Posts Tagged ‘Federal Reserve’

Waste and Corruption Out of Thin Air

Friday, August 7th, 2009

If government proposed a “stimulus” program to give each American 50 million dollars, we’d immediately think of inflation.  At that scale, the proposal would meet its deserved ridicule.

However, I’d like to look at how it would work ex-inflation, so let’s pretend there is no inflation problem.  The Federal Reserve’s magic omnipotence determines that there’s “slack” in the economy so that government can create and give everyone 50 million dollars (and Goldman Sachs its commission), with no significant inflation.  We’ll make no assumption about ever repaying the 50 million per capita, which is a realistic expectation in the current real world of money and credit expansion anyway.

So with no inflation, should The Fed get really excited (they must have been at least starting to doubt the magic) and do it again?

No.  Even without inflation, the artificial abundance of credit money will cause plenty of other distortions to economic behavior.

For starters, some people will simply retire to become consumers only.  With their production removed earlier than it otherwise would have been while their consumption is still there (and may increase in early stage “stimulus” euphoria), over all wealth measured in production (rather than money out of thin air) has gone down.

In our decades long credit roller coaster this retirement miscalculation has certainly occurred, with credit expansion giving people false signals that they can retire or semi-retire when actually they still needed the economy and the economy still needed them (provided they could somehow have been directed to real production and not to bubbleland).

The scope of this gift from The Fed and the banking system to our seniors and near seniors is still unknown.  Some people soon to be forced into unretirement now that the credit veil has slipped will have skills they can market at the level they’re used to in the face of impaired economy headwinds, and some won’t.  Since that’s about all we can know for now, we’ll have to leave these folks high and dry where the helpful stewards of the economy have put them, and move on to other expansionary credit “life blood” effects.

With my 50 million, I’ll probably stop everything else to pursue a writing career.  Any other productive possibilities from me will be permanently (or at least until everything blows up even more) lost to society.

In the 50 million for everybody story, plenty of other part-time writers will join me in pursuit of the full-time dream.  Also, actors, film makers, dancers, models, painters, sculptors, chefs, fashion designers, musicians, and of course, singers.  American Idol will need at least a few extra rotations– maybe even its own network.

Something like this happens in real life credit expansion.  It’s not just directly bohemian pursuits, but other apparently more practical endeavors that become over indulged because of false expansionary signals: we get more retailers, restaurateurs, boutiquerateurs, financial and real estate tycoons in training, “internet marketing gurus”, advertisers, public speakers, and miscellaneous experts– every type and stripe of consultant who once did something successfully for a decade (or at least didn’t fail too publicly), and have now risen above doing the expert activity to advise others.

Pursuing the dream, or advising others on dream pursuit, isn’t bad as such (too late, I’ve insulted everyone– no one is reading anymore).  And it’s certainly not that many people in professions this piece may appear to denigrate aren’t exactly in their productive niche and awesome there.  However, regardless of whether we make those judgements that money and credit creation make the economy too fluffy, it clearly does make it too frothy– entrepreneurs get hasty in pulling the trigger, and then hang on waiting for the next boom that credit expansion signals have promised them.  This paper promise must eventually be broken since no amount of paper, nor any book keeping entry of whatever size, is ever going to eat a single restaurant meal, or otherwise consume anything except for a dwindling supply of economic clarity and perspective.

(It isn’t entirely a vacuumful of wishful thinking on the production side of course.  The psychological extremes of overreaching are naturally late stage, while consumers will all along have been helpfully translating their expansionary false signal receptions into “real” but ultimately regretted demand for dreamy non-essentials– the new era feedback loop that the Fed thinks it wants, and doesn’t really even seem to much doubt after it collapses.)

In the 50 million dollar story, Fed magic is still on the job, and there’s no collapse yet.  There are no laborers– everyone is retired, an artist, or an entrepreneur– but we still haven’t got to the true elephant in the central bank.

The “slack” has come out of the economy– at 50 mil per head, probably with a pop.  The artificial boom has ratcheted up the optimism of the players.  Those entrepreneurs with apparently successful businesses will be getting signals to expand them.  The Fed, not wanting to “choke off” the apparently vibrant economy, and getting plenty of cheerful feedback from the banking system that new credit can be “absorbed”, will feed the frenzy, as they were born and structured to do.

Now the future looks so huge that the entrepreneurs believe they can take on bigger and more distant expansionary projects.  Indeed, the situation seems to demand it.  The closer borrowed money gets to being free– a favorite central bank ploy– the more dangerous it seems to decline expansion.  Your competitor may be using the free money to grow to infinity and then smother you.

Because the credit is artificially created, it can signal temporary enthusiasm, but it can’t signal an actual match up to future available resources.  The flashing, screaming pedal to the metal promise of future resources to complete every entrepreneur’s project is a screaming pedal to the metal lie that no actual arriving future can possibly fulfill.  (For one thing there aren’t any laborers, somebody’s bound to notice that eventually.)

This is where the true “confidence” issue shows up.  It doesn’t matter if players are confident that government “will provide liquidity”.  Speeches, guarantees, backstops and loans of last resort don’t help– in fact make it worse, because these are rational doubts about what is and is not being produced from finite resources, how much of the future is being crammed into the present, and when exactly this denuded future will make it’s appearance (or from where we are at the moment, its curtain call).

No Bernanke or Geithner speech can address this, because all they can produce is debt and more speeches, and all that brings is economic and political miscalculation, waste, instability, and possibly on top of that, inflation.

By Les Lafave
Monetary and Banking Reform –
Originally Published at Strike The Root

Carbon in the Monetary Unit: Alternatives to Fiat Currency

Sunday, April 5th, 2009

In an earlier piece, An Energy and Carbon Monetary Unit, I wondered if there might be a happy medium (so to speak) between the bubbly excesses of fiat currency and a perhaps distant but disturbing problem of interest payments under a gold standard.

Energy money can be considered on its own, but I’d like to introduce a “carbon” credit sub-plot, on the theory that an analysis of energy should be undertaken with all of its output, and tied to its negative externality so that true costs percolate into the light.  A related piece of theory is that over a long enough time frame we benefit if all stakeholders at every scale get to give their “answer” to our economic questions.

My fantasy is that if we could throw the issue into the monetary unit and force a cost judgement on everything, from mini wind turbines hand-knitted of hemp fiber at vegan communes, to whale blubber charcoal cured in spent reactor fuel baths by North Korean child labor, then we could all shut up for just five minutes (except for me; I’d spend ten of my five minutes on a request for exemption).

As an example of energy-pollution monetary interaction, if we determined that wind energy was as friendly as anything could be, then a wind energy unit would require the lowest additive pollution credit to bring it up to one monetary unit– one “energy-carbon dollar”.

Say you’re a farmer (you don’t have to say it out loud if you’re near someone who’ll think it’s weird). You’ve built a wind turbine.

Perhaps (since you’re a farmer), the government will let you use your wind energy on your farm without buying a carbon credit; perhaps (since they’re the government), not.  But if you want to convert your wind energy into money, then you’ll send it through the grid to your bank where they store it in their accumulators and you get, say $.90 for each $1.03 of energy– $.03 in the bank’s pocket, and it’s matched up with $.10 of pollution credit hypothetically required for clean wind, to create an energy-carbon dollar.

If you want, your energy-carbon dollar thus created could sit and wait for you in the bank as a demand deposit.  As is normal for a non-fiat, non-fractional reserve currency, you wouldn’t get interest (and don’t forget the 3% you just got charged for the bank’s administration, risk and loss).  Your money, by law (at last rational), would not be loaned out by the bank, since it’s waiting there for you to demand it.

If you prefer you could ask the bank to loan out your energy money as a term loan.  Then you would get paid interest, with a portion to the bank as intermediary, but you’d no longer have access to your money until the end of the term.  Only one person, the borrower, would be using the saved money until it’s returned to you, upon which only one person, you, would then have access.  (No credit money has been created “from thin air”, and no credit bubble can occur– Austrian School money and credit theory with energy and pollution credits jammed into that mold.)

There is money being created in the example, however the energy piece is created on the productive side of the economy, not the made up financial engineering side, and this energy piece is created from real savings, with a real practical use in future growth, or in a future crisis.

The pollution credit piece is not real savings, and is indeed forged from the fires of Mordor (as some readers may have long ago stopped screaming to their computer screens about out of exhaustion and stress laryngitis).  However, I’d like to invite you to please take a sip of water and look on the bright side. The government created pollution credit part is not real savings, but is “real taxation” for real use of resources, not credit from who knows what, when or who.  Also this money creation can’t occur unless it’s directly and objectively demanded by the market side of the equation.

There would be no Federal Reserve jamming as much credit into the pipe as they can based on a formula of: (Politics) – (What We Think We Can’t Possibly Get Away With) = (Money Supply).

Back to Mordor for a moment.

I’ve seen suggestions that government should issue currency with a deliberate predetermined decay (over and above inflationary decay), so that people can’t “hoard” savings.  In the U.S. this seems like a solution to the world’s biggest non-problem, at least up until now.  How this glib manipulation can be viewed as anything other than disgusting– folks who’ve gamed their way into a nice pension determined that the peasants should never find a way to get any rest of their own– that’s hard to fathom.

However, a practical reason for decay that economic actors can attempt to mitigate seems both qualitatively and quantitatively different– the wear to a gold coin, for example, or in this case, costs and imperfections to storage.  A key question is how cheap and how good energy storage can become, but that seems like a question worth working on anyway.

Would pollution credit, as essentially a tax embedded in money, make industry uncompetitive and drive out capital? That depends.  As a replacement for income tax, it could be the opposite.  (Also as a replacement for creating credit fueled financial whirlwinds and calling them GDP growth. )

Can we get there from here?

Well.  (And this may have a familiar upside-down ring to it, if you read Part I of this piece.)  I tend to be a pessimist.  I believe that if you always listen to the yeasayers, you end up doing stunningly stupid stuff, like building your society’s economy on the premise that credit can create wealth, as long as the credit is created faster than analysis can catch up (sort of a perpetual optimism machine).

The positive part of the pessimist’s credo is that at rock bottom, there may be some upside.  There wasn’t any reason to expect that a king would accept the Magna Carta, but with friendly assistance from societal breakdown, a desperate king did.

Monetary reform doesn’t get much traction– it takes power away from people who’d prefer not to give it up.  The energy in the monetary unit would tend to take some power; the carbon piece might give some back.  I think that what’s given back wouldn’t be as much as the “political class” might think.  Maybe a concept like carbon money could jump in to roll some political logs on the way to hard (or at least harder) money.

By Les Lafave

 Monetary and Banking Reform –

 Originally Published at Strike The Root, March 30, 2009

An Energy and Carbon Monetary Unit: A Realistic Money to Replace Fiat Currency “Optimism”

Sunday, March 8th, 2009

Money is “a medium of exchange, a unit of account, and a store of value.”

However, absent from the view of Monetarists and Keynesians (and the “money” Wikipedia page), is an additional role for money, a role that’s given an important place by Austrian Business Cycle Theory. Money should be a measure of the aggregate of society’s savings– its future capacity for growth.  Unless someone tries to force it to tell lies, money, in its interaction with other goods, gives both the society as a whole and individual entrepreneurs a measure of the society’s ability to take on new projects (or not).

There’s a good reason why Monetarists/Keynesians won’t consider this.  A money that measures wouldn’t support their fantasies of what “monetary policy” is expected to accomplish.  To them, money needs to be a vehicle that government can manipulate to “stimulate” economic activity and create “optimism”.

Repeat that last sentence out loud once, and for most of us that’s enough to appreciate the fundamental dishonesty of the concept.  Still we could throw that out, stipulate to the erroneous “greater good”, and simply look at the effects after decades of manipulated money, credit and financial opinion– the “greater good” is itself in ruins.

The criminality (the Madoffs et al) is a red herring– only a fraction of the waste from a process that was natural and inevitable under artificial credit creation.  The Federal Reserve and the government got exactly what they asked for— if more and more credit is created, with more and more “stimulus” and “optimism” to get us all moving and spending, could there be any doubt that the average modern society will have no shortage of people willing to get “creative” in order to soak this up?  The exact path of the creativity is difficult to know in advance, but nothing will stop a party like that, other than the eventual clear vision by a critical mass of economic actors of the scary, unsustainable wasting of our limited resources.

Since it’s the normal and predictable side effects of fiat money credit creation, not spontaneous greed, random mistakes, or insufficient “stimulus”, that is the primary cause of these bubbly, wasteful financial disasters, what form of money could stop the cycle?

A gold standard ranks well on measurability– just flop it onto a scale and there it is– a measure.

And Monetarists generally don’t like gold, which you’d think would be a perfect recommendation.  However, while many Monetarists have used a need for monetary expansion as an excuse to be profligate morons, there’s a little kernel of real world worry at the twisted heart of the issue.  A gold monetary standard has an eventual problem– once the standard is generally established, the modern trend wouldn’t take more than a century or two before there’s a strain to find new sources of money, a strain that would continue ratcheting up until loans at interest become impossible. Someday, there would be “peak gold”.

It’s a distant flea of a problem compared to the immediate brontosaurus that Monetarists saddle us with daily.  However, a few centuries can pass surprisingly quickly (especially for the unborn, who have very little concept of time).

So we’re looking for a money that is non-static, but nevertheless a real measure of a society’s ability to create new goals and move forward, or conversely, would appropriately stall us out when we’re not ready.  We need a limitless limitation.

A few thousand years ago, a food backed currency– stored food, if absent the problem of spoilage– would have taken a good rough reckoning of a society’s future capacity.

Today we need to be able to do a lot more than eat in order to accomplish our work.  But I’d suggest that energy would be a good measure for today’s economies, since we need it in pretty much anything we do.  If we have sufficient energy stored to take on a project— it’s as safe as it can estimably be to take it on.  If not, then we know we’d get stuck with a half finished project and the waste and risk associated with that— we would have to wait.  (The way we needed to wait on “improving housing affordability”.)

We can also theorize that the payment of interest will never be a problem with an energy monetary unit.  Until we’re capable of building a “Dyson Sphere” enclosing the solar system, we won’t run out of energy potential (and who knows, even that might be a pit stop on the way to the stars?)

Is it a little odd to propose that we literally have money to burn?

Comparatively, no, it’s not.  How much stranger that for money we’ve chosen an unmeasurable paper standard. We measure anything and everything.  People have even tried to figure out if a human soul has weight, but for money, of all things, we’d rather pretend?  The one thing that we think we don’t need to measure is our savings versus our consumption– our stored capacity to use resources– our future on earth?  (If I didn’t know how inherently trustworthy government is, I’d suspect we were being manipulated or something.)

A currency that can be spent literally, or saved literally, is a chance to stop pretending that savings, or lack thereof, has nothing to do with our future.  A chance to uninduce the self-induced march of the bubbles.

Let’s go back to optimism for a moment.  As you can perhaps tell already, I’m not entirely a fan.

President Obama has “The Audacity of Hope”, but the implied rarity of hope in the political sphere is a little disingenuous.  The value of “optimism” is unquestioned in politics, especially if it’s yours.  You can pretty much imagine any president saying when criticized something like: “Look, any plan will be criticized, but I believe in optimism– you can’t always listen to the naysayers.”  (Maybe there’s a reason there’s always naysayers– maybe all the plans have sucked?  We are, after all, where we are, and didn’t get here overnight.  Every presidential plan is a central plan, with a clear theoretical basis for sucking.)

Optimism isn’t just the universal political habit of mind, but the most common in general.  Perhaps optimism deserves some of its boosterous reputation, but in the end as a mass state of mind, it can turn very quickly into an excuse for lazy thinking.  Money and economics in particular have been heuristically much too glib, and not to be too dramatic, it’s conceivable we could pay for it with our lives.

It isn’t only that we’ve managed to stupidly fool ourselves into underestimating the savings we need for our own not much more than day to day living, and then, what’s needed to have a future equal to or better than the past.  It’s not just that we’ve decided, out of nothing, that doing nothing is not an option, while spending trillions of dollars is a must.  (Mandatory trillions spent on something somewhere– we “know” it must be spent, but how, where, what– that we don’t know.)

To me there’s still much more, as long as we’re throwing our fiat currency habitual non-measurement of resources into the mix.  We also appear to be underestimating by many orders of magnitude the level of saving that we need to give us a near certainty of sustaining a human civilization indefinitely.

We’ve added a lot of dependencies in our modern system that haven’t even been tested by an historical sized natural disaster— a San Francisco earthquake, or a Krakatoa.  What about something many orders of magnitude bigger, which might have a very high probability over a period of a thousand years or so– the natural disasters that we know have happened in early or pre-history?  (If a thousand years seems like a long time, consider that that still gets a double digit percent chance that it would occur in the lifetime of yourself, your child, or your grandchild.)

These, along with potential manmade disasters (where perhaps rightly, many people would place even more emphasis), put us on the footing of “it’s a matter of when, not if”, a place that I’d contend we wouldn’t be if we had a hundred or so times our current savings.

(Say for example that most countries had started work on an energy currency system 50 years ago, had because of this perhaps developed more advanced energy accumulators, and now had the above type magnitude of real savings in energy.  Say further that tomorrow someone is able to prove that pollution caused global warming is real, with a best model estimate 90% certainty of ending modern civilization.  With that evidence, and those usable savings, then these countries would have potential to mothball most industry for a decade or more, working instead entirely on changing the outcome, rather than just waiting for a civilization ending catastrophe.)

A long, long time ago (in the title), I mentioned “carbon” in the monetary unit.

Now, I’ll carefully disappoint half the readers who were waiting for the good stuff, while providing (temporary) relief to the other half, who had probably been saying, “Carbon? Is this idiot one of those “cap and traders”?

To be continued in Part II…

By Les Lafave

Monetary and Banking Reform –

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, 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 –

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

A Central Bank of the World (As if Central Banking Errors Aren’t Already Global Enough)

Tuesday, October 28th, 2008

An October 25, 2008 Newsweek article by Jeffrey E. Garten is titled, “We Need a Bank Of the World.”

What I need is some sort of keystroke to represent spluttering astonishment.  There can only be a few things on the list of what we need less than a World Central Bank (a planet busting asteroid might be a tie— other than that I can’t think of much).

Central Banks have been error making machines.  They never have and never will accomplish anything else, because they’ve been given (or have taken) an impossible task— money and credit expansion in a fiat currency system along with (rather laughably), maintaining economic stability.

A Global Central Bank’s most likely accomplishment would be to ensure that any nation that ever has second thoughts and wants to leave the fiat currency and credit creation rat race, is instead trapped.  From there the World Central Bank can move on to booming and busting us all, with no escape in any global nook or cranny, until every person, place and thing in the world is exhausted.

Mostly lost in the recent credit follies with it’s nexus in the credit creation and credit collapse from the Federal Reserve Bank of the United States (which admittedly has been so egregious it needs the invention of another computer short cut key— maybe one that rolls all the world’s expletives into some kind of text and graphics ball), are the multi-decade errors of the Bank of Japan.

Financial analysts are casual about the ripples from the Yen Carry Trade (borrowing in Yen at low interest to invest, or speculate, in vehicles under a higher interest currency), as if it’s just something that randomly happened.  But the Yen Carry Trade has been classic market disruption and unintended consequences from central bank force feeding of credit into a system that would desperately prefer to puke it back.  Instead of looking for opportunities for stable production, Japanese money and credit has been stampeding all over the globe for years, looking for arbitrage opportunities.

Japan’s Central Bank started with a real estate bubble, moved on to the “zombification” of it’s supposedly private sector banking, and then, with rates near (or even at) zero, has now clearly enabled a speculative emphasis in global finance and the era of the hedge fund, the last chapter of which is being written now (and looks to deserve a pretty poor review).

The main contention of Garten’s World Central Bank article is that “the Fed no longer has the capability to lead singlehandedly”, a contention that would be perfectly true if he would have substituted the words “never had” for “no longer has”— it’s the exact same capability that a Global Central Bank would continue the tradition of never having.

“To give it legitimacy” Garten continues, “a global central bank would have to be governed in light of political realities.” Well that should be easy— fortunately, political realities are always simple and helpful.  (As Garten is able to demonstrate concretely in his nimble salvation of the world in a thousand words, even while reassuring us that we won’t have to give up the political realities that have been serving us so well.)

It makes sense though that we’ll never have to give up our cherished political realities if Garten has his way— a World Central Bank is a logical step in our main political reality— the steady march of centralized decision making to higher and higher levels, so that we guarantee that decisions are aggregated above the level at which it’s possible for any individual or structured group to make them.  No doubt someday we’ll have an international organization to tell your local T-Ball team what position your 5 year old should play, and at that point, all our dreams will come true (except maybe for a few confused kids and cancelled T-Ball leagues.)

It appears that in the United States we’re comfortably adjusting our expectations as economic hybridization ratchets to a level where we can no longer pretend that “fascist” is just an insult to be sprayed around by radicals.  But at least we could refrain from demanding that everyone else must wade around with us in the same knee deep glue.  Let’s let other countries make, or perhaps even not make, their own mistakes.

I’d suggest that any nation interested in financial stability and fair opportunity should ignore this call to global credit creation arms, eliminate its own central bank, and raise banking reserve requirements to a sane level as a simple fixed matter of law.

By Les Lafave 

Banking Reform –

Bernanke Can’t Do It Alone

Tuesday, July 15th, 2008

Ben Bernanke will testify for Congress this week, and they’ll ask him tough questions.

Bernanke isn’t my vote as witness most likely to turn into Al Pacino and start screaming, but it sure would be nice if that, or some other trigger could make us step back and look at the economy from scratch. Congress in particular could use a long look in the mirror. (Presumably an undertaking that would not end in a mass puke, unless it’s somewhere provided in rules and precedents.)

The free market (the concept, not the CEO’s) should get a pass, for a simple reason– there isn’t one. I’m not sure how many Volkswagen Beetles it would take to hold in printed form all the federal and state laws, regulations, interpretations and rulings that the financial industry is constructed from (along with government debt), but I’d bet it’s more than one. It’s a free market only when compared to Lenin’s tomb.

The Federal Reserve and Chairman Bernanke in contrast, deserve the grilling Bernanke will get– but are they the most deserving?

There’s a fuzzy, wish fulfillment theory that the federal deficit doesn’t matter– or at least doesn’t make the top five– a rare but unfortunate instance of functioning nonpartisan agreement.

A deficit with a constant rate of growth somewhere near the growth rate of the economy may or may not matter, but a deficit with an accelerating rate of growth in a shrinking economy in a country that doesn’t care is likely to matter a lot. As in any overly creative household that starts with wealthy foundations, it could take some time for the mattering to become a matter of clear unrestrainable fact.

Although to me Federal Reserve mandates don’t make sense, in postulating for the moment that the mandates are meetable, I’d suggest the Fed can no longer fulfill them anyway in the face of our quietly obscene fiscal laxity. The Fed can’t realistically be independent of size and demand at Treasury auctions for long (like decades, for example).

If Ben Bernanke decides it’s best to minimize his support for the Treasury, the potential scope of his “independence” is already determined– relating to what’s already on the fiscal plate– perhaps not exactly like a child who defies a parental directive to clean his plate by leaving one spoonful of peas disguised in dispersion, but not exactly unlike it either. The Fed can monetize, it can let interest rates soar, or in the end maybe both. That’s not exactly superhero omnipotence.

Laurence Gonzales in his book Deep Survival, titles a chapter on being lost “Bending The Map”. When we’re lost, our identity itself instinctively comes into question, making us prone to panics of emotive self-delusion, with a bias for quickly moving forward and thoughtless repetition, not for backtracking or stopping to think. The bending the map metaphor for human reaction to being lost is also a good metaphor for our mental map of the Fed.

The Federal Reserve is both blamed for the current economy, and widely expected to be the instrument of a rapid and happy emergence into the sunlit clearing. That the Federal Reserve is a small, secretive planning committee that’s thought of as consistent with “free markets”, while the committee’s deliberate creation of fluctuations and unpredictability are parsed and rationalized as clever policy, is the ultimate, deluded, century long “map bend”.

The scary part of the bending the map metaphor is what it implies for the future. It should be clear that we’re thrashing around in the forest, thoughtlessly repeating mistakes– looking for the Federal Reserve to solve problems that it’s far more likely to cause. But in translating the lost person bias to a lost society bias, it implies that to question central banking as a foundation of the economy (and so in a sense, human life itself), will be like questioning our future existence– and not with a cheery camaraderie while sitting by the campfire with a cooler of beer, but while lost and weakened and under stress.

By Les Lafave

Abolish The Federal Reserve –