Speculation Will Not Cure What Ails Us

No.: 
57

It is time to dismantle the central bank conspiracy. In countering the cabal, Farrell urges the reading of William Greider’s July 15 essay,“Dismantling the Temple”. Greider provides an exposition of the Fed’s calamitous financial biases and regulatory deficiencies. Furthermore, he draws attention to the bipartisan idea that the U.S. Congress develop a stand-alone fund for long-term capital investment projects — technological endeavors that build America’s infrastructure for the benefit of the entire nation.

Greider’s sense of justice and economic pragmatism lead him to propose that while the Fed could continue to create money — honorably instead of dangerously — it would send new infrastructure money to a U.S. capital investment fund rather than injecting the money into the banking system. Our nation could begin to reduce the ability of the financial system to feed off productive enterprise. The financial sector is too big relative to other parts of our economy. As Greider observes, the proposed changes would make mega-bankers howl, interest payments to their oligarchic institutions being reduced (along with their ability to dictate the future shape of the world).

While Greider’s proposal is commendable, it carries its own serious dangers if congressional involvement in the money supply is not carefully hedged in by constitutional strictures. Greider acknowledges the folly of empowering the Fed in 1913 (and again in 1977) without suitable checks and balances. It would be just as foolhardy to give the existent Congress new powers to create money without clear-cut constitutional constraints. It is not enough to say the goal is ‘public interest monetary policy.’ Partisanship and special interest lobbying has done too much damage to entrust the Congress with new power unchecked by constitutional limitations.

Our U.S. Constitution was created to protect us from the whims of men and the delusions of faction driven politics. Sadly, we’ve not kept our two-century old Constitution relevant, sleeping while the financial industry developed such massive power that some of its elites hijacked the nation’s destiny. Our U.S. Constitution needs a well-crafted article on central banking and the financial sector as robust as Article II (Executive Power) in our Constitution. But instead of getting a good corrective in 1992, our last amendment (no. 27) states that a compensation change for members of Congress cannot take effect without an intervening election. We substituted political pablum in place of real constitutional nourishment.

America faces challenges bigger than a biased Fed and spend-happy Congress. We’re challenged at the level of culture and national ethos. The Congress and the Fed are byproducts. This nation has fed on lies so long that the electorate struggles to recognize simple truths. This is a recipe for calamity. But until unstoppable calamity strikes, this nation will continue to milk dry its political, economic and social deceptions.

Micah, an ancient biblical prophet to Judah, declared that the nation had become so deluded it would pick for a spokesman a man full of falsehood and liquor (Micah 2:11). Why is it that nations decline and feed on lies? Why did Rome delude itself as its downfall approached?

People don’t like to think about problems they don’t know how to individually address. It is easier to go along with profitable delusions than to fight them at the risk being left behind.

Little wonder, then, that the Internet is full of tenuous advice: if Goldman Sachs can’t be beat at its games, small fry might as well join the debacle and garner crumbs that fall off the gaming tables. Jeremiah saw this, too, the ancient people of Judah saying, “It is hopeless,” so we will each “act according to the stubbornness of his evil heart” (Jeremiah 18:12, NASV).

Democracy can seldom fix national problems that the majority cannot understand. Greedy people don’t want reforms that reduce their chance of obtaining unjust gain. People seldom see what they cannot feel (per George Washington), and they cannot feel their errors rightly when government insulates them from the consequences of misjudgments. In a libertarian age it is not fashionable to urge that people withdraw from liberties that are personally profitable although nationally destructive. Party politics immunizes people against recognizing injustices that benefit their partisan alignment. The list goes on.

Jim Jubak wrote recently about the lie of “efficient markets”. He says that while the lie may be “intellectual Swiss cheese,” Wall Street will not let go of it because it is “far too profitable.” Furthermore, the “rewards for creating profitable instruments based on this flawed theory far outweigh the punishment for being wrong.” Indeed, to the degree that the market misleads the many it magnifies financial opportunities for the few.

Jubak concludes that the best option for average Americans is to follow efficient market investing during normal times but contrarian investing during times of irrationality and heavy manipulation. Jubak urges readers to be value investors, standing up “to the ridicule of consensus,” until short term delusions are eventually resolved. This may be the right call on some plane of analysis, but what will be the consequence of the next financial crisis? (a crisis Jubak predicts will come). If the government cannot obtain sufficient funds to roll debt obligations forward it may restrict the ability of people to sell financial assets, just as it recently changed rules on short sales. People may find they cannot recover the value of their investments without agreeing to a national financial architecture they don’t want, or a compromised national economic sovereignty. What will objectors do then?

Jon Markman argues that the sidelining of many investors who were made fearful by the panic of 2007-2008 sets the stage for a continuing rally (see “The recovery puzzle’s missing piece”). What better time for banking elites to drive up the price of paper assets then when people who want government reform are sitting out the party to boycott its immorality? After all, the game is all about the relative distribution of power and wealth.

Many sectors are now running on speculative momentum (see Markman, “A 2,700% gain, with room for more,”). A positive feedback loop has replaced the negative feedback loop, creating the potential for a cyclical upswing that contradicts secular macro fundamentals (i.e., like preposterous federal debt creation). The word “investor” in this environment is at best a misnomer. In investing people supply capital in exchange for a stake in the net income to be generated through productive enterprise. That’s not what is happening in the main. People are piling on the money wagon hoping for asset inflation before jumping off again.

Every speculator feels better prepared to jump ship when the next crisis reveals itself. But what about the well-being of the nation? As knowledgeable people observe, the sense of fair play in the market has been greatly diminished. If so, does the day come when the Almighty God says, “Enough”? If the Almighty exists, and if he cares about justice, how much longer until the growth of weeds diminishes his harvest? How long can he afford to wait? Religion’s claim of the ultimate superintendency of a Divine Being is now put to the test by the institutionalization of moral hazard and the rise of international financial injustice. One way or the other, we stand to gain some clarity on religious beliefs in the not-so-distant future. Meanwhile, mega-bankers believe their ability to create money out of thin air will prove to be the closest thing to godhood and divine power.