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Investing Ideas Inside the Highest-Stakes Gathering in Financial History
Investing Ideas Inside the Highest-Stakes Gathering in Financial History 
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By Chris Johnson Dear Reader, Bullish on Bailouts. That's the best way to describe what we saw last week, as investors bought equities while evidence continued that government aid would be available to help the market through its current crisis. |
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| Inside the Highest-Stakes Gathering in Financial History |
| Thursday, 26 July 2007 | ||||||||
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By some estimates, one-quarter of the entire world's wealth was represented among the seven attendees. It was 1910. The meeting was such a secret, the world didn't learn about it until many years later, after it had achieved its goal... the founding of our current bizarre money and banking system. It's a system that allows bankers to take big risks knowing taxpayers will bail them out. The first inkling of what transpired was reported by B.C. Forbes (who later founded Forbes magazine). He wrote this in "Leslie's Weekly" on October 19, 1916: "Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness... Sneaking on to an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was mentioned lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance." I am writing to you now from The Club, which was restored in 1986 and is now a resort. According to resort's current brochure: "The Jekyll Island Club was described in the February 1904 issue of Munsey's Magazine as 'the richest, the most exclusive, the most inaccessible club in the world.' Its impressive members included such luminaries as J.P. Morgan, William Rockefeller, Vincent Astor, Joseph Pulitzer, William K. Vanderbilt and other recognizable names, on the roster were Macy, Goodyear, and Gould." My wife surprised me with a quick getaway here for my birthday. She had no idea of the history here... which is where the foundations for our Federal Reserve System were laid. At this meeting, it was decided that the Federal Reserve should be created, and it should control the price of money (interest rates). But why does the Federal Reserve control the price of money? In short, because the richest and most powerful financiers in America secretly decided this is the way it should be 100 years ago on Jekyll Island, Georgia. At a conference I spoke at several years ago in New Orleans, legendary economist Milton Friedman told attendees, "We should abolish the Federal Reserve, as it was a flawed system in the first place." He blames the Federal Reserve for the Great Depression – the very thing it was created to prevent. (I met Dr. Friedman backstage at the conference. It had to be a sight... I am a solid six-foot-four. And Friedman was only about five feet tall.) The current head of the Fed, Ben Bernanke, actually agrees with Friedman about the Depression, but says "it won't happen again." I disagree with Ben... The greatest housing boom in the history of America just happened. What was the cause of the boom? The Federal Reserve...
In 2001, the Federal Reserve quickly started lowering short-term interest rates, eventually leaving them at 1% for a very long time. We've never seen rates that low since we went off the gold standard. The result was obvious: People borrowed lots of money. The Fed forced interest rates down to an artificially low level, which had all kinds of effects. One of those effects was people getting into adjustable-rate mortgages at 1% interest. Now, today, we're stuck with the mess from this. If the Fed hadn't cut interest rates to an artificially low level, then we wouldn't be here now, I don't think. Some people get really worked up about the Fed and its power. But it's simply a fact of life, and we're not going to change it. The best thing to do is take advantage of it. I call it "taking the government to the cleaners" in True Wealth. For example, when the government started cutting rates, we started buying what I call "virtual banks" (they're mortgage REITs). The reason was simple: These things make money on the spread between short-term rates and mortgage rates, in essence. So when the Fed creates an artificially large spread between these two rates, we can make artificially large profits. And we did... shares of Annaly (NLY) our favorite "virtual bank" doubled from late 2000 to 2002. I don't think it's right for the Federal Reserve to control short-term interest rates. It doesn't make sense to me. But I'm not going to get worked up over it. I'm going to take advantage of it when opportunity presents itself... Good investing, Steve Source: Daily Wealth
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