Bunk from central bankers

History teaches us that the Federal Reserve has been the root cause of our biggest, most harrowing financial problems

By Bill_Fleckenstein Jul 19, 2013 11:27AM

Federal Reserve Building © Hisham Ibrahim/Corbis

I have not really delved in depth into the subject of the Federal Reserve for some time, but this week I decided to revisit some of my history books on the 1920s and ‘30s. Once again, I was struck by the length of time it took for the Fed's inappropriate policies to wreak havoc, the damage done, and, in between, how wonderful everyone thought everything was.

Of course, that creates a bit of déjà vu.

But it is instructive to consider the modest actual amount of monetary injections, as a percentage of gross domestic product, in the mid-1920s that led to the stock bubble and, ultimately, to the bust. That stimulus was small compared with the easy money of the late 1990s that culminated with the $30 billion to $50 billion the Fed injected to protect the world from "Y2K."

Yet the sums involved in previous periods of irresponsibility are mere rounding errors nowadays.

Thus, when I contemplate the damage that will be done by four years (and counting) of quantitative easing, I just shudder at how big the disaster might be -- and there is no doubt this experiment will be a disaster.

The Fed has expanded its balance sheet to $3.5 trillion, and it now owns more than 20% of outstanding U.S. debt. Either it is going to continue buying bonds forever, which is impossible, or there is going to be a massive dislocation at some moment, because someone else is going to have to buy that debt when the Fed ultimately stops, even if it doesn't choose to sell anything (and just lets the debt run off).

There will be no painless extrication from QE and, as I have said, I don't believe the Fed will be able to leave ZIRP (zero-percent interest rate policy) willingly.

My best guess is that inflation will rise high enough to matter and people will question the Fed's policies, but it will not have achieved its objectives on the employment front and will continue to try to suppress interest rates, which will result in a funding crisis.

(On the inflation front, the July 16 Consumer Price Index of 0.5% was higher than expected and annualizes to a rate that is closer to the real world than to the 1.5% or so the Fed pretends is the case. Nonetheless, it is mind-boggling to think that so many people in the financial world are actually rooting for the inflation rate to go higher.)

More money, more problems

Printing money has never worked. The only questions are how big the consequences are going to be and when they are going to hit. This is as true today as it was 80-plus years ago, when our young central bank made its first forays into monetary mismanagement.

While the current mainstream view, with Chairman Ben Bernanke its leading proponent, holds that it is the Fed's response to the Crash of 1929 that helped worsen and prolong the Great Depression, the fact is that the Fed deserves the blame much earlier. The Fed (even on the gold-bullion standard) actually had a very large role in causing the boom, which got out of control (Bernanke, please note).

In Benjamin Anderson's fabulous book "Economics and the Public Welfare" (mandatory reading for any serious student of the Depression), he states, on page 156: 

"(T)he Federal Reserve System used (open market operations) deliberately for the purpose of relaxing the money market and stimulating bank expansion in 1924 and 1927. At a time when unusual circumstances called for extra caution, they abandoned old standards and became daring innovators in the effort to play God.

“ . . . The process of the creation of excess reserves with the resultant great expansion of bank credit did not move slowly and gradually from early 1922 to early 1928. It was concentrated, rather, in three great moves.

“ . . . Then again in the latter part of 1927 there came a third great move in the purchase of government securities, with a new great burst of expansion in bank credit.

“ . . . (This) touched the match to the powder keg and set the uncontrollable forces working which blew us up late in 1929."

Anderson continues, on page 192: "With the renewal of the Federal Reserve cheap-money policy late in the summer of 1927 a sharp acceleration of the upward movement of stock prices began. "

And on page 193: "(Finally) alarmed, the Federal Reserve authorities reversed their policy in the winter of 1927-28. They sold government securities. They raised rediscount rates.

“ . . . But the boom went on. There was a new factor in the situation. The public had taken the bit in its teeth. The rise in stock-market prices and the lure of stock-market profits had caught the public imagination."

In short, then-New York Fed Chairman Ben Strong decided to boost the economy in the mid-1920s, one thing led to another and, eventually, we had a mania and then a bust.

The Federal Reserve was the root cause of creating the problem. Bernanke thinks the Fed had no role to play in this phase, and that it erred by not doing enough later. But that is nonsense.

When whiskey sours

Those passages by Anderson led me to this from "Modern Times: The World from the Twenties to the Eighties" by Paul Johnson, who wrote:

"Domestically and internationally they constantly pumped more credit into the system, and whenever the economy showed signs of flagging they increased the dose. The most notorious occasion was in July 1927, when Strong and (Bank of England Gov. Montagu) Norman held a secret meeting of bankers at the Long Island estates of Ogden Mills, the U.S. Treasury Under-Secretary, and Mrs. Ruth Pratt, the Standard Oil heiress. Strong kept Washington in the dark and refused to let even his most senior colleagues attend. He and Norman decided on another burst of inflation and the protests of (German banker Hjalmar) Schacht and of Charles Rist, Deputy-Governor of the Bank of France, were brushed aside."

Johnson continues: "The New York Fed reduced its rate by a further half per cent to 3-1/2; as Strong put it to Rist, 'I will give a little coup de whiskey to the stock-market' -- and as a result set in motion the last culminating wave of speculation. Adolph Miller, a member of the Federal Reserve Board, subsequently described this decision in Senate testimony as 'the greatest and boldest operation ever undertaken by the Federal Reserve System (which) resulted in one of the most costly errors committed by it or any other banking system in the last seventy-five years."

The policy appeared to be succeeding, Johnson wrote. 

"In the second half of the decade, the cheap credit Strong-Normal policy pumped into the world economy perked up trade. . . . This was genuine economic management at last! Keynes described ‘the successful management of the dollar by the Federal Reserve Board from 1923-8’ as a ‘triumph.’ (British economist and Keynes ally Ralph George) Hawtrey's verdict was: 'The American experiment in stabilization from 1922 to 1928 showed that early treatment could check a tendency either to inflation or to depression. . . . The American experiment was a great advance upon the practice of the nineteenth century.’

“ . . . Strong's last push, in fact, did little to help the 'real' economy. It fed speculation. Very little of the new credit went through to the mass-consumer. . . . Strong's coup de whiskey benefited almost solely the non-wage earners: the last phase of the boom was largely speculative. . . . The 1929 crash exposed in addition the naivety and ignorance of bankers, businessmen, Wall Street experts and academic economists high and low; it showed they did not understand the system they had been so confidently manipulating. They had tried to substitute their own well-meaning policies for what Adam Smith called 'the invisible hand' of the market and they had wrought disaster. Far from demonstrating, as Keynes and his school later argued -- at the time Keynes failed to predict either the crash or the extent and duration of the Depression -- the dangers of a self-regulating economy, the dégringolad indicated quite the opposite: the risks of ill-informed meddling."

The main point to understand is that the "ill-informed meddling" on the part of the Fed in the mid-1920s was infinitesimally small compared with what it has done in the past five years, and the ultimate damage will be correspondingly horrendous. 

Jul 19, 2013 4:11PM
Bill, the Fed's actions are working for just who it was intended to help from the very beginning, the Rich and the Elite. It has nothing to do with the unemployment rate nor inflation. Rick Santelli stated as much on Cnbc a few days ago. Tapering is tightening as the Global Feds are the only ones willing to buy worthless crap. They are the buyers of last resort.

Uncle Ben is now talking of Rolling over Assets and or letting them Mature. What Uncle Ben isn't really talking about is exactly how he plans on carrying those plans out. How it will affect reserve requirements and how much will mature and or be reinvested. Uncle Ben has done the easy part, running amuck with Credit Cards he doesn't even own. His successor will have the hard part of fixing all the problems he has created. Bill is absolutely correct, the damage by the Fed prior to Uncle Ben pales to what Uncle Ben has done since he was appointed Fed Chief. Yet everyone in Congress is calling him our Savior. More like the Anti-Christ if you ask me.

Jul 19, 2013 7:36PM
I don't get it: there are more of us 'regular' folks than there are 'rich and powerful". Why don't the American people unite and *demand* that our government get rid of the Fed?! They're unconstitutional, and I'm sure that the Founding Fathers would NOT have wanted them. For the government to allow the Fed to operate is akin to hiring an alcoholic to guard a liquor store.
Jul 19, 2013 8:49PM
One big difference between the 1920's and today is the terminology.  Cool terms like "QE" and "Stimulus" sound so harmless when tossed around in everyday articles about money, verses the reality which should be termed like this "Last ditch effort"  or "paying off credit cards with credit cards".  When the $hit hit the fan in the 20's people weren't fooled or stupid.  People got on with the bubble-burst and started cleaning up the mess.  Now adays the Fed thinks that if it is sneaky enough to not panic the public or investors, and can keep painting a rosy picture, maybe just maybe we will keep investing money in a bloated stock market full of pipe dreams.  The funny thing is everyone is waiting to see if the Fed raises interest rates, so they can for sure know the "QE"s are pushing us into a bad state of affairs.  However, they have already raised interest rates, most people just don't know it.  They have already whiped out the middle class, so what was their next move?  To whipe out the future middle class.  Interest rates funded by the Fed on student loans soared to 6.7%.  So when Obama said "let's help those youngsters get an education in this hard time, and offer student loans fore EVERYONE at low rates"  what he really meant was.  Even though there will be no jobs in the future, go and take out huge loans from the Fed to fund our stimulus so that you can pay off the national debt, not me or wallstreet.   Bottom line... No amount of "QE" or "Stimulus" or $10/hr jobs is going to pull us out of this.  That is the funny thing about the economy.   No matter how much you twist, bend or warp it... it will always snap back and auto-correct itself.
Jul 20, 2013 12:05AM
Could it be that the Federal Reserve system is not really intended to benefit or represent the average American citizen's individual interests? 

There have been at least three (and probably more) vocal, pivotal leaders since 1787 that understood the dangers and foibles inherent in a central banking system---Thomas Jefferson, Abraham Lincoln, and John Kennedy.

And ponder this:  The value of extant U.S. Treasury Securities increased by $51.586 billion during a 56-day period when the federal government’s debt subject to the legal limit set by Congress has remained constant at $16,699,396,000,000.00—just $25 million below the legal limit.

On May 17, the day the debt began its long stay at $16,699,396,000,000.00, Treasury Secretary Lew sent a letter [can search and find copy online] to House Speaker John Boehner. In the letter, Lew said the Treasury would begin implementing what he called “the standard set of extraordinary measures” that allows the Treasury to continue to borrow and spend money even after it has hit the legal debt limit.”

A third grader can understand the simple explanation.  I know---I tried it out on my kid.  You cannot sustain a situation where you borrow more money than you make every year.

Jul 19, 2013 11:41PM

Totally agree with you Bill and I've been saying this for years.

The fed NEEDS to be abolished and Ben and his cronies NEED to be publicly punished by HANGING,  that's what should be done to ALL counterfeiters and especially LYING COUNTERFEITERS.


Go back to gold and silver and then the government or ANY central bank COULDN'T manipulate us this way. It would be impossible for them to counterfeit money if they HAD to back it with gold and silver.


Jul 20, 2013 12:12PM

How the Bureau of Labor Statistics as well as the Federal Reserve calculate inflation is an absolute crime.


Numbers are "cherry-picked" to show low inflation numbers that are nonsense. Prices for clothes and electronics imported from Asia that are stable are over-emphasized while rapidly increasing prices for items such as health care costs(even though health care is 1/6 of US gdp), college tuition costs, airline ticket costs, movie ticket costs, etal. are de-emphasized.


It is the ludicrously low CPI inflation numbers that are thus non-sensically calculated that justify the Federal Reserves' position that their QE policies do not contribute to inflation. If the CPI was calculated by the same method used during the 1980's when Paul Voelker was Fed Chairman (prior to hedonics, owner-equivalent rent, etc) the real CPI inflation number would be significantly higher and would thus prevent the Fed's current justification of QE policies.

Jul 19, 2013 9:19PM
And ... Urkel wonders why American businesses are not "doing their part" in his false "recovery."  Perhaps it's because they can read and learn from history.  .
Jul 19, 2013 9:54PM

Wah? How in the world did MSN allow this article to make it this far? How dare you question the Federal Private Reserve? 


Poor Bill Fleckenstein you will now:

A. Force to resign

B. Labeled a "conspiracy theorist" "radical" "extremist"

C. Career and accomplishments attacked, discredited, destroyed. You Will Never Work again


Might as well spread the truth about Obama, write an article about who is "really" in control of the Whitehouse. Who bankrolled Obama?


Oh wait... Never mind, you'll end up like Hastings and Breitbart

Jul 20, 2013 4:32PM
Interesting that in 1913 our government turned over the power to control money to the Federal Reserve which is NOT a government entity but a group of private banking cartels....2 or 3 domestic and around 4 foreign.  The US Mint, which is a government entity, prints money and the Federal Reserve pays the US Mints pennies per dollar.....then the Federal Reserve creates debt when they buy US Treasury Notes or government bonds.  What in the hell was our government thinking?  The Federal Reserve had a 100 year contract or deal and it comes up for renewal this year 2013 and our government should NOT renew the Federal Reserve but too many politicians are in their pockets so we are fu_ked again for another 100 years!   
Jul 20, 2013 12:45PM

OK now that I am thoroughly depressed over this article, can anyone out there let me know what I should be doing now with my 401K??? This money is all I have to live on. I get no pension, etc.


Jul 20, 2013 2:38AM
Sort of feel sorry for Big Ben, not!! Greenspan all but admits he was full of bull so how will history treat Big Ben & his open wallet policy?
Jul 20, 2013 11:40AM
You got it right Dave.  Audit and reveal ownership of Fed and see how they do in the long run, only then will their motives be clear.
Jul 20, 2013 1:26PM



Ben and his cronies will be remembered, all right.  Hopefully, about as fondly as Hitler and the Nazis, or Stalin and his buddies.  Seems like the world periodically HAS  to go through something like this to pound it into people's heads that GOVERNMENT is NOT YOUR FRIEND, but YOUR WORST ENEMY

Jul 20, 2013 4:17PM
Anybody read the WSJ on hedge fund slimeball Stephen Cohen...his firm is riddled (no doubt all hedge funds are) with insider trading...it simple proof that WALL STREET is a major fraudulent institution that is killing the middle class and overall destroying the American economy..while the SEC and Washington DC sit around with their collective thumbs lodged up their collective a$$es..this has got to be neutralized somehow...wake up America!
Jul 20, 2013 1:29PM



Close the banks, end the Federal Reserve, get RID of Wall Street. Time to pop the pimple of simpleton minds with greedy hearts and no souls.

Jul 20, 2013 11:38AM
I would really like to know why the Federal Reserve has failed to permit Germany to see it's gold on deposit......
Jul 20, 2013 2:51PM
Thank God Ben will be gone by February.. BYE BYE.. Maybe the next person will have a little common sense.. Ben has no clue and QE  program has done nothing but devalue the US$ and gives savers nothing ! What a dude..
Jul 20, 2013 1:28PM
And, the dirty little secret that we are forced to deal with...

FDIC "insures" up to $250,000 in deposits, bu in the event of a crisis (and the average person doesn't get to vote or define what this is) they have the legal right to seize our funds to a zero balance ("borrow") and take 25 years to pay it back without interest.

Jul 22, 2013 8:19AM
lobbying sold out our government. Central  bank sold out our wallets.
Jul 20, 2013 5:39PM
Gentlemen (and ladies)....again:

A little govt is not all a 'bad' thing.
A little knowledge, however could be dangerous.

The FED is no more deleterious to our financial health
than a septic crowd of villagers with lit torches, all fanatically
driven by recirculated dreams of Righteousness and Conspiracy.

Yes, there are harmful aspects to government and we should
weed those out.  Rigorous control over your own passions should
be the starting point;  the better to submit those who would ask for
your vote to a stringent examination and approval.   Outside of these
avenues, the origins our problems come back to lie with us. 

It is when we abolish this very deluded notion that one side is right
or wrong and we begin  to collectively comprehend the source of
our problems AS WELL AS the wellspring of our combined powers;
only then will we be objective enough to begin to right those injustices.

The solution is political, regardless  of how we try to avoid or denigrate
it. The actors are US!  If we do so abhor the unfolding drama, we actually
possess the power and sovereignty not to buy tickets to that stage.  The
so called Free Market must begin with our vote- Each and every one,
united in a stand to recommit the rule of 'ending Wrongs' and undiluted
in our zeal to see the nation returned out of the hands of banksters and
other criminal elements must first rid ourselves of those elements which
have been complicit in this corruption for so very long.

Take a strong stance about Congress, People.  Where you see collusion,
vote to restore fairness.  Where you see corruption, vote to Cleanse these

Easier said than done, I know...but I refuse to be cynical.  I refuse to reject
my "full faith and credit" in the hearts of the American people who DO know
Right from Wrong and who, once liberated from the pernicious divisive nature
of the seemingly endless Right - vs- Left schisms, will TRIUMPH! 

Have a nice weekend.
And yes, its a good thing to own a little gold just in case...

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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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