Betraying the Oligarchs — Federal Reserve a big part of the problem?
by Justice Litle, Editorial Director, Taipan Publishing Group
Posted originally Oct 14, 2010
“WHAT WOULD YOU HAVE THEM DO?” So asks reader Richard M., in response to [my previous piece] on the Federal Reserve. There is zero chance the Fed would ever take my advice. But if, by some miracle they had an interest in hearing it, here is what I would advise.
I would tell the dog to bite the hand that feeds it. I would tell the Federal Reserve that the servant must betray its master. Those who throw the levers of power and benefit greatly from everything the Federal Reserve does must be allowed to feel pain — real and significant pain — in order that the country might heal.
To understand what I mean, it is first necessary to understand something else. As we have outlined at length in these pages, the Federal Reserve does not serve the people of the United States of America. It serves banks and financial institutions. And even then, the Fed does not serve all banks and institutions, but only the most powerful and connected of these.
And still, the concentration of power does not stop there. Within the halls of the favored banks and institutions, there are those who wield power over all their fellows. These are the men who, by and large, tell the Federal Reserve what to do and why. These are the men who must be betrayed for the sake of the country at large. (It is not going to happen, but the question, again, is what would happen were it up to me.)
One of my favorite articles of the past few years is a piece called “The Quiet Coup” by Simon Johnson. (You can find that article here.) Johnson, a former chief economist for the International Monetary Fund, speaks of financial oligarchy. He describes how the U.S. government has been captured by high-placed financial interests, and how these interests are making recovery impossible. This is still true, I think.
Making sense of the insensate
From the average citizen’s point of view, the Fed’s actions are stupid and foolish. Printing up money does nothing to help unemployment. Giving free money to Wall Street does not help Main Street.
The disconnect is in the assumption that the Federal Reserve has America’s best interests at heart. The Federal Reserve does not give a damn about America, because the Fed’s true masters do not. When one aligns the Fed’s actions with the interest of private overseers, rather than the public at large, the puzzle pieces start to fit. Consider the toxic nature of zero interest rate policy, or ZIRP.
The Federal Reserve says it is keeping interest rates near zero in order to help the economy. But this is a lie. Interest rates are kept near zero to help those who benefit most from playing the paper-asset game. But ZIRP does not help cash-strapped Americans, who for the most part have terrible credit scores and cannot borrow anyway. ZIRP does not help small businesses, who are similarly turned away at the borrowing window.
No, the major benefactors of ZIRP right now are blue chip corporations, like Microsoft or IBM or Johnson & Johnson, who find themselves able to borrow billions of dollars they don’t need, at negligibly low interest rates, in order that they might buy back shares and keep stock valuations propped up. And thus we come round back to paper again. The Fed wants to help those who own and wield great quantities of paper, because the paper-wielders are the ones pulling the strings.
In seeking to justify itself, the Fed tries to pretend that zero interest rates can aid an economic turnaround. But this is a lie too. As ex-money manager Andy Kessler has pointed out in the WSJ:
In most companies, projects are funded when expected returns are higher than the risk-free rate of return, i.e., investing in T-bills. But the risk-free rate today is a big fat zero! Every project makes sense, which can’t possibly be right, so corporate planners sit on their hands and companies just sit on their piles of cash. The sooner we zip the ZIRP, the sooner we return to some sort of normal…
Ripping off the bandage
It is not a popular thing to say, but the road to recovery requires walking through a good deal of pain. Not just fearfully enduring it, but stoically facing it… taking it head on and passing though.
This seems a crazy thing to endorse after all the pain that has been doled out these past few years. But who has felt that pain? Who has received it? Once again there is a huge disconnect. The masses felt the pain, but those in the halls of power did not. When Wall Street cried out in anguish, the response was a massive bailout. The prime directive was “extend and pretend,” for an effectively infinite dollar amount and indefinite time period if need be.
Those on Main Street were allowed to suffer. Those far from power were allowed to wither. But the center stage players were made whole as quickly as possible, nourished by the milk of unlimited taxpayer funds. They are still being nourished. And their refusal to endure pain — their determination to “extend and pretend” and thus pass off the pain to the real economy at any cost — is why the United States still has not healed.
Allowing interest rates to rise, and home prices to fall, would be like ripping off an infected bandage. It would hurt like hell, and the sting would be excruciating. A tide of creative destruction would bring down many edifices. A great swathe of hangers-on would have to throw in the towel and start over. But at least the worst would be over with, and America’s real future could begin.
Keeping interest rates at zero and the printing presses churning, in contrast, is like tugging at the infected bandage with no real conviction. In this scenario, the bandage never comes off. The tugs are sharp stabs of pointless discomfort and nothing more.
Without removing the bandage, the wound cannot be cleansed… and thus the wound does not heal. And so the low-grade pain of not having healed stretches on and on, forever into the distance, like a stupid succession of quantitative easing programs that continuously transfer wealth into financial oligarchs’ pockets as the real economy rots away.
Delayed, not denied
The broader point here is that the ongoing sickness of the U.S. economy is no accident. And the economy will not be healed by a list of political talking points or a simple set of instructions. To actually serve the people, the Federal Reserve as an institution would have to first betray those whom it was originally built to serve.
Ask yourself a question: Why don’t our leaders simply own up to reality? Why don’t we admit, as a country, that we screwed up by getting neck deep in debt, gorging on “stuff” we couldn’t afford, and that it’s time to stop whining and start digging ourselves out? Why don’t we kick away the props, grit our teeth against the pain, and tell the oligarchs to choose between exile or imprisonment?
Were this to happen, we could start on a transition. But that transition would be hard and painful. Certain connected players would lose a great deal of money during the course of it. The oligarchs would prefer not to have that, so they order the Fed to keep the old order propped up as long as possible… to keep squeezing that last bit of blood from the stone.
And yet the inevitable can only be delayed, not denied. On the path we are headed down, economic collapse is likely to happen at some point. It might, in fact, be happening now… a sort of “managed collapse,” as the social order and the cultural fabric starts to fray. It is increasingly becoming an Alice in Wonderland, Anything Goes, Make Believe world.