How the Federal Reserve Hijacked Free Markets and Ushered in Socialism

Shah Gilani May 20, 2020
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The Federal Reserve’s promised to be the support pillar that holds up America’s capital markets. And they’ve promised to hold up the economy.

Too bad the price America’s paying is our way of life.

Here’s the short story how the Fed hijacked free markets and ushered in socialism, and how to win our freedom back.

The Federal Reserve System is a “Racket”

It was and is an unnecessary-but-accepted scheme foisted upon America with the help of a duped and duplicitous congress back in 1913.

After the infamous “Panic of 1907” that almost bankrupted the biggest banks in the U.S., the most powerful bankers in the world at the time secretly designed a private central bank they’d own and control to backstop all their banks so they’d never face insolvency again.

In return for privatizing the currency of the United States, the System would lend the government money by buying any debt issued by the government, so politicians could spend what they wanted, run up deficits if need be, to placate the citizenry and garner votes.

Of course, the bankers’ System gave them the power, since they owned and issued America’s money, to provide as much money to their constituent banks as they wanted, to lend out to make interest on, and to backstop them when their greed pushed them to insolvency.

Back in 1913, because of the Panic of 1907 and other good reasons, banks weren’t trusted. So, getting a bank scheme through congress that was to give bankers the keys to the country was seemingly impossible. That’s why there was no mention of “bank” in the new central bank legislation.

America’s new private central bank was going to be a Federal Reserve System. Federal because it sounded like a government entity or branch of the government. Reserve because it implies safety. And System because no-one would ever trust a bank.

The Federal Reserve Act was greased through Congress and signed into law by President Woodrow Wilson, whom the bankers helped get elected, on Christmas Eve of 1913.

Fast Forward to Modern History

There’s a lot of frightening and freaky Fed history in between, but I said I’d make this a short story.

The Fed, because it had been masterfully manipulating interest rates for years, under the false prophet, or Maestro as he was called, Alan Greenspan, saw fit to manipulate rates lower for longer headed into the feared turn of the millennium (1999 to 2000), then lower for longer still when the tech wreck hit, and lower for longer after that because he thought that would be his legacy.

The cumulative rounds of low and long were eventually enough to let the subprime mortgage machine eat America alive.

We know what happened then.

The banks that drove themselves to insolvency had to be rescued, at least the TBTF banks were rescued.

Thank goodness we have the Federal Reserve! everyone cried, not realizing the Fed firemen who rescued the banks started the fire.

People forget.

Then, to save the country from the Great Recession, and their constituent banks, the Fed kept rates lower for longer, again.

Piles of dead wood that should have been cleared in the economy, including zombie companies being kept alive by leveraged loans that were packaged into more junk, and other structured products that keep useless companies alive and capital from finding more productive uses, built up.

Meanwhile, the banks looked good and safe, that is until the coronavirus crisis hit, actually just before the virus struck, when it was discovered there was no liquidity in the fed funds market and the Fed had to step in, again, to help its biggest banks.

Then the virus really hit.

The stock market tumbled, and the capital markets panicked.

Enter the Fed

Like Superman to the rescue, before they were called to the crisis, the Fed takes over the capital markets by promising it will buy anything and everything, including corporate bonds, and munis, and ETFs, and CLOs and, like I said, anything and everything.

And equity markets rose, with a vengeance.

And the capital markets stabilized.

And the government said they’d do their part if the Fed backed them.

And out of nowhere, without any debate, we have instant MMP; Not MMT, Modern Monetary Theory, we have MMP, Modern Monetary Policy.

Now we know there’s no end to what the Fed can buy.

Now we know with the flip of a digital switch there’s trillions of dollars wherever it’s needed.

Now we know the Fed can make universal healthcare happen. Now we know the Fed can erase student loan debt and make education for everyone free. Now we know the Fed can make universal basic income a reality.

How do we know? Because we have universal basic income, it’s already started. Try putting that back in the can with 40 million Americans unemployed.

We’ve turned socialist and no one’s talking about it.

Our capitalist democracy is gone.

There are no free markets, no price discovery, no creative destruction.

There’s only the Fed and the slide into socialism.

If there was no Fed manipulating the economy and capital markets for the benefit of its banks and bankers, the banks that rule us would have been turned into utilities, which is what they should be, which is what their function in society is.

But, banks rule and now their master has us under its total spell.

Thank goodness they’re here to save us.

No election necessary. No vote by mail required. We’re socialists now. It’s already happened.

If we want to undo it and save our way of life, we better dismantle the Fed, take our money supply back, “utilitize” the banks and free our economy and citizenry from the yoke of misery and socialism.

It’s not the coronavirus we have to fear, it’s the Fed itself.

Until then,


Shah

18 Responses to How the Federal Reserve Hijacked Free Markets and Ushered in Socialism

  1. Dave Danza says:

    Shah, you nailed it perfectly.

  2. Kaizer Soezay says:

    socialism FOR THE WEALTHY

  3. Kaizer Soezay says:

    THE TRUTH HURTS, DOESN”T IT??????

  4. Shari Godward says:

    Great article!

  5. Andy Zahoran says:

    I HEARD SOME WHERE THAT PRESIDENT TRUMP TOOK OVER THE FEDERAL RESERVE

  6. DrBillLemoine says:

    The Fed has done no such ‘hijacking’. It is using its tools effectively as practiced before in 2008-9 during the Great Recession. Pity such downturns are prompted by Republican administration deregulation. Reps like their ‘free markets’ so much that don’t work without controls. Lowering interest rates to near zero resumes low rates that persisted from about 2008 till the Trump era. Fed Chair Powell learned from his predecessors Bernancke and Yellen to do this given massive market turndowns–now prompted by low, late and inadequate pandemic emergency power application to the nation by Pres. Trump. Printing bonds to raise case for corporations and small companies is also tried and true to eliminate losses of bond holders to defaults and bankruptcies. The bonds are guaranteed. The loans to companies are repaid with interest typically for a profit. Debt holders are spared haircuts and total wipe out of their investments. All results are good for the country having been tested not only in America but adopted in Europe and elsewhere, moreso this turndown in pandemic. So nobody’s fooled by panic stories like this one, proposed for suspicious reasons in an upcoming election season with a negatively rated incumbent Republican (read ‘rich’) candidate about to lose ala Hoover for economics and Harding for scandal. I look forward to resuming American worldwide leadership and hegemony under prospective Pres. Joe Biden.

  7. Kendrick Miller says:

    The US cannot operate as a free market economy without first trust busting all firms on the NYSE, NASDQ and the S%P 500. Yes also eliminate the FED, outlaw lobbying with harsh penalties, outlaw the participation of business in election financing, stop the musical chair appointments between regulated industry and regulatory agencies, get rid of obstructive agencies and execute firm executives that lie and regulators that suppress data. Treat white collar crime aggressively, not with fines , but with long jail term and where appropriately , execution!

  8. Sharon says:

    Great info regarding the Fed. You explained it in a way I could I understand . I would like to hear more of this type of commentary and info from Shah. His insight is much appreciated.

  9. Michael Shand says:

    Thank you for telling it like it is. The Fed has gone far beyond its charter in ways ways that will almost certainly destroy life in the U.S. as we know it. We hear little about it, with mainstream media keeping a cowed citizenry focused on COVID, a convenient distraction that, in retrospect will prove trivial by comparison. I’ve followed you for many years and have confidence in your knowledge. I’m hoping you’ll have advice to at least slow down the slide of the middle class (those who, after the coming post-crash inflation with less than $10 billion or so) into oblivion. I fear, however, that once cash is gone and dividends are temporarilysuspended so that almost everyone is forced to sell their stocks to the elitw, there will be no way for us 99.99% to avoid becoming lower class “wards of the (totalitarian) state”. I’ll be reading your advice, hoping I’m wrong.

  10. Larry says:

    Hi Shah, and thank you for a great, though disturbing, article. The term “Can’t fight the Fed” comes to mind. It’s so tied up with the banks, politics, fake news, etc. I don’t see any way for us average folks to do anything to change the situation. Maybe in a future article you might share some tips on how we might rid ourselves of this gigantic beast. Thanks

  11. Gerhard says:

    It has been coming for a long time, now there is only Bitcoin and Gold, real Gold, not ETF’s.

  12. Jim Welge says:

    Shah
    Ive followed your column for years. I agree with some of your premises, but in this case I disagree with some of what you have said.

    You stated under “Fast Forward to Modern History” that “Thank goodness we have the Federal Reserve! everyone cried, not realizing the Fed firemen who rescued the banks started the fire.” This was in reference to the Feds reaction to the 2008 Financial Crises.

    Im not at all sure how the “Fed firemen who rescued the banks started the fire” in 2008. The Fed does not actively regulate the Safety and Soundness of Banks. The FDIC was and is charged with
    determining and regulating the Safety and Soundness of the banking system.

    The Fed is chartered, to perform 3 functions, these being, to function as a 1)Lender of Last Resort to banks which are in a Reserve Tight situation. 2)To be an arbiter of Monetary Policy thru, among other things, Open Market Operations, this being the buying of Government Securities from Member Banks and Primary Dealer Brokerages, and thru this regulating the Liquidity in the Banking System and thru this Interest Rates 3)To create Stable Economic Growth and Control Inflation.

    A good example of the Lender of Last Resort function (1) would to be to watch “Its a Wonderfull Life” with Jimmy Stuart. In one scene Jimmy Stuart holds up 2 Dollars, after the bank closed for the day during a bank run in the Great Depression and says “Heres Moma Dollar and Heres Popa Dollar and lets hope they have a lot of children.” In that Scene, the bank had run thru all the Cash in its drawers paying off depositors, and was probably down to Government Securities (which can be sold for Cash), and the only other option Jimmy Stuart would have after selling all those Government Securities would be to call in Loans!!! Demand immediate repayment of Loans!!!! And by demanding immediate repayment of those loans, driven Farmers, Small Businessmen and others out of Business!!!

    The 2008 Crises was a product of a change in the Risk Management Practices of FDIC Insured Banks. Banks instead of relying on Loan Committees and limits on the Industry Concentration and Geographical Concentration of their loans, instead began relying on “Risk Management Products”. They began relying on “Credit Default Swaps” to “Insure” the loans that they made. These SWAPS, sold by companies like AIG and other Insurance Companies were not “Insurance” in the sense that the “Premiums” paid by the banks on
    “SWAPS/INSURANCE” were not required to have Loss Reserves set aside by the Insurance Companies against the Premiums the Insurance Companies received. AIG for instance, was able when some loans went bad to reimburse the Banks on the the risky loans they had made which went into default, up to a point. But since AIG, or the entity which AIG owned (a subsidiary of AIG, which sold the SWAPS) had no Loss Reserves, that subsidiary went bankrupt after running thru its cash. The banks which bought
    SWAPS realized that they had “No Insurance” on their Loans, and
    the Panic Began. Banks realized that they, not AIG, were on the hook for their bad loans, and that their Net Worth was woefully innadequate to absorb the Write Offs!!!!

    Another factor in the 2008 Crises was the banks ability to create “Mortgage Backed Securities”. There is nothing inherently wrong with this, as long as the Mortgages backing the Mortgage Backed Securities are sound, well underwritten loans!!! This is the Ultimate Failure of the FDIC in not having the capability to evaluate and determine the Soundness of the Mortgages backing the MBS products issued!!!!!!!

    The combination of Credit Default Swaps and Mortgaged backed securities lead to an “Its Other Peoples Money” mentality by banks which led them to take exessive risks in the loan that the made, and in the Securities (MBS) which they issued. They didn’t care about the loans they made because they did not intend to hold on to them in the long run. It was “Other Peoples Money”.
    These 2 factors, CDS products, and MBS (Mortgage Backed Securities) were not properly regulated by the FDIC!!! This neglects also the sloppy underwriting prectices of Fanny May
    and Freddie Mac, which were not under FDIC control.

    The Crash in the Market in March 2020 was a function of 1)An overinflated Market, by any historical standards, enabled by a Fed which was intimidated by the President from raising rates early in his administration 2) The Pandemic 3)The reaction of the Russians and the Saudis to the huge drop in demand for Oil and Natural Gas. Add in an election year and this was The Perfect Storm!!

    President Trump is not completely to blame for rates being held far to low for far to long!!! Somewhere between 2009 and 2020 the Fed needed to step in an pull the Punch Bowl away from the table and raise rates to pull air out of an overinflated market. The Fed is subject to political preasure, and from 2008-2016 Barrack Obama was the President!! Ben Barnanke and Ms. Yellen succumbed to preasure from President Obama and the Democratic Party and did not “Pull the Punch Bowl” away from the Party and raise rates when doing so would have made sense!!! Trump continued the practice!!!

    Given the situation we are in, with the Market Crash in March 2020, the high unemployment, and the High Probability of a Recession(given that recessions usually kick in within 6 months of Market Corrections) the current administration is faced with a dilemma. Interest rates are far to low and the Fed has burned all its powder in that area. Seemingly the Only tools available to address a sharp drop in demand are on the Fiscal side of the tool box. And that means Government Spending!! Admittedly this is a bitter pill for Fiscal Conservatives to swallow, and is not preferable as a long term solution to sharply curtailed demand.

    Guaranteed Incomes are not a desirable long term economic solution to the situation we now face. But until the economy stabilizes Fiscal Deficits and the Borrowing this entails are
    necessary conditions. What other plausible sets of tools are now available Shah to deal with the fallback in demand we are experiencing!! Unless you consider rolling back the sharp reductions in Corporate Taxes made in 2017, and this entails its own set of problems when done in a Recession!!!

    Further, who lends to banks which are short of cash, in a bank run, other than the Federal Reserve (The FED)? What do you propose to replace the Fed with that acts as a “Lender of Last Resort” to Reserve Tight (Cash Short) banks???

  13. Craig says:

    The Fed is a bunch of Private Bankers. “The Fed” was coined to confused the issue that it is Private and make people think it is part of the Federal Government. Its a billionare club lending money to the Federal Governement with a guaranteed return that the TAX payers are obligated to pay in the current situation. I say erase 2/3rds of the Fed Debt and be rid of “The FED”.

  14. Ron Andronica says:

    Great article, Shah. Indeed in 1913 a group a robber Barons highjacked our nation’s money supply and Americans have been paying the price ever since.

  15. Ellen Urben says:

    Hi, thank you for the article and I wonder what I should do. Do you know where I can buy gold coins or bars. I have two 409K and I could cash one into gold. Should I buy gold stocks?

  16. Kim says:

    Awesome article Shah. I feel like we Americans are blind sheep being led to the slaughterhouse and we willingly follow. The truth needs to be put out there but the “fake news” somehow has taken over freedom of speech.

  17. Timi says:

    The system is never a capitalistic democracy. It is a bombardment of multiple systems( Capitalism, socialism, command and “fiction”.All the economic assistance to the poor are helping hands of socialism to make Capitalism worth it. The command aspect is what the Govt.did in 08 and are doing now;big daddy to the rescue!

  18. Jay says:

    While I do not entirely agree with you Shah I respect and value your courage to address the situation. We are in a pickle as an economy, nation, and society which must be addressed and corrections made.
    One aspect that nobody addresses is that no one has been prosecuted and judged for their actions or lack of actions in the various situations that brought or caused the economic losses paid by taxpayers who are now indebted for generations to come! And there has been multiple misdeeds deserving prosecution!! In addition to clearly greedy unethical and grossly abusive misconduct. One that was ignored by all was the “rescues” with US Treasury Checks orchestrated during the end of G.W. Bush presidency and first year of Obama’s presidency. The “TARP” architected and led by Treasury Secretary Paulson and others. Treasury checks of $10 Billion each were hand carried by couriers from Treasury to Goldman Sachs and Morgan Stanley in mid afternoon which their principals promptly hand carried and deposited in their corporate accounts, met and distributed a large portion of that money to themselves as Retention Bonuses and Performance Incentives. And they were those in charge whose actions drove their firms to the brink of insolvency and collapse that required intervention and infusion of all that cash to stabilize and avoid. And most stayed on and worked to ultimately have their firms live on and repay the Treasury. A few credible people in the Finance profession pointed this out at the time yet zero action was taken to investigate it because there were “bigger fish to fry”, and perhaps there were but no fish was ever “fried”.
    I know a lot of taxpayer who look at this entire sordid affair as systematic corruption in the Financial industry and the government regulators and label the entire group a corrupt gang of greed driven self serving wrong doers who have political influence and get away with it at taxpayer risk and cost. So, yes Shah there is a whole LOT of wrong with these episodes of near collapse of our economy and conditions ARE socialist and an abandonment and corruption of our “free enterprise democratic regulated economy”. Thanks for writing about it!

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