“Pain and suffering are always inevitable for a large intelligence and a deep heart. The really great men must, I think, have great sadness on earth.”
Fyodor Dostoyevsky, Crime and Punishment
Commentary & Analysis
Stop Bashing the Fed – It is pointless!
Let’s face facts. People love to hear bad things. We ogle at train wrecks, we gather to watch buildings on fire, and we can’t get enough of crime scene tape. In the financial “guru” world a lot of people have made, and are making, careers by weaving tales of woe; some even have a hint of plausibility; fewer have a decent probability.
In short, financial gurus are masters at giving their readers what they want to hear, and for many that includes warnings of financial Armageddon around every corner. Of course we all know by now, the US Federal Reserve Banking System, and its maximum leader—the Fed Chairman—represents and unlimited reservoir of raw material for fear mongering. Bashing the Fed seems to be challenging baseball and football to become the new national pastime. I am here to tell you as fun as Fed bashing may be, it is pointless.
I realize there is a lot of juice in the evil conspiracy theory aspect of the Federal Reserve banking system. No doubt, even without leaping to conspiracy one can say the development of the Fed has enhanced the wealth and power of the oligarchical elite which in the end control America—or at least “guide” it to their benefit, shall we say. So from that standpoint criticism seems quite justified.
But the real meat of change in the system has nothing to do with better decision making at the Fed [or a Fed audit]; it comes in a form of a paradigm shift in the banking system itself—one that is quite easy to accomplish tactically and logically; politically, that is another story.
The fractional reserve banking system itself is the cause of our monetary madness. Given the nature of fractional reserve banking, which is nothing more than a self-perpetuating boom-bust process whereby commercial banks are effectively in control of the money supply, it makes no difference how smart the FOMC and its Chairman may be—all of them could have Einstein’s brain and it wouldn’t matter. What matters a lot more is what Jamie Dimon, Brian Moynihan, and John Stumpf are doing; chairman of JP Morgan, Bank of America, and Wells Fargo, respectively. I am not saying they are evil bad guys. I am saying the system is skewed so that their incentive is to grow-grow-grow no matter the risk—which is passed on to taxpayers; this is how they a remunerated and they have the tools to grow-grow-grow regardless of what the central bank does.
How do I support this conclusion? After reading a brilliant study recently commissioned by the Prime Minister of Iceland titled, “Monetary Reform: A better monetary system for Iceland.”
The report is about a hundred pages long, I read about 85 of them. It is a great primer on what the fractional reserve banking systems is supposed to be—the one we learned about in school. But it clearly proves theory and reality are two different beasts, as commercial banks through the process of lending can effectively create money and the central bank can do little to stop them. In fact it gets worse, because commercial banks create money by lending and simply looks for reserves later; if they don’t have them, the central bank (Fed) is forced to supply said commercial banks under the guise of stability lest there be a systemic liquidity problem. It is the quintessential case of the tail wagging the dog.
I urge everyone who has the slightest interest in this stuff to read the study—it is written laymen’s language and extremely well organized. It shows why a new banking model based on The Sovereign Money System would be so much better for all of us as it would end the boom-bust nature of the current system, and all the ills in its wake. I said it would be better for all of us. But not quite all would benefit. I shared this summary in an email to a friend who forwarded this study to me, which he read from the website The Automatic Earth:
I remember years ago Milton Friedman suggesting we replace the FMOC with a computer that simply maintains the money stock growing at about 3% per year. He of course was right about that. The [Iceland] Monetary Reform study lays out exactly how to proceed with such an arrangement–it would be better for everyone except the executives of commercial banks whose income is now tied to growth at all cost and leveraging the risks in the system for which the taxpayer is on the hook–great work if you can get it, as they say. The Volcker Rule, which the commercial banks are fighting tooth and nail through their highly paid and well place lobbyists, took a baby step in the direction of the Monetary Reform study. I think that is an example of how difficult this new banking regime would be to implement. I loved the reference to the Dodd-Frank bill–8,000 pages. That says it all. Sadly. Thanks for sending Greg.
So, all you Fed bashers warming up for another day of fun may want to read the Iceland study first. I hope you do, as it would likely redirect your bashing to a place where it makes sense.