Sent: Friday, July 31, 2009 7:08 AM
Subject: Reality Check - Why Bernanke Is In Panic Mode

                Gary North's REALITY CHECK

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     Bernanke video: He stutters; he stammers; he is
     in visible panic mode over Ron Paul's bill to
     audit the Federal Reserve.  Watch it.  You'll
     love it!  Then send it to your friends.


Issue 879                                     July 31, 2009


     Usually, when Ben Bernanke is interviewed, he has the
demeanor of a college professor in the presence of freshman
students.  Of course, as a full professor, he did not have
to teach freshmen.  That is for untenured assistant
professors to do.  Stammering and stuttering are therefore
a real departure for him.  There is a reason for this.

     For the first time since 1914, there is a public
debate in Congress over the Federal Reserve's power.  Never
before has a majority of the House of Representatives
called for what should always have existed: Congressional
scrutiny over the FED's money.
     Bernanke says that Ron Paul's bill to audit the
Federal Reserve is a bill to audit Federal Reserve policy.
Yet the bill says nothing about auditing policy.  So, what
is he talking about?

     Bernanke says that Congress can have access to an
audit at any time.  Sure it can -- an audit vetted and
sanitized by the FED, where no one knows which banks got
what bailout money.  This is an audit in the way a CIA
audit is an audit.  The main differences are these: (1) the
CIA legally operates only outside the borders of the United
States; (2) the CIA can assassinate any uncooperative
Congressman who insists on a full audit.  The FED does not
have the second power, but it is not limited by the first

     What has Bernanke panicked is this: the Federal
Reserve has bailed out the biggest banks and has let over
50 little ones die.  This is crony capitalism at its most

     The threat is that Congress will discover what should
be obvious: the biggest banks last October almost went
bankrupt.  Bernanke and Paulson admitted this to
Congressional leaders.  This is how they got the leaders to
authorize the Treasury bailout.  This is why the FED
swapped marketable Treasury debt for unmarketable toxic
debt at face value with the biggest banks.

     Which banks?  The FED refuses to say.

     This is the heart of the matter.  This is what has
Bernanke in a panic.  If Congress compels a full audit -- a
real audit, not a FED-controlled audit -- individual
members of Congress will discover that the American
financial system is a house of cards.  A few of them will
release the results of the audit to the public.  This will
include Website publishers, who will go over the audit,
line by line.  The mainstream media will face being scooped
by newsletter writers, so they will try to publish first. 

     The public will find out which banks are not safe.
This is what has Bernanke in panic mode.

     The public will pull deposits out of the biggest,
least safe banks and open new accounts at banks that look
safer.  That will bust some very big banks.

     There is no way that the FDIC could cover the losses
of even one of these giant banks.  It is down to $12
billion in assets, mostly T-bills.  It would have to come
to Congress for the line of credit that Congress has
extended: $500 billion.

     The banking cartel would face a breakdown.  Why?
Because the public would finally learn which big banks got
how much money, how much Treasury debt for toxic assets,
and on what terms.


     Bernanke says this bill is all about criticizing
Federal Reserve policy.  Not really.  It is all about
exposing policy to the public, and letting them decide
where to deposit their money.

     This thought of depositors finding out which banks are
at risk is what the Federal Reserve was created in 1913 to
prevent.  The banking cartel must prevent banks runs from
spreading.  If the public had explicit information on what
the FED did and why, the public would be in a position to
pull their money out of illiquid, economically insolvent
large banks.

     Bernanke feigns a fear of Congress setting policy.
What he is afraid of is depositors setting policy.  He does
not want depositors to see which banks are at risk.

     The bankers live in fear of their depositors.
Depositors can bust a bank in a matter of days.   All they
need to do is write a check or send a bank wire transfer
from their present bank to a different bank.  If too many
depositors pull money out of Bank A to send to Banks B, C,
or D, Bank A goes under.  The FDIC has to have a Friday
afternoon emergency session where it absorbs the bad assets
of Bank A and opens bidding for the good assets.

     The big banks love this when they are not the targets
of the bank run.  They can buy up millions of dollars of
good assets, while palming off the bad assets to the FDIC.
If the FDIC can't cover the losses, then Congress picks up
the tab.  A sweet deal for the surviving banks!

     But what if the surviving banks are being held
together with accounting gimmicks.  Example: the FED
"lends" Treasury bills (marketable) at face value to big
banks that are sitting on a hundred billion dollars in
unmarketable assets: bad real estate loans.  The receiving
banks list the Treasury bills as their capital.  The
government auditors are then instructed to evaluate the
solvency of the banks in terms of the quality of their
loans -- in this case, T-bills.  No problem!

     But these assets are borrowed from the FED.  In
theory, the FED can force the banks to swap back at face
value.  At that point, the banks are technically bankrupt.
These assets have no liquid market. 

     The solvency of the American banking system rests on
smoke and mirrors.  Bernanke knows this.  Congress is
ignorant.  Congress thinks things are probably OK.  But a
majority of House members want to be safe.  They don't want
the folks back home to believe that they are asleep at the
wheel, which Congress has been since 1914 with respect to
the Federal Reserve.  So, a majority of House members co-
sponsored Ron Paul's bill to audit the FED.

     Barney Frank understands the threat.  He has bottled
the bill up in committee.  This way, members who support
the bill can tell the folks back home that it's not their
fault.  If they are asked about this, they can say, one by
one, "I am really sorry.  I did my best, but the bill is
bottled up in committee.  There is nothing I can do." 

     Of course there is something they can do.  They can
vote to bring the bill to the floor for a vote.  There,
they will be exposed to the folks back home.  Did they vote
"yes" to audit the FED?  By co-sponsoring the bill, they
can tell the folks back home, "I'm with you on this."  By
letting Frank bottle it up in committee, they can plead
powerlessness.  Nice.

     It's all smoke and mirrors.  It's all about not
letting depositors find out how their banks are doing.


     Bernanke said this on-camera: "The public does not
want Congress to set monetary policy."  If that really is
the case, then it is odd what the United States
Constitution says about this.  Consider Article 1.

     Section 1. All legislative powers herein granted
     shall be vested in a Congress of the United
     States, which shall consist of a Senate and House
     of Representatives.

     Then Article 8 spells out the powers of Congress.
These include:

     To coin money, regulate the value thereof, and of
     foreign coin, and fix the standard of weights and

     To provide for the punishment of counterfeiting
     the securities and current coin of the United

     That surely appears as though Congress does have
lawful power over money.  That in turn seems as though the
public can ask Congress to fulfill its duties.  That seems
as though Congress has the legal right to audit or set
policy for the private agency -- the Federal Reserve Bank
of New York -- that executes the monetary policy of the
government agency, the Board of Governors of the Federal
Reserve System.

     The way that the public kept both Congress and the
commercial banks under control was through the silver
standard, up until about 1815, and then by the
international gold coin standard until late 1913, when the
Senate rushed through the Federal Reserve Act when most
members had gone home for the Christmas recess.  President
Wilson signed the bill into law that evening: a very fast

     When Dr. Bernanke showed contempt for Congress in the
name of the American people, he forgot to mention an
alternative to both the Federal Reserve and Congress: the
gold coin standard.  That system lodged the power of the
veto in the hands of the public.  That was why commercial
bankers, central bankers, and politicians joined forces to
ridicule both the gold standard and the earlier silver

     A precious metal coin standard -- coins payable at a
government-fixed price on demand for paper money -- gives
the public too much authority over monetary policy.  This
gives them too much authority over government tax policy:
no inflation tax.

     The Federal Reserve Act transferred legally sovereign
power over money from Congress to the Board of Governors of
the FED.  The Board of Governors labored under the
restraint of the gold coin standard domestically until
Roosevelt unilaterally abolished it in 1933.  Then Nixon
unilaterally abolished the last remaining traces of the
international gold standard in 1971.  That let the Federal
Reserve System with nearly uncontested power over money,
with only the infamous and much-denigrated "bond
vigilantes" possessing an independent veto over FED policy.

     Bernanke is adamant: any attempt by Congress to
monitor the activities of the FED is an assault on Federal
Reserve sovereignty.  The Constitution lodges such
sovereignty in Congress, but Congress delegated this
sovereignty to the not-yet operational Federal Reserve in
late 1913. 

     Ron Paul's bill is the first bill ever to gain
widespread support in the House to transfer the right to
audit the FED to Congress.  This is the first time since
1914 that any Congressman has persuaded a majority of his
colleagues to assert the legal sovereignty that the
Constitution delegates to Congress with respect to money.
This is why Bernanke is in panic mode. 

     This is the first chink in the FED's armor since 1914.
This bill is a nightmare for the FED.  Yet the FED's
staffers are going to get paid their above-market salaries
and keep their fully vested pensions, with or without an
audit by Congress. 


     The real panic is in the boardrooms of the largest
banks.  This bill will allow Congress to see the specifics
of the sweetheart arrangement that big banks have had with
the FED.  Congress will get the statistical facts, and
newsletter writers will interpret them for subscribers --
rich subscribers.

     The big bankers know that their banks would be
insolvent without Federal Reserve bailouts, Treasury
Department bailouts, and smoke-and-mirrors accounting.
They know that any light thrown on the system's smoke-and-
mirrors accounting will reveal the insolvency of the
biggest banks. 

     The directors of these banks do not want the public to
be able to get access to these facts by means of a full-
scale audit of the Federal Reserve System.  The paper
trail, meaning the digital money trail, leads to their
banks.  This terrifies them.  It should.

     The big bank bankers are now in full defensive mode.
They see the threat.  They dare not go public with warnings
about letting the public gain access to full information
about the bailouts since last September.  This would appear
to be self-serving, which it would unquestionably be.  So,
they let Bernanke be their spokesman, as if Bernanke and
the Board of Governors were not enforcers of the fractional
reserve banking cartel.

     This puts Bernanke on the spot.  He dares not tell his
interviewers that the United States Constitution lodges in
Congress legal sovereignty over the money of the United
Stares.  He does not want to remind the public of this
Constitutional fact.  So, he denigrates Congress as
incompetent to set monetary policy.  He is therefore
contemptuous of the Constitution, but he dares not let this
slip out.  That would not be prudent.

     If Ron Paul's bill is kept bottled up, this will be
grist for the mill of a growing number of Americans who
have only recently learned about the existence of the
Federal Reserve System.  From the beginning, the Federal
Reserve was designed to be a mystery to the public.  This
strategy succeeded for over 90 years.  But Ron Paul's
Presidential campaign at long last began to gain attention
for the FED.  The campaign took place in 2008.  That was
the year of the crash and the desperation bailouts.
     This was bad timing for the FED.  This bad timing led
this year to widespread member support in the House of
Representatives for an audit of the FED.  Worse yet, the
bill was sponsored by Ron Paul -- the FED's greatest
Congressional opponent in this generation.  This is very
bad news for the banking cartel.  It took place on
Bernanke's watch.  He is in panic mode.


     The Federal Reserve has lost a lot of its legitimacy.
It has also lost a lot of its secrecy.  By opposing the
audit, Bernanke is positioning himself as an anti-
democratic representative of the Wall Street banks.  Of
course, this is what every FED chairman has been.  But this
is the first time since 1914 that any FED chairman has had
to adopt this positioning in full public view.

     This is bad news for the Federal Reserve.  When the
economy gets worse, as it will, the FED will receive its
share of the blame, which is considerable. 
     Bernanke is the primary visible agent of the FED.  He
will no longer get a free ride.  The critics are at long
last getting a hearing by the informed public -- the people
with lots of money deposited in large banks.  This is why
he has been going on television to present his case.  No
other FED chairman in history has been forced to do this.
This is a sign of the degree of panic in the boardrooms.

     The more often Bernanke goes on TV, the more people
will think: "Methinks he doth protest too much."

     This is a very good thing.

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