By: George Warren; Columnist
The Federal Reserve was created in 1913 to be the “lender of last resort” to our nation; because of past bank failures, most notably the “bank panic” of 1907, It was then, that financier James Pierpont Morgan is given credit for rescuing the economy; when he locked himself and other bankers into a room, until he raised $100 million to save the failing banks.
Normally, the Fed loans money to the government by buying United States government debt in various forms. It also loans money to National banks, who are required to be a part of the Federal Reserve System. It is actually the banks who own the Fed, and not the tax payers of America.
Back as recently as April 26, 2007, according to the Federal Reserve Statistical Release, the total assets of the Fed (debts of others) were $883.5 billion, with a “B” The lion’s share (89 percent) of that debt was AAA quality debt of the Federal government. As of a few days ago, the Fed assets had exploded to $2.19 trillion, with a “T”.
Regretfully, the AAA (supposedly risk free) plain vanilla Treasury debt is now only 24 percent of those assets. What is the balance? They bought $355 billion of those mortgage backed securities and $61 billion in bonds issued by Fannie Mae, Freddie Mac and Ginnie Mae. Fannie Mae and Freddie Mac used to be private enterprises, but they failed and now we effectively own them. The Fed also bought $455.8 billion of short term loans collateralized by just about everything---credit card debt, auto loans, commercial mortgage backed securities, and Brady bonds (Latin American debt).
The Fed also holds $238 billion in commercial paper (short term debt to US corporations) and $111 billion in “other loans” Finally we paid $72 billion for the dodgy assets of Bear Stearns and AIG insurance. AIG went into complete failure mode because it was they who “insured” all these bogus mortgage securities for Wall Street by selling “credit default swaps.” We own them now, too.
Two years ago, the Fed was leveraged 27 to 1. Now they are leveraged 48 to 1. The Wall Street firms who collapsed were leveraged only about 40 to 1. But they were not the pseudo government. 53 percent of the Federal debt which is not owed to Social Security is owed to foreigners, mainly China and Japan. I contend most of this is the product of those “learned fathers” who told us it was imperative we open the free world to free trade. Then, told us it was important to spend-spend-spend, even if we had to use credit.
In 1946, we owned 20,000 tons of gold and were the pre-eminent manufacturer in the world. Now we only own 8,000 tons of gold and 71 percent of our domestic economy “was” made up of consumer purchases. There is much more foreign gold in the basement of the Federal Reserve Bank in New York than there is American gold in Fort Knox. A lot of those fathers may have made a lot of money, but for most of us, this was certainly not progress.
Treasury Secretary Geithner now advises us the end is near. I just wish I knew which “end” he is talking about.
Printed in the April 30, 2009 edition.