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The Financial Crisis: How It Happened, and Why It Is Still Happening

“Stock-jobbers will become the praetorian guard of the government, at once its tool and its tyrant, bribed by its largesses and overawing it by clamours and combinations,” wrote James Madison in 1791.  He and Thomas Jefferson both knew that Alexander Hamilton’s debt and financing policies would ultimately undermine the victory for democracy won in the American Revolution.  And they were right: 75 percent of the American people opposed the recent bailout of the U.S. financial sector, yet that did nothing to stop Washington from committing eight trillion taxpayer dollars to finance purchases, loans, and guarantees, of which the people’s elected representatives in Congress have approved only $700 billion.  The Federal Reserve simply said it had the authority to issue the other $7.3 trillion and could make a plausible technical argument to back up its claim.  No matter: Since Congress is not in control of the bailout, it lacks democratic legitimacy.  “We can’t keep doing this,” Fed Chairman Ben Bernanke said to Treasury Secretary Henry Paulson in mid-September.  “Both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that Congress come in and take control of the situation.”  But given the public’s opposition, Congress was not willing to take control, and Paulson and Bernanke went ahead on their own. ...

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