The Great Depression of the
Economics is not rocket science.
Neither is power
Darryl Robert Schoon
May 6, 2008
Depressions are monetary phenomena
caused by central bank issuance of excessive credit. In 1913,
the newly created US central bank, the Federal Reserve, began
issuing credit-based money in the US. Within ten years, the central
bank flow of credit ignited the 1920s US stock market bubble;
and shortly thereafter, following the collapse of the bubble
in 1929, the world entered its first Great Depression in 1933.
Investment banks are the undoing
of central banking. While all banks, central, commercial and
investment, view credit as the opportunity to exploit society's
growth and productivity, investment bank exploitation of growth
and productivity exposes society to extreme risks - for investment
banks use society's savings to make their volatile and speculative
The speculative risks undertaken
by investment banks is done by leveraging the savings of society;
and, when investment bank bets are sufficiently large enough
and the bets go bad - as they inevitably do as the luck of investment
bankers is due more to their proximity to credit than to their
ability to foresee the future - it is society that will bear
the brunt of the pain in the loss of its savings.
Inevitably, investment bankers
cannot resist the temptations of excessive credit and, like the
buyers of teaser-rate home mortgages, they will always overreach
themselves - an overreaching that will have disastrous consequences
for the society whose savings they bet.
The leveraged overreaching
by investment banks in the 1920s caused the Great Depression
of the 1930s and their more recent overreaching in this decade,
the 2000s, is about to cause another Great Depression in the
next, the 2010s.
It is the proximity of investment
banks to the pools of savings that allows investment banks to
profit. By their access to society's savings, investment banks
use society's wealth as the foundation of their highly leveraged
bets in financial markets; and in so doing, they have now placed
all of us in harms way.
GOVERNMENT - THE DEVICE BY WHICH THE
FEW CONTROL THE MANY
The collapse of financial markets
in the first Great Depression led to the US Congress to enact
laws that would hopefully insure that such a collapse would never
again happen. To that end, in 1933 the Glass-Steagall Act was
passed by Congress and signed into law.
Acknowledging the role that
investment banks had played in the Great Depression, the passage
of the Glass-Steagall Act in 1933 separated investment banking
and commercial banking to insure that investment bank speculation
would not again destabilize commercial banks as it did during
the Great Depression leading to the loss of America's savings.
What bankers hath joined
together let no man put asunder
However, in 1999, the US Congress
repealed the Glass-Steagall Act and America was once again vulnerable
to the highly leveraged shenanigans of Wall Street. This time,
however, it was not only the US but the entire world whose futures
were to be bet and lost by Wall Street gamblers.
The globalization of financial
markets had spread the dangers of US investment banking to banks,
insurance companies, and pension funds around the world. Now,
the savings of Europe and Asia as well as the US were to be impacted
by the wagers of Wall Street who in the 2000s literally bet the
house on the possibility that subprime CDOs were actually worth
their AAA ratings.
Glass-Steagall, the law enacted
in1933 to prevent another Great Depression was repealed at the
behest of bankers. While it is true that at certain times the
US government will act in the best interest of society, usually
(and usually in the guise of so doing) the US government is the
pawn of the special interests that benefit from the trough of
government largesse and regulation. The repealing of the Glass-Steagall
Act in 1999 was therefore a reversion to the mean.
We are today in the initial
stages of another collapse that will lead to another Great Depression.
The safeguards put in place to prevent such from happening were
not only disassembled in 1999; but, now in 2008, the US government
has moved even closer to exposing its citizenry and indeed the
world to the speculative carnage and folly of investment banking
THE RULE OF LAW IS A WONDROUS THING
- ESPECIALLY IF YOU WRITE THEM.
Bloomberg.com April 8, 2008
"As credit markets seized up, the Fed gave the 20 primary
dealers in U.S. government bonds the same access to discount-window
loans that had previously been reserved for banks. The central
bank now auctions as much as $100 billion to lenders a month,
and has cut the cost on direct loans to just a quarter-point
above the overnight rate on loans between banks."
The US Federal Reserve is now
underwriting, i.e. subsidizing, the commercial activities of
global private investment banks. The 20 primary dealers in US
government bonds include the world's largest investment banks
- BNP Paribas Securities Corp. (French), Barclays Capital Inc
(British), Banc of America Securities LLC (USA), UBS Securities
LLC (Swiss), Dresdner Kleinwort Wasserstein Securities LLC (German),
Daiwa Securities US Inc. (Japan) etc.
In truth, these investment
banks are global entities and have no actual nationality no matter
what jurisdiction in which they are legally domiciled. As such,
they also have no allegiance except to their own self-interests.
Why is the US government allocating public resources for the
benefit of private international investment banks?
US resources are subsidizing international investment banks through
the Federal Reserve Bank, a quasi private entity which was given
governmental powers in 1913 (some allege in violation of the
US Constitution). That a quasi private bank is bailing out private
banks with public monies does make sense. What doesn't make sense
is why the public allows it.
There is much discussion as
to the justification and reasons for US, UK, European, and Japanese
central banks bailing out private banks with public money. Issues
such as moral hazard are now being raised in questioning the
right and consequence of so doing.
In truth, such issues are irrelevant.
Not that they are in themselves not important, but issues such
as moral hazard will have no effect whatsoever on what is going
Intent is the underlying motive
that explains what is about to occur. The intent of private bankers
is not public stability, nor growth, nor productivity - it is
the pursuit of private profit via the use of public credit and
Today, most governments, especially
the US and UK, are controlled by private bankers - which is why
government policy continues and will continue to favor the interests
of private bankers over the public good.
THE MELTDOWN OF MAMMON
I am sure that in some quarters
of the Catholic Church objections were raised (perhaps even on
theological grounds) about the torture used by the Church during
the Spanish Inquisition; just as today, there have been objections
raised by some in the US in regards to the use of torture in
its "war on terror".
Objections are always tolerated
by those in power as long as the objections do not rise to the
level of action. The objection to central bank credit and influence
in our monetary affairs is therefore rhetorical. The influence
of private bankers and central banking in our monetary affairs
will not change until their influence has run its course - which
is now about to happen.
The present epoch of central
banking will perhaps be known as the period when bankers roamed
the earth. Just as during the Jurassic Age, when dinosaurs
roamed freely eating whatever and whomever they encountered,
bankers did much the same in the present epoch that is now about
to end - profiting by the productivity of society and the public
and private debts incurred as a result of bankers' induced credit-based
Bankers achieved their immense
power during this era by exploiting flaws in human nature and
systemic flaws in the economic system they constructed for their
own benefit. But as with all flaws, human or economic, the consequences
of so doing are exposed over time. That time has now arrived.
Money is not credit, nor is
money created de jure by circulating paper coupons imprinted
with a government stamp stating the coupons are now legal tender
to be used in the settlement of debts.
The idea that central bank
coupons/paper money, sic debt, can be used to settle another
debt is astounding. That we have been led to accept it is so
is even more astounding. Throughout history, every experiment
with paper "money" as a settlement of debt has failed.
Our experiment with paper money towards that end will be no different.
The recent correction in the
price of gold and silver is just that, a correction in an otherwise
direct repudiation of the on-going attempt by governments and
bankers to substitute paper coupons for real money.
A paper yen, a paper euro,
a paper dollar, when no longer backed and convertible to gold
or silver is but a paper coupon masquerading as money - a coupon
with an expiration date in invisible ink.
In truth, the bankers' real
gambit is not their bet that paper money can be substituted for
gold and silver or that subprime mortgages can be passed off
as AAA securities. Their real gambit is that central bank issuance
of debt as money and their control of governments will never
be discovered by the public.
HUBRIS FOLLY AND DISASTER
The world of credit and debt
and all it has created has been made possible by bankers and
their debt based system of money and central banking. Its cost,
however, will be born by future generations who were not present
when the debts were incurred.
Those who utter in pious simplicity
those wonderful words, "our children are our future",
have no idea what they have done to those very children and their
future by spending today what future generations will have to
Here, in the US, an entire
generation has grown up on the suspect promises of easy credit
and paper money. That generation is now beginning to suspect
that something is wrong, that the price of their gas, food and
healthcare is rapidly rising and their dream of home ownership
is a trap from which bankruptcy is increasingly their only escape.
Still, this generation has
no idea of how terribly wrong it actually is and why it has happened;
and their ignorance of such will give them little comfort during
the Great Depression that lies directly ahead.
The chickens are coming home
to roost; and they closer they come, the more they are looking
Note: I will be speaking at Professor Antal E. Fekete's
Session IV of Gold Standard University Live (GSUL) July 3-6,
2008 in Szombathely, Hungary. If you are interested in monetary
matters and gold, the opportunity to hear Professor Fekete should
not be missed. A perusal of Professor Fekete's topics may convince
you to attend (see http://www.professorfekete.com/gsul.asp).Professor
Fekete, in my opinion, is a giant in a time of small men.
Darryl Robert Schoon
About Darryl Robert
I majored in political science with a focus on East Asia (B.A.
University of California at Davis, 1966). My in-depth study of
economics did not occur until much later.
In the 1990s,
I became curious about the Great Depression and in the course
of my study, I realized that most of my preconceptions about money
and the economy were just that - preconceptions. I, like most
others, did not really understand the nature of money and the
economy. Now, I have some insights and answers about these critical
In October 2005,
Marshall Thurber, a close friend from law school convened The
Positive Deviant Network (the PDN), a group of individuals whom
Marshall believed to be "out-of-the-box" thinkers and
I was asked to join. The PDN became a major catalyst in my writings
on economic issues.
When I discovered
others in the PDN shared my concerns about the US economy, I began
writing down my thoughts. In March 2007 I presented my findings
to the Positive Deviant Network in the form of an in-depth 148-page
analysis, "How to Survive the Crisis
and Prosper In The Process."
to my presentation, though controversial, generated a significant
amount of interest; and in May 2007, "How To Survive The
Crisis And Prosper In The Process" was made available at
www.survivethecrisis.com and I began writing
articles on economic issues.
in the book and my writings has been gratifying. During its first
two months, www.survivethecrisis.com was accessed by over 10,000
viewers from 93 countries. Clearly, we had struck a chord and
www.drschoon.com, has been created to
address this interest.