Monday, September 2, 2013

Money for the Sake of Our Families

We work hard to take care of our families, and we are paid with money, not gold coins or bushels of soybeans.  Most of us work at a job to earn our money.  I have friends who have lost their jobs due to our bad economy.  I have friends who have been hit with a 20% furlough from the Federal sequestration action.  And I think everyone is waiting for the economy to improve.  We are still in tough times.

We need to watch out for the economy getting worse instead of better, and there are a few things we can do to keep our economic recovery on track:  (1) we can understand the threats to our economy and (2) we can write our representatives, encouraging them to take prudent action.

The Federal Reserve Did Nothing to Prevent the Subprime Mortgage Meltdown

A recent newspaper article in the New York Times said that Ben Bernanke and the Federal Reserve did not know the subprime mortgage industry was going to collapse; supposedly, they were as surprised as everyone else.  The American people learned of the collapse of the sub-prime market when Lehman Brothers went bankrupt in 2008.  But in 2007 Edward Gramlich published "Subprime Mortgages, America's Latest Boom and Bust."  Dr. Gramlich had previously been a member of the Board of Governors of the Federal Reserve System and he knew the subprime mortgage market had gone bust, publishing a book about it a year before Lehman Brothers collapsed.

Early in 2007, Fabrice Tourre at Goldman Sachs was selling the Abacus 2007-AC1 CDO, a collection of mortgages assembled by John Paulson that he was betting would failJohn Paulson made billions of dollars short selling subprime mortgages in 2007.  The Federal Reserve and the U.S. Treasury Department have some of the best information available on the American economy.  They knew the subprime market was collapsing and did nothing about it because there were people making money as the economy went down by short selling.

We are Not Out of the Woods Yet

Lehman Brothers collapsed five years ago, but Adam Davidson in "Did We Waste a Crisis?" (New York Times Magazine, August 11, 2013) reports that it is still hard to determine if the financial industry is healthy.  On top of a shaky financial system the Federal Reserve has been pumping money into the world economy using a program called Quantitative Easing.  The problems with the Fed's program are that (1) it puts the value of our money (yours and mine) at risk of dilution and inflation, (2) it creates asset bubbles that can burst, leading to another down turn, and (3) the big banks borrow the money and invest it outside of America, so we taxpayers take risk but get no reward.

The value of the Indian Rupee nose-dived recently on the fear that the U.S. Federal Reserve would cut back on its quantitative easing:  the fear that money from the Fed would quit flowing into India.

The American Interest, January 2012, pages 5 to 12, has the article, "The Death of Money" by Peter Hartcher.  On page 12 he writes, "Even though some members of the Fed itself aren't sure that hyper-liquidity will restore the U.S. economy to health, there's one thing we can be pretty confident of:  America and the rest of the world will pay a price for it.  If recent history is any guide, hyper-liquidity will lead to another bust in asset prices and another downturn in the economy."

If the Federal Reserve Makes Mistakes, You and I Pay the Price

Ben Bernanke, the Fed chairman, launched the quantitative easing program at the Fed, but has not wound it down.  Maybe he has the talent and skills to turn on and then turn off the money spigot without causing harm, but he is retiring from the Fed and will not be there to wind down the money flow. If the wind-down goes wrong then the value of our savings and our income can diminish and put us all in a financial bind.  We work hard for our money, but it is the big shots in Washington and New York that roll the dice with our life savings.

The next chairman of the Federal Reserve could really hurt us.  One of the leading candidates for the position is Larry Summers, the consummate insider.  If he becomes chairman of the Fed, he will not be an objective college professor like Ben Bernanke.  Dr. Bernanke taught at Stanford and Princeton.  Larry Summers has received between 7 million and 30 million dollars from various Wall Street firms.  It is my opinion that he cannot be trusted to regulate the institutions that have enriched him.

You should form your own opinion of Larry Summers.  The New York Times on Sunday August 11, 2013, had a cover story on Larry Summers:  "The Fed, Lawrence Summers, and Money" by Louise Story and Annie Lowrey.  This is one source for your reading.

What Can We Do?

I have already contacted my senators about the next Federal Reserve chairman.  The next chairman could wipe out your life savings.  I encourage you to form an opinion about Larry Summers and share that opinion with your senators.

The firewall between investment banks and federally insured deposits was removed when Senator Phil Gramm repealed the Glass-Steagall Act.  The banking system will not be safe until a form of Glass-Steagall is put back in place.  Senators John McCain and Elizabeth Warren, along with others, have sponsored the 21st Century Glass-Steagall Act.  I have contacted my senators to share my opinion on this legislation, and I encourage you to do so as well.

The money we use for the sake of our families is not safe.  If the value of our currency collapses, it will be too late for us to act.  Now is the time to act.  I encourage you act now and email or write your representatives.

Thank you,