Friday, May 04, 2012

central bankers are intellectually bankrupt...,

zerohedge | Likely glowing from his glorious victory (h/t Trish Regan) over Krugman in Bloomberg's recent Paul vs Paul debate, Rep. Ron Paul destroys the central-planning arrogance of Bernanke and his ilk in an Op-Ed released by the FT today.

Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.

Our Central Bankers Are Intellectually Bankrupt

by Ron Paul

The financial crisis has fully exposed the intellectual bankruptcy of the world’s central bankers.

Why? Central bankers neglect the fact that interest rates are prices. Manipulating those prices through credit expansion or contraction has real and deleterious effects on the economy. Yet while socialism and centralised economic planning have largely been rejected by free-market economists, the myth persists that central banks are a necessary component of market economies.

These economists understand that having wages or commodity prices established by government fiat would cause shortages, misallocations of capital and hardship. Yet they accept at face value the notion that central banks must determine not only the supply of one particular commodity – money – but also the cost of that commodity via the setting of interest rates.

Printing unlimited amounts of money does not lead to unlimited prosperity. This is readily apparent from observing the Fed’s monetary policy over the past two decades. It has pumped trillions of dollars into the economy, providing money to banks with the hope that this new money will spur lending and, in turn, consumption. These interventions are intended to raise stock prices, lower borrowing costs for companies and individuals, and maintain high housing prices.

But like their predecessors in the 1930s, today’s Fed governors behave as if the height of the credit bubble is the status quo to which we need to return. This confuses money with wealth, and reflects the idea that prosperity stems from high asset prices and large amounts of money and credit.

The push for easy money is not new. Central banking was supposed to have ended the types of periodic financial crises the US experienced throughout the 19th century. Yet US financial panics have only got worse since the centralisation of monetary policy via the creation of the Fed in 1913. The Depression in the 1930s; the haemorrhaging of gold reserves during the 1960s; the stagflation of the 1970s; the dotcom bubble of the early 2000s; and the current recession all have their root in the Fed’s loose monetary policy.

Each of these crises began with an inflationary monetary policy that led to bubbles, and the solution to the busts that inevitably followed has always been to reflate the bubble.

This only sows the seeds for the next crisis. Lowering interest rates in an attempt to forestall a recession in the aftermath of the dotcom bubble required massive credit creation that led to the housing bubble, the collapse of which we still have not recovered from today. Failing to learn the lesson of the bursting of both the dotcom bubble and the housing bubble, the Fed has pumped trillions of dollars into the economy and has promised to leave interest rates at zero through to at least 2014. This will only ensure that the next crisis will be even more destructive than the current one.

Not content with its failed attempts to prop up the US economy, the Fed has set its sights on bailing out Europe, too. Through currency swaps, it has committed to offering potentially hundreds of billions of US dollars to the European Central Bank and we cannot rule out the possibility of direct intervention.

The Fed’s response to the crisis suggests that it believes the current crisis is a problem of liquidity. In fact it is a problem of poorly allocated investments caused by improper pricing of money and credit, pricing which is distorted by the Fed’s inflationary actions.

The Fed has made banks and corporations dependent on cheap money. Instead of looking for opportunities to invest in real products that will serve the needs of consumers, Wall Street awaits the minutes of each Federal Open Market Committee meeting with bated breath, hoping that QE3 and QE4 are just around the corner. It is no wonder that long-term investment and business planning are stagnant.

We live in a world that seems to have abandoned the concept of savings and investment as the source of real wealth and economic growth. Financial markets clamour for more cheap money creation on the part of central banks. Hopes of further quantitative easing from the Fed, the Bank of England, or the Bank of Japan – or further longer-term refinancing operations from the ECB – buoy markets, while decisions not to intervene can cause stocks to plummet. Policy makers focus on spurring consumption, while ignoring production. The so-called capitalists have forgotten that capital cannot be created by government fiat.

Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.

5 comments:

John Kurman said...

Well, if the twitterverse thought Ron Paul "won" that "debate", then it must be so. I watched that video, and what I saw was Paul Krugman staring in disbelief at the  shit coming out Ron Paul's puckerhole. Honestly, Krugman's problem is that he is not a career politician like Paul, and so doesn't know how to slice and dice sound bites on camera. Listening to Paul's standard tired old bullshit reminds me that, going with the politician's heuristic,  if you serve shit  on a plate often enough, the people will finally think it's  a sandwich. Paul went beyond misrepresenting history, he fucking kneecapped it. It was a repeated drive-by shooting of history. I mean, come on, the Byzantine Empire was under the gold standard and never experienced war? What fucking timeline was that in? They had a fucking thousand years of war. And, and, they debaed their currency more often than anyone. And gold sure kept the US out of the Long Depression of the 1890s, right? Gold kept us out of all those wars we never fought from the Revolution until Nixon took us off the gold standard, right? Deleveraging of the debt after WWII created the Long Boom? Seriously? Bubbles were caused by Fed? Not by asshole fucking empty business suits out to fuck over your average citizen? Come on! Ron Paul is so full of shit he needs serious surgical intervention.

DD said...

 Gold aside John (since the asteroid mining is set to begin), what fault do you find with his essay above?

I actually think he's wrong that wealth can't be printed, since money is just a proxy for power and we can increase our wealth just by turning the screws on the other guys, and since we have all the food and weapons (the true wealth) they have to take it. Debasing the dollar is actually great for debtors, which is why I am all for it as it's the true socialist play.

If course, "we," just refers to the dollar as reserve currency, not you and me per se.

CNu said...

Has there ever been an era during which gold was anything other than a proxy for power?   http://subrealism.blogspot.com/2012/05/waste-unrivalled-by-anything-short-of.html

John Kurman said...

First off, my comments above are directed at the video debate. Watch and marvel. Krugman has a hard time not laughing out loud.

As to the FT essay, where to begin? There are so many strawmen, red herrings, empty and unsupported assertions in the essay. How about, for just one example:

"Yet US financial panics have only got worse since the centralisation of monetary policy via the creation of the Fed in 1913. The Depression in the 1930s; the haemorrhaging of gold reserves during the 1960s; the stagflation of the 1970s; the dotcom bubble of the early 2000s; and the current recession all have their root in the Fed’s loose monetary policy."

I'd like to see some data to back that up. Not to mention Paul's ongoing problems with the fallacy of false dichotomy. No other causes for these problems? And what data is provided that all bubbles and collapses prior to the founding of the Fed, were milder? The Long Depression (which really was from the 1870s - 1890s)? The Panics occuring every 4-5 years? How about all bubbles of the past going back some 5000 years? Are they the result of an inflationary monetary policy? If I had more time, I'd go through point for point, but I don't.

John Kurman said...

http://johnkurman.blogspot.com/2011/03/fred-goodwin-is-wanker.html