The not-so-invisible hand: How the plunge protection team killed the free market

"America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich. . . it's just bailing out financial institutions. . . . 

"This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this."11  

If we are going socialist, we should own up to it and have some transparency in what's going on.  We the people need to know how to plan and to invest for an uncertain future.  If we're nationalizing the banks, let's nationalize them all the way, with the profits going back to the people along with the losses and risks.  Better yet, let's nationalize the Federal Reserve, so it can issue "the full faith and credit of the United States" directly, without having to back this credit with a multi-trillion dollar federal debt that will never get paid back but just continues to grow.  It would actually be less inflationary for the government to print dollars directly than for it to print bonds that are swapped for dollars created on a printing press by a privately-owned central bank, because in the latter case both the bonds and the dollars remain in circulation.  U.S. bonds not only serve as money around the world, but they count as the "reserves" for banks to create many times their face value in loans.  These bonds never get paid off but just get rolled over from year to year, inflating the money supply just as if dollars were printed directly; but the bonds carry the added burden of perpetual debt and interest payments. 

The costly bank bailouts and blatant market manipulations going on today are justified as being necessary to save a private banking system that we think we need to get the credit that keeps the economy running.  But we don't actually need private banks to get credit.  Many authorities have attested that, contrary to popular belief, banks don't lend their own money or their depositors' money.  Every dollar lent by a bank is money created out of thin air on a computer screen.  It's just "credit."  The bank "monetizes" the borrower's own promise to repay.  The government could issue its own credit in the same way.  There are a number of successful historical precedents for this, including the publicly-owned central banks of Australia and New Zealand, which saved those countries from the devastating effects of the Great Depression in the 1930s; and the publicly-owned bank of the colony of Pennsylvania, which funded the Pennsylvania provincial government without taxes or debt in the first half of the eighteenth century.  (See Ellen Brown, "How Banks Secretly Create Money," www.webofdebt.com/articles, July 3, 2007; and "It's the Derivatives, Stupid!", ibid., September 18, 2008.) 

Today's bankrupt banks dug their own black hole when they loaded up their books with lucrative but highly risky derivative bets that are now backfiring on them.  Instead of trying to clean up the banks' books by throwing taxpayer money at this impossible-to-fill black hole, we would be better off simply letting the banks go bankrupt, as President Reagan did with the savings and loan industry in the 1980s.  The banks' bad debts could then be discharged in bankruptcy, and their assets could be absorbed into a public credit system with a new, untarnished set of books, a system that would serve the interests of the people and return the profits to the people. 

So What Is an Investor to Do?      

That still leaves the question of how to negotiate today's very unpredictable markets.  The Friday before the white-knuckle October 24 ride, investors were being encouraged to get back into the market.  Commentators cheerily announced the best market week in 5-1/2 years, after the Dow climbed from a low of 7,774 on October 10 to a high of 9,924 on October 14.  But the week still ended below 9,000, and the market was coming off the most historic plunge since the Great Depression, down from a high of 10,845 on October 3 to below 8,000 a week later.  By October 24, the Dow was again hovering near 8,000.   

"Frankly, I'm sick of this," said CNBC market watcher Erin Burnett as she tracked the Dow's wild gyrations on October 23.  "Up and down, up and down.  It doesn't seem to mean anything or be linked to anything."   

I'm hanging onto my gold and silver stocks out of sheer doggedness; but other beleaguered investors might well decide it's time to pull their money out of a stock market that is looking more and more like a rigged and risky Las Vegas casino and put it somewhere else.  As one talk show commentator quipped recently, "I'm fully diversified.  I've got some under the mattress, some under the floor boards, some in the backyard."      

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