Now it appears that Brown successfully lobbied for California to get $6 billion in cash and siphon off a total of $18 billion from the $25 billion mortgage settlement with the five largest U.S. banks, who were accused of fraud in the handling of foreclosures and loan modifications. But as Franklin Center Fellow, Steven Greenhut asks in a deliciously sarcastic article: “Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?” Greenhut highlights that the mortgage settlement money is really just another accounting entry, because the real source of cash to fund the “Left Coast” is “implicitly via Federal Reserve/Government coffers.”

Most Americans still snarl about crony capitalism when they think of multinational banks taking $1 trillion slurp of taxpayer’s hard earned cash and then paying themselves record bonuses, while hiking fees and cutting off borrowers. But with the United States President and Congress solemnly telling Americans healthy banks were key to our future, most Americans gritted their teeth and came together to bail-out of banks, insurance companies, and other financial firms.

When the good people of the other 49 states learn the terms of this bail-out, I believe they also come together. But this time they will be showing their fangs and carrying pitch forks! With only 13% of the GDP of the United States, California gets 72% of the settlement proceeds. Undoubtedly, the five national banks will pass 100% of the cost of this settlement on to all their customers nationally. Consequently, 87% of the increased bank fees will be paid by other states increases to bail-out California’s insolvent budget.

Kamala Harris, California’s Attorney General, claimed the settlement may help roughly 250,000 California borrowers by requiring the banks to cut mortgage debt amounts and extend $2,000 payments to homeowners who already suffered foreclosure. But Greenhut points out that powerful interest groups, like the California Public Employees’ Retirement System, which had nothing to do with individual mortgage holders being unfairly foreclosed upon, carved off a piece of the settlement money to bail-out some of their investment losses on real estate speculation that resulted from bad advice.

According to the L.A., a 17-month investigation recently found that some of that bad advice came from Federico Buenrostro Jr., the former chief executive of the $250 billion California public employee pension fund. It seems that he and , and a couple of his pension Board buddies were recently accused of pressuring subordinates to invest billions of dollars of pension money with politically connected firms and strong-armed a for a $4 million in fee to be paid to consultant Alfred J.R. Villalobos, who later hired Buenrostro.

Most Californians refer to Jerry Brown as left wing, but I think he just proved he is more left brained. Left brain thinkers excel in math, language studies and logic problems. Since the banks that settled only control or own only 7.3% of all outstanding single-family mortgages, every time Brown wants to increase spending, he just needs to do another “settlement.” After all, California bank customers only pay 13% of the settlement costs, while the State gets 72% of the proceeds. Either Brown is a very smart or the other 49 governors and their Legislatures are really stupid.

An article: “Why Ron Paul Challenges Liberals”, by Mat Stoller of the Roosevelt Institute and former Policy Advisor to Democrat Congressman Alan Grayson, describes Ron Paul as:

“dedicated first and foremost, to his political principles, and his work with his grassroots base reflects that. Politics and procedure simply didn’t matter to him.”

Stoller confesses that liberals treasure the Federal Reserve as a power-tool of big government they wield to advance their social and military agenda. He concedes Paul and his staff have been effective by working with “vigor and principle” to force greater transparency regarding the Fed’s central banking practices and is disturbed that as Paul’s libertarian movement grows the power of the Fed to advance the liberal agenda will be diminished.

Stoller fears Paul is so secure in his deep conservative convictions he is immune from liberal election attacks and worries the public will prefer a principled libertarian who voices his agenda up front to:

“authoritarian Democratic leaders who will expand healthcare to children and then aggressively enforce a racist war on drugs and shield multi-trillion dollar transactions from public scrutiny.”

Stoller also acknowledges liberals dread Ron Paul’s quest to revive the gold standard will curtail deficit spending on wars and social progress. He states Abraham Lincoln, Woodrow Wilson, and Franklin Roosevelt financed their administrations by ending dollar convertibility into gold.

Lincoln established the Office of the Comptroller of the Currency to charter and regulate national banks, then passed the Legal Tender Act of 1862 to force the new banks to only hold currency not backed by gold; even though gold is written into the Constitution. Stoller slyly comments:

“Prior to Lincoln, it was these United States. Afterwards, it was the United States.”

Woodrow Wilson passed the Federal Reserve Act in 1913 to provide discount financing for commercial and agricultural loans. But once America entered WWI, the Federal Reserve became a tremendous financing vehicle by leveraged discounting of government bonds.

As a Fellow at the ultra-liberal Roosevelt Institute think tank, Stoller is especially reverent of Franklin Delano Roosevelt’s peacetime utilization of emergency war powers to centralize monetary authority during the Great Depression. According to Stoller:

“FDR abrogated gold clause contracts, seized the domestic supply of gold, and devalued the currency. He constrained banks with aggressive regulation and seizures of insolvent banks, saving depositors with the Reconstruction Finance Corporation. He also used the RFC to set up much of what we know today as the Federal government, including early versions of disaster relief, small business lending, massive bridge and railroad building, the FHA, Fannie Mae, and state and local aid. Eventually, the government used this mechanism to finance college and housing for veterans with the GI Bill. Since veterans were much of the population right after World War II, effectively this was the first ever near-national safety net. FDR also fused the liberal and union establishments with the corporate world, creating the hybrid “military-industrial” complex that is with us to this day”

Stoller fears liberals have no moral defense against Ron Paul’s libertarian critique that the Federal Reserve exercises centralized state power to act in an unjust or repressive manner. Stoller pleads that even though it might be immoral, liberals must secure state control over bank financing as a tool to achieve their virtuous social and military objectives. He cautions that as Ron Paul’s libertarianism grows, the public may turn against liberals and their Democratic allies.

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech and Francis Cianfrocca are joined by Newt Gingrich to discuss his plans for entitlement reform, how he would change the Federal Reserve, the Eurozone crisis and more.

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About a month before I wrote my commentary, my old friend Richard Rahn had, without my noticing, written on the same issue in a commentary article published in the Washington Times, but he had gone beyond the simple point I made. Rahn notes that besides suffering the loss of wealth occasioned by the negative real yield on such investments, the investor has to pay tax on the nominal yield—truly a case of the government’s adding insult to injury. He notes that given the currently prevailing rates of interest, rate of inflation, and tax rates, a small investor who earns a nominal yield of 1% and pays a 20% marginal tax rate, while the rate of inflation is 3.5 %, actually ends up paying a real tax rate of 370%. For example, an investor buys a $100,000 CD, earns $1,000 in annual interest, pays a tax of $200, and incurs a loss of $3,500 in purchasing power on the invested principal. Total (nominal) income is $1,000; total real tax (nominal tax plus inflation tax) is $3,700.

This expropriation of private wealth is not accidental.

It is the joint product of the Fed’s near-zero interest-rate policies, the Fed’s money supply increases that underlie the current rate of inflation, and the tax rates established by Congress and administered by the IRS, including the taxation of nominal interest earnings even when they amount to real losses of capital, rather than genuine earnings. The government clearly aims to expropriate private wealth on a massive scale. The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.

The expropriation amounts to a huge sum. For example, the value of the Non-M1 component of the monetary aggregate M2—consisting of savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts—currently amounts to more than $7.5 trillion. If investors lose 2.7% on this investment each year (nominal yield minus the sum of the amount lost via taxation of nominal interest and the amount lost via the inflation tax), the loss amounts to about $204 billion. Because this type of investment is not the whole of the investments subject to this effect, the total amount the government is expropriating comes to a much larger sum.

Because this taking continues year after year, so long as current conditions persist the continuation of this expropriation for another year or two will bring the cumulative amount expropriated in this fashion to more than $1 trillion since the onset of the recession and the Fed’s adoption of the near-zero interest-rate policies, along with its allowance of substantial growth of the money stock and the consequent decrease in the money’s purchasing power. This is a rough calculation for the purpose of illustration. My point does not hinge on a precise estimate, because any well-founded estimate is sure to amount to a gigantic sum.

In sum, the government’s monetary and fiscal authorities are currently engaged in the expropriation of private wealth on a vast scale. Entire classes of investors—especially people who saved during their working years and expected to live on interest earnings on their accumulated capital during their retirement years—are being steadily wiped out. Astonishingly, this de facto robbery is being committed by a government that misses no opportunity to shed crocodile tears over how single-mindedly it seeks to protect the weak and helpless among us.

Twenty years ago, European nations sought to form their own reserve currency to limit the power of the United States in controlling their economic destiny. Following World War II, the U.S. took control of European monetary policy by pouring over $50 billion of cash into the war shattered economies. Over time, sovereign currencies were re-introduced; but the U.S. maintained dominance over each nation’s monetary policy through its reserve currency status.

In 1971, President Richard Nixon exercised this domination in a trade dispute with Europe and Japan by suspending the convertibility of the U.S. dollar into gold, setting wage and price controls, cutting taxes, and placing a 10% surcharge on all imports in an effort stimulate the U.S. economy by devaluing the exchange rate of the dollar. U.S. stock markets had their largest one day rally in history; while foreign stock markets crumbled. Four months later; the United States forced agreements for currency appreciation by Japan of 16.9%, Switzerland of 13.9%, Germany of 13.6%, France of 8.6%, and Britain of 8.6%. This effective devaluation of the dollar is credited as creating 700,000 American jobs and cementing President Nixon’s reelection in 1972.

Having suffered from such manipulation under America’s control over European financial affairs; in 1992 the nations of Europe began creating an economic integration that would lead to the introduction of the euro currency on January 1, 1999. Overnight, Europe became the largest trading block in the world and the euro with €890 billion in circulation became the world’s second reserve currency.

Prior to the introduction of the euro; the southern European nations of Portugal, Italy, Greece, and Spain (PIGS) regularly devalued their currencies to remain competitive with the highly industrialized and sophisticated northern European countries. The introduction of the euro permanently fixed exchange rates for all euro members; but gave the PIGS access to loans from northern banks at less than half their prior interest costs.

The euro currency seemed to be a huge success as Greece, Spain, and Portugal experienced huge real estate booms powered by low interest rates. With the southern nations forbidden to devalue under euro membership regulations; the sales and profitability of German and other northern companies increased due to their higher productivity growth against southern companies. But after the 2008 credit crisis; German banks demanded the PIGS pay higher and higher interest rates. These higher rates crushed real estate prices and devastated the economies of the PIGS.
The ECB may have called itself the “Central Bank of Europe”; but it virtually no ability to act as “lender of last resort”, like the U.S. Federal Reserve that prints unlimited amounts of money in an American banking crisis. As fear of potential defaults caused large depositors to pull money out of European banks and convert euros to dollars; the ECB was incapable of stopping a system-wide run on the banks. In desperation; the ECB was forced to surrender its sovereignty back to the U.S. Federal Reserve by agreeing to engage in 90 swaps of euros for dollars.

Given that U.S. banks operate with half the leverage of the European banks; the short-term structure of these arrangements will put pressure on the European banks to deleverage or risk the Federal Reserve refusing to roll over the swap by demanding repayment of dollars. This “dollarization” of the euro seems likely to be a prelude to defaults in the south as one or more of the PIGS seek to devalue by re-issuing their currencies back to escudos, lira, drachmas, and pesetas. But whatever happens; it seems clear that from now on decisions regarding European monetary policy will now primarily be made in Washington D.C.

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The Bank of England and central banks in the United States, eurozone, Japan, Switzerland and Canada have launched co-ordinated global action to ease a growing credit crisis among eurozone banks.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Bank of England said in a statement.

The central banks are providing liquidity to the financial system by lowering the price on existing dollar swaps, making it easier for banks to get access to dollars.

Eurozone banks have struggled to raise dollars amid Europe’s escalating debt crisis. Many traditional sources of dollar funding, such as US money markets, are no longer willing to make short-term loans to many European banks or are asking too high a price to do so, raising the spectre of the 2008 credit crunch

Christian Schulz, of Berenberg Bank, said: “This shows that central banks across the world continue to cooperate and that the ECB, and its partners, are very aware of the funding stress that European banks are under at the moment.”

Central banks have also agreed to supply liquidity in other major currencies if needed.

Michael Hewson, market analyst at CMC Market, said: “It gives an indication that monetary authorities are prepared to do what is required to stop a freeze up in the funding markets. But, basically all they are doing here is QE (quantitative easing) on steroids. It does not deal with the underlying issues.”

Read more here.

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

Read more here.