| December 06, 2013 | | | | |  | | | Money for Nothing | | | - The interesting story of a crisis… and a filmmaker who foresaw it and profited...
- We're happy to announce your invitation to an exclusive Daily Reckoning event!
- Plus, Gregory Bresiger on the many criticisms of our favorite semigovernmental institution...
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 The U.S. was bouncing back from Sept. 11 and the pricked tech bubble. It was the mid-2000s, and the economy, stocks and real estate were heating up. Still, Jim Bruce, filmmaker, had an inkling things just weren't right. Perhaps you remember the folly at the time:
Financial institutions were becoming highly leveraged but wanted to make their books look pretty for investors. As you know, packaging their loans into collateralized debt obligations, or CDOs, did the trick. As you also know, today CDOs stand as proof that selling a load of crap is far easier when you obfuscate simple matters with technical financial jargon. Paying rating agencies to label it top investment grade doesn't hurt either.
But the main character of our story, Jim Bruce, cut through it all, even though many thought his opinions were off-the-wall. He "was worried it was all a sham," writes The Washington Post's Ylan Mui, "that instead of reducing risk, these complex new instruments would actually magnify it, helping to fuel a new bubble that could bring down the entire economy."
Mr. Bruce shorted the madness with conviction, scooping up a tidy sum as a result. Now, fittingly, he's used that money to finance a documentary on the Fed that has us very excited. It's called Money for Nothing: Inside the Federal Reserve. Mr. Bruce was kind enough to send a sneak preview to us, which we eagerly watched and now strongly recommend to you.
The opening minutes got us going (though we're a nerd for this sort of thing) as the camera pans through the halls of the Eccles Building. Sound bites of the experts that the film features are peppered throughout to kick the story off.
"The dollar is the most remarkable achievement in the history of money," teases Grant's Interest Rate Observer editor Jim Grant in the documentary's opening minutes.
| "How can the dollar be anything except the world's greatest monetary brand, the Coca-Cola of money?" | "Think of it -- this piece of paper costs nothing to produce. There's nothing behind it except the goodwill of Ben S. Bernanke and, let us not forget, the U.S. Congress. This piece of paper somehow still commands value and respect. How can the dollar be anything except the world's greatest monetary brand, the Coca-Cola of money? How could it be anything else but? Well, you just watch."
Other financial and economic bigwigs interviewed in the film include historian Allan Meltzer, our friend Barry Ritholtz, John Mauldin, Paul Volcker, Janet Yellen and a slew of Fed officials from the Greenspan years to present. We bet the suspense is killing you… but we're not about to spoil it for you.
Jim Bruce would like to invite you to watch the film with him at an exclusive screening, however. He'll will be hosting it in Austin, Texas, at the Marchesa Hall & Theatre on Tuesday, Dec. 10, at 6:30 p.m. (Tickets are available here.) There will be a cash bar happy hour at the theater from 5:00-6:15 p.m. Mr. Bruce will also be holding a Q&A session after the screening.
"That's just grand," we hear you saying to yourself. "I'd love to go… but I don't live anywhere near Austin!"
Well, don't worry. We were so impressed with Jim Bruce's story that we personally invited him to Baltimore, Md., to host our own screening of Money for Nothing. And Addison has agreed to do an exclusive question-and-answer session with him afterward in which we can interact.
As a Daily Reckoning reader, you're hearing about it before anybody in the press. We'd like to offer you first dibs to reserve a limited spot to attend, too. More to come on reserving your free spot next week. Keep your eyes peeled on this space.
In the meantime, we serve up a sampler of criticisms of the Fed as it approaches its centennial. Read on below...
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| | | | The Fed Turns 100: A Survey of the Critics | | | | by Gregory Bresiger | | | End America's central bank because it caused the crashes of 2008, 1987, and 1929 and will blunder again.
That's what many critics are saying about the Federal Reserve System (the Fed), which turns 100 on December 23. They note that on the Fed's watch America has endured numerous bubbles, crashes, and inflationary cycles that have greatly devalued the dollar. The Fed, they say, has caused or aggravated several crashes.
"The Fed's performance over the century has been abysmal, no matter how you look at it," says Professor Joseph Salerno, a business professor and monetary expert at Pace University.
"If you say the goal of the Fed was to prevent calamities, then you have to say that it has been a failure," says William A. Fleckenstein, a hedge fund manager and the author of Greenspan's Bubbles.
Fleckenstein says he's seen two bubbles over the past quarter century. He also believes that, under the Fed's system of easy money, of interest rates of close to zero percent over the past few years that, "the Fed is once again creating a bubble." The Fed should be abolished, he adds, because it has no accountability for its mistakes.
The length of the Fed's charter is indefinite, said Fed sources, who would only speak on background. And that is generally the only way Fed sources will speak when asked about the bank's current policies or historical record.
| "If you say the goal of the Fed was to prevent calamities, then you have to say that it has been a failure." | The Fed is a bank for banks that creates money. It is designed to be a lender of last resort to sick banks in times of crisis. And crisis is one reason why the United States finally returned to authorizing a central bank a century ago. (America had previously had a central bank in the 19th century, but its legislative re-authorization was vetoed by Andrew Jackson who railed against a central bank as the tool of moneyed interests.)
The Fed began with the goal of protecting the dollar. It was given the exclusive right to create money in 1913.
The Fed would "provide a means by which periodic panics which shake the American Republic, and do it enormous injury, would be stopped," according to Robert Latham Owen, one of the authors of the original Federal Reserve Act.
After the Wall Street banking Panic of 1907 led numerous banks to fail, "there was a growing consensus among all Americans that a central banking authority was needed to ensure a healthy banking system and provide for an elastic currency," according to the official Federal Reserve history.
But critics claim the Fed has made things worse. Subsequent problems were the result of Fed governors giving in to political pressure, providing elastic or "cheap money." This is the controversial Fed policy of setting interest rates. If set too low, the rates will mislead consumers and businesses, causing them to borrow too much. And that can lead to a cycle of boom and bust.
That's what many believe happened in 2007-2008 as millions of Americans were encouraged through cheap-money policies to use subprime loans to buy homes they couldn't afford. But Fed critics contend that it had happened before.
For instance, interest rates were dirt cheap in 1972, which led later to an economic disaster as inflation jumped to 10 percent and interest rates went to over 20 percent in the 1970s.
"The consequence of the monetary framework of the 1970s was two bouts of double-digit inflation," said Fed Chairman Bernard Bernanke in a recent speech entitled, "A Century of U.S. Central Banking: Goals, Framework, Accountability." These 1970s events killed interest sensitive industries and destroyed many small businesses that couldn't obtain credit. | | | | | | |
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| | | | | | | | These controversial money policies have lead to crashes, depressions, and recessions, including the crash of 1929 and resulting Great Depression, critics say. Some 10,000 banks failed between 1930 and 1933, according to Fed numbers.
"Tragically, the Fed failed to meet the mandate to maintain financial stability," Bernanke said in his speech.
"Many people," according to the official Fed history, "blamed the Fed for failing to stem speculative lending that led to the crash, and some argued that inadequate understanding of monetary economics kept the Fed from pursuing polices that could have lessened the depth of the Depression."
One of the people blaming the Fed was economist and monetary historian Milton Friedman. He criticized Fed policies for triggering the 1929 crash and then causing a depression that lasted over a decade.
"Throughout the contraction, the System [the Fed] had ample powers to cut short the tragic process of monetary deflation and banking collapse," according to The Great Contraction 1929-1933, by Milton Friedman and Anna Schwartz.
To Fed critics, the Great Depression of 1929 and the great inflation of the 1970s were part of a series of policy blunders that happened again in 2008.
"There never would have been a subprime mortgage crisis if the Fed had been alert," Schwartz told the Wall Street Journal. "This is something Alan Greenspan must answer for."
| "There never would have been a subprime mortgage crisis if the Fed had been alert." | In Greenspan's memoir, The Age of Turbulence, the former Fed chairman conceded that Fed actions leading up to the crisis were dangerous. He wrote: "I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk, and that subsidized home ownership initiatives distort market outcomes." Still, Greenspan said he believes in the idea of every American having a home.
Economist Laurence Kotlikoff of Boston University says he'd give the Fed a C grade in its first century.
"It didn't prevent the Great Depression or the Great Recession. It hasn't fixed the core problems: opacity and leverage in the banking system," Kotlikoff said.
"Central banking has a poor record but other methods do as well," adds Jeffrey Gundlach, the manager of the Doubleline Total Return Bond Fund, which invests in mortgage backed securities. Gundlach has been very critical of cheap money policies of the Fed and predicted the crash of 2008. He believes the government should balance the budget first and then consider the Fed's future.
Other critics, in reviewing the Fed's record are harsher. They say it is time to end the Fed, in part because it favors certain banking interests.
"The Fed is an instrument of crony capitalism," warns Hunter Lewis, a money manager and the co-founder of Cambridge Associates, an investment advisory firm.
"The Fed should be abolished because its legal monopoly of the money supply renders it an inherently inflationary institution able to create money at will and without limit," says Salerno, noting that the value of a 1913 dollar is now five cents.
"History and current experience," Salerno adds, "reveal to us that groups endowed with a legal monopoly over any area of the economy are prone to use it to the hilt to enrich themselves, their friends and allies."
Regards,
Gregory Bresiger
for The Daily Reckoning | | | | | | | | |  Gregory Bresiger, the editor of Traders Magazine's CQ&D, writes for the Sunday business section of the New York Post and is also the author of Personal Finance for People Who Hate Personal Finance. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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