Posts Tagged ‘central banking’

Environmental Banking

Saturday, December 6th, 2008

When someone runs for office under a promise of fiscal reform, the office seeker may try to grab some press by throwing out big budget cut numbers.

Once the numbers make a big splash, the cuts may turn out to be in the category of “waste, fraud, and abuse”, whereupon everybody rolls their eyes.  We’ve heard this one before.

No doubt there’s plenty of waste, fraud and abuse, but is this genius who’s just discovered the concept of cutting it from government budgets really going to out do the hundreds of predecessor geniuses who said the same thing, and then watched it all grow again while nurturing their own pet budget items?  It’s not that easy.

As a matter of fact, it is that easy.  There’s a simple, structural way to cut waste, fraud and abuse, not just at every level of government, but in every corporation, big or small, in every industry, politically connected or otherwise, and indeed, in the budget of every individual person, rich or poor.

The magic bullet is bank reform, and the beast to be slain is artificial credit creation (artificial in that it’s created wholly from bookkeeping entries of central banks and commercial banks, not from real savings).

Take a look at a couple of modern day financial bubbles– always credit fueled– Japan real estate, the Internet bubble, the U.S. housing bubble.  We’re clearly talking about trillions of dollars of wasted resources (with plentiful enablement of fraud and abuse built in).

If this credit had never been born, we could almost picture the environmental backwards film: Strip mines filling themselves in, forests jumping back to life, smokestacks sucking back pollutants.

Think of the fuel that was used for billions of trips and commutes, the electricity, office supplies, computers, communication equipment, new constructions, building customizations, and trash haul aways, the unneeded businesses, to support other businesses that support businesses, and all, in the iconic Internet bubble example of Pets.com, amounting only to the fruitless, temporary support of a sock puppet.

To all the above, staggering as it is, we need to add another layer from decades of excessive consumer credit, and the consequent misjudgment of the level of consumerism that society can currently support– again an illusion that would not have been possible without artificially created credit.

I was struck by this vignette of excess from Satyajit Das’s “Traders, Guns, and Money”: “A colleague – Chris, the head of hedge fund sales – was recently divorced.  He began to travel frequently to Paris for business meetings.  It turned out he travelled to have his laundry done.  He did not know how to use the washing machine and liked the way the Hôtel Plaza Athénée in Paris did his shirts.”

Any society with division of labor will have parallel stories of excess, but usually limited to a handful of those directly in the ruling class, or perhaps in the actual owners of large businesses, not in the upper echelons of the “laborers”, as in this story.  (It seems telling that in contemporary America we get stories like this exactly where the credit creation rubber meets the economic road.)

And of course, there really is such a thing as trickle down.  If you’ve taken a recent look (like I have), at your personal budget and purchasing patterns in light of the seemingly unstoppable march of economic uncertainty, you may be wishing (as I do), that you could have back some of the purchasing power you took for granted in past years– money used to replace a cool item with a slightly cooler item, an extra purchase of this or that because the price seemed right, the little luxuries that you deserved, because you work hard.

A healthy society probably has no way to avoid some small percent of conspicuous consumers, and perhaps a little envy and modest emulation from many of those quite humanly wishing to join the fortunate few.  If this “waste” comes from real savings, then any harm will be less than what society would get from a habit of trying to make subjective top down judgements to force people away from their personal assessments of what is or is not an acceptable level of profligacy.

However, we’ve had very significant waste that’s risen above the level of any possible subjectivity, and with a clear first cause of artificial credit “created out of thin air”.

The efforts of policymakers, and particularly of the Federal Reserve, to give businesses and consumers a positive economic outlook and keep them borrowing and spending have, in the past, worked, but only as the confidence game that they always were– ultimately these careless policies had to get to where they were always headed, to the destruction, not the creation, of wealth.

Corporations spent their potential, not on creating real efficiencies and innovations, but on frantically buying each other up and financial engineering– neglecting core business in favor of debt enabled breadth and mass in preparation for imaginary future growth.

And at least some of us who’ve been buying a new luxury car every other year, should (in the absence of excessive credit), have been duct taping patches on the tail lights of our ten year old sub-compacts instead.

All of this may sound like just a little too much dismalness from the dismal science, but if we could decide to refrain from ramping the leverage back up again, I think that most of us would handle it with a sense of relief.

Leverage is a giant fog.  Who knows what we actually have or can actually do with this kind of borrowing? It makes it impossible for us to talk to each other about anything– certainly not subjects like entitlements or sustainability or taxes.

If we decide to get rid of central banking altogether, and replace it with a simple system of 100% bank reserving, where every loan must come from the use of someone’s real savings, then the “small footprints” that environmentalists have vainly exhorted us toward could get a second channel of support.

And who knows?  Maybe if we can clear away the fog of debt to sensibly concentrate on real business and science, we’ll find that we can sustainably afford medium size footprints after all.

By Les Lafave

Abolish the Federal Reserve – themaestrosrep.org

Originally Published at Strike The Root – 12/5/08

The Federal Reserve’s Mistake(s)

Wednesday, July 2nd, 2008

Recently there was a segment on CNBC Squawk Box with Peter Schiff (Euro-Pacific Capital) and Brian Wesbury (First Trust Advisors).

It was set up as a debate, though the two agreed on much about the causes of the U.S. economy’s problems. But while Wesbury says that the Federal Reserve “made a mistake” six years ago with interest rates that were too low, Schiff says that we’ve had Fed problems pretty much forever.

The Fed “made a mistake”. Wesbury’s phrase is the one I’m afraid to hear– the phrase that tends to pop up like a scared meerkat when there’s even a precursur thought for a question that could tap on central banking’s fortress:

“Hello? What if…”

“They made a mistake, o.k.? Anyone can make a mistake. Or rather, only Ben Bernanke can make a mistake, but now neither he nor anyone else can make one again, because we’ve learned so many lessons– millions of lessons in fact, since each of us has our own version of the lesson we’ve learned and the mistake we’ll never make again.”

“Hello?… Loose tight loose tight loose loose?”

“Shut up! It was a mistake!!”

The good news is, if we made that one mistake, all we have to do is not make it again. The bad news is that believing the good news is exactly why we may never plunge a wooden stake through this delusion. The Fed is an archetype for our desire to believe we can manipulate the world to have it all, skipping right past any helpless feelings or tough choices to tomorrow’s best sounding best case scenario.

With budget deficits including Social Security and Medicare running at four trillion dollars annually while political debate is about how much more to add to government obligations (should it be only a lot, or really, really a lot?), how likely is it that any central banker could ride a horse grown that big and not “make a mistake”?

In the unlikely event that some sunny day politicians can resist stretching the central piggy bank until “mistakes” are inevitably made, it would be an astonishing accomplishment that wouldn’t matter, because Austrian Business Cycle Theory malinvestment is waiting in the wings anyway. It seems more likely that ABCT is correct, rather than the assumed but never quite explained Fed Mistake Cycle Theory, where every time something blows up it actually would have been perfect if it wasn’t for another darn mistake showing up just when we didn’t need it the most.

Chairman Bernanke himself talked about “the mistake” that the Fed made to set off the Great Depression, a mistake he said we’d learned from and would never repeat. Now Bernanke’s becoming Mr. Made-A-Mistake in the eyes of many. That irony in itself seems like an indicator that in this system the mistakes are built in, and if a mistake has your name on it, don’t bother to run, it’ll find you.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

The Fed And The Robot Brownie Experiment

Tuesday, March 11th, 2008

There’s been a lot of commentary that Fed Chairman Ben Bernanke was “too slow”.

Bernanke has been “too slow” sort of the same way as if a bunch of us sit around a big puddle of gasoline, passing around lit matches until we catch fire, then shout as we roll out the flames, ‘Man, that one person sure was stupid– he got “too close”.’

Federal Reserve operations have failure built in.  Chairman Bernanke is just the lucky one left holding the hand grenade. Now we’re starting to hear the first murmurs that the Fed Chairman is being too accommodative.  Soon he’ll have experts shouting “too slow”, “too fast”, “too loose” and “too tight”, in exact cacophonous balance.

A poignant irony for Wrong Way Ben, but most of us are going to be too pre-occupied with our own private (crashing) economies to spare him much sympathy.

Let me demonstrate what I mean about the Federal Reserve as built to fail– never really in control of monetary policy– with another lame allegory.  Because the key elements are robots and brownies, I call it The Robot Brownie Experiment:

Monetary Policy Lab 1 (The Robot Brownie Experiment)

Equipment: -Robot with a finely adjustable cattle prod.

-Large supply of brownies.Subjects: -50 University Students (Preferably economics majors).

The Experiment: A small brownie is placed before the student subject.  When subject reaches for the brownie, the robot with a cattle prod gives the subject a mild shock.  On further iterations of the experiment, the subject is tempted with ever-larger brownies, but deterred with increasingly severe electric shocks. 

Hypothesis: Although most of the subjects will initially take and enjoy the brownie, at some point this behavior will cease.   Secondly, if the brownie size and cattle prod voltage is increased at the threshold of student perception, the point at which he or she will cease attempting to get the brownie can’t be predicted.  Third and last, if the robot was produced under a government contracting process, it will go berserk and chase me out of the lab and down the street, until I escape by throwing the brownies I’d pinched at the feet of a mother and child while shouting, “There they are, get ‘em!”

While the ethics of the experiment may be questioned, I believe that the theory and principles (including a lack of ethics) can be overlaid directly onto modern day central banking.

Like myself as the robot brownie experimenter, our Fed tempts economic actors and then shocks them, trying to drive them toward the economic course deemed to be in the economy’s interest.  And similarly, there is no way to predict how or when the behavior of people independently looking to determine their interests might change, or exactly how punchy and out of touch they may get from easy credit, or how scared, angry and tentative when a shock feels unexpected.

Government economists and TV commentators discuss supply and demand as if supervising someone making soup. It’s just a matter of a few key ingredients and temperature adjustments.  What’s so obvious that of course it has to get lost– people are behind what happens in the economy– people supply the supply and demand the demand.

People aren’t numbers– they aren’t even lab rats or university student archetypes.  The idea that the Fed can manipulate money and stay one step ahead of our responses as we try to adjust to such a key factor in our lives and ambitions is silly. Conventional economics doesn’t have much to say here– if you start with a silly premise, then PhD’s, brilliant formulas and complex measurements may be able to make the silly premise appear serious, but they can’t make it actually work.

The Fed can’t control money demand, since it can’t control us.  We may ignore stimulus, then adjust to it, and then ignore it again.  We’re alternately (in no particular order, which is kind of the point)– too emotional, too calculating, too smart, too stupid, too cocky and too afraid– all in varied, fractally periods and sizes simultaneously too small for Fed tweezers and too big for their cranes.

Then again, once in a while we may abandon all of the above ‘cause we’re just plain tired of getting zapped.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org