The land of the free market falters

I grew up thinking America is the land of free markets.

Recently, the Federal Reserve Bank of the United States helped to prevent a collapse of banks and investment houses that made many risky bets in the mortgage and world derivatives markets by arranging a special buyout of Bear Stearns Bank by JP Morgan Chase Bank.

The Federal Reserve (Fed) did so by guaranteeing $30 billion dollars worth of Bear Stearns bad investments for JP Morgan Chase. Somehow, without a vote by Bear Stearns shareholders, JP Morgan Chase gets to buy Bear Stearns for only $2 a share (now $10 a share). The Fed also made it clear that special Fed-selected banks that normally cannot get loans from the Fed, could also get special financing by using worthless mortgages as collateral for loans.

“So what if this Fed bank bails out a smaller bank,” you might say, “It doesn’t affect me.”

Few things could affect you more. The Fed paid for this favor by creating money, literally, out of thin air, for a company it considers important to the financial system. The Fed gets mortgages as collateral, and you and I get to pay forever through inflation.   
If it isn’t obvious by now, this is not a free market.

The Federal Reserve is actually the opposite of a free market, and one of the most powerful institutions ever created by man. It creates U.S. dollars at will and artificially controls short term interest rates that affect everything from car loans to credit cards. It has the responsibility from Congress under the Federal Reserve Act of 1913 and the Humphrey Hawkins Act to keep the value of the U.S. dollar stable and ensure full employment in the USA, but has achieved neither.

The Fed is totally independent, and  cannot be controlled by Congress except by changing these laws; a lengthy process sure to be resisted by major banks. Moreover, the Fed is not a government agency, but rather a government sanctioned cartel of banks. The content of their meetings are secret by law, and full transcripts of what the Fed discusses cannot be gotten by the public until five years after the event.
This is all, supposedly, for our benefit.

But who really benefits? The vast majority of people in the USA were not contractually involved in the Bear Stearns-JP Morgan Deal, but are very directly getting lassoed into paying for it. Think of that next time you have to buy milk or gasoline.

The favor shown to JP Morgan Chase makes it clear there are two systems of justice in the country.  If you are a mom-and-pop business, or even a large company that is not an industry leader, you will live or die by your wits and the law. But if you are a friend of the Fed, you may have access to a bottomless sack of freshly created dollars.

What counts here is not the law and the enforcement of contracts, but rather influence with the Fed and government. Under this kind of economic management, it is conceivable to have a JP Morgan Chase Bank forever. How is that a free market?

This ability of the Fed to create money is a politician’s dream, which should really make everyone stop and think. For a national level politician, if there isn’t enough money for the budget, it’s standard practice to have the Fed print up the difference, and buy U.S. treasury bonds.

Since inflation doesn’t kick in right away, the bad effects of extra money in circulation can be ignored for a while. For a politician this is something for nothing, and he can just go on happily bribing you with your own money. It gives a whole new meaning to Vice President Dick Cheney’s comment that “deficits don’t matter.” Remember, in the end, you, and your kids, will still pay. 

All of this was accomplished by the Fed, controlled by a group of seven bank governors that are unelected, unaccountable, and kept in check only by their own self interest in maintaining what they think should be the value of the dollar and a fully employed economy. 

A famous Floridian, Ernest Hemingway, wrote “The first panacea for a mismanaged nation is inflation of the currency. The second is war. Both bring a temporary prosperity. Both bring a permanent ruin.”

Peter J. Blome is a retired military officer and Secretary of the Libertarian Party of Okaloosa County.  He can be contacted at blomep@cox.net