The Great Depression – Is it the US Treasury’s “Playbook” for the Current Monetary Crisis?

December 8, 2008

Within the past couple of months, there has been a lot of discussion regarding US Treasury Secretary Hank Paulson’s allocation of half of the initial tranche of $700 bailout money, with many describing his spending of $350 billion thus far as appalling, disappointing, and even shocking. During a US Congressional hearing that addressed accountability of Paulson’s choices for spending $350 billion or American taxpayer money thus far, consider the following statements issued by various US Congressmen, Republican and Democrat.

“When the program was passed, very explicit language was included to provide for mortgage foreclosure,” said committee Chairman Barney Frank (D-Mass.). “It is essential that we do something to use some of the TARP funds for the diminution of the rate of mortgage foreclosures.”

“There’s a lack of confidence, it seems to me, both in this body and in the general population,” said Rep. Paul E. Kanjorski (D-Pa.). “Do we have a plan? Where are we going?”

“[Hank Paulson’s use of the bailout money is] the second-largest bait-and-switch scheme that history has ever seen, second only to the reasons given to us to vote for the invasion of Iraq.” Rep. Gary L. Ackerman (D-N.Y.)

Both Barney’s and Ackerman’s comments referenced initial assurances that Hank Paulson granted to US Congressmen that the bailout money would be used to purchase trouble mortgage assets, provide support to Americans in danger of losing their homes, and to inject liquidity into the US capital markets. Instead, Paulson reneged on these promises and thus far his spending has focused mainly on re-capitalizing banks.

This bait-and-switch particularly irked former investment banker and current United Steel Workers (USW) President Leo W. Gerard, who wrote a scathing letter to Hank Paulson that compared Warren Buffet’s $5 billion investment in Goldman Sachs with Hank Paulson’s $10 billion allocation of bailout money to Goldman Sachs.

Mr. Gerard, in his analysis, concluded that “Per dollar invested, Mr. Buffett received at least seven and perhaps up to fourteen times more warrants than Treasury did and his warrants have more favorable terms.” Furthermore, Gerard stated, “Mr. Buffett’s preferred stock has a higher dividend rate and can only be bought away from him at a premium, while Treasury’s investment of taxpayers’ money pays a lower dividend and can be repurchased at par.” Thus because Hank Paulson’s purchase of Goldman Sachs assets was at a minimum, half as attractive as the deal Goldman Sachs gave Warren Buffet, Gerard concluded that Hank Paulson’s bailout grant to Goldman Sachs included a $5 billion “gift from the taxpayers of the United States to the shareholders of Goldman Sachs”.

And regarding Hank Paulson’s allocations of bailout money to eight additional banks, Gerard bluntly stated, “Applied to the deals you made at the other eight institutions, you paid $125 billion for securities for which a disinterested party would have paid $62.5 billion.” Thus, extrapolating Gerard’s analysis to the allocation of the remaining $350 billion of the first $700 billion tranche of bailout money, if Hank Paulson continues to make the same decisions, he would effectively gift $350 billion of taxpayer money to his banking friends.

But did he really adjust his strategy to reflect fast-moving changes in the crisis or was the socialization of banking losses really his plan all along?

Consider that before the US Treasury’s decision to bailout a failing Citigroup, the US Treasury, led by Hank Paulson, considered a direct investment of “$30 billion in Citigroup — including $15 billion in preferred shares and $15 billion in common stock to be bought in the secondary market” according to the UK Financial Times. Various journalists have described Hank Paulson’s deliberate gifting of American taxpayer money to recapitalize the balance sheets of banks that have lost hundreds of billions of dollars through poor investments in risky assets as “shocking” and “appalling,” yet there is plenty of precedent that this was the plan all along, and that talk of helping out American citizens was never under any real serious consideration.

Paulson defended his actions by stating, “There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis.” In fact, there is such a playbook. Consider the plan of the Federal Reserve in response to the 1929 US stock market crash that ushered in the beginning of the Great Depression.

During the Great Depression, though thousands of small US banks failed, some of the largest banking institutions like JP Morgan thrived. In 1930, the Federal Reserve Board and the 12 Federal Reserve banks advanced some of the largest US banks $13,022,782,000 to recapitalize their balance sheets and to offset the losses that they suffered through speculation on risky assets (Source: US Congressional archives, US Congressman Louis McFadden). In a scathing speech made on the floor of the US Congress that addressed this behavior, Congressman McFadden stated, “When the swindle began to fall, the bankers knew it in advance and withdrew from the market. They got out with whole skins and left the people of the United States to pay the piper.”

Because the exact same thing happened during the Great Depression that is happening today, US Treasury Secretary Paulson’s actions should not come as a shock to any student of history. In fact, not only are the actions taken by the elite banking cartel during the Great Depression a “playbook” for what is happening today, it is a virtual blueprint. How can this be? John Maynard Keynes, the father of all modern economic theory that is taught in higher institutions of education like the University of Chicago and Harvard University once stated, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

It is fairly safe to say that the same holds true today. Not one in a million men are able to see that the root of all economic problems worldwide today is a fraudulent, unsound monetary system. Because of this, US Treasury Secretary Hank Paulson, a man BusinessWeek called “Mr. Risk” in 2006 because of his propensity to place huge bets on exotic, highly risky derivative products while the CEO of Goldman Sachs. BusinessWeek named Paulson as “one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits.”

However, Keyne’s statement that hidden forces of economic law are engaged on the side of economic destruction in a manner “which not one man in a million is able to diagnose” was clearly manifested by an International Herald Tribune journalist, who scripted in an article that Paulson “was one of the first Wall Street leaders to recognize how drastically investment banks could enhance their profitability by betting with their own capital instead of acting as mere intermediaries.” Clearly, this journalist did not know his history nor understand the process of currency debasement, for Wall Street firms in the 1990s likely took such great risks based upon the expectations that they were not gambling with “their own capital” but with the capital of the American and global public. Anytime, a system historically promises you the retention of all profits from huge bets on highly risky derivatives and a propensity to socialize all losses should they occur, who wouldn’t take that bet?

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