Too Big to Bail

Upon reading the excellent exposition
given by my colleague on this subject, I felt the time was ripe to
further shine some more light with my own understanding, on the
issues regarding the Federal Reserve’s so-called independence. The
assertion that it has any is largely a red herring, and as many
readers on this blog familiarising themselves with the Austrian
School of Economics may be realising. The intellectual focus on the
central bank maintaining some sort of elusive “independence”,
presents a painfully naïve understanding of the incentives and
interests of the esteemed actors of our current monetary system.
These are the politicians, their banking system and the central
bankers.

To avoid being obscure to
beginners (you’re welcome here too!), I’ll begin; The Federal Reserve
as has been pointed, is America’s central bank, created
unconstitutionally by the US congress in 1913. It was created largely
at the behest of the powerful banking lobby in the country at the
time. Some have pointed out the dark alliance created by the
Rothschild and Rockefeller families to bring the institution into the
fold. The reasons for its creation are largely the same as for the
creation of any government agency for a specific industry;
protection. However, what is unique about a central bank is that it
offers protection to the banking establishment from the inevitable
risk of insolvency prevalent in the very business model it practices.

This business model, used by most banks
today, is known as Fractional Reserve Banking. The reader may find
some great information on it from sites like mises.org. The basic
point however, is that a central bank is not really much more than a
printing press that backs failing banks with newly created,
increasingly worthless dollars. Hence the Federal Reserve is the
cause of price inflation, as goods on the market are bid up in
response, as this newly created money is entering the marketplace.
Strictly, increasing the money supply IS inflation.

Another harmful thing it does is to
distort interest rates, misleading entrepreneurs to allocate capital
to projects they otherwise would not have. When the futillity of
these projects is revealed due to price corrections, we are at the
end of a business cycle, and the inevitable “bust” follows.

So what has this got to do with large
banking lobbies creating “the Fed”, and currently defending
it? As Murray Rothbard once noted before his unfortunate death, what
is a conspiracy theorist but a praxeologist? One may disagree with
many of their speculations and on the basis of one’s own
understanding deem their extrapolations as irrelevant, yet it is
stretching the mark to simply reject them altogether as “paranoid.”
Hence one can hardly deny the interest certain groups occupying(or
practically owning, to use more conspirational language) our
political establishment, have in maintaining the current and
expanding mode of operations being undertaken by the Federal Reserve.
To not understand this would be bad economics.

True monetary
reform would allow for the “creative destruction”(to use a
phrase coined by Joseph Schumpeter), that would prevail in
unperturbed capitalism. It would be an incredible threat to the
current political and business establishment. This should not come as
a surprise. The successful entrepreneur knows his position has only
come at the better anticipation he made in the past, against his then
established competitors; regarding the uncertain future concerning
the way consumer preferences, revealed by market data, were tending.

Now grown “tired and old”(to
borrow an expression from Mises), the entrepreneur watches warily at
the parapets, fearing the ever threatening and bewildering flux of
new and potential market participants. Reacting to this threat he
seeks security under the strong arm of that parasitical great mother
of his nation; the Government. This kind of special interest, can not
only explain the emergence and lobbying for the Federal Reserve, but
many other aspects of our current legal system, like the deeply
ironic and inherently contrary to purpose “antitrust”
bodies.

Critics of the gold standard correctly point out the
harmful inflationary problems associated historically with the
discovery of large sources of gold. The theorists of the School of
Salamanca were fully aware themselves of the harmful effects this
created in post-medieval Spain.

A critique of this
perspective does not require(though it is useful to know); one to
point out that these past distortions were meagre, especially when
compared to the chaotic and unanticipated(and unknown, given their
secrecy) large cash infusions sent into the market today by the
Federal Reserve. Indeed, it is largely as a result of this
unfortunate set of affairs that businesses pay so much attention and
effort, to anticipate the moves of, and lobby hoping to influence the
actions of; what should be a non-existent bureaucracy. They end up
wasting precious resources that could have been allocated more
productively in the market to serve consumers and capture profits.

It is entirely understandable, however,
why the current business establishment continues to suckle the
poisonous breast of this “maternal institution,” chaired by its
wise and powerful “maestros” like Ben Bernanke and Alan
Greenspan. Indeed, has anyone wondered pragmatically who the federal
reserve board are composed of?

With “special” interests already
involved at the very founding of such an institution, to argue the
issue of whether it is private or independent reveals an amazingly
prevalent and widespread intellectual poverty; regarding the
underlying cause of what we ignorantly refer to colloquially as
“political interests.”

Where the critics of the classical gold
standard are missing the point, is that its problem stems not from
its reliance on a certain luminous yellowy metal, but from the
centrally mandated monopoly afforded to this metal by government
authority. Humans are certainly not omniscient and we cannot escape
the ultimate uncertainty regarding our knowledge of the future. Yet
without the constraint of legal tender laws, the market could use the
anticipations and tacit knowledge of the most efficient entrepreneurs
in order to find the best good that could serve as money, given
expected future resource constraints and consumer demand.

The
present writer’s view is that h.r 1207; the bill currently in
Congress, that will authorise audits of the federal reserve; has been
a smart strategic move on “our side’s” part. We are getting the
statists(those who love the state to interfere in affairs between
individuals) to be honest with their own espoused philosophy, in turn
revealing contradictions within their entire system. I have to be
honest, I had never much thought of Ron Paul as a Machiavellian, but
I love how he currently seems to be using the divide and conquer
strategy pioneered by the Fabians, against them and their ideological
allies.

On the face of it hr 1207 is relatively modest, it
simply allows post hoc accounting of what should have been public
information if we’re going to play the whole “everybody decides”
democracy game. However it makes the job of continuing to expose and
ridicule the plans and philosophy behind monetary central planning.
It does this by allowing us to use the account information of this
devilish organisation against it in public argument.

Hence I
wholeheartedly support the current “unholy” alliance Ron
Paul and “other conservatives” currently have with
socialists like Bernie Sanders. Also, I think the clarification
should be made that increased sovereignty of the people over their
money should be supported. However, I argue that it should be taken
uncompromisingly and logically to its full conclusion; in the form of
consumer sovereignty, with choice over private currencies competing
on the basis of reliability.

I’ve met many on the left, and I still
sympathise with them because I feel they are good people. If we do
our duty and can aid them in achieving logical clarity and
consistency, I feel we will have critical mass and be
unstoppable.

Admittedly this may well be a long and time
consuming process so we should have patience and determination.