Wasington, D.C. -- (ReleaseWire) -- 02/03/2015 --BENNETT: Nomi Prins is renowned journalist, author and speaker. Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, ran the international analytics group as a senior managing director at Bear Stearns in London, as well working as a strategist at Lehman Brothers and an analyst at Chase Manhattan Bank. In her latest book All the Presidents' Bankers: The Hidden Alliances that Drive American Power, Prins writes about an elite group of men that has transformed the American economy and government throughout the 20th century. The books spans from the Panic of 1907 and the creation of the Federal Reserve, through two World Wars, as well as the question of whether American financial power today is in decline, which is where I want to start. Nomi, welcome to Financial Myth Busting.
NOMI PRINS: Thank you. Good morning.
BENNETT: I want to thank you for this book, because it speaks to the money relationship that favored corporations have with the White House. Can you go into some detail about this alliance in today's political and economic environment?
PRINS: The alliance kind of morphed from being a very tight personal connection amongst the elite in politics, banking and the corporate world. It has evolved to expand beyond that to the lobbyists and lawyers and all the minions and people in between the individual relationships that used to exist. Because of that, there's much more of a bureaucratic relationship between the White House and Wall Street and corporate America, but it's also a much more dangerous relationship, because it has evolved away from the benefit and stability of the American population into simply using the government as a vehicle to make money for Wall Street and corporate America without also balancing the economic stability of America. It used to be that the two could be balanced, but over time, and particularly recently, we see that the relationships are so few that they don't balance anything, they're simply for the benefit of those that are already in control to control more.
BENNETT: You dug through presidential archive documents in doing the research that appears in All the Presidents' Bankers. What are a couple of shocking nuggets you stumbled upon that really stand out?
PRINS: There are a couple of things. For example, FDR in the depression era and after the booming, Roaring 1920s, when he came to power, he also had very tight friendships. I mean, not just associations but friendships—yachting expeditions and college engagements and all sorts of things—with a group of individuals that ran Wall Street. And when he came into power, two other individuals came into their own power bases on Wall Street. One was Winthrop Aldrich, the son of Nelson Aldrich, who was one of the founders of the idea to form the Federal Reserve. Another was a fellow sort of forgotten by history, James Perkins, who became the head of National City Bank, which we know now as City Group. This involves very influential wealthy men, as was FDR. I've written a couple of books where I talked about how the instability of the banking system was one of the causes of the 1929 crash and the Great Depression. But I always thought, well, FDR and Congress and the people were on the same side and decided to regulate the banking system and divide the speculative activities from people's real money, from their deposits and the loans that they were giving real individuals on the ground. But from what I found in the FDR archive that Winthrop Aldrich and James Perkins worked behind the scenes with FDR to divide up their own banks. Before the last legal act was passed which separated speculative from regular activities within the banks, they split up their own banks. They had meetings with their shareholders. They had secret meetings with FDR to basically say, 'look, you know, we prefer confidence in the banking system to just being able to do what we want'. They were sort of visionary men. Winthrop Aldrich, in particular, was the head of Chase for almost two decades. He was also involved with all sorts of presidents. He was involved in helping to finance World War II. He was involved with Eisenhower, as ambassador to the U.K. So he had a lot of political clout but he also was involved in trying to help stabilize the system so that America could grow financially and that was one of the things that happened in the decades that followed the Depression. So what was very interesting, here is this very progressive president, and here are these Republican bankers that are getting together to save the system. That was one of the more interesting things I found which is something that is, of course, lacking in how partisan politics works today and how the relationships of bankers to presidents work today. They are not looking at overall stability, they're looking at their own piece of the pie.
BENNETT: So that was Chase back then. As to Chase now, in your book you described how the Fed, which most people think of as a public institution, is a paying client of J.P. Morgan Chase. How does that work? Why is this bad for average Americans?
PRINS: Well, it's interesting because what happened was, in the wake of the financial crisis, the Fed decided, 'All right, we're going to buy a lot of assets from the banks. We are going to create a zero interest rate policy. We are going to do everything that we can do to sort of come to liquidity or help the system continue along and we're going to say that this is for the benefit of the regular economy,' when in fact, if you're buying assets and securities from banks that you can't sell anywhere else, you're helping the banks. You're basically giving them money for stuff that's in their garage that nobody wants, in a corner gathering dust, and you are saying you'll pay top dollars for it. In addition to that, the Fed bought $1.7 trillion worth of mortgage assets which we came to know as toxic assets which were still sitting on the banks' books after the financial crisis that started in 2008. And in addition to that, the Fed is paying J.P. Morgan, which is one of the big six banks in the heart of the crisis, and one that sold the Fed some of those mortgage securities, to manage the mortgage securities. So not only did the Feds help J.P. Morgan Chase to get rid of some of its securities and pay them well for it, they then turned around and said, 'Here are all the securities, yours plus the ones that we bought from the other big banks, you go manage them and we'll pay you a fee for doing that.' And this is all publicly documented information, but it's not the kind of information that gets out in the most of the media and to the American public. So we're paying several times to the institutions that helped to cripple the economy and are continuing to do so through the Fed.
BENNETT: In your book, you've argued that the financial system has failed and cheap money is artificially inflating asset prices, which creates the illusion of a healthy economy. In the first hour, we talked about Friday's jobs report, which I don't believe. And surprisingly, the DOW hit an all-time high on Friday. In your opinion, is this the latest example of what you're talking about?
PRINS: Exactly, and the problem is when the fake world ultimately blows up, it hurts the individuals who are living in the real world much more than it hurts the individuals living in the fake world, who are largely using other people's money or this cheap money that's been infused into their hands from the Federal Reserve System to help elevate things like stock prices. So, you have this disconnect, as you mentioned, between jobs, not just the number of people who have jobs, but the quality of the jobs, how much they're getting paid for those jobs, whether what they are getting paid is keeping up with what they need to have regular items in life. Whereas, the stock market has been infused with $4.5 trillion of money that the Fed has given the banking system, which has then flown out through the banks to their top clients like hedge funds, to be able to purchase or leverage themselves into lots of stocks and other types of securities, which is why we see this asset problem. It's interesting, just this morning the BIS—the Bank of Institutional Settlement, which was created in the middle of Depression in 1931 to examine what's happening internationally in the banking system—today finally, they woke up and realized in their statement that there might be fragility—that was their word—in the system because of this artificial—that's my word—basically, this infusion of quantitative easing money into the system that's creating bubbles in active prices and in stock prices. So finally, one large entity that's part of overseeing the banking environment has recognized that this is happening. But meanwhile, yes, the DOW's had a great run, and it looks good on paper, it looks good for the people that are looking at some of their statements. But it is a fragile DOW, because it is based on external money not organic growth of companies, not organic growth of their employees or in their product or anything else. Even the companies like Apple, that we know are making more money now after they're buying stock and paying shareholder dividends and sort of evading U.S. taxes and doing things offshore and so forth, and not necessarily because of what they are making or putting into making of their product.
BENNETT: You have a dramatic warning that I want to read to our listeners and then I want your thoughts on it. You said, "When this sham finally buckles and the next shoe falls and rates do eventually rise, the stock market will tank, liquidity will die and the broader economy will plunge into a worse depression than before. We are not there yet, because of these coordinated moves and the political force behind them. But we are on a precarious path to the inevitability." So you think it's going to be worse than the Great Depression? Do you have an ETA on that?
PRINS: The reason I think it's going to be worse is because the Great Depression and even the financial crisis, part one, that we are still going through, were based on a clash of assets and liquidity and banking confidence and derivatives and all sorts of things that were mixed together, but what all of those things which still exist behind the scenes are having now, is this additional multi-trillion dollar subsidy program by central banks throughout the world; so $4.5 trillion from the Federal Reserve, $2.5 trillion from the European Central Bank which is Europe's version of the Fed. China has come in with reducing rates and finding ways to put money into the market. You have a coordinated effort of central banks. They really just throw fabricated money into the financial system which goes first to the largest banks and then into the market, and that we didn't have before. So you have all this extra artificial money plastering over problems that haven't been solved. When the cost of that money, the interest rates, start to rise and the market that has been fed with financial liquidity on a regular basis now for going on six or seven years no longer has the cheapness of that money because rates rise, there will be nothing left to hold the markets up. Not only will the same problems come to the surface again, but also all this additional money that's been thrown out will be eaten through very quickly as well. Markets tend to, when they go down for real, go down faster than they go up, and that hurts more people, that hurts pension investments and all those things where people's real money is. Not money borrowed from banks and not leveraged through banks and not banks' money but actual individual money. That will create a much broader crisis. We've also had corporations eat all of this cheap money and put more debt on their books. And when they have to pay their debt at higher prices, because rates go up, they will lay off more people to cut costs. And so the jobs that we really don't have to begin with that have quality, will decrease even more. So all these things will fit together to create a much worse environment because of the artificiality of the 'fix' that has been thrown into the system today.
BENNETT: We've been doing quantitative easing here in the United States, the process you've been talking about, for six years. The moment we quit quantitative easing, in a well-orchestrated move, the Bank of Japan started it the next day. When do you think the next shoe will fall?
PRINS: The Bank of Japan is so far out of ammunition anyway, they've just adopted what, for some reason, they perceive has been a successful enterprise from the Federal Reserve in terms of quantitative easing and boosting up the market here and creating that artificiality in figures that relate to the economy, but not real figures. And Japan has done it, and now China is doing it. And of course the European Central Bank has done it as well. I think the European Central Bank has probably another half a trillion to a trillion, we're throwing big numbers around, over the 2.5 trillion they have already put in to the system. So that's going to take, I say, about a year, as well as on the same token whatever the Bank of Japan decides to do as well as what the Central Bank of China does. I do think we're looking at kind of a very precarious year coming up, because they're not fully out of the realm of quantitative easing. And in addition, behind the scenes in the United States, the Federal Reserve has stopped their program of quantitative easing through buying bonds. But the banks are starting to buy the bonds that the Federal Reserve isn't buying, so there's again an artificiality of that collaboration going on as well. I think that can last another year just in terms of the speed at which it's happened through these six or seven years already. I think it's going to be very precarious year, because every time there is a statement to the effect that a central bank won't do something or stops doing something, there is a visible mini crash in the market that day and so there's definitely a relationship there. I think we're going to have a lot more of those, because it's spread out. That can create a very vulnerable market this year. But I think there's only so much more we can push that.
BENNETT: Frankly, I thought it was over three years ago.
PRINS: I agree with you and I had the same thought and then I kind of went back to my book and I said, 'You know what, the power relationships are so strong, they're so international between banks, central banks, and governments that the volume of this artificial support is unprecedented in history and that's the only thing that's keeping this game going right now.' It's unprecedented, which is why we were all wrong about the timing.
BENNETT: You can't be logical in this market, that's for certain. I believe research is obsolete until this all blows up. I'm going to quickly ask you. With quantitative easing comes debasement of currency. Do you think that gold could serve as a standard in the future to standardize the dollar or the yen or the renminbi?
PRINS: You'd think so for the same reason that this all should've come to a head three years ago. But the reason that gold hasn't been elevated in value is because everyone who is involved in keeping this game going, from central banks to large private banks, is interested in interest rates keeping paper currency going, because paper currency can be created out of nothing, whereas gold cannot be. And so, the same sort of powers that be that are collaborating to keep paper quantitative easing going on, have no interest in having gold be any sort of reserve anything, because gold creates a stability, gold creates an anchor to artificiality that no one who's benefiting from artificiality wants to have. So yes, it should be more in reserve, yes, it should be an issue, but as we just saw in Switzerland, where they voted against going with gold, there's this power layer and collaboration that's keeping us out of gold.
BENNETT: Thank you, Nomi. Nomi Prins' book All the Presidents' Bankers: The Hidden Alliances that Drive American Power is available on Amazon.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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