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clean up in aisle 8

The Fed's New Line of Business
By Al Berrios

American tax-payers getting involved in the financial system

(Wordcount: 1,179; Pages: 3) Few things are as indescribably entrancing as monitoring and deciphering the consequences of American monetary and fiscal policy.  But for a few days in March, Fed-gazing became an unexpectedly mesmerizing sport. The Fed, launched to prevent financial crises from happening, has finally started living up to its original raison d’etre, and oddly, few of those Fed-gazers seem to understand what this really means. 

After agreeing to use as collateral $200 billion in mortgages taken out by poor (or dumb) Americans that had been bundled and then sliced up into traunches with varying degrees of risk, the Fed proceeded to then loan out billions more, initiate an artificial consolidation in the banking industry, and lower interest rates faster than a NY governor’s career.  According to a politically astute friend, the Fed has resorted to “using ‘depression era tactics’ to ‘stimulate’ the economy.” 

Not a bad observation, but here’s why the month of March 2008 will surely go down in history as nothing short of the strong-arm man-handling of the entire global economy.  Recall that the Fed is quasi-governmental.  It doesn't accept deposits; everything it funds it funds by borrowing money, in true capitalistic fashion.  And guess who it borrows from?  Big banks, like JP Morgan, who rely on the "governmental" part of quasi-governmental that the Fed will pay it all back.  In other words, it relies on the biggest collateral of all: taxpayer income.  (Side note: I personally can't help admire the evil genius at work here.  Swoon!)

So, the Fed borrowed money from JP Morgan to re-lend it back to them to buy Bear Stearns, without the risk of the sub-prime mortgage portfolio that nearly killed Bear, which the Fed bought with some of the $200 billion it also borrowed from JP Morgan.  So, JP Morgan doesn't only get a $30 billion bank at 99% discount and no debt, it also collects interest from the Fed on a portion of the $230 billion it lent it so it could do that, thank you very much.  It’s like your current tenant borrowing $200k from you to lend it back to you so you could buy a new house for yourself, which he’ll gladly fix up for free and pay the taxes on forever. 

Now, you must be wondering why (not to mention how) they would pull off something so flagrantly offensive to your sense of “common sense”?  By now I’m sure you’ve already read all about the biggies in law and investment banking that were involved in this particular transaction.  But I’m willing to bet you missed the historical context part: The original JP Morgan twice bailed the whole country out of “panics” in 1907 and 1911 (1).  In 1913, he subsequently helped Paul Warburg (2), of old, European Warburg money, and Nelson Aldrich’s, Rockefeller Jr.’s father-in-law, establish the Fed so that the country wouldn't have to depend on Morgan money and charity anymore.  (The reason the country faced dozens of panics before 1929 and the reason Mr. Warburg was asked to participate in the Fed's creation was because it was the extremely rare U.S. politician who knew anything about international finance, leaving them heavily reliant on the scions of European international banking houses, particularly Mr. Warburg.  It was similar to how no one seemingly knew anything about Iraq except Ahmed Chalabi.)

In 1910-12, Teddy was having fun busting trusts and Sherman made monopolies illegal. And 1913 was also significant because that's when income taxes started.  The first two events created a once-in-a-century, unintended aberration: it actually doubled the Rockefeller family wealth (3) (estimated at $200 billion in 2007 dollars [4]).  The third event (income taxes) amplified their wealth since they’d already found a way to insulate it from taxes: the original “family office” to manage their mammoth wealth, massive investments overseas, and large-scale philanthropy, all of which were the blueprints for the tax minimization strategies used today by the super-rich.  But one particular investment stood out, a controlling 10% stake in Equitable Trust, passed down from John Sr. to John Jr.  In 1930, Chase merged with Equitable (5), and David, John Jr.’s son, became Chairman, CEO of Chase (which remained the largest bank in the world until the mid-1990s).

In subsequent decades, Chase bought Manufacturer's Hanover, then Chemical, then JP Morgan (a huge deal at the time, since Mr. Morgan never cared for "retail" banking), then Bank of New York Mellon (which Alexander Hamilton started as a pre-cursor to the Fed, after he'd already created the Treasury), and finally Bank One (run by former Citigroup founder Sandford Weil's protégé Jamie Dimon, known for cutting costs and consolidating industries, a nod to both John D. Rockefeller's and JP Morgan’s business philosophies), and with each transaction, this monstrous agglomeration of banks (and deep historical memory) has successfully kept a Rockefeller in it’s universe (today, it's David Jr from the 4th generation.)

Fast forwarding back to the present.  Just like muckraker Naomi Klein claimed in her critique of American-style capitalism, "The Shock Doctrine", the only time you can get away with such blatant profiteering is in times of crisis, like, say, a financial panic, which has been widely labeled “recession” (or staglation, depending on who you talk to).  Never mind that a recession is just a slowdown in commercial productivity (and stagflation a simultaneous and disconnected increase in prices), something so technical and difficult to measure as to not really be identifiable until at least 6 months after it's over, during which it really doesn't affect the average person with even the most remote skill.  But, hey, we're all too scared, fussing about recessions and state capitals dead-set on competing with Britney Spears and Brangelina for the front page of the National Inquirer to know or even care about what the Fed is doing and why.

(It's worth noting here that Greenspan, true to his risk-averse New York economics school of thinking, preferred to use the Fed to insulate the entire, global, financial system from major shocks, whereas his predecessor, Bernanke, true to his Miltonite Chicago economics school of thinking, prefers to use the Fed to privatize public property and profit from it [i.e. taxpayer income as collateral for loans to banks to buy each other].  

(I really cannot help but appreciate the smoothness with which the Bush Administration is having the last laugh as they leave office, since it was they who appointed Bernanke - not to mention a pro-business Supreme Court Chief Justice Roberts, and a ga-zillionaire former Goldman banker Paulson as Treasury secretary.  Bush's regime actually, subversively, used every means at their disposal, from war-mongering to economic manipulation, to transfer entire GDPs into their bank accounts, right under free, tax-paying voters' noses, and in the end, we're going to thank them because they're making sure they take care of us with a few hundred dollars in tax rebates, $43 billion (6) of which has already been predicted to be spent shopping.)

Somewhere, some old geezer who's at the top 1% of 1% is recounting this story to his family, "And on the seventh day, I just had to rest!"


Footnotes

(1) Chernow, Ron, “The House of Morgan”

(2) Chernow, Ron, “The Warburgs”

(3) Chernow, Ron, “Titan”

(4) The Wealthiest Americans Ever, http://www.nytimes.com/ref/business/20070715_GILDED_GRAPHIC.html

(5) An Evolutionary View of Internationalization: Chase Manhattan Bank, 1917 to 1996, http://fic.wharton.upenn.edu/fic/papers/02/0237.pdf

(6) Tax Rebate Checks to Immediately Pump $43 Billion Into Economy, http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=478


Al Berrios is Managing Director of al berrios & co., a strategy innovation consultancy advising organizations on succeeding in a service and information economy. Write or Subscribe to Consumer Strategies Report.