Global Economic
Trend Analysis

Recent Posts

Saturday, July 18, 2009 7:56 PM

Six Reasons to Abolish the Fed

Mish Moved to MishTalk.Com Click to Visit.

In Dismantling the Temple, William Greider lists Six reasons why granting the Fed even more power is a terrible idea:

1. It would reward failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction. During the past twenty-five years, it failed to protect the country against reckless banking and finance adventures. It also failed in its most basic function--moderating the expansion of credit to keep it in balance with economic growth. The Fed instead allowed, even encouraged, the explosion of debt and inflation of financial assets that have now collapsed. The central bank was derelict in enforcing regulations and led cheers for dismantling them. Above all, the Fed did not see this disaster coming, or so it claims. It certainly did nothing to warn people.

2. Cumulatively, Fed policy was a central force in destabilizing the US economy. Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations. Abandoning its role as neutral arbitrator, the Fed tilted in favor of capital over labor. The institution was remolded to conform with the right-wing market doctrine of chairman Alan Greenspan, and it was blinded to reality by his ideology (see my Nation article "The One-Eyed Chairman," September 19, 2005).

3. The Fed cannot possibly examine "systemic risk" objectively because it helped to create the very structural flaws that led to breakdown. The Fed served as midwife to Citigroup, the failed conglomerate now on government life support. Greenspan unilaterally authorized this new financial/banking combine in the 1990s--even before Congress had repealed the Glass-Steagall Act, which prohibited such mergers. Now the Fed keeps Citigroup alive with a $300 billion loan guarantee. The central bank, in other words, is deeply invested in protecting the banking behemoths that it promoted, if only to cover its own mistakes.

4. The Fed can't be trusted to defend the public in its private deal-making with bank executives. The numerous revelations of collusion have shocked the public, and more scandals are certain if Congress conducts a thorough investigation. When Treasury Secretary Timothy Geithner was president of the New York Fed, he supervised the demise of Bear Stearns with a sweet deal for JPMorgan Chase, which took over the failed brokerage--$30 billion to cover any losses. Geithner was negotiating with Morgan Chase CEO and New York Fed board member Jamie Dimon. Goldman Sachs CEO Lloyd Blankfein got similar solicitude when the Fed bailed out insurance giant AIG, a Goldman counterparty: a side-door payout of $13 billion. The new president at the New York Fed, William Dudley, is another Goldman man.

5. Instead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator. A new superclass of forty or fifty financial giants will emerge as the born-again "money trust" that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington. The Fed, having restored and consolidated the battered Wall Street club, will doubtless also shield a few of the largest industrial-financial corporations, like General Electric (whose CEO also sits on the New York Fed board). Whatever officials may claim, financial-market investors will understand that these mammoth institutions are insured against failure. Everyone else gets to experience capitalism in the raw.

6. This road leads to the corporate state--a fusion of private and public power, a privileged club that dominates everything else from the top down. This will likely foster even greater concentration of financial power, since any large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify. Most enterprises in banking and commerce will compete with the big boys at greater disadvantage, vulnerable to predatory power plays the Fed has implicitly blessed.
Greider was talking about reasons not to give the Fed more power, but the reasons read more like a list of why the Fed should be abolished.

There are far more than 6 reasons. Consider his first point.

1.1 The Fed rewards failure
1.2 The Fed was a co-author of the destruction. During the past twenty-five years, it failed to protect the country against reckless banking and finance adventures.
1.3 The Fed allowed, even encouraged, the explosion of debt and inflation of financial assets that have now collapsed.
1.4 The Fed did not see this disaster coming. It certainly did nothing to warn anyone.

You can literally take any of his six points and come up with additional reasons.

Point number 6 is certainly an abbreviated version of my Fed Uncertainty Principle.
Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
The article is a long and mostly worthwhile read but unfortunately as is often the case in these matters, Greider comes to horribly incorrect conclusions about what should be done.

On Page 4 Greider states:
In this emergency, Bernanke essentially used the Fed's money-creation power in a way that resembles the "greenbacks" Abraham Lincoln printed to fight the Civil War. Lincoln was faced with rising costs and shrinking revenues (because the Confederate states had left the Union). The president authorized issuance of a novel national currency--the "greenback"--that had no backing in gold reserves and therefore outraged orthodox thinking. But the greenbacks worked. The expanded money supply helped pay for war mobilization and kept the economy booming. In a sense, Lincoln won the war by relying on the "full faith and credit" of the people, much as Bernanke is printing money freely to fight off financial collapse and deflation.

If Congress chooses to take charge of its constitutional duty, it could similarly use greenback currency created by the Federal Reserve as a legitimate channel for financing important public projects--like sorely needed improvements to the nation's infrastructure. Obviously, this has to be done carefully and responsibly, limited to normal expansion of the money supply and used only for projects that truly benefit the entire nation (lest it lead to inflation). But here is an example of how it would work.

The reform of monetary policy, in other words, has promising possibilities for revitalizing democracy. Congress is a human institution and therefore fallible. Mistakes will be made, for sure. But we might ask ourselves, If Congress were empowered to manage monetary policy, could it do any worse than those experts who brought us to ruin?
Letting Congress Manage Money Supply Is Pure Insanity

If there is one institution that could do a worse job at managing money supply than the Fed it would have to be Congress. Legislators have made a mess of everything from Fannie Mae, to Medicaid, Medicare, Social Security and literally every program they touch. Medicare and Medicaid were projected to cost $12 billion and we are at $400 billion and counting, and Congress even blew something as simple as ethanol. It awarded subsidies but ethanol producers went bankrupt anyway. We need less government interference in the free markets not more.

Sadly, Greider proved he does not even know what inflation is!

Suggesting that money supply growth be "limited to the normal expansion ... lest it lead to inflation" is ridiculous because monetary expansion is inflation (at least up to the point of a credit collapse such as we are in now). The reality is there does not need to be any monetary expansion at all.

Furthermore, government bureaucrats have no way of knowing or understanding what "projects that truly benefit the entire nation". Congress knows as much about what would benefit the nation as my neighbor's cat. Just imagine how many earmarks there would be if Congress could simply print money to pay for them.

The key is no one should be in charge of money supply or interest rates. We do not need a Fed at all and most importantly we do not need a Congress deciding how much money to print. What we do need is a balanced budget amendment to the constitution to rein in Congressional spending and of course we also need to abolish the Fed.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Last 10 Posts

Copyright 2009 Mike Shedlock. All Rights Reserved.
View My Stats