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Britt Combs: A Perfect Storm of Government Debauchery

Government and the Fed, not "Wall Street greed," created the economic collapse

By Britt Combs | The McDowell News

Published: May 19, 2009

Disgraced former New York Governor Eliot Spitzer has found work writing opinion columns for Slate, denouncing practices at the New York Federal Reserve. He accuses them, basically, of scandalously close relationships with AIG, Goldman Sachs and other big Wall Street financials.

"Is it any wonder," he asks, "that despite its fundamental responsibility to preserve the integrity of the banking system it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?"

They made an inside deal, he charges. Probably so. What's amazing is that Spitzer – no stranger to back room deals himself – manages to avoid implicating anyone famous or powerful.

Who's guilty, according to Spitzer? A bunch of mid-level players you've never heard of. Who's innocent? How about then-New York Fed chief and now-Treasury Secretary Tim Geithner for one. Geithner, Spitzer says, made some "early mistakes" at Treasury, but he's grown a lot since. Certainly, no one in a position of power in Washington or in the Democratic Party had anything to do with creating the financial collapse.

He never questions the Fed itself. The system is the solution. The only problem is that the New York branch of the Fed has been infiltrated by the evil businessmen. The bankers, investors, and businessmen should be silenced, replaced by Bob Reich-style think tankers with no experience in the field of managing money.

"We have seen … disastrous groupthink," he cries, "a way of looking at the world from the perspective of Wall Street…. That failure has brought the world economy to the edge of unraveling."
The Fed and the government, Spitzer would have us believe, was kept entirely in the dark about over-leveraging, sub-prime mortgages and any business association between members of the New York Fed and Wall Street. We never knew! We never suspected! We trusted you guys!

His belief in government controlled economics is nearly universal in the "inside the Beltway" culture of Washington, New York, Boston and Los Angeles. They insist the recession is the final damning evidence that the free market does not work. It is inherently corrupt. Only more regulation can save us, as the problem was caused by rampant freedom.

The Fed's defenders repeat the same lines they used nearly a century ago: The Fed balances the economy and checks inflation through control of interest rates and the availability of capital. Thus it protects "democratic capitalism." Nothing could be more false.

A controlled market is, by definition, not a free market. For decades, the government and the Fed have pumped paper dollars onto the market, increasing supply while devaluing the dollars you already have. This enriches them and allows them to tax you without relying on you to file or comply. The trend of that is inflationary and not even the Fed can stop it. What it can do, and did do throughout the Greenspan years, was maintain outrageously low interest rates, contravening natural market forces, to "stimulate growth," thus appearing to offset inflation.

But it was a big lie. That kind of growth just delays the inflation payout until the end of the cycle. When the growth is interrupted, reality sets in.

The free market – people investing for profit – sets a high premium on high-risk, or "sub-prime" loans. Higher risk, higher profit. In a free market, interest rates naturally peg to inflation (the return must be greater than the inflation rate) and to the degree of risk (the borrower's credit rating).

The Federal Reserve and the federal government did very much create the conditions of the recession. They caused the sub-prime mortgage crisis. The Greenspan Fed set irrationally low interest rates and opened the sluices of money for the banks to lend. The Clinton government deregulated interstate bank mergers in 1994 and passed revisions to the Community Reinvestment Act, now seen to be ruinous. Throughout the years of the housing bubble, the advocates of central planning praised themselves for allowing more "low income" borrowers access to unlimited credit. Now, it seems, the CRA was a fine and noble idea, if only the greedy bankers had been willing to operate at a loss.

In a grow or die economy, lenders could comply and get rich and grow like weeds, or see themselves shut out. Public comment provisions in the Clinton-era revision, said economist Stan Liebowitz, allowed predatory protestors to extort vast credit from these banks. But no worries. These lenders were pretty much promised by Greenspan that the government would bail them out if they got into trouble.

With massive debt compounding rapidly, and inflation held in check only by the veil of growth, the Bush government went on a spending spree that would have made Imelda Marcos blush. It was a perfect storm of government debauchery.

As writer Thomas E. Woods pointed out in a C-Span appearance, the very people most guilty in creating the crisis are the ones hand-picked by Obama to get us out. Guys like Geithner and Fed Chairman Ben Bernanke had no inkling the bust was coming because they are committed to the idea of the centrally controlled economy and paper money. Because of that error, they are now unwilling or unable to see their own central part in causing the disaster.

When government enters the market to help, it invariably spreads and prolongs the hurt (for everyone but themselves).

For example, President Obama's "stimulus package" has launched a vast undertaking in road construction. The downside (aside from the vast new debt he gave us) is that other asphalt products are rapidly escalating in price. Need a new roof on your house? It'll cost about 60 percent more, thanks to the stimulus.

It's more than the impact on the homeowners. The housing industry takes the hit. From general building to the specialty of roofing, the recovery (if there is to be one) has been slowed or prevented by the government. Obama createth jobs with one hand and taketh them away with the other.

This is not, and has not been, a free market.

As Woods pointed out, Rep. Ron Paul predicted the collapse perfectly on the floor of the House way back in 2003. Why, Woods asked, hasn't the president (or even the Today Show, for that matter) asked for input from people who were right all along?

Reporter Britt Combs was right all along. He write a weekly column for The McDowell News.