Blame Central Banking, Not Banks
from The Daily Bell
Originally posted Friday, July 16, 2010
THE FINANCIAL CRISIS BLAME-GAME: HAVE WE GOT IT RIGHT IN JUST BLAMING THE BANKERS? At the Feast of the Immaculate Economy – well before the crisis of 2007 and 2008 – there were many guests. Governments keen for endless amounts of cheap money to fund their mighty public sector programmes, homeowners keen for an extra bedroom even though their income didn’t quite stretch, central banks who appeared to almost wilfully ignore what was going on under their very noses. And the waiters, of course, the bankers, running around the table filling everyone’s glass to over-flowing, whipping everyone up into an ever-increasing frenzy and taking their very nice cut (and cut and cut), thank-you very much. In the blame game that followed it is the waiters who have got the spanking. Of course, if the waiters failed and had to pack up and leave, governments wouldn’t get served, consumers would have nothing to eat and the whole system would seize up. So we had to ask all the guests to dip into their pockets for a whip round to save the waiters. And that made us very angry. Is it simply about rumuneration and lending? Or does it go deeper than that? With the Government about to announce the details of the new powers it is to give the BoE, what are the dangers ahead for the finance sector, whether it’s from Basel III, new European regulation or the G20? And what effect could that have on the prospects for economic growth? I look forward to your thoughts. – Kamal Ahmed, writing in the UK Telegraph
Dominant Social Theme: Is it just the bankers’ fault?
Free-Market Analysis: We will take Mr. Ahmed up on his offer. We do not believe that blaming the bankers gets it “just right.” In fact, it is the most common of all dominant social themes – that economic downturns are the fault of big, powerful private interests. This sort of populism has been cultivated by the power-elite throughout the past several centuries as a way of promoting an “us versus them” mentality. Let the “people” blame capitalism and turn to government for solutions and the power elite that stands behind government benefits inordinately.
In a sense this article in the UK Telegraph is surprising because for the most part the mainstream press, even in this day and age, is circumspect about criticizing central bankers. It was in fact surprising when criticism of the Federal Reserve went mainstream last year, but this was perhaps in part due to the massive nature of the downturn and the availability of a high-profile Fed critic, Congressman Ron Paul (R-Tex). As a result of Ron Paul’s efforts, the Fed is facing an audit of its recent activities. The audit is not so far-reaching as Ron Paul and others hoped, but it is a start.
In Britain, criticism of the central bank has been more subdued, perhaps because the Bank of England is such an extraordinarily powerful institution, one of the first of its kind and the model for most other central banks around the world There is no doubt, of course, that the British central bank played its part in the financial meltdown just as the American central bank did. Nonetheless, the British press has been circumspect. Here’s some more from the article:
Now, at last, someone has pointed the finger at another of the guests – the central banks, and in this specific instance, the Bank of England. In an essay for a new book called The Future of Finance, the former member of the Bank of England’s monetary policy committee, Sushil Wadhwani, argues, in that wonderful way economists have, that is is “surprising” that the BoE doesn’t appear to have apologised for its role. And by that he really means apologise and therefore understand what went wrong and what should be done to put it right.
Banks have been seen as the chief architects of the financial crisis, but is that fair? “In my time at the MPC at the bank, I was surprised by the lack of interest in issues relating to financial markets,” Mr Wadhwan says. “Indeed there seemed to be a deliberate policy to run down resource in the financial stability wing. It is therefore odd that the new regulatory structure [to be introduced by the Government] makes an unrepentant BoE even more powerful.”
The UK’s five biggest banks are being hauled in by George Osborne and Vince Cable for a summit on lending. You must do more, they will be told, and we can expect some suitably angry policy statement following the meeting to show that the Government means business. The question, though, as Mr Wadhwani says, is whether the other guests at the meal have really understood their role and changed their behaviour accordingly. Is Mr Wadhwani right to point the finger at the BoE and Mervyn King? Is it time we gave the banks some praise for the changes they have made and see their role in a more positive light?
What is most notable about this – other than that it points out central banking’s culpability – is the statement that during his time at the bank, a former central banker says he “was surprised by the lack of interest in issues relating to financial markets.” Mr Wadhwan continues: “Indeed there seemed to be a deliberate policy to run down resources in the financial stability wing.”
Were there any real press freedom in the UK (at least so far as concerns the mainstream media) such a phrase would set off alarm bells. If we understand Wadhwan correctly, the Bank of England was purposefully destabilizing financial markets – or so it seemed to him. To us, that seems newsworthy. As does the “new regulatory structure” (within this context) that will give the Bank of England more power. We note that the same thing is occurring in America, where the Fed is set to take on more responsibility.
Of course it is in fact central banking that provides an endless destabilizing influence on economies the world over. This is why the current financial regulations being promulgated in Europe, the US and Britain are nonsensical. We write this quite a bit, as anyone who stops by the Bell already knows, but we remind ourselves we need to continue to do so because so far as the mainstream press is concerned it’s “business as usual.”
A tiny power elite basically controls the world’s mercantilist central banks. Central bankers, politicians and others stand in front of this mercantilist crowd (worth trillions) to give the appearance that the system is necessary, inevitable and the natural outcome of a free market. But it is not so. The system is one of monetary control and the “work” that central bankers do involves fixing the price of the money which inevitably distorts economies over time.
Too much money leads first to a boom and then a terrible bust. Re-stimulation continues the process and makes economic imbalances worse over time until finally the whole system begins to collapse and something else emerges. We are in a collapse phase currently.
The problems begin and end with mercantilist central banks. Absent central banks and government involvement in money, gold and silver – probably in a free-banking environment with or without fractional banking – would be the order of the day. There would still be booms and busts, but they would likely be shorter in nature, regional in scope and far less destructive. Additionally each business cycle would thoroughly wring itself out instead of merely setting the stage for more serious problems down the road.
The financial regulations that are being rammed through the EU, America and Britain comprise a response that has been prevalent for the past 100 years. The idea is that people, incensed by “Wall Street” and by “the City” and by powerful and arrogant private banking in general, will throw their collective weight behind new regs aimed at rogue bankers. Of course it is not a satisfactory solution but it is not intended to be a rational one. It is supposed to satisfy emotionally.
But because of the Internet and the severity of the downturn, we have seen ample apocryphal evidence that this time around people DO understand that it is the central banking system itself that is at fault. Because the powers-that-be control governmental and regulatory structure, the process of blaming private sector banking continues, but without nearly so much credibility. The problem for the elites raised oh-so-quietly in this Telegraph article is that people DO know this time round.
The blame-game continues unabated but instead of properly channeling people’s anger into regulatory retaliation – which leave the system basically unscathed – it will actually INCREASE anger and frustration this time round. This is the real problem the elite and its many enablers have to deal with.
The tool kit which has availed the elite over many generations is not working in the era of the Internet. More and more may have seen behind the curtain. Our answer to the question raised by this article is therefore, “Yes, it does go deeper than that.” And also, “The crisis is probably not averted.” If it is not ameliorated but continues on its present course, our suggestion would be that, “You haven’t seen anything yet.”