The title of this post is also the title of Chapter 3 of G. Edward Griffin’s book The Creature from Jekyll Island. The creature he refers to is the Federal Reserve System.
If you want to understand the root cause of this bailout, you need to understand the Federal Reserve System. It is nothing more than a banking cartel, using the force of government to protect banker’s profits and socialize their losses. It establishes a pyramid scheme of fractional reserve banking – a fragile house of cards that is capable of generating massive profits in credit booms, but is always subject to wide-scale failure when the inevitable bust occurs. The system was designed to allow the banks to enjoy the booms, and to protect them from failure in the bust by passing on the cost of failure to the taxpayers.
The Federal Reserve created the crisis, through manipulation of interest rates and inflationary monetary policy. Yes, there were irresponsible lenders and borrowers; yes, there is a tangle of government regulation forcing banks to create risky loans – but these are symptoms, not root causes. None of this will occur in the first place without the Federal Reserve System and its central planning and control. The housing boom itself was a product of the Federal Reserve, as outlined in this document sponsored by the central bank itself:
“Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission.”
Monetary policy transmission = avenue for inflation.
And now it is the Federal Reserve that will “save the economy” by bailing out politically connected bankers. Once again, we’re told that the people who created the mess are the ones who understand how to “fix” it. This line should be getting old.
The bailout is nothing less than outright theft. It will not “save” the economy, it will only prolong our pain and make matters worse. The damage has been done: There is a lot of malinvestment out there. The best way to deal with the problem is to allow the market to revalue the “toxic paper” and liquidate the bad debt.
The Mises Institute has put together a nice collection of writings they call the Bailout Reader. Anyone wishing to get an in-depth understanding of this mess would be well advised to start there. It is from the perspective of the Austrian School of free market economics. The Austrian School predicted this crash years ago, based on sound economic theory and an understanding of the perils of central banking and fiat money.
You are being robbed by a small number of extremely wealthy people. They profited handsomely from this crisis, and will walk away from the mess they created unscathed, as usual. Your congress is complicit, because it benefits from their gains as well. Campaign coffers are filled by wealthy bankers intent to keep the scheme going.
Save the republic. Abolish the Fed.