posted on Dec, 29 2006 @ 11:07 PM
Shortly after Alan Greenspan was appointed chairman of the Federal Reserve in August 1987, the stock market crashed. The crash created uncertainty,
which slowed the economy and in turn worsened the ‘savings & loan’ crisis that had been brewing for years. The collapse of countless S&L’s had
softened the real estate market because many of the loans the S&Ls had made to build houses and office buildings turned out to be uncollectible.
These buildings had no immediate use, so they were sold for whatever price they could fetch, often at bargain basement prices.
Given this glut of inventory and the volume of distressed selling, real estate prices nationwide then pretty much went into a bear market, and the
knock-on effect was eventually felt by commercial banks. By 1990, giants like Citibank were essentially insolvent, and it looked like they in turn
were going to need a taxpayer bailout like the one the S&Ls had received only a few years before.
However, taxpayer bailouts are never popular, and another one seemed politically impossible. The cost of the S&L fiasco was becoming all too
apparent, and the public had become sickened by the banking industry’s corruption and management incompetence that led to the collapse of so many
So the Federal Reserve and Mr. Greenspan faced a dilemma. How do you save Citibank and other big banks from collapsing when a taxpayer bailout was
not possible? It was here when the Federal Reserve started to pick taxpayers’ pockets.
The Fed dropped short-term interest rates to artificially low levels, but it kept medium term rates relatively high. To take advantage of this
widening spread, Citibank and other banks borrowed large amounts of short-term funds at relatively low interest rates, and then invested this money in
relatively high interest rate US government notes and bonds, earning the huge profits available from the spread between these assets and
In time all the banks strapped on this feedbag, and within a few years their capital positions were replenished, even after allowing for all of the
bad real estate loans they had to write off. In effect, the banks were bailed out in a hidden way. Taxpayers paid for the bailout, but not one in a
million Americans realized that they had their pocket picked by having their taxes used to pay excessively high interest rates on US government notes
and bonds. What’s worse, this form of pocket picking has led to another equally pernicious form of theft, namely, picking the market’s pocket.