Opinion> Thomas Sowell> Irony In Wall Street

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Irony in Wall Street

There was a real irony in the recent intervention by the Federal Reserve System to provide the money that enabled the firm of JPMorgan Chase to buy Bear Stearns before it went bankrupt. The point was to try to prevent a domino effect of panic in the financial markets that could lead to a downturn in the economy.

The irony is that it was almost exactly a hundred years ago — 1907, to be exact — that the original J.P. Morgan arranged a bailout of a troubled financial institution for the same purpose of preventing a panic that could end up with the whole economy declining.

The difference is that J.P. Morgan and his fellow bankers used their own money, while the Federal Reserve System used their power to create money.

What that means is that the value of your money and my money — all Federal Reserve Notes — goes down when more Federal Reserve Notes are issued to subsidize the purchase of Bear Stearns by JPMorgan Chase.

It wasn't really a bailout because the stockholders of Bear Stearns lost their shirts. But the firm of JPMorgan Chase got money from the government to seal the deal.

In other words, we all paid to keep Bear Stearns out of bankruptcy, whether we all realize it or not. Whether that was better than the alternative is a separate question — and one whose answer may never be known.

But the big difference between this year's rescue to stabilize the financial markets and that 101 years ago is that this year's government rescue leads to demands that still more rescues — including real bailouts — should be extended to homeowners and others.

Back in 1907, nobody could demand that the original J.P. Morgan bail out more people with his own money. But whatever the government does sets a precedent and causes more special interests to demand that they get the same treatment.

There is another irony in this situation. There was no Federal Reserve System in 1907. That is why Wall Street bankers like J.P.

Morgan had to do their own heavy lifting with their own money.

Somehow that did not sit right with the Progressives of that era who, like today's liberals, seemed to think that things should not be left to the market when the government can step in and make everything right.

Such thinking led in 1914 to the creation of the Federal Reserve System.

Unlike other countries, the United States had gotten along for generations without a central government bank. But President Woodrow Wilson thought that the monetary system of the country was too important to let private bankers play such a large role as J.P. Morgan had played in 1907.

Describing the Federal Reserve System created during his administration, Woodrow Wilson said: "It provides a currency which expands as it is needed and contracts when it is not needed."

The power to expand and contract the currency was "put into the hands of a public board of disinterested officers of the Government itself."

Their task was to prevent financial panics, bank failures and a catastrophic contraction of demand. It sounded wonderful — and such sounds count for a lot in politics.

In reality, however, the biggest financial panic in American history occurred under the Federal Reserve System in 1929, followed by thousands of bank failures and an unprecedented contraction of the money supply by one-third during the Great Depression of the 1930s.

There is no question that the people who run the Federal Reserve System today are a lot more knowledgeable about economics than those who ran it back in the days of the Great Depression. Indeed, the average student who has passed Economics 1 today is probably more knowledgeable than those who ran the Federal Reserve System back during the Great Depression.

Being a disinterested government official does not mean that you know what you are doing. That fact gets left out of the equation in a lot of proposals for new government programs.

To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate web page at www.creators.com. Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His Web site is www.tsowell.com.

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"Disinterested government official" Is there such a thing? Let's ask all the special interests groups and lobbyists roaming Washington with their pockets full of money and their mouths full of lies on the prowl for disinterested government officials. Wilson was approached and assisted into office by special interest groups just so he could indeed could pass the Federal Reserve Bill. In his later years, Wilson expressed regret at his folly. Too late for most American's. The special interests groups that bankrolled his winning campaign also made the margin calls that brought about financial panic and collapsed the banks that did not join the Federal Reserve. Throughout our history, from banks charging of interest, the gold standard, then off the gold standard, to credit card companies writing their own rules and regulating themselves, all brought about by special interest groups using political puppets. Using money to control a government or a people is standard practise. Read the NY Times The Ripples of Punishing One Bank. July 3, 2007. Never forget, the Bush's and Cheney's. They and their ilk will never lose money. They will grow it, off our blood, sweat, and tears. There are no "disinterested government officials".

Comment: #1
Posted by: liz
Tue Apr 1, 2008 3:25 PM

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To Mr. Sowell,
Read your column frequently and enjoy them muchly.
One thing few Americans are aware of and this includes members of Congress, the fact that the Federal Reserve is a misnomer. This title was given to the Private Banks in this country in 1913 when Congress violating the Constitution, created the Federal Reserve Act. The Federal Reserve is neither Federal nor does it have any money in "Reserve" vaults as people might think. The "Reserve" has to do with the amount of available moneys required to be held back when a loan is made. Greenspan and Bernake are paid by the taxpayers (Greenspan's retirement..) but they do not take orders from either Congress or the President. They get their orders from the Private Banking System, which is tightly tied to the International Banking System. Congress should at least, sit in or be members of the Federal Open Market Committee as responsible and honest brokers.
Why should the private banking system in this country control productivity and who should get loans and who shouldn't?
The recent "Bail-out" of Bear Stearns had to do with the "Federal Reserve" sureptitiously taking over the Loan Industry, which they resent having been allowed in the first place. There are fewer regulations with these Loan Agencies and the hewn cry against the likes of Walmart wanting to get into the loan business.
The Federal Reserve has no qualms to ask the government for guarantees (Subsidy) as you will note, to support its so called "Rescue" of these loan industries. They are buying them up with OPM (Other People's Money---The Tax payer's..) Handing out Pork to those who don't qualify for loans (Perhaps this is legitimate and should be but the pressure came from extortionist demanding this from Congress..and was done with abandon without proper over-site!) and now the so-called "Federal Reserve," wants taxpayer's Pork to help straighten the mess out. Most of Congress members do not have a clue about the banking system so they will simply hand it out!!
The Sub-mortgages came from pressure to force these agencies to make precarious loans to people who would not normally qualify for loans. Without proper over-sight the loan sharks took big advantage and realty speculation buying on margin.
The Banking System did not hand out these loans because they have their own regulations to prevent this abuse, albeit they abuse in other ways i.e. Credit Cards and being more than what normal banks should be. They are involved in many more tricks other than Checking and Savings e.g. by selling mutual funds, insurance , financial advice and who knows what all...
The responsibility of Congress to control money in this country was put in the Constitution: Article I, Sec. 8, Part 5 reads: "Congress shall have the power to coin money and regulate the value therof; and of foreign coin." States are prohibited from exercising this power as well: Article I, Sec. 10, Cl. 1. Congress sold out!
The war between Congress and the Banking System has a long history going back to the Revolution and Congress (Illegally) gave up its responsibility with the National Bank Act (NBA)of 1863 and the Federal Reserve Act of 1913. They put the Fox in the hen-house.
Prior to the NBA, Lincoln encouraged Congress to print its own money (out-side of the banking system) to help pay for the Civil War. Congress did this and the "Debt Free" money saved this country $ billions and this money remained in the system as legal tender into the next century (1940' snd 50's..). Lincoln's "medling" was delt with of course, as was JFK's messing with the Banking System.
Perhaps Oliver Stone should revisit these assasinations, don't you think?

Comment: #2
Posted by: Jacques Bakke
Mon Apr 7, 2008 10:03 AM

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