Occupy Wall Street: You want to end Wall Street “greed”? End the FED!

Protests against Wall Street and corporate greed are spreading across America.  The amalgam of protestors who have been joined by organized labor unions are complaining that America’s banks and corporate sectors are reaping billions of dollars in profits while unemployment is still hovering around 9%. 

The unofficial unemployment rate is over 22% if we count part-time workers who want to work full-time and discouraged workers who have given up searching for a job.

Occupy Wall Street is protesting the dismal state of the economy, and rightfully so, but the protesters apparently have not made the correct diagnosis as to what has caused the massive redistribution of income from Main Street to Wall Street.  In short, the cause of the continued rip-off of the American people can be summed up succinctly—the Federal Reserve.

The FED has been the bankers’ best friend since it was founded in 1913 at the behest of the bankers.  The conventional view of the FED is that the public rose in righteous indignation to corral the greed of bankers more than 100 years ago and demanded a central bank to rein the power of bankers is pure myth.  The secret meeting to outline the plan to create the Federal Reserve was held on Jekyll Island off the coast of Georgia in 1910 and attended by powerful Wall Street bankers, their allies in Congress and economists who helped draft the legislation that President Wilson signed in December 1913.

In short, the FED was created to prop up commercial banks because they operate under a flawed business model.  Banks borrow short and lend long.  In other words, they take in short-term deposits from the public and lend the funds for longer-term projects to businesses and individuals, earning the “spread” between the interest they pay depositors and receive from borrowers.

Moreover, banks do not have all the funds in reserve to pay off depositors if they should come to cash in their deposits. Without going into the pros and cons of “fractional reserve” banking here, suffice it to say banks are the only institutions that can become bankrupt immediately because if all or many depositors want to get cash from the banks, the banks have only a fraction of cash to meet the depositors’ requests.

More importantly, the FED was created to be the “lender of last resort,” which essentially means having the legal power to create money to prop up banks if they suffer horrific losses or if bank run occurs.  The American people have been told by the bankers and FED officials that “too big to fail” is an ongoing threat to the economy because the collapse of one or more banks can trigger a financial meltdown.  The banks have had government protection for 100 years.

The FED has another power that is at the heart of reason the protesters are upset with the state of the economy but so far have not articulated it.  The FED has the legal authority and power to create money to “stimulate” the economy by manipulating interest rates in order to boost business investment and consumer spending, particularly on housing.   This power in turn causes booms and busts, price inflation and distortions in the economy.  The dot com bubble and the housing bubble are the most recent examples of how “cheap money” from the FED causes sectors of the economy to boom and then crash, resulting in pain on Main Street.

Economics professor Murray Rothbard wrote how inflation redistributes income from the average working household to the country’s financial elites and crony capitalists in What Has Government Done to Our Money?

Inflation…redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a raceto see who can get the new money earliest. The latecomersthe ones stuck with the lossare often called the fixed income groups.  Ministers, teachers, people on salaries, lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contractscontracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are taxed.

So who are the first-comers?  Wall Street firms who borrow billions of dollars from the banks to speculate in financial, commodity and foreign exchange markets.  Well connected corporations that borrow at low interest rates to expand their operations, some of which has to be liquidated during the downturn after the artificial boom ends, thus causing higher unemployment as companies shed workers to reduce their costs during the recession/depression.

In sum, the FED is the engine of inflation, driving up prices and thus lowering the standard of living of the average American family.  In addition, the FED causes the boom that enriches the bankers and their counterparts in corporate America—the well-connected crony capitalists.

Occupy Wall Street should know who is the enemy of the average American family, the institution that has the power to create money out of thin air, manipulate interest rates and can prop up the crony capitalists in the country—the Federal Reserve.  If OWS wants to  change America for the better, it should call for the abolition of the FED.

Moreover, the only GOP presidential candidate who wants end the FED is Rep. Ron Paul.  The protesters should meet with him so he can explain why the FED should be abolished and how that would restore sustainable prosperity to the country.

 

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