Archives Philosophy Politics — 25 January 2012
Debating monetary policy, new “cool” thing

True inflation of gas and food prices, a weakened dollar, booms, busts – who’s to blame?

Yes, congressional influence on the economy has much to do with it, but there is something else. Did you know that two of the most powerful drivers in the American economy, and even the world economy, are not driven by Congress?

Those two areas are: interest rates and the amount of money being printed. So, who controls these enormous drivers in the economy? A private, unaccountable, un-auditable, unchecked entity called the Federal Reserve Bank.

There is one elected official who has been raising the red flags on the dangers of central banking and the lack of transparency for years, and that’s Presidential candidate Ron Paul. But, I was surprised to see another Presidential candidate take up this battle cry – Newt Gingrich. I actually found myself agreeing with Gingrich on this new found enthusiasm for correcting the debacle of an entity known as our Federal Reserve Bank.

If Gingrich is willing to take a hard look at this, he should be given credit. I’m glad Dr. Ron Paul isn’t alone in this Presidential field with his belief that the free market system works, and that no market is truly free when constrained by central planning from an entity like the Federal Reserve.

This may seem like Econ 101 to some of you, but humor me for a moment with regards to central planning and the Federal Reserve…I know, I know…already super econ-geeky. I’ll stay with layman’s terms for this little review, since that’s all I’m capable of anyway.

Most would agree economic booms only to be followed by busts aren’t the best cycle for individuals. Instead, consistency is preferred. But what causes economic these artificial booms?

One cause is top down economic planning by a central bank like the Federal Reserve. Ironically, the Federal Reserve was supposed to be “managing” this exact problem. Instead, it creates artificial stimulus to the economy by inflating the supply of money through printing of cash or manipulating credit by controlling interest rates designed to encourage lending and stimulate or control the market an “appropriate” pace.

What backers of the current Federal Reserve system don’t understand is that successful central planning of an economy is IMPOSSIBLE because typical and naturally occurring signals which would cause markets to expand or contract are hidden or ignored through artificial manipulation of those same signals when central planning is implemented. Bottom line – central planning completely ignores the real market.

Therefore unnatural or sustained booms inevitably result in even larger busts because the market was never permitted to make smaller, more incremental corrections as needed.

Example – manipulated signals of plenty of cash and low interest rates directly contributed to the mortgage boom, then catastrophic bust coming to fruition in 2008. Both buyers and lenders engaged in behavior natural market adjustments would have signaled against had central planning not been attempted.

Another factor was that government regulations and laws actually created the means for the private market place to make decisions it would have previously shunned – all because central planning was deemed appropriate for manufacturing prosperity or equality (depending on which side of the aisle a Congressman sits). Home ownership was considered a right, so through multiple Presidencies, laws were passed to force banks into sub-prime lending, when in the past – they were not in this business.

The market adjusted to natural supply and demand of new buyers in the market place– home purchases and prices rose, and banks sought to diversify this new risk through credit swaps and securities. In lieu of new economic policy and law provided by the “full faith and credit” of the US government (AKA…we’ll bail you out) – the entire economy began running on a view of endless growth and cheap credit. We embraced the artificial boom created by bad laws and bad monetary policy.

We can thank our friends at the Federal Reserve Bank for all the free flowing money and credit that perpetuated the entire boom. Of course, it all busted in the end costing everyone involved much more than they earned along the way and placing the entire US economy in limbo, but – hey, central planning, government stimulus and big spending work great, right?

Bottom line –If you want to cure the bust, don’t create the boom. Economic growth must be based on real factors, not phony stimulus from the Federal Reserve like printing money and artificially cheap credit. Unfortunately, central planning has become a bi-partisan approach with both Bush and Obama most recently approving of such methods like many before them. Both had stimulus packages. Both engaged in monstrous spending, governmental growth and debt to fix problems. Both allowed an unchecked federal reserve to increase money supply and manipulate credit. Both tried to pick winners and losers through subsidies, regulations and laws.

By the way, this doesn’t even account for the ridiculous amounts of unchecked foreign lending, treasury purchases and crony capitalist sweetheart deals the friends of our Federal Reserve Bank continue to receive every year. “Government” Sachs and “DC” Morgan-Chase are like hogs at the troth lapping up billions while the veiled monetary policy continues.

We continue to arrive in the same place and ask ourselves how we got there. From the last bust, what has changed?

Various forms of central planning continue to be used by Congress. Couple this with flawed monetary policy from an institution with no oversight and you have created a perfect recipe for instability. Welcome to the modern American economy – an unsustainable welfare-warfare state with central economic planning as the master.

The fixes to these problems are so easy, it’s scary. Unfortunately, both sides in DC have come to accept economic central planning as the only way to “fix” our economic problems. With very little real diversity in their approaches to the economy – don’t count on real changes to the economy any time soon.

Most politicians are there to be heroes, when what we really need them to be are stewards. Less is always more. Thanks to Dr. Ron Paul for his years of work on the dangers of our unaccountable Federal Reserve system, and most recently – dare I say it…Newt Gingrich who has made a point to raise this as a campaign issue as well. Apparently debating monetary policy is, all of a sudden, “cool.”

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