AM PDT

    •  The District banks of the Fed (2+ / 0-)
      Recommended by:
      arlene, Jim P

      are technically owned by the member banks, but in order to be members, the banks must buy shares in the District bank, (as a fund raising tool) so the shares are more like membership dues.
          How much the shareholders control the District banks and how much they are simply regulated by the District fed is a matter of some disagreement.
         The Fed is basically two entities - The District banks (there are 12 of these, and 25 branches) and the regulatory bureaucracy that reports to the Federal Reserve Board of Governors.
        The Board has seven members, appointed by the President(s) to staggered 14 year terms. One of the Governors is the Chairman. The chairman serves a 4 year term and can be reappointed.
        The Governors are appointed by the President and confirmed by the Senate.
         The FRB is for all intents and purposes a government agency, although its budget is not controlled by Congress. Any profits it earns from its activities are turned over to the US Treasury.
        Monetary policy is made by the Federal Open Market Committee, which consists of the entire Board of Governors plus 5 of the 12 District bank presidents. The President of the New York District bank is always on the FOMC (because that is the bank that underpins Wall Street.) The other 4 seats are rotated.

      •  Thanks, but doesn't really answer who the humans (0+ / 0-)

        are who own the thing: "technically owned by the member banks." Well, who owns those banks? And if another business entity, who owns that...?

        And whatever the formal structure, I'd imagine the actual humans who do the owning are not left out of the decision-making.

        The Internet is just the tail of the Corporate Media dog.

        by Jim P on Tue Oct 02, 2012 at 07:43:19 AM PDT

        [ Parent ]

  •  There are now two kinds of dollars (1+ / 0-)
    Recommended by:
    Kurt from CMH

    Thanks for this excellent diary.

    It seems to me that these policies have led to two very different economies; one in which a million dollars is a lot of money and another in which it is a rounding error.   In my opinion the fed policies are leading to hyperinflation at the top of the economy while leading to actual deflation in the middle and lower ends.   It is not a gap between the rich and poor, it is a completely different universe now.    

    If you try to put the banking numbers that are tossed around into terms of man hours per dollar you can't -- there are not enough man hours in the country to cover the value of the money at the top end.   "Forty billion a month" is an easy number to toss off, but it is the entire monthly wages of 12.5 million people at $20/hr -- and this is just one of many small tweaks that we have  put into the economy at the upper end.

    Does anybody know what tranches of the mortage backed securities the fed is buying?   MBSs are usually divided into three parts, one that has some value, one that is probably worthless, and one that is definitely worthless.   (This is not snark, this is by design.)    If we are buying the worthless tranches then all we are doing is printing money to cover a ponzi scheme.


  •  Hey Tony, excellent diary (0+ / 0-)

    here and on Real Economics.  I try to hit Real Economics every day because you and Jon Larson have important things to say.  Without fixing the financial system we cannot address the real problems afflicting the economy: energy, climate change, and producing the things that society really needs.

    "You're not allowed to sell your countrymen out to multinational financial corporations anymore and still call yourself a patriot." --MinistryOfTruth

    by Kurt from CMH on Tue Oct 02, 2012 at 01:34:38 PM PDT

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