Timmy Wonka and the Chocolate Factory
By Justin Williams
The Federal Reserve Board, at the behest of Treasury Secretary Tim Geithner, has now decided to initiate a new program that will lend up to $1 trillion dollars for anything from student loans to small business bailouts. And his began the ultimate blurring of the lines between a commercial bank and the role of the Federal Reserve.
It is all to be done under a new program known as the Term Asset-backed Securities Loan Facility, or TALF, created in October of last year. Significantly, TALF was set up not by Congress—which is, of course, answerable to those whose tax dollars it spends. It was created by the Fed itself, which is answerable to ...well, itself.
Commercial banks, which traditionally made TALF like loans, are defined as financial intermediaries. The Federal Reserve is supposed to be the lender of last resort. This means that the job of commercial banks (i.e. Bank of American, Wells Fargo, and BB&T) is to match those who are willing to save their money with those who are looking for a loan. The Federal Reserve, on the other hand, is supposed to protect the fractional reserve banking system by supplying cash when banks get in trouble and people try to withdrawal all their assets at once.
Now with Geithner's new TALF plan, the Federal Reserve is in direct competition with these commercial banks. In short, in yet another major step in fulfilling the administration's socialist agenda, the government is now preparing to use its fiat money printing press to compete with individual's savings at private banks.
And there is no doubt that the Fed, having a monopoly on the printing press, will be able to destroy any attempt by the banks to fight back.
For example, if Bank of America loans out money and the loan defaults, they lose money and learn that they should make their lending practices stricter. This is how the financial free market is supposed to work. If the Federal Reserve loans out money and the loan defaults, all they have to do is print money to make up for the loss.
Commercial banks cannot print money they must raise their money from depositors, which is any person who holds a savings account or a CD. Already with the constant pressure from the Fed to push down current rates of interest, today's savings accounts lack any significant real rate of return.
After the Federal Reserve gets done destroying the competition, the commercial bank's real (minus inflation) interest rates will be nonexistent. In other words, there will be no real incentive for Americans to keep their money in a savings account.
But not to worry: the Fed has even more tricks up its sleeves. As it prints more money to make more loans, the nominal (before accounting for inflation) interest rate will naturally rise with inflation.
Then as in the 1970s, the nominal interest rate gives people the illusion that they are making more money in their savings account, which is actually being devalued by inflation.
This, of course, is a double whammy—because what actually matters is the real interest rate. This is the true amount of wealth an individual is accumulating.
For example, if John Taxpayer puts $100 dollars in his savings account then he would be very happy if he receives a 7 per cent rate of interest (2008 average rate was less than 1 percent). Both this means that every year the bank will pay him $7 dollars on that initial $100 dollars. If the inflation rate is at 6 percent, which was the average in the 1970s, then John is actually only making $1 dollar a year making the real rate of interest only 1 percent. Though government hopes, John just won't notice
Secretary Geithner and the Federal Reserve both believe that they can delude the American people, by creating another unsustainable bubble by printing money and competing with (while destroying) American savings.
It's a bubble that will be much bigger than the last. And, it's not only a bubble we cannot afford; it's one we cannot survive.
Unfortunately, unless the fiscal conservatives in Congress step in, the only thing that the American people can do is watch as their currency disintegrates. Or as Austrian Economist Ludwig von Mises said, “Money, like chocolate in a hot oven, [will be] melting in the pockets of people.”
But unlike chocolate the American people will be left with anything but a sweet taste in their mouths – or for that matter, sound money in their devalued bank accounts!
Justin Williams is a Contributing Editor of ALG News Bureau.