The mortgage-housing turmoil responsible for much of America’s current financial crisis is the result of decades of compounded government intervention. But altruistically motivated mortgages are not the only problem. America is also suffering the consequences of altruistically motivated government interventions in its other financial institutions, dating back almost a century, interventions (whether in the form of regulations or subsidies) that have led to financial crises time and again and will continue to do so as long as they remain in place. In 1913—after about a century of the stable free banking system that financed America’s stupendous Industrial Revolution—Washington took a large step toward wresting control of America’s financial system when it established its central bank, the Federal Reserve. Previously, banks with conservative reputations (e.g., J.P. Morgan & Co.) had issued reliable currency convertible into fixed weights of gold (the essence of the gold standard). But critics insisted that there was “too little” money, that overextended borrowers should enjoy an occasional inflation to reduce the burden of their debts, that the needy should have easier access to money and credit, and thus that government should control the supply of each. The Fed was granted a monopoly on the issuance of currency; all other bank currencies were deemed illegal. Within twenty years (in 1933), the Fed reneged on the gold standard and began issuing fiat paper money—money unmoored to any objective standard of value—as it does to this day. With this privileged, pet bank at their side in the decades since, Washington’s politicians were better able to finance the burgeoning American welfare state. Had Americans objected to this monopoly and its nonobjective money at the outset, we would be thriving in a very different America today. But Americans did not object. Why? Few people have ever objected to the Fed’s role as financier of the welfare state because so few object to the welfare state itself. The welfare state is the political ideal of altruism; it facilitates the sacrifice of the successful to the needy. Indeed, defenders of the welfare state defend the Fed no matter how irresponsible its policies or actions, precisely because it is so integral to the welfare state. And Fed officials excuse their own irrational behavior in the ether of moral superiority, seeing themselves as duty-bound to help the needy, even if indirectly, through the funding of mathematically and economically ridiculous Congressional schemes. They willingly finance (by printing fiat money) the welfare schemes that Congress cannot finance via direct taxation. Paul Volcker, head of the Fed from 1979 to 1986 and now an economic advisor to Mr. Obama, admitted that “central banks are not exactly harbingers of free market economies,” primarily because they have always been “looked upon and created as a means of financing government [projects].” (As America has moved toward a more socialistic money and credit system in the past century, few people have acknowledged how closely it has reflected and codified avowedly altruistic premises. Karl Marx, the preeminent altruist and socialist of the 19th century—who enjoyed renewed acclaim during the alleged “breakdown” of capitalism and the gold standard in the 1930s—argued that in a truly socialist world, wealth would be perpetually transferred “from each according to his ability, to each according to his need.” Toward this altruistic ideal, plank five of his Communist Manifesto [1848] demanded a “centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.” This is exactly the role of the U.S. Federal Reserve.) Motivated as they are by altruism, the Fed’s monetary policies have inflicted significant damage over the years. In sabotaging America’s banking system in the early 1930s, the Fed (together with punitive tax policies) caused the Great Depression. Today’s Fed chairman, Ben Bernanke, who specialized in the Great Depression when he taught at Princeton, admitted as much in 2002, after summarizing a 1963 book by Milton Friedman and Anna Schwartz that showed definitively that Fed officials (not free markets) were to blame: “As an official representative of the Federal Reserve, I would like to say to Milton and Anna, regarding the Great Depression: You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” But neither Friedman and Schwartz’s book nor Bernanke’s admission have reined in the Fed’s monetary policies, which continue to wreak havoc on American finance and contributed greatly to the current financial crisis. In addition to instigating the recent wave of loan defaults by encouraging borrowers into ARMs and then skewering takers by dramatically raising short-term interests rates in 2006, the Fed also sabotaged bank profit margins, caused bank insolvencies, and killed the remaining banks’ incentive to lend—by raising short-term interest rates well above long-term interest rates, a policy known as “inverting” the Treasury yield curve. The significance of this Fed policy cannot be overstated. As intermediaries, banks collect demand deposits and funds that are payable in the short term, then lend the proceeds over the longer term. Consequently, when short-term interest rates (say, 1 percent) are below long-term rates (say, 5 percent), banks are profitable (at a margin of +4 percentage points) and thus motivated to expand their extension of loans; in the rarer cases where short-term interest rates (say, 5 percent) are above long-term rates (say, 3 percent), banks suffer losses (at a margin of -2 percentage points) and are thus motivated to contract their extension of loans. This latter phenomenon—an inverted yield curve—has preceded all six U.S. recessions (and all “credit crunches”) since 1968, including the latest one. And though this causal link is well known to Fed officials, they persist in using this interest-rate weapon to fight what they deem to be “excessive” economic growth. The Fed, established to help Washington finance its various altruistically motivated programs, is an economically devastating institution, but its destructiveness is largely ignored or excused as the unavoidable but acceptable side effect of the “moral” goal of helping the needy. Washington has a long tradition of attempting to solve financial system problems caused by its previous interventions with still further interventions. For example, rather than abolish the Fed or even restrain its powers in the wake of its well-known role in causing the Great Depression, Washington expanded the Fed’s power to control American banking, by abandoning the gold standard and establishing the Federal Deposit Insurance Corporation (FDIC), the purpose of which was to guarantee bank account holder deposits in the event of a bank failure. In so doing, Washington institutionalized a system of undisciplined money-credit expansion. Freed from the gold standard, the Fed could print money without limit; buy an unlimited supply of government debt; and inject currency as reserves into banks, thus manipulating them for Washington’s altruistic ends. The welfare state now had a dark angel who, through inflation—which dilutes the value of everyone’s money—could steal wealth by stealth. —Richard M. Salsman theobjectivestandard/issues/2009-spring/altruism-financial-crisis.asp
Posted on: Fri, 31 Jan 2014 22:03:39 +0000