The Fed Unreserved
Jun 21, 2008
Throughout history, governments
have always used crises to justify blatant power grabs. Often
the crisis subsides, but the expanded government powers remain.
In America this week, the tendency came into sharp focus. Congress
signaled that it is preparing to perpetuate the Bush Administration's
domestic wiretapping program, and has even abandoned the pretense
that warrantless surveillance be confined to terrorism. Similarly,
even though our financial crisis has yet to reach full flower,
Treasury Secretary Paulson announced plans to give the Federal
Reserve new and explicit powers to oversee and regulate the financial
services industry. However, a sober look at his plan reveals
that it is tantamount to giving the fox complete autonomy to
guard the henhouse.
What few economic leaders have acknowledged is that the Federal
Reserve itself is responsible for the real estate and credit
bubbles, which are the source of our current troubles. By keeping
interest rates too low for too long, the Fed ignited a speculative
fever and engendered a disregard for risk management that pushed
asset prices above rational levels. Should we blame the private
sector for taking advantage of all the cheap credit, or the Federal
Reserve for supplying it? If a kindergarten teacher passes out
handfuls of Pixie Sticks, and then leaves her classroom unattended
for several hours, should we blame the five year olds for the
hysteria that ensues?
The reality is that we should be restricting, rather than expanding,
the powers given to the Federal Reserve. Since Greenspan, Bernanke
and company have already inflicted so much damage with the weapons
already in their arsenal, why provide them with heavier artillery?
Only in Washington do those who screw up get rewarded for doing
Since the Fed has demonstrated complete incompetence at setting
interest rates, why not return that function to the market? Instead
of allowing the Fed to inflict unbridled havoc on our economy,
why not re-impose some discipline? Instead of looking for new
ways to regulate Wall Street, why not find an old way to regulate
the Fed? Actually there is a simple answer to all of these questions;
it's called the gold standard.
In his speech outlining these proposals, Paulson stated that
during the past fifty years the performance of the U.S. economy
has been second to none. I do not know what planet Paulson has
been living on these past fifty years, but it is certainly not
Earth. If Paulson were referring to the prior fifty year period,
from 1908-1958, his statement would have been correct. But from
1958 to 2008, the U.S. economy has blown a lead even greater
than the one the Lakers enjoyed over the Celtics in game four
of the just concluded NBA Finals. In fact, it may well qualify
as the biggest economic choke in history.
In 1958 the U.S. enjoyed a standard of living so unmatched that
the rest of the world still lived in the Stone Age by comparison.
Our per capita income was so far ahead of our nearest rival that
it seemed impossible that any other nation would ever catch up.
Today not only is per capita income in the U.S. barely in the
top ten, but we are being rapidly overtaken by countries that
up until a few years ago were barely discernable in our rear-view
mirrors. When it comes to economic performance during the past
150 years, the U.S. is the Big Brown of economies. 1858-1908
was the Kentucky Derby, 1908-1958 was the Preakness, and 1958-2008
was the Belmont Stakes.
Not only did the U.S. surrender a substantial lead, but in many
respects our current standard of living is lower than the one
our grandparents enjoyed. Sure we have a few more gadgets, larger
televisions and more prevalent air conditioning, but the quality
of life has actually declined. In the 1950's, the average man
earned enough money to fully support a wife and four kids, all
while saving for retirement and paying off his mortgage. Today
the average man can barely support himself. It takes two bread
winners in most families to make ends meet, and that is assuming
only two children. Even with both parents working, the typical
mortgage on the family home will never be paid off and retirement
is now a pipe dream. Flush with high pay, low debt, and a strong
currency, the Ugly American in the 1950's could vacation in Europe
like a king. Now we can now barely afford the gas for a day trip
to a Six Flags theme park.
If Paulson can be so completely
clueless regarding the Fed's role in the current debacle and
in America's economic stumbles over the past two generations,
why would anyone place any faith in his proposed remedies? In
fact, an unaccountable and unelected Federal Reserve, which nonetheless
has lately proven to be as politically craven as any two-bit
politician, does not hold the keys to our economic revival. However,
with its increased willingness to rescue the big financial firms
from their own excesses, perhaps Paulson sees an expanded Fed
as the best way to ensure the continued prosperity of his former
pals on Wall Street.
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read my book "Crash Proof: How to Profit from the Coming
Economic Collapse." Click here
to buy a copy today.
More importantly, don't wait for reality
to set in. Protect your wealth and preserve your purchasing power
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Jun 20, 2008
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.