Creature From Jekyll Island by G. Edward

In 1975, New York City had reached the end of its credit rope. It had borrowed heavily to maintain an extravagant bureaucracy and a miniature welfare state. Congress was told that the public would be jeopardized if city services were curtailed, and that America would be disgraced in the eyes of the world. So Congress authorized additional direct loans up to $2.3 billion, which more than doubled the size of the current debt. The banks continued to receive their interest.

In 1978, Chrysler was on the verge of bankruptcy. Congress was informed that the public would suffer greatly if the company folded, and that it would be a blow to the American way if freedom-of-choice were reduced from three to two makes of automobiles. So Congress guaranteed up to $1.5 billion in new loans. The banks reduced part of their loans and exchanged another portion for preferred stock. News of the deal pushed up the market value of that stock and largely offset the loan write-off. The banks'

previously uncollectable debt was converted into a government-backed, interest-bearing asset.

In 1972, the Commonwealth Bank of Detroit—with $1.5 billion in assets, became insolvent. It had borrowed heavily from the Chase Manhattan Bank in New York to invest in high-risk and potentially high-profit ventures. Now that it was in trouble, so was Chase. The bankers went to Washington and told the FDIC the public must be protected from the great financial hardship that would follow if Commonwealth were allowed to close. So the FDIC

pumped in a $60 million loan plus federal guarantees of repayment. Commonwealth was sold to an Arab consortium. Chase took a minor write down but converted most of its potential loss into government-backed assets.

In 1979, the First Pennsylvania Bank of Philadelphia became insolvent. With assets in excess of $9 billion, it was nine-times the size of Commonwealth. It, too, had been an aggressive player in the

'80s. Now the bankers and the Federal Reserve told the FDIC that the public must be protected from the calamity of a bank failure of this size, that the national economy was at stake, perhaps even the entire world. So the FDIC gave a $325 million loan—interest-free for the first year, and at half the market rate thereafter. The Federal Reserve offered money to other banks at a subsidized rate for the PROTECTORS OF THE PUBLIC

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specific purpose of relending to First Penn. With that enticement, they advanced $175 million in immediate loans plus a $1 billion line of credit.

In 1982, Chicago's Continental Illinois became insolvent. It was the nation's seventh largest bank with $42 billion in assets. The previous year, its profits had soared as a result of loans to high-risk business ventures and foreign governments. Although it had been the darling of market analysts, it quickly unraveled when its cash flow turned negative, and overseas banks began to withdraw deposits. It was the world's first electronic bank run. Federal Reserve Chairman Volcker told the FDIC that it would be unthink-able to allow the world economy to be ruined by a bank failure of this magnitude. So, the FDIC assumed $4.5 billion in bad loans and, in return for the bailout, took 80% ownership of the bank in the form of stock. In effect, the bank was nationalized, but no one called it that. The United States government was now in the banking business.

All of the money to accomplish these bailouts was made

possible by the Federal Reserve System acting as the "lender of last resort." That was one of the purposes for which it had been created.

We must not forget that the phrase "lender of last resort" means that the money is created out of nothing, resulting in the confiscation of our nation's wealth through the hidden tax called inflation.

Chapter F o u r

HOME, SWEET LOAN

The history of increasing government interven-

tion in the housing industry; the stifling of

free-market forces in residential real estate; the

residting crisis in the S&L industry; the bailout ofthat industry with money taken from the taxpayer.

As we have seen in previous chapters, the damage done by the banking cartel is made possible by the fact that money can be created out of nothing. It also destroys our purchasing power through the hidden tax called inflation. The mechanism by which it works is hidden and subtle.

Let us turn, now, from the arcane world of central banking to the giddy world of savings-and-loan institutions. By comparison, the problem in the savings-and-loan industry is easy to comprehend. It is simply that vast amounts of money are disappearing into the black hole of government mismanagement, and the losses must eventually be paid by us. The end result is the same in both cases.