Wednesday, October 15, 2008

The Creature From Jekyll Island Returns

My cousin, who politics I have never quite been able to figure out, gave me a copy a few months ago of G. Edward Griffin’s The Creature from Jekyll Island, a popular paleo-conservative/libertarian attack on the Federal Reserve System. Its title comes from the famous secret meeting at Bernard Baruch’s estate on Jekyll Island in Georgia in 1913 that helped establish the Federal Reserve System. The book is a strident attack on the Fed, and argues that it has over the years led to gross distortions in the free market, to the benefit of a handful of rich bankers and the detriment of almost everyone else. It calls for the restoration of a form of the gold standard, arguing that principal function of the Fed, whatever else it claims to do, is to circulate an adulterated currency, which is inherently inflationary. Like many paleo-conservative works, it asks many of the right questions, though mostly comes up with wrong answers. But there is no question that the concerted efforts under Alan Greenspan to keep interest rates low was the basic kindling the housing boom needed to start burning, and low interest rates tend to make investors seek cleverer and cleverer schemes to manufacture ever higher rates of return.

But The Creature from Jekyll Island tends, like many of these sorts of books, overly conspiratorial in its historical thinking, and careens from one extravagant claim to another. For a much more carefully researched history of the origins of the Fed, I recommend William L. Silber’s recent and excellent, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy.

As I said, The Creature from Jekyll Island, like other books of its ilk, often ask the right questions, and I thought of the book this morning, after reading accounts of the meeting between Paulson and the leaders of the largest banks in the country –are we nationalizing the banks or are the banks privatizing the US Treasury.? Certainly the meeting Monday was perhaps the most dramatic meeting in the history of American central banking, with Paulson pleading with eight of the largest financial institutions in the country to take $150 billion in additional capital, and with the bankers, after much hemming and hawing and standing on their principles, reluctantly agree to take the money, for, “the good of the country,” like Cincinattus at the plow.

Look, I think this is basically a good thing, certainly better than the asset purchases that Paulson had been peddling a few weeks earlier. But it seems very much like what happened in 1913, when the Federal Reserve System was invented not to change the existing financial quo, but to preserve it. There are a lot of questions which seem not to have been asked, or asked sotto voce –why purchase preferred stock rather than common stock? Yes, there are advantages to owning preferred stock as a creditor, but it means that the government will have no control or say in how the banks operate. Why no members of the government on the board of directors? (The limits over executive compensation are weak, but that is only to be expected.) And why no controls over what the banks can do with the money? There is nothing to prevent them from using the money, borrowed at 5%, to retire debt owed at 10%. What if the banks still don’t lend? One thing is clear; the economy is in for a very rough patch. Nothing will turn around the economy in the short run. And in the long run, not only will we be all be dead, but we will need a new banking system. I don’t know if the Treasury needs to nationalize the banking system—Clement Atlee where are you at this hour?—but it needs to take effective control of what banks do, and make sure that what they do is in the nation’s interest. What Paulson did what not enough, and I can only hope it doesn’t tie the hands of an Obama administration. We need to be sure that the government is dictating terms to the bankers, and not the reverse,


Irishgolfer said...

Your crazy! The Fed caused this! That is what they wanted from the start. ONE WORLD CURRENCY. I know you must think I am a nut, and you maybe be right, but it looks like it could be done easier than ever. I could see the country going this period for 2 to 4 years maybe even longer. Then, they will make all of us suffer to the point we would do anything to get out of this turmoil.

Anonymous said...

you need to do better research. The "money" system was running like a smooth engine before 1913. That was the "problem", the banking elite had no control over the fact that people were "saving" their monies and operating just fine. That was the purpose of the Federal Reserve System being implemented to enslave the population, in a nutshell

Anonymous said...

I agree. The Fed was created as a solution to a problem caused by the banks in the first place, reserves on hand less than 100%.

The only reason for bank failures, were due to runs on the bank, of which the catalyst were rumors (albeit fact) that the banks didn't have enough money to cover deposits.

All that our congressional buffoons, or more preferably, state legislatures, needed to do to resolve the problem, was to require private banks have on hand a 1/1 ratio (ak 100% reserves).

Anonymous said...

Did you really read the book - the meeting took place in 1910, not 1913 and as far as SIR Alan Greenspan keeping interest rates low he was ON RECORD telling home buyers to take a teaser rate and then raised rates 17 times - do you really think that is a good strategy of keeping rates low. Also the idea that we need the FED to keep control of the bankers - it was STARTED by BANKERS.

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Anonymous said...

it was past in Congress in 1913, meeting took place 1910...

Anonymous said...

They offered low interest rates to everyone so they could get a piece of the american dream....even though they couldn't afford it...greenspan retired because he saw this crap coming...chicken shit...he shoulkd be in, when he let citi but traverlers insurance that is whe the shit hit the fan...they werent allowed before, but he ok it....

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