The Federal Reserve soap opera began over a century ago. The never-ending melodrama is fraught with twists and turns, good times and heartbreak and most of all – lies! One constant character, the Fed Chair, plays the role of a carnival barker, hawking the illusion of diligently guiding our country’s banking system through turbulent times – while deceiving the country about their real mission.

TalkMarkets Contributor, Bill Bonner, explains Another Bamboozle:

“The big bankers wanted to be able to make big bets, but without the risk of going broke. They solved that problem by creating the Fed in 1913. Now, when business is good, they keep the profits. When their bets go bad, they get bailed out by the Fed, generously sharing their losses with the public.”

P.T. Barnum would be proud of Current Fed Chairman Powell’s recent deception, “Everything we do is in service to our public mission.”

Browse Books, explains Barnum’s famous quote, “There’s a sucker born every minute”:

Meaning: “There is no shortage of naive people ready to become victims of frauds and cheats.”

Wall Street On Parade (WSOP) chimes in:

“A fascinating new academic paper has been released…. ‘The Myth of Fed Political Independence.’ Its premise is this: ‘The much-vaunted independence of the Federal Reserve is a myth. The Fed is not the bastion of sound monetary policy. Rather, it is just another politically coopted agency of the federal government.'”

WSOP adds, “Based on our analysis over three decades of research, the Fed has been captured by the Wall Street megabanks.” WSOP makes the case on how their premise and that of Dr. Webster (report author) may be simultaneously correct.

Bill Bonner’s writes Disaster Approaches:

“Different elites fight for control of the government, by taking wealth from one group and giving it to another. With control of the machinery, they use it to move even more wealth in their direction.
 

…. The ‘political caste’ uses its resources to control the distribution of wealth. As it becomes more powerful, the society becomes more corrupt… with more and more wealth going to favored groups. The top 1% makes out, well, like bandits. Since 1990, when the Fed began backstopping the stock market, the wealth of the top 1% of US households has increased by $31 million each… 680 times more than the wealth increase for the bottom half of all households.”

Forbes reports, “Markets Firmly Expect The Fed To Cut Interest Rates On September 18th.”

Fed Chair Powell confidently predicted the Fed was working toward the “neutral rate,” defined as an interest rate that does not encourage or prohibit commerce.

Historically the current 5.25% rate, was considered a “neutral rate” and worked well. Corporate America borrowed to invest in assets that would generate more profit – the metric being return on investment. The lender, seeing the projected profit increases, felt comfortable the loan could be repaid.

When the Fed bailed out the banks in 2008, dropping rates to zero, banks, and corporate America, borrowed billions, not to improve things; but rather to buy back stock and pay special dividends.

I asked friend, and expert Chuck Butler:

“So now, do we have a new definition of neutral rate? Theoretically, the rate shouldn’t encourage or prohibit commerce.

Corporate America and the government borrowed recklessly when rates were too low. Now the debt must be paid off or rolled over at higher rates which will either bankrupt them, force them to cut dividends, or sell assets to get their debt level down.

I naively believed the Fed raised rates to tame inflation and get the excess debt, caused by low interest rates, out of the system.

If the Fed is saying, ‘Nooooo, we can’t have that’, it will hurt the government or Wall Street to pay for their past sins; does that change the definition? Is it no longer neutral going forward, but rather allowing government and corporate America absolution from past sins??”

Chuck responded:

“The banks used to make the bulk of their earnings on “the spread.” Banks would buy Treasuries with a coupon rate, let’s say 5%…. They then made loans @ say 12%… and the spread was their profit, plus loan fees etc.

The banks bond departments were small potatoes. When Glass-Steagall was thrown out… the new, casino banks realized the “other income” they could generate building huge bond departments and mortgage departments, etc. So, interest spread (traditional banking) is no longer a major part of a bank’s net profit…

While a higher rate helps their “spread income”…. it damages their investment portfolio since most all bonds in that portfolio are older low-rate bonds.

The way I see it… a “neutral rate ” is no longer feasible or needed…. the Fed funds rate should be left to the bond markets who at least have a finger on the pulse of the economy, as opposed to the numbskulls at the Fed.”

Chuck reinforces the Fed’s true, but hidden mission – protect the banks, elite and government at the expense of the people. I doubt the Fed would ever allow free market rates to prevail.

With a rate cut expected, Bonner explains the likely outcome:

“The Fed has a huge bias in favor of errors that benefit powerful, moneyed groups… leading us to guess that its next error will be, once again, to under-price credit for privileged borrowers.

…. Every choice made by the Fed is an error; it cannot help but misprice credit. A rate that is too high prevents borrowers from getting the credit they need. A rate that is too low encourages them to borrow too much.

…. Each policy decision is an attempt to deal with a current problem. But the error causes problems downstream that must be addressed with more policy choices, causing even more problems. The decade-plus of ‘zero’ interest rates, …. led to today’s inflation and $35 trillion in debt. So, the Fed is now trapped between ‘inflate or die’ — fighting inflation while also trying to prevent a debt meltdown.

…. We also saw that the Fed’s errors were not random. If they were sometimes too high and sometimes too low, they would average out to somewhere close to where they ought to be. Instead, the Fed chooses rates that are almost always too low, thus encouraging too much credit and setting the country up for a credit crisis.”

Chuck’s old friend Hyman Minsky would be warning us today…

Help Is NOT On The Way….

Neither political party even acknowledges the current debt, out-of-control spending and cost of servicing the debt. They propose more free stuff, spending and debt, which will make things worse. A balanced budget? Fuggedaboutit!

Bonner doesn’t mince words:

“We have seen that the political system is a fraud. We don’t have a real democracy; we have a DINO… democracy in name only. Our elected representatives do not really represent us; they represent the special interests who provide them campaign money (and jobs… speaking fees… etc). It is not a government ‘by the People,’ in other words… it is one of elites, competing to control our political system.”

Politically Coopted Fed Playing Politics

Fed Chair Powell will cut rates just before the election, vehemently denying it is politically motivated. Democrats will claim victory over inflation, Trump broke it, they fixed it. Don’t buy it, they all broke it and have no intention of fixing it; they’ll just make things worse.

Both parties are screaming – should you elect their opponent; expect another great depression. They’re both probably right.

When the “Powell Pivot” was announced, James Rickards explained:

“He not only pivoted to interest rate cuts, but more significantly he pivoted from concern about inflation to concern about unemployment.

The latter pivot is much more troubling because it signals that a recession is upon us and the Fed may be too late (as usual) to do anything about it.

…. We also wrote that, when the pivot did arrive…. It would not be a soft landing or a Goldilocks narrative. It would be a hard landing and a recession.

…. Now we’re there.

The rate pivot is coming…. Wall Street will crash once they wake up to what the Fed is actually saying.”

WSOP nails it:

“Because Wall Street megabanks have honed to perfection a century-old bag of tricks that enable them to get their way by intimidating their regulators, game accounting rules with impunity, and put personal greed above the good of the country – the only means of restoring sanity and stability to the U.S. financial system is for Congress to restore the Glass-Steagall Act, which would permanently separate federally-insured banks from the trading casinos on Wall Street.
 

…. There appears to be little to no guardrails or moral compass on Wall Street in its pursuit of profits. That will doom both it and the U.S. economy if federal regulators continue to stand down.”

No matter what happens in November, the lies and deceit are coming home to roost – the correction is coming.
 

Unfortunately, history has shown that many times, when empires are collapsing, the elites create a war to divert our attention and maintain their power. The economic reset has to take place, we don’t need a war to make things worse…. One nuke and the world will change forever.

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