Success by its very definition includes failure. People forget that the discipline of failure is integral to capitalism. When the Fed creates money out of thin air, the risk of failure does not exist. Without the risk of failure, the big banks know they can place one way bets and not worry about losses because they are literally “too big to fail.”
In fact, management and traders are paid to do exactly this. If the monstrous one-way bets pay off, they get up to 50% of the profits. If the bets go bad, the stockholders, the Fed, and now the public eat the losses.
So they have every incentive to act in their own interests while reinforcing incompetent management, improper risk taking and inefficient operations. Politicians and regulators are incentivized the same way, since the Fed also makes it possible for them to skirt the issue of responsibility.
The Fallacy of Free Money
Which brings me to the last sacred cow I want to barbeque today: Interest rates.
The Fed spends a good deal of its time and our money promoting and maintaining low interest rates. It’s doing so on the assumption that low rates prompt everyone to put money to work by making savings less appealing. But ask Japan how much demand there was when money was free – the answer is next to none.
The trillion-dollar problem is that this economic assumption presumes the savings are there in the first place. In reality, America and other “Fed” nations are flat broke. There is no savings pool to draw upon, which means the foregone assumption is a bust. At some point, people who do not have cash cannot pay for the goods and services they need — no matter how much liquidity is in the system.
International capital markets actually exacerbate the problem because other governments and major trading firms purchase that very same excess liquidity which they, in turn, then begin using as collateral for their own expansion.
Congressman Ron Paul, a staunch Fed opponent, summed it up much more eloquently than I ever could in his book, “End the Fed,” noting that “those who suffer [rarely] see the connection between Federal Reserve monetary policy and the suffering that comes as a consequence of financing” big government and big banking.”
Under the circumstances, is it any wonder that almost every currency in recorded history that is controlled by a central bank has failed or is failing? Here’s just a few since 1913 when the Fed was formed.
No. We do not need a Fed because dissolving it would:
- Force any government that has one to live within its means;
- Restore the appropriate level of risk to the global financial community; and,
- Nullify the risks involuntarily forced upon the public in the name of political priorities.
As for how we dissolve this mess, that’s a subject for another time and another email.