The massive fraud committed by Wells Fargo bank employees against their customers — opening up bogus accounts to siphon off money, etc — will no doubt result in a whole new round of banking regulations. But what about the biggest fraudster of them all…the Fed itself?
Ron Paul: Hello everybody and thank you for tuning in to the Liberty Report. With me today as co-host is Daniel McAdams and Daniel, good to see you.
Daniel McAdams: Happy Monday Sir.
Ron Paul: Very good. We have a special program today and we both know him very well, Paul Martin Foss, who was in the Washington office for a good many years and he helped me so well with the Banking Committee and the regulations and he knows his stuff very well and he of course just recently attended our conference in Alexandria and did a fantastic job. Paul Martin welcome to our program today.
Paul Martin: Thank you Dr. Paul. I am glad to be with you.
Ron Paul: Good. The subject I wanted to talk about is a subject in general terms and you and I have talked about a lot and that has to do with the Federal Reserve and regulations and I want to start off with dealing with the Wells Fargo scandal, because that is indeed a scandal. I mean there is a lot of fraud involved, but I wanted to sort this out of the type of scandal that occurred in comparison to the fraud and the scandal of the Federal Reserve itself. So, why don’t you give us a little brief update on what is going on with Wells Fargo.
Paul Martin: The comment that Wells Fargo was pretty bad, it was over two million customer accounts that were created without authorization, employees were literally taking money out of people’s accounts and putting them into these new accounts that were opened without authorization, 5,300 employees ended up getting fired as a result of this, so it was really a kind of fraud on a massive scale that you would have expected a kind of the CEO and the Senior Vice Presidents to have caught, at least been aware of and taken care of a lot sooner.
But, obviously like you said it pales in comparison to what the Federal Reserve System is doing and the Federal Reserve has created trillions of dollars out of thin air, its behavior affect hundreds of millions of account holders, not just two million like in Wells Fargo, so Wells Fargo as bad as it is and as deserving as Wells Fargo is of punishment and certainly its employees who engaged in this fraudulent behavior, the Federal Reserve is far more responsible and far more in need of punishment than Wells Fargo is.
Ron Paul: The other day, last week, the Senate committee was investigating and Stumpf the CEO was there and he received some pretty hard questions and all, but as far as the politicians are concerned he handled it pretty well and the big question is what is going to come of all this and we find out today, at least I find out today that if is asked to resign or decides to resign, it shouldn’t be such a bad deal, he is going to get 123 million dollar separation fees, so these guys that are involved in this, obviously he had moral responsibility and I can’t believe that he can be a CEO and not promoting this. This did tremendous things for his company, but he literally has destroyed this country’s credibility, but this is part of the system, where does this come from, how could it be so lucrative that somebody could mess up this badly and get a 123 million dollars, I think he can live rather comfortably with that sum of money.
Paul Martin: The reason why it is so lucrative is because the Fed keeps pumping easy money and it pumps it indirectly through the Wall Street banks, so it’s the fat cats on Wall Street, it’s the CEO’s, the Senior Executives, who are the ones who benefit from all this money, they are basically playing with free money and 123 million dollars, the bank probably considers that also just a drop in the bucket. They have gotten, these banks have gotten a total of 700 billion dollars of bailouts, back during the bank bailouts, their excess reserves that they have gotten from the Federal Reserve are in trillions, so 123 million dollars, they are probably considering that chump change.
Ron Paul: Opening these accounts, it was commission of fraud, but it benefited the bank, because a lot more customers have built up their stock prices and allows guys like Stumpf to make a lot more money and to make more money he has to have easy credit, like you said that credit goes into the banks, so it is related to assist the money. This wouldn’t have happened in free market banking. I mean there is no way they would do it and it probably would have been stopped a lot sooner.
But, what is this story, you and I worked a lot on Dodd-Frank, of course pointed out all the defects, but this whole thing that the consumer protection agency was going to protect the consumer. It doesn’t look like it did a very good job.
Paul Martin: Right. I don’t think they caught this thing, they were kind of, I think they got some credit from Elizabeth Warren, but it was completely unwarranted, they kind of just, once this thing kind of blew up, they kind of piggybacked on it. The first complaints were going into the office of the comptroller of the currency, who is the main regulator, but even they, very early when this stuff was happening, all they were doing was sending letters, you need to stop this, they weren’t actually doing anything to stop this program and the program ended up being way, way out of control and the regulators were just completely asleep at the switch, they allowed this thing to get to the point where two million account holders were affected. Had they actually done what they were supposed to do, we wouldn’t be hearing about this today.
This would have been stopped three or four months ago, but it just goes to show the regulators are not really effective, they are not actually out there to stop any of this bad behavior, they are just basically out there to kind of increase their own power and their own budgets and what is going to happen now is they have shown to have failed and then not to have stopped this program, so what is the result? They are going to get more staff, they are going to get more budgets, the Congress is going to pass more regulations and you are just going to get this in the OCC and the CFPB and all these regulators are going to get more power and more money and more authority and next there is going to be another scandal coming down the pipe probably in a couple of years they are not going to be able to stop that either, but there is a solution to every crisis in Washington, all the regulators fail, give them more money, give them more staff, give them more power.
Daniel McAdams: Sounds like never let a good crisis go to waste. On the same point that Dr. Paul was making, we thought the Dodd-Frank was supposed to protect consumer privacy, but of course the government as the regulator of privacy, they are the biggest violators of privacy.
Paul Martin: Yeah, it’s all just one big mess. It still remains to be seen, now that this is of course becoming a big scandal and is in the public’s eye, all the regulators now want to jump by and SCC I saw is going to be jumping on this, because obviously it was involved with sales targets with something that was used to kind of gain the stock prices, so they are going to to and see whether there were false declarations etc made during the SCC filings, so they are all fighting for scraps now, trying to get a piece of the pie, trying to get their name in the public eye, trying to make a name for themselves and boost their own regulatory careers. The customers who were affected they are not going to get anything out of this, even if they file a class-action law suit and they win, their lawyers are going to get the lion’s share of the money. It’s the account holders who suffer all the time, while the Wall Street prosecutors escape prosecution and the regulators just get more money and more authority.
Ron Paul: They talk about more regulations, the regulations are always placed on some type of market activity and they blame the market, so the market is always responsible for the recessions and depressions, never the Fed. But, they never talk about regulating the Fed. If we had to have regulations to solve this problem, why couldn’t we suggest to them, which they would not accept, why don’t we regulate the Fed and tell them that they are not allowed to set interest rates and they are not allowed to create credit out of thin air. I don’t think they would like that too well, because that would be invading this principle that they are independent and they don’t need the regulation. Of course, I always argue that independence was equivalent to privacy and secrecy, so that they can do whatever they want.
Paul Martin: Right. And Congress has such a cozy relationship with the Fed and other regulators. I mean, you remember that every time there was a hearing up on the Hill, the first thing they do whenever there is a government witnesses, they go overboard in saying thank you for your service and to this country and to the American people, yadda, yadda, yadda. They bend over backwards, they don’t keep the Fed or the OCC, or the CFPB or any of the other regulators on a short leash, they don’t exercise any sort of oversight, they don’t call them to task when they fail.
It is very striking the way that they, rightfully, tore into the Wells Fargo CEO, but you would never ever see them tore into Janet Yellen or Ben Bernanke in the same manner.
Daniel McAdams: You mentioned regulating the Fed, looking into the Fed and by the way Paul Martin I want to thank you very much for speaking at our conference earlier this month. It was, Dr. Paul I am sure you agree it was such a great talk how the Fed facilitates war, it is not exactly what we are talking about today, but it really is so critical to what we do. But, I am going to ask you to speculate a little bit if you don’t mind and as you know I focus a little bit more on foreign policy, but also the Fed and foreign policy sort of intermesh. But, talk about regulating the Fed, what do you think the Fed audit would expose with regard to the Fed’s activities in foreign central banks and even as far as foreign policy of foreign governments.
Paul Martin: I think it would expose everything and we literally don’t know what the Fed is doing, except with whenever they get into a swap agreement, we get supposedly the text of the swap agreements with the foreign central banks, but we really aside from that, we don’t know to what extent the Fed has basically become kind of become the world’s central bank, the world’s lender of last resort.
I was talking to somebody a few weeks ago, I forget who it was, but basically the IMF has been supplanted by the Federal Reserve. What the IMF was supposed to do in terms of international monetary cooperation, the Fed is now doing, through its swap lines with central banks, its dollar liquidity lines and all this stuff. We don’t know any of the Fed’s meetings with foreign central banks, we don’t know how often Janet Yellen is going to Switzerland to talk to the bank for international settlements, we don’t know what kind of liaison agreements there are between the Bank of England, the European Central Bank and the Federal Reserve. We don’t know the extent to which the Fed’s swap lines are stimulating purchases of treasury securities abroad or to what extent the Fed is helping other central banks to purchase their own government securities.
We are literally completely in the dark when it comes to the Fed and foreign activity and that is probably the most effective thing that the Federal Reserve audit would bring to light, where we would finally know exactly who they are meeting with, who they are talking to, what they are talking about, because right now we don’t know a thing.
Ron Paul: The system that we have today, it’s very encouraging, we talk about malinvestment and excess of debt, which they get involved with when they have easy credit and they get the wrong information with interest rates. But, then there is the other thing that compounds this and if they did that, but they were up against the wall of something in the market like a failure, they might be a little more cautious, but they don’t even have to anticipate that because of the moral hazard of the insurance system, the FDIC and also most people no matter how much they talked about changing this too-big-to-fail business, we know that if it is too big to fail they are going to get bailouts and they work on these assumptions and I don’t think they are going to bailout Wells Fargo, I think they are going to keep that thing going for a while, so it’s this bailout. So, I think it’s this moral hazard that you cannot handle under the circumstances that we have today.
Paul Martin: Right and every time you start increasing the regulations in the banking sector to response to all these crisis, all you are doing is raising barriers to entry that makes it more difficult for the smaller banks, the mid-size banks to compete and you are making the big banks bigger, so you are actually compounding the problem and making it worse. The reason you have these Wells Fargo’s and City Bank and Bank of America, these banks that are too big to fail, is precisely because you keep adding more regulations on top of what we already have and make it so that only the biggest banks can compete and only the biggest banks can survive and it ends up making the problem worse and worse.
Ron Paul: When they are working on a regulatory bill, the lobbyists for the banks, they are everywhere to be seen, because they do come in and people who argue more regulations, more regulations, they won’t admit that the people who are going to be regulated have a lot to say about the regulations. We can go all the way back to 1913 and say who is creating this system to protect bank failures and protect the value of the dollar. It was the big banks that did this, so they are always in a position where they are protected. So, these regulations, I see it in medicine too, the FDA and the others with the doctors, they get to write these bills, the drug companies are very much involved. I think the principle was completely wrong and they sort of feed into the system, the people who are honest and earnest and they think it’s a terrible thing and we have to try to protect the consumer, they actually make things much worse.
Paul Martin: Right and like you said the lobbyists are there talking to the Congressional staffers in getting, they are drafting their own pieces of legislation and giving to the staffers and saying here, you want something, this is what would be a good bill. It is completely self-serving. They are the ones who are talking with the regulators, they have meetings with the regulators all the time, their opinions are the ones that have a lot more weight. There is nobody from your taxpayer who is going in and talking to the Federal Reserve or the OCC or the SCC or any of the other regulators in getting their opinions through, it’s always the big money and the power and influence of the big banks.
Ron Paul: What is your opinion about the effort now that we’re hearing now on restoring Glass-Steagall to try to prevent these problems and you and I dissed that once before, but have you noticed that it looks like there is some pressure on even from some free market people, thinking we better just prohibit the banks from doing certain activities.
Paul Martin: Yeah, it’s a type of nostalgia for I guess the good old days what the people perceived to be the good old days in the 1930s, which were anything but of course, where banks were prohibited from engaging in both consumer banking and investment banking, because there was even a thought that they would be a kind of a cross purposes. I mean, there is really nothing wrong with banks getting involved in both those businesses, as long as the taxpayers don’t subsidize investment banking activities through federal deposit insurance. I mean that was the problem with getting rid of the Glass-Steagal, it was that it opened up those activities to federal, being backed, stopped by federal deposit insurance, kind of indirectly. If people want to not subsidize those, great, but the solution is get rid of the deposit insurance, get rid of that implicit or explicit sometimes government backing. It’s not ban banks from getting involved in certain activities.
Ron Paul: That was one of those votes where I voted with the group who liked the idea of regulating the banks, but I was doing it for what you said, that I wasn’t in favor of turning war risk that the Fed and the government has created and the taxpayer has to bail them out, so it’s a messy system. They don’t come from a basic principle of free markets and a prohibition against fraud, they just encourage it.
We have a few more minutes but I wanted to get your assessment on where the next bubble is and when that is likely to happen, because this is essentially what we have gone through. I know not only in your lifetime, but in my lifetime, it’s been up and down ever since we’ve had the Fed and they create the bubbles and the recessions and it keeps getting worse and it seems like we have a pretty big bubble going right now. Is there one particular area that you think is more bubbled up than anything else?
Paul Martin: That is a tough question. There are so many bubbles, I see so many bubbles all over the place, I see fine wines, whiskey, exotic cars, art, you see a whole bunch of really strong price increases there that are much greater than you would expect in a normal market, so there is obviously some money flowing there. Stocks and bonds obviously in a bubble of some sort. I would think that probably the first indicator that the bubble is going to start bursting is when the prices of stocks and bonds start to fall.
Real estate, a little bit of residential real estate and commercial real estate too, we have so many foreclosures, back during the last financial crisis and a lot of those, a lot of properties, I mean really the only underlying strength in the real estate market is through institutional investors who are hedge funds, private equity, etc, who were buying up these properties and creating property management companies and owning tens of thousands of what end up being rental houses. I think that might be another potential bubble area that might burst.
Ron Paul: Paul Martin I think your answer is perfect because this has been going on for a long time and we are ending the stage of how long, how many times can they inflate and have deficit spending and get the economy going again. You described a lot of bubbles out there and that would be a probably pretty good sign that things are grossly out of whack and that a correction could start almost anyplace, but I think we live in very dangerous times.
Paul Martin: It could start at any time. I am very much concerned that in the next year or two we are going to face a financial crisis that makes 2008 look like a cakewalk. The next crisis, because this bubble has been blown so large, there is nothing the Fed in the face of another financial crisis, there is really nothing the Fed can do, it has already purchased thee or four trillion dollars worth of securities, there are just not enough assets for the Fed to continue quantitative easing in the event of another financial crisis to the same extent that they are doing right now.
They are basically, they have kind of hit the wall in terms of the response. The next financial crisis, they are not going to be able to even attempt to try to bail somebody out, so that we are just going to have to suffer the effects and it’s going to be these effects of this huge bubble that they’d blown for the past 8 years. I think it’s going to be very painful and could go on for a very long time.
Ron Paul: Right and I certainly share those concerns. Paul Martin I want to thank you very much for being with us today and we will stay in touch.
Paul Martin: All right, thank you Dr. Paul. It was great to talk to you.
Ron Paul: And I want to thank the audience for being with us today on this very important issue, even though we talked about Wells Fargo, it is an example once again of how government’s regulations and monetary policy messes up and it just calls attention to the organization that has been responsible for so many of our problems and that is the Federal Reserve, You go all the way back to 1913, created the inflation for the war and the depression in 1921 and the inflation of the 20s and the depression of the 30s and on and on and every time there is more and more regulations trying to regulate away their mistakes.
It’s impossible, we need regulations to regulate the Federal Reserve into oblivion, because it is an immoral system and you can’t get morality in the marketplace when you have an immoral system of money. It wasn’t intended, the Founders hated it, they wanted only gold and silver to be legal tender, not fiat money, not paper money and here we are today, not only are we engulfed in it, but the world is engulfed in a fiat monetary system, which is very, very huge and very, very dangerous, but there will be a correction.
I want to thank everybody for tuning in today to the Liberty Report and please come back soon.