Bunning Statement On The Re-Nomination Of Ben Bernanke To Be Chairman Of The Federal Reserve

Senate Banking Committee
Thursday, December 3, 2009

As Prepared For Delivery:

Four years ago when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator to vote against you. In fact, I was the only Senator to even raise serious concerns about you. I opposed you because I knew you would continue the legacy of Alan Greenspan, and I was right. But I did not know how right I would be and could not begin to imagine how wrong you would be in the following four years.

The Greenspan legacy on monetary policy was breaking from the Taylor Rule to provide easy money, and thus inflate bubbles. Not only did you continue that policy when you took control of the Fed, but you supported every Greenspan rate decision when you were on the Fed earlier this decade. Sometimes you even wanted to go further and provide even more easy money than Chairman Greenspan. As recently as a letter you sent me two weeks ago, you still refuse to admit Fed actions played any role in inflating the housing bubble despite overwhelming evidence and the consensus of economists to the contrary. And in your efforts to keep filling the punch bowl, you cranked up the printing press to buy mortgage securities, Treasury securities, commercial paper, and other assets from Wall Street. Those purchases, by the way, led to some nice profits for the Wall Street banks and dealers who sold them to you, and the G.S.E. purchases seem to be illegal since the Federal Reserve Act only allows the purchase of securities backed by the government.

On consumer protection, the Greenspan policy was don’t do it. You went along with his policy before you were Chairman, and continued it after you were promoted. The most glaring example is it took you two years to finally regulate subprime mortgages after Chairman Greenspan did nothing for 12 years. Even then, you only acted after pressure from Congress and after it was clear subprime mortgages were at the heart of the economic meltdown. On other consumer protection issues you only acted as the time approached for your re-nomination to be Fed Chairman.

Alan Greenspan refused to look for bubbles or try to do anything other than create them. Likewise, it is clear from your statements over the last four years that you failed to spot the housing bubble despite many warnings.

Chairman Greenspan’s attitude toward regulating banks was much like his attitude toward consumer protection. Instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. You did no better. In fact, under your watch every one of the major banks failed or would have failed if you did not bail them out.

On derivatives, Chairman Greenspan and other Clinton Administration officials attacked Brooksley Born when she dared to raise concerns about the growing risks. They succeeded in changing the law to prevent her or anyone else from effectively regulating derivatives. After taking over the Fed, you did not see any need for more substantial regulation of derivatives until it was clear that we were headed to a financial meltdown thanks in part to those products.

The Greenspan policy on transparency was talk a lot, use plenty of numbers, but say nothing. Things were so bad one TV network even tried to guess his thoughts by looking at the briefcase he carried to work. You promised Congress more transparency when you came to the job, and you promised us more transparency when you came begging for TARP. To be fair, you have published some more information than before, but those efforts are inadequate and you still refuse to provide details on the Fed’s bailouts last year and on all the toxic waste you have bought.

And Chairman Greenspan sold the Fed’s independence to Wall Street through the so-called “Greenspan Put”. Whenever Wall Street needed a boost, Alan was there. But you went far beyond that when you bowed to the political pressures of the Bush and Obama administrations and turned the Fed into an arm of the Treasury. Under your watch, the Bernanke Put became a bailout for all large financial institutions, including many foreign banks. And you put the printing presses into overdrive to fund the government’s spending and hand out cheap money to your masters on Wall Street, which they use to rake in record profits while ordinary Americans and small businesses can’t even get loans for their everyday needs.

Now, I want to read you a quote: “I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too-big-too-fail, so that bank management, shareholders, and un-insured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well-managed and well-controlled.”

That should sound familiar, since it was part of your response to a question I asked about the systemic risk of large financial institutions at your last confirmation hearing. I’m going to ask that the full question and answer be included in today’s hearing record.

Now, if that statement was true and you had acted according to it, I might be supporting your nomination today. But since then, you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Instead of taking that money and lending to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in bonuses. Because you bowed to pressure from the banks and refused to resolve them or force them to clean up their balance sheets and clean out the management, you have created zombie banks that are only enriching their traders and executives. You are repeating the mistakes of Japan in the 1990s on a much larger scale, while sowing the seeds for the next bubble. In the same letter where you refused to admit any responsibility for inflating the housing bubble, you also admitted that you do not have an exit strategy for all the money you have printed and securities you have bought. That sounds to me like you intend to keep propping up the banks for as long as they want.

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton. First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio. Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated. Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par. In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank’s offer to take a haircut was declined. I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut. Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs, Merrill Lynch, and a handful of large European banks. I also cannot understand why you did not seek European government contributions to this bailout of their banking system.

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for. Where I come from we punish failure, not reward it. That is certainly the way it was when I played baseball, and the way it is all across America. Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case. I will do everything I can to stop your nomination and drag out the process as long as possible. We must put an end to your and the Fed’s failures, and there is no better time than now.

In the following interview Jim discusses inflation, deflation, hyperinflation, the U.S. Dollar, gold, silver, social unrest, the Federal Reserve, commercial banks incorrectly positioned on the COT, fraudulent bank balance sheets, the equity market, future opportunity, gold and silver shares and much more.

The link to the interview

Professor Simon Johnson of the MIT Sloan School of Management is interviewed on PBS by Bill Moyers.
Click on the link below and listen to Professor Johnson’s common sense, but politically controversial, solution to the present banking crisis.

The Interview

by
Hugo Salinas Price
Feb 6, 2009

Some readers may ask themselves, “What has gold to do with protecting jobs? Gold hoarders are certainly not creating jobs, and hoarding more gold will not help at all.”

Gold has everything to do with the loss of jobs in the US, and gold has everything to do with recovering jobs for the US economy.

Let me go back to the 60’s. During those years, the US and the world were on a Gold-and-Dollar Standard.

Back in the 60’s, countries were very careful about maintaining a constant monetary balance between their exports and their imports. They all wanted to be in a situation where they would export more than they imported, so that they would have increasing balances of gold or dollars in their Treasuries.

To state this more correctly, they all wanted to export more than they imported, except the United States.

The US didn’t care very much about maintaining a balance between exports and imports, because the US was able to pay for its deficit in trade (more imports than exports) by simply sending more dollars overseas.

Many economists warned about this trend, which was accompanied by a constant loss of gold during those years; some countries, notably France, refused to hold more and more dollars. The French asked for their gold – at $35 dollars an ounce – and this caused great disgust in Washington, D.C. and New York.

Nothing was done to stop the trend. In 1971, Henry Hazlitt, a good conservative economist, warned that the dollar would have to be devalued – that it would be necessary to raise the number of dollars which would be needed to obtain an ounce of gold – some months before the dam broke and the US was faced with the need to devalue, because the US stock of gold had become much too small.

What Mr. Hazlitt never imagined, was that instead of devaluing – which was the advice of economist Paul Samuelson, Nobel Prize winner, published the week before August 15, 1971 – Nixon followed the advice of Milton Friedman and simply “closed the gold window”. The US would henceforth not deliver any gold, at any price, to any foreign Central Bank who might wish to invoke the right to redeem its dollars for gold, according to the Bretton Woods Agreement of 1944.

Since that date, all world trade – or the better part of it – is carried on in dollars which are nothing more than fiat money. Since the rest of the world’s currencies were tied to gold through the dollar, all the currencies of the world also became fiat money – fictitious money, backed by nothing. That includes the Euro, of course.

What happened after that fateful date has overturned all order and harmony in economic relationships between the nations of the world.

Countries around the world began to accumulate more and more dollars as credit expansion in the US went forward, implacably. Central Banks had to accumulate these dollars in their Reserves, whether they wanted to or not. (Not having sufficient dollars would force other countries to devalue and destroy savings. The US cannot run out of dollars, it manufactures them.)

With no loss of gold to restrain the US and force it to stop expanding credit, US imports surged and exports waned. The monetary difference was “paid” in dollars.

Free trade was extolled by the US; every country that wanted to be in the good graces of the US had to bow to “free trade”.

Free trade is a good thing – but not for a country that is providing the world’s fiat money. This “free trade” was called “globalization”, meaning that the US could, and did, buy everything it wanted in the world, in any amount, at any time, by simply paying dollars for it.

There was no restraint to US credit expansion. It was a lovely time to be young and an American.

However, free trade means you buy where it’s cheapest, and the cheapest place to buy, in recent decades, was China , South East Asia and India ; the oil required to fuel the US economy was cheap and bought with dollars which it cost nothing to produce.

Thousands upon thousands of products and floods of oil came across the oceans to the US, and also to Europe, which began to pay in Euros for some of its imports: Euros which also cost nothing to produce.

US manufacturers, facing this competition from Asia, decided to move their factories to Asia instead of waiting for certain bankruptcy by competing against much lower-cost production.

That was how the US was de-industrialized.

It happened because gold was eliminated as a limit on credit expansion and money creation.

Had Nixon not gone off gold in 1971, China would have taken generations to create its industrial base. It would have been necessary for China to accumulate capital slowly, because its exports to the US would have been limited by the need for the US to pay up with gold for the amount by which Chinese exports exceeded its imports from the US.

The Chinese would have had to buy as much from the US, as they sold to the US; and since they were so terribly poor, there was not much they could have bought from the US.

Their growth would have been slower, but they would not now be facing over 20 million unemployed, as their markets dry up.

The US would never have allowed China to drain US gold from the Treasury by selling more to the US, than the US sold to China. But since payment was in fiat dollars and not in gold, the destructive effect of huge Chinese imports was not considered important by policy makers. And so, the US sailed into unemployment and had a great time doing it. Only now, that the party is over, are the grim facts visible: no jobs! Manufacturing is decimated.

The fiat dollar – unanchored to gold – was the greatest strategic gift that the US could have made to China. Now, they have a huge industrial base and the US has Oh, so little!

The damage is done. How to recover the industrial base of the US ? Not by slogans such as ” Buy American “, nor by protectionism.

What is required is to recover economic balance between the nations of the world so that they all can balance their exports with their imports. This is not done by protectionism, a false remedy to joblessness.

The world needs to return to gold as the international means of payment. All imbalances must be paid, monthly, in gold. No fiat money “payment” allowed!

If a nation does not have gold to export, it must do without or manufacture what it needs, itself: there you have the clue to restoring jobs in the US and in Europe. This is not “nationalism”, it is simply good economics.

The US has to limit its imports drastically, not by protectionism and tariffs, but by returning to the Gold Standard. Jobs will mushroom in the US beyond what anyone can dream as soon as its market must buy locally or not buy at all, for thousands upon thousands of articles. A return to gold, will achieve that aim very quickly, to be sure.

The Gold Standard is the friend and protector of the worker and of the investor, as well as the basis for harmonious relations between the nations of the world.

And by the way, the current financial disaster in the US is directly attributable to Nixon’s decision to “close the gold window”, because a monetary system based on gold is an obstacle to the criminal credit expansion perpetrated by the bankers. Gold based money puts shackles on bankers, forcing them to be careful. A fiat money system enables financial criminality – it’s as effective in restraining criminality in finance as tying up a dog with a string of sausages.

Feb 4, 2009
Hugo Salinas Price, President
Asociación Cívica Mexicana Pro Plata, A.C.
Mexico City

By Greg Hunter

While I was watching the wall to wall Inauguration coverage of Barack Obama there was a “man in the street” segment on one of the networks where people were being asked “What should the new President do about the troubled economy?” One man said “He should give money to all the homeowners who are in trouble and give some money to other homeowners too.” I think the idea of bailing out anyone and everyone is now in the vernacular of American society. How do you suppose people are getting the idea that everyone should get a financial rescue? Could it be story after story in the news everyday about how Citigroup, Bank of America or a variety of other banks are getting hundreds of billions of dollars in cash and government backing to keep them afloat? Maybe it’s the 200 billion given to AIG to keep it from causing systemic failure. It just couldn’t be the nearly 18 billion given to GM and Chrysler to keep them in business. Bailout fever is spreading like kudzu. The list of businesses and industries in need of a lifeline are like snowflakes in Colorado. Home builders, airlines, insurance companies, money market funds, states (41 are in financial trouble) and hundreds of cities around the nation are facing big budget shortfalls. Is that going to turn into some sort of bailout too? I was in North Carolina two weeks ago. While watching local television I heard the new Governor, Bev Perdue, say the state was 2 billion dollars in the red and that without federal bailout money there would have to be drastic cuts to the state budget. She was in Washington trying to get a piece of the TARP money and, why not, every other state governor is doing the exact same thing!!! Governors from around the country are asking the Federal government for a trillion dollars so they’ll not have to make some very hard choices.

With all this bailout talk, another word is starting to make it into the vernacular…Inflation!!! Before the Geithner confirmation hearing, former Fed Chief Paul Volcker, who I like to call “the Real Maestro,” gave a short testimony to vouch for tax dodging “Turbo” Tim Geithner. (He used Turbo Tax to do his returns.) The most newsworthy thing said were the few lines Volcker slipped in about his concern about inflation because of all the bailout money being created for the banks. No news organization I know of reported that little tidbit. Volcker’s fear of inflation should have been the real headline for the hearing because “Turbo” Tim was already a lock for Treasury Secretary. Later that night on Bloomberg Television, former SEC Chairman Harvey Pitt said he saw “no way” that there is not going to be inflation given the massive amount of money that will be spent for bailouts and economic stimulus. You won’t see that sound bite anywhere in the news either. When you talk about inflation you are really talking about consequences to monetary policy. Inflation was so feared by the founding fathers they wrote in the constitution that money shall be of “Gold and Silver.” That meant no fiat currency for economic stimulus packages and of course bailouts. We are a long way from the founding fathers and their kind of thinking. Today the government can print money until it runs out of trees, but what most people do not realize is there is an after effect for that kind of financial engineering. America has swept aside any talk of moral hazard and is embracing the toxic idea of a “bailout nation” for which the consequences risk our very survival as an independent country.

By Antal Fekete

A Message To American Labor Leaders

The “crime of 1873″

My title is a paraphrase of the 1896 battle-cry of William Jennings Bryan during his presidential bid. He was talking about ‘crucifying mankind on a cross of gold’. Bryan was protesting against the unconstitutional closing of the U.S. Mint to silver. Congress inadvertently suspended the unlimited coinage of the standard silver dollar, which it had no authority to do under the Constitution. Bryan called it “the crime of 1873″.

No battle-cry was issued during this year’s presidential campaign by the finalists in protest against our present unconstitutional paper money system, even though it has started a wave of unprecedented unemployment that would sweep through the land in the wake of the current financial crisis and the official response to it: further serial cuttings of the rate of interest.

Politicians have long ago vacated the field of warning people about the danger caused by violations of the monetary provisions of the Constitution. It is now incumbent on the leadership of American labor to call the workers to rise in protest against the job-destroying policies of the government. Please take a few moments and bear with me as I go through a simple monetary explanation of the job-destruction process that has been going on in America for the past thirty years through serial cuttings of the rate of interest, that will reach fever-pitch next year.

Serial rate-cuts destroy the wage fund

Suppose you are a worker taking home $50,000 a year in wages. When your income-flow is capitalized at the current rate of interest of, say, 5 percent, you arrive at the figure of $1,000,000. The sum of one million dollars or its equivalent in physical capital must exist somewhere, in some form, the yield of which will continue paying your wages. Capital has been accumulated and turned into plant and equipment to support you at work. Part of your employer’s capital is the wage fund that backs your employment. Assuming, of course, that no one is allowed to tamper with the rate of interest.

Suppose for the sake of argument that the rate of interest is cut in half to 2½ percent. Nothing could be clearer than the fact that the $1,000,000 wage fund is no longer adequate to support your payroll, as its annual yield has been reduced to $25,000. This can be described by saying that every time the rate of interest is cut by half, capital is being destroyed, wiping out half of the wage fund. Unless compensation is made by adding more capital, your employment is no longer supported by a full slate of capital as before. Since productivity is nothing but the result of combining labor and capital, the productivity of your job has been impaired. You are in danger of being laid off — or forced to take a wage cut of $25,000.

Lemming-like rush into certain disaster

I have news for you. Employers are not in the habit of compensating for the destruction of capital caused by falling interest rates. Rather, they welcome the cut as manna sent from heaven. They are kissing the hand that is strangling them. They are as badly misinformed about the lethal effects of a falling interest rate structure as the rest of society. They confuse a low interest rate structure with a falling one. No less than employees, employers are hurt by the destruction of capital caused by serial rate cuts. After all, it is their capital, too, that is being destroyed. Nevertheless, they accept at face value the official propaganda line that “falling interest rates are good for you”. Employers are like lemmings running to their own certain disaster.

The “crime of 1971″

In the euphoria of celebrating the advent of the irredeemable dollar in 1971, politicians and economists have ‘forgotten’ to look at the untoward consequences of the New Brave World of synthetic credit. Not only was the dollar destabilized by the ‘crime of 1971′; interest rates were cut adrift as well. The U.S. Treasury was soon forced to print 16 percent coupons on its 30 year bonds which would not otherwise sell.

This did not present much of a problem to the Treasury, since interest on bonds was now payable in irredeemable dollars. The same paper, the same amount of ink, and the same printing press would produce the coupon at the same cost, whether it carried the figure 4 or 16, with which the obligation would be discharged.

However, bringing down the rate of interest from 16 percent to its normal level of 4 percent was a different story altogether. It meant that the rate had to be halved twice from 16 to 8 and from 8 to 4 percent, destroying three quarters of the wage fund. Is there any wonder why so many well-paid American industrial jobs were driven offshore in the intervening years, as production was being outsourced?

Academia and media were silent on the real cause of the de-industrialization of America: the destruction of capital through serial rate-cutting. They are still silent as they expect that the Federal Reserve will do more money magic and pump still more money into the economy, causing rates to fall still more. They are oblivious to the fact that this will destroy still more capital in the process, pulling more rug from underneath employment.

Vanishing capital

The problem is vanishing capital. During the past thirty years capital was destroyed across the board as the long-term rate was pushed down from 16 to 4 percent, and the short-term rate from 22 to 1 percent. The process is insidious: only one in a million can identify the causal relation between vanishing interest and vanishing capital. As a result the captains of industry are not aware of what is happening to the capital of their enterprise until it is too late and they are forced to fold tent. Even then, they have no idea what has hit them. It would never cross their mind to blame irredeemable currency and the serial cutting of interest rates for the disaster. Hat in hand, they go to Washington to beg for bailout money with which they can shore up their capital structure. They don’t realize that Washington will claw it all back just as soon as the next round of rate cuts are announced.

Make no mistake about it: vanishing capital does not disappear without a trace. It is being siphoned away clandestinely from the capital account of businesses, to benefit the issuers of irredeemable dollars and their cohorts. These honorable gentlemen cut rates with their right hand and grab the obscene profits thus generated on their bond portfolio with their left hand. It is legalized embezzlement. Keynesians say that the government can turn the stone into bread through driving down the rate of interest to zero. It would be more accurate to say that the government, in a vampire-like fashion, sucks the blood of labor through the bleeding of their wage fund.

The fate of the auto industry

As a result of vanishing capital the American auto industry, not so long ago the envy of the world, is tottering at the brink. The statistical likelihood of the three giant auto-makers running out of capital at the same time is nil. The fact that they do is the evidence of outside interference. The capital of the auto industry has been eroded and ultimately destroyed by the serial rate cuts of the Federal Reserve. It is true that the industry has been adding new capital in the form of state-of-the-art technology. But it could not keep up with the relentless serial rate-cutting. The Fed can cut rates faster than the auto industry can build and equip new factories.

The blame for the suffering should be put squarely on the criminal check-kiting conspiracy between the Treasury and the Federal Reserve. They issue and swap liabilities which they are neither willing nor able to meet. It is a charade, pretending to serve the interest of the national economy when, in fact, they are destroying the nation’s capital.

The destruction is not visible to the naked eye. The details are in the book-keeping. That’s why the sabotage is so hard to detect. As the rate of interest is being pushed down, it makes inroads on the wage fund. Employers are unable to meet their payroll because the falling interest-rate structure calls for ever larger capital to fund it. Unemployment is the result, which is becoming widespread and chronic.

Under a stable interest rate structure none of this would happen. The auto industry and its workers would have a bright future, as they did before the ‘crime of 1971′ hit them. Every worker who is being laid off should be reminded of that fact. They should know that they are being sacrificed on the altar of Mammon. They should understand that they are being crucified on the cross of paper money.

Capital destruction at an ever faster rate

Please also note that the rate of capital destruction is accelerating as we are getting closer to the black hole of zero interest. In principle halving the rate can continue indefinitely. In reality, ever smaller absolute cuts will have ever greater destructive effect on the wage fund. While in the 1980’s it took an 8 percent decline to wipe out half of the wage fund, right now a 2 percent, and thereafter a mere 1 percent cut will do the trick, causing the same amount of damage to employment. This means that the level of economic pain increases ever faster, soon reaching the point where it will become unbearable.

The situation is more than desperate. The political process has failed. The president-elect has committed himself to the status-quo. He will not challenge the unlimited power usurped by the Fed, as his nomination of the president of the Federal Reserve Bank of New York to the post of Treasury Secretary indicates. This nomination evoked the comment, echoed in the New York Times on November 25, that “Geithner deserves retirement, not promotion”. (He is 47.) Obama’s utterances during the election campaign seem to suggest that he believes in Keynesian prestidigitation, turning the stone into bread through serial cuts in the rate of interest, and in Friedmanite money magic of the printing press.

Labor’s finest hour

The only remaining hope the country has is that labor will not tolerate the ongoing destruction of capital. It will not take it lying down any more. It will take to the streets and confront the small reactionary elite running our monetary regime, including Geithner. This is the most destructive system ever devised: the regime of irredeemable currency. Every time it has been tried in history it failed miserably. As the current crisis clearly shows, this time is no different. What is different is that this time the entire world is on irredeemable paper money. That has never happened before. Accordingly, the stakes are immeasurably higher as irredeemable currency is getting ready to self-destruct.

Labor must take the initiative and demand that Congress put an immediate end to the mindless destruction of capital. Congress should stop the Federal Reserve from pursuing a monetary policy of open-ended deliberate interest-rate cuts. The economy is now like a runaway train with brakes disabled, entering a downhill section of tracks. Crash is certain. At the end of the run the country could be completely denuded of capital, with a large part of its labor force idled.

Labor could be the savior of the country in forcing a return to constitutional money at the eleventh hour, by demanding that the Obama administration open the U.S. Mint to gold and silver. That measure would enable the brakes on the money-train. It would stabilize foreign exchange and interest rates and stop the shredding machine, now spinning out of control, from destroying capital. This would be labor’s finest hour: saving the United States from financial ruin and ignominy.

This country has an intelligent, dedicated, and industrious labor force. The best in the world. It should step into the breach. Time for street action has come, if we want to prevent blood from flowing in the streets later.