The Land of the Free (13 page)

Gerry Levine had arranged a meeting
between President Torres and the chairman of the Federal Reserve, Dr. Rudolph Havenstein. 
Havenstein had previously requested the meeting and had been writing alarming
memos about bond auction failures.  Torres had accommodated him to discuss the
issue, but his encounter with the Chinese envoy had raised a lot of questions
in his mind that he wanted to pose to the Fed Chairman.  The Fed Chairman is
nominated by the President at the conclusion of his predecessor’s term, but his
term does not coincide with that of the President and in fact, outlasts him. 
Once in office, he is in theory unanswerable to any elected official.

“Mr. President, are you aware of
how the Federal Reserve controls the supply of money?”

“Yes, Dr. Havenstein.  I’ve studied
the matter to some degree.”

“Then you know that our balance
sheet has two columns.  Our assets are government bonds that we hold, and our
liabilities are Federal Reserve Notes, or Dollars, that we have issued in
exchange for those bonds.”

“Right.”

“When a bond matures, we collect
the dollars that are paid to us and just buy a new bond with them.  That
rollover of funds keeps the money supply constant.  Until the tenure of my
predecessor, the Federal Reserve only purchased short term T-bills no longer
than three months in duration.  We would always roll them over, but the point
is that we could in theory, without selling anything, shrink the monetary base
of the United States simply by allowing our bonds to mature.  As a result we
had great credibility in safeguarding the value of the dollar and dollar
denominated government debt.”

“The Fed is not normally the
primary buyer of government debt, is it?” asked Torres.

“Yes and no,” answered Havenstein. 
“The asset column of our balance sheet is mostly government debt.  We don’t
hold much gold or other hard assets anymore.  But as I said, in the past it was
all short term debt.  This is how we keep short term interest rates low.”

“You don’t set long term rates?”
asked Torres.

“Not traditionally.  The supply of
dollars we create to buy short term T-bills
influences
long term rates,
but only indirectly by making more money available.  That’s the way it’s been
until recently.”

“You’ve moved to buying longer
dated bonds in recent years?” asked Torres.

“Yes.  The amount of money the
government is borrowing has increased so dramatically that the market was
flooded by long bonds.  The memos I’ve written concern the fact that there is
not enough cash in the world to buy the quantities of bonds the government is
issuing.  We’ve consequently had to step in and buy long term bonds to prevent
government bond auctions from failing, which would shatter confidence in
government finances.”

“I’ve had a recent visit from a
Chinese envoy who saw very clearly that what you’re doing is monetary
inflation, and it is devaluing their holdings of dollars and Treasury bonds. 
Is he wrong?”

“He’s not wrong, Sir.  But if we
had not stepped in, China’s existing holdings of US debt would lose even more
value because we would default.  The reason we had to start buying Treasury
bonds was to pick up the huge amount of slack in the bond market.  That’s the
essence of why I needed to see you.  My deputy Gil Gonneau has confirmed that
China is selling its US government debt, which is consistent with your visit
with their envoy.

“So the choice is death by
inflation or death by bankruptcy?”

“I’m afraid that’s what it comes
to, Sir.”

“Dr. Havenstein, explain to me how
we got here.  And spare me the public relations bullshit, please.”

Havenstein looked visibly insulted,
but continued.  “In short, the supply of money and credit has expanded
continuously since the 1950s, with only occasional pauses.  When the recession
of 2001 arrived, my predecessor further inflated the money supply because of
pressure from your predecessor who was engaging in and had to finance new
wars.  When commodity price inflation kicked in and we raised rates to combat
that, the money supply tightened far faster than any of us could have
imagined.  Loan defaults made the banks’ reserves evaporate, and their ability
to make loans vanished, so credit froze.  You know the rest of the story.  The
resulting crisis created a real danger of reversing the whole monetary
expansion of 60 years’ duration.  We had no choice but to inflate.”

“So how do you prevent the
inflation from getting out of control?”

“By treading carefully.  We’re
walking a tightrope, and one misstep will, as you said, give us death by
inflation or bankruptcy.”

“And if you’re perfect and no
accidents happen that are beyond your control, then all you’ve done is walk on
that tightrope for a while longer.  But you’re still high up in the air and you
still face the same dangers as before.  If anything, the dangers may be worse
for the extra money you’ve created.”

“They’ve managed it pretty well in
Japan.  I think we can do the same,” replied Havenstein.

“25 years of recession with no end
in sight isn’t my idea of success, Dr. Havenstein.  Here’s a quote the Chinese
envoy alluded to that summarizes what he was saying.  ‘There is no means of
avoiding the final collapse of a boom brought about by credit expansion.  The
alternative is only whether the crisis should come sooner as a result of
voluntary abandonment of further credit expansion, or later as a final and
total catastrophe of the currency involved.’”

“That’s Mises,” said Havenstein. 
“It’s not exactly a mainstream view.”

“The mainstream is what got us into
this crisis,” retorted Torres.  “And the students of Mises saw it coming all
along.  They claim your tightrope predicament has no safe solution.  They claim
that you can’t avoid disaster, but can only prolong and increase the misery
before the final disaster.”

“Okay, Mr. President, since you’re
asking for the naked truth, here it is,” said Havenstein.  “The fact is, we
know Mises is basically right.  But what are we supposed to do about it?  If we
followed his advice, we would freeze the money supply, interest rates would
rocket upwards, the government would have to cut out two thirds of its current
cost, and we would have a very deep depression.  That’s what Mises’ students
want.  They think it would be brief.  But are you aware of what it would do? 
It would wipe out most of the wealthy people and corporations in this country
and probably the world.  Think about that carefully.  It means all your
backers, all your friends and enemies, all wiped out.  These are people with
influence throughout the government, in the military and the intelligence
community.  And I don’t just mean in the United States.  Most foreign
governments are also on their speed-dial lists.  If you think you have problems
now, imagine the media they own holding you personally responsible for a
complete collapse of the economy.  I’m talking unemployment of 50% or more,
riots in the cities and severe shortages of food and gas.  What emerges on the
other side when the recovery comes won’t resemble today’s order.  There will be
new elites, and they won’t owe you anything.  In fact, they may put you and me
and the rest of the government on trial.  The world we live in will be lost,
and the institutions we’ve built will disappear.   My public comments are
designed to keep the bond market stable, without which we risk the scenarios I
just described.”

“That’s the honesty I wanted.  So
the people will continue to suffer so we can spare the elites from being wiped
out.”

“I’m afraid so, Sir.”

“And the Chinese have a valid
point, don’t they?  We are going to rip them off on the value of our bonds.”

“Yes, Sir, they do.”

“And you’re stuck buying our debt,
and will continue to be.  There’s no real exit strategy.”

“No, there’s no exit strategy.  As
soon as we stop, the economy will collapse.”

“So the collapse of the dollar is
inevitable, and your memos to me are only attempts to deflect the blame. 
You’re just preemptively trying to shift the blame.”

“The Federal Reserve may have
provided the champagne Mr. President, but the politicians drank it at one
sitting.  If I can’t close the bar, I at least want the record to show I did
not condone this binge.”

“You can go now, Dr. Havenstein. 
The truth is every bit as bad as I feared.” 

Lyle and Jess sat in Ahmed’s
Montreal apartment, sipping coffee and telling him their story.  By the time
they finished, he was willing not only to help out but to participate if they
needed him.  And he was more than willing to create new identities for them. 
Ahmed was too proud to use his forging skills to defraud anybody financially. 
He was always careful to establish that this was not going to be the objective
if he was to render his services.  He specialized in concealing people, or to
facilitate their travel without the complications that might arise were their
true identities to be known.  And with the advent of computerized travel
databases, it was not possible to simply invent identities.  A successful
forger of documents had to have a reliable contact inside the government who
could furnish computerized codes that would identify people who already existed
in the databases.  He would then choose a plausible identity that already
existed and alter the biometrics to match the new recipient of the documents. 
By the time they left, Ahmoudi had photographed the couple, taken essential
measurements of height and weight and promised to find them appropriate
identities that would not attract undue attention.

Lyle and Jess checked into a motel
on the south shore of the St. Lawrence River then crossed the Victoria Bridge
back to the old port of Montreal.  With some time on their hands, they decided
to explore the area, and walked for some time among the old stone buildings and
cobblestone streets that contained some of the few architectural flavors of old
Europe in North America.  As it was an uncommonly warm fall day, they settled
on a restaurant with an outdoor terrace, from where they could watch the action
on the Place Jacques Cartier in front of them.  Caricaturists were drawing
faces, while street performers put on various shows.  “So what were you doing
in Israel, smuggling Palestinians out of the country?” asked Jess, finally
getting her opportunity to ask the obvious question. 

“I was a civilian
contractor for the Tranche Corporation, having joined them right out of law
school.  We were hired to do an economic analysis of what Western investment
could do for the Palestinians in the West Bank.  Our projections were hugely
exaggerated, of course.  We used a computer program designed to produce
exaggerated numbers.  Our objective was to persuade them to take on big loans to
buy a lot of stuff from major corporations.  Having a nation in your debt can
be very useful in subsequent negotiations.  We never did the lending.  We only
sold them the concept of development, while simultaneously working with the
World Bank, who would step in and fund it.

While we were in
the West Bank, our group lived among the Palestinians for a while, and we got
to know a group of them.  Ahmed was one, and he was already an expert forger
back then.  You have to understand that for him, living in a society like that
where you can never take your personal safety entirely for granted, it’s very
important to do little favors for anybody powerful who asks.  This keeps you in
good standing with the powers that be, and that can sometimes literally be a question
of life-and-death.

Ahmed forged the
odd document for the Israelis, which they plainly didn’t need since they had
plenty of in-house expertise.  Most likely, those jobs were given to him so
that if the papers were tracked back to their source, the Israelis could ensure
they were tracked to some poor Arab, rather than to the Mossad.  Of course he
also forged for the Palestinians, and they kept him a little busier than the
Israelis.

As part of our job
with Tranche, we traveled between Israel, the West Bank and Jordan quite often,
and our security status was such that we were rarely questioned at any of those
borders.  That could pose certain problems for us when using our IDs to check
into hotels in Jordan.  If word ever came back what an easy time we had
crossing the border, the locals might assume we were Mossad, or CIA.  To be
honest I’m not sure which would be worse.  So we had Ahmed get us documents
making it seem we were UN observers of human rights compliance, and that was
good enough for the Jordanian hotels, though we regularly got an earful about
the practices of the Israelis.

One morning, Ahmed
came knocking on our door in a panic.  The Mossad was looking for him, or so he
believed.  In his mind, he was a dead man if they found him.  It looks as though
one of his customers had crossed a big line, maybe arms smuggling or planning
terrorism.  I never learned what it was, but it was obviously something big
enough that top politicians heard about it and ordered everyone connected to be
rounded up.  If they’d asked their own intelligence people, they would have
learned Ahmed was harmless and just trying to survive.  But when politics gets
involved reason goes out the window, and I think he was in real danger.  So I
hid Ahmed for a few days, then I hid him in the back of the vehicle on our
regularly scheduled trip into Jordan and got him out.  He’s convinced I saved
his life, and he may be right.

As for me, I
quickly soured on the mission we were tasked with at Tranche, despite a
financial package you simply would not believe.  I decided to come back home to
rejoin dad’s law practice.  I’m paid far less, but I made a small fortune at
Tranche, so I have enough money to last a lifetime.  Most importantly, I can go
home at the end of the day knowing I haven’t hurt anyone.  On some days, I even
think I’ve helped out.”

“That’s really saying something,
for a lawyer,” quipped Jess. 

“There’s no shortage of scumbags in
law,” replied Lyle.  “But not many of the scumbags are running small town law
offices, doing real estate transactions, wills and speeding tickets.  Yet our
reputation is made by the ones in New York high-rises.” 

“I was only kidding, Lyle,” replied
a slightly chastened Jess.  “I respect and admire what you did, putting
morality first and money second.  Those guys at Morningstar, I don’t think you
have anything in common with them.  Contrast how they made the key decisions in
their lives.”

Lyle looked seriously at Jess. 
“They represent the extreme of the system I couldn’t take.  ‘Security’ is not a
defensive word to them, except insofar as how to keep their murderous plots
secure, as in secret.  What Tranche couldn’t achieve with promises and bribery,
Morningstar would come in and finish in their dirty way.”

Despite the unpleasant subject
matter, Jess couldn’t help her excited curiosity.  “You mean overthrowing
governments, like Kermit Roosevelt’s takedown of Mosaddegh in Iran?”

“That’s how things started, but it
was too messy,” replied Lyle.  “Mosaddegh was unfortunately a democratically
elected leader.  The Shah was too obvious as an American plant, with a brutal
human rights history.  The fact it’s still talked about shows how sloppy it
was.  It also led directly to the relationship we have with Iran today.  Even
before Khomeini overthrew the Shah, it was obvious things had to be done in a
cleaner way.  So now, when a company like Tranche fails, you sometimes see a
mysterious plane crash.  Other times mysterious organ failure.  ‘There must be
50 ways to lose the leader,’ to paraphrase Paul Simon.”

Jess ate her appetizer and sat
silently for some time, thinking.  She finally spoke up.  “So I get it.  They
work for the government and do stuff the government wants done but doesn’t want
known.  But how do they go to suddenly working against the government?”

“Money.  It simply means someone
else made them a better offer.  Knowing what kind of money gets thrown around
in Washington, it had to be one hell of an offer.”

“Perhaps from someone with a lot of
extra money and some outstanding issues with the US government,” observed Jess.

“China?” asked Lyle.  “That’s
possible I guess, but it’s not how I imagine China acting.”

They finished up and both being
exhausted, retreated to the motel for some sleep.  Lyle had booked them
separate rooms, and they exchanged awkward glances as they retired for the
night.  In the morning they would see what identities Ahmed had fixed for them.

…

“Josh and Rachel Feldstein? 
Where’d you get those names?” asked Lyle.  Ahmed handed them their new
passports and drivers’ licenses.

“Neither one of you speaks French,
but you live in Montreal.  We have a sizable Jewish community here who mostly
don’t speak French.  It was the only thing that would work.”

Lyle looked over the documents and
was clearly impressed.  “The only thing missing is a set of credit cards.”

Ahmed shook his head:  “These are
real people, and they haven’t harmed me.  No way will I destroy their credit
ratings.  Besides, when you fake passports and driver’s licenses some
bureaucrat will fill out a form.  But if you fake credit cards, the FBI will
scour the earth until they find you.  They prioritize crimes against money
pretty high.”

“Don’t sweat it,” replied Lyle.  “I
still have contacts in the banking sector who I think can help us.”

Jess was less convinced. “You mean
we just pretend to be these people?  What if they start asking us questions
about their background?  I don’t know anything about them.  I don’t know much
of anything about Montreal.”

Ahmed waved off the objection.  “I
guarantee nobody will bother you.  I like to pick Jews because they pay their
taxes, they have a clean criminal history, and they’re not on any terror watch
lists.  There’s no more a hassle free way to travel.  I wish I could do it, but
I look too Arabic.”

With their identities established,
Lyle made a few phone calls and obtained the number for his new credit card, to
which he had transferred a sizable debit balance.  He would pick up the
physical card a little later at a local branch.  He used the new card number
immediately to book a trip to Aruba for the following day.  Then in a separate
transaction, Lyle booked them from Aruba to Panama City, with a connection from
there to Contadora Island the following morning.

Jess and Lyle then spent the
afternoon shopping on Montreal’s St. Catherine Street, picking out a small,
functional, yet plausibly vacation oriented wardrobe.  “You’d think the whole
population of Montreal replaced their wardrobe every weekend,” joked Jess,
amazed at the volume of people all doing the same as themselves.

“You’re not far from the truth,”
replied Lyle.  “Just pay attention to how well dressed they are.  Fashion is
huge in Montreal among the French.  We can afford to be a little style
challenged, since that’s how they see the English speakers anyway.”

They made their way through a
number of lavishly stocked clothing stores, and Lyle picked up the tab for
everything.  “Lyle, you really shouldn’t be spending your money on my stuff,”
protested Jess.  “With dad’s estate coming to me, I have some money of my own.”

“You need your money for a new
start in life without parents to help you along.  Besides, I have a lot of what
I call ‘dirty money.’  It’s money I saved from my bonuses when I was with
Tranche.  The chance to spend it opposing an agenda involving Morningstar is
just too satisfying.”