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The following excerpt is from the book 'Secrets of the Temple -- How the Federal Reserve runs the country by William Greider
Now I know some of my good friends already know all this stuff.. But I still think it's a good read for everyone.. It's just so well written LMAO
To me it shows the complete desperation of the government and the Federal Reserve no matter how they may have tried to hide the panic from the general public.
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During the war, as the federal government borrowed hundreds of billions, the Federal Reserve explicitly supported the Treasury debt financing with its monetary policy, pumping more liquidity into the banking system so that private buyers would be able to absorb the new government securities. The FED followed Treasury's instructions, yielding any pretense to independence. The central banks money-supply management was "pegged" to one purpose--low interest rates. The interest rate on the longest-term government bonds was held at a steady 2.5 percent throughout the war and short-term rates were correspondingly lower (ninety-day T-bills paid less than .5 percent).
If market pressures threatened to push rates higher, the central bank simply bought more Treasury issues itself, thus adding more money to the financial system and preventing the price of money from rising. In effect, the FED guaranteed that if there was any Treasury paper that the private market would not buy, then the FED itself would buy it. In 1933, when FDR took office, the national debt was $22 billion. When Pearl Harbor was attacked in 1941, it was $48 billion. By V-J Day, when the war ended in 1945, the national debt was $280 billion.
Paul Volcker, the economics major, concluded that the Federal Reserve must stop "pegging" interest rates at a fixed level and allow rates to rise to reflect market pressures "in order to have an anti-inflationary policy worthy of the name." Inside the government, Marriner Eccles was making the identical argument--and becoming increasingly unpopular for it. "I regret that the Federal Reserve did not take a more independent position despite Treasury resistance," Eccles wrote in his memoirs. "There was no justification for our continued support of the Treasury's war time cheap-money policy."
During the war itself, Eccles quarreled regularly with Treasury on how to finance the mobilization, but he was compelled to acquiesce. The Federal Reserve had played a similar role in supporting the government's borrowing for World War I. Lincoln had printed "green-backs" to pay for the civil war. History and politics argued that a nation at war, threatened with survival, will do what ever it needs to do in order to win and worry later about the financial consequences.
Eccles did not disagree with that general proposition, but he objected in particular to the financing methods. The periodic Victory bond drives staged by Treasury, he said, meant "outrageous profits" for banks and large investors because the arrangement allowed a daisy-chain exploitation of the the FEDs money creation. to insure a successful bond sale and stable interest rates, the FED expanded bank reserves by buying up outstanding government securities. The commercial banks lent the expanded money supply to private customers who would in turn lend it to the government by buying the new Treasury issues. The customers then sold their new government securities to the commercial banks--and they eventually sold them back to the FED when the central bank was again required to expand the money supply. in a roundabout way, the government was borrowing it's own money--and paying a fixed fee to middlemen for the privileged.
The bankers, of course, were delighted with most aspects of Treasury financing, as were government bond dealers and the brokers [Eccles complained]. The practices followed insured them a windfall of profits, as they did to countless corporations and insurance companies. A substantial part of the buying did not come from genuine savings; it came from money created by the banking system through the very process of buying the securities held by nonbank investors.
Greg
[a government] "will do what ever it needs to do in order to win and worry later about the financial consequences"
As *I* have been saying for a very long time now.. I feel a bit vindicated in my own beliefs after having found this.. Bernanke is stuck in the 1930's enjoying a lifelong dream of his, battling the ghost of the great depression.. there is nothing they can do to manipulate things this time.. it simply WILL NOT WORK.
the New Paradigm continues.. please stay tuned..
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