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and no its not Gordon Brown

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A lot of people seem to believe that although the market economy is a swell system, it requires the equivalent of a Soviet commissar to be in charge of money and interest rates. This belief is altogether misplaced. The Federal Reserve System, or simply "the Fed," is both harmful and unnecessary.

Since the Fed was created in 1913 the dollar has lost at least 95 percent of its value. If the much-maligned gold standard had produced such a result we’d never hear the end of it, but in our system the Fed is, for whatever reason, curiously exempt from criticism. Under the Fed, therefore, people have lost an option they once had: accumulating savings in cash. Under a commodity standard, people could save for the future simply by accumulating precious-metal coins – which, back when they functioned as money, held or even increased their value. No one has that option any longer. In other words, only a fool would try to save by piling up dollar bills. Instead, everyone is forced to become a speculator, and to invest in securities markets they know little about and that can wipe them out entirely if times turn bad.

As early as the eighteenth century, Richard Cantillon identified distribution effects as another way inflation harmed the general public. The newly created money is injected at particular points. Whoever receives it first – that is, people who happen to be politically well connected – get to spend it before prices have commensurately risen, and these fortunate few thereby receive a windfall. By the time it trickles through to ordinary people, on the other hand, the general public has in the meantime been forced to pay the higher prices to which the new money gives rise.

Private and public debt have exploded under this system, especially since the collapse of Bretton Woods in 1971. No one has a right to be surprised when indebtedness skyrockets under a system in which credit can be created out of thin air.

The very existence of the central bank institutionalizes the problem of moral hazard. Moral hazard involves an actor’s willingness to behave with an artificially elevated level of risk tolerance because he believes any losses he incurs will be borne by someone else. Since there is no physical limitation on paper money creation, market actors know the paper money producer can bail them out if things go terribly wrong. They have been vindicated in this belief time and again. They will, therefore, be more reckless in their investment activity and speculation than they would in the absence of such a system.

We were once told that boom-bust business cycles were a thing of the past because, thanks to the Fed, we now had scientific management of the money supply. If anyone believes that today, I’d like to meet him. Artificially low interest rates courtesy of the Fed do not yield us a utopia of sunshine and kittens. To the contrary, they artificially stimulate capital-goods production and long-term investment. They thereby deform the structure of production into a configuration that the public’s freely expressed pattern of saving and consumption will be unable to sustain. When this phony boom inevitably collapses, it is "capitalism" that takes the blame – when in fact the Fed, a non-market institution, is the culprit.

I am interested in neither the saccharine promises nor the technical details of the alleged superiority of a monopoly fiat-money system. The Fed is the lifeblood of the empire, the great enabler of the perversion of the original American republic into the world’s largest and most powerful government. Even if the central bank did confer a net economic benefit, a contention the great Austrian economists F.A. Hayek and Ludwig von Mises strenuously denied (and indeed Hayek won the Nobel Prize in the process of denying), the alleged benefit could not possibly be worth the destruction of the American soul.

As it turns out, we don’t have to make that choice. When it comes to the Fed, justice, economic prosperity, and the values of the original American republic are joined together.

The Fed, its academic apologists, and the drones in our supposedly free press who demonize all dissent from the monetary status quo, have done our economy enough damage. For the sake of American freedom and prosperity, it is long past time that, in the spirit of Andrew Jackson, we killed the monster

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Last week I was very pleased that hearings were held on the independence of the Federal Reserve System. My bill HR 1207, known as the Federal Reserve Transparency Act, was discussed at length, as well as the general question of whether or not the Federal Reserve should continue to operate independently.

The public is demanding transparency in government like never before. A majority of the House has cosponsored HR 1207. Yet, Senator Jim DeMint’s heroic efforts to attach it to another piece of legislation elicited intense opposition by the Senate leadership.

The hearings on Capitol Hill provided us with a great deal of information about the types of arguments that will be levied against meaningful transparency and how the secretive central bankers will defend the status quo that is so beneficial to them.

Claims are made that auditing the Fed would compromise its independence. However, by independence, they really mean secrecy. The Fed clearly cherishes its vast power to create and spend trillions of dollars, diluting the value of every other dollar in circulation, making deals with other central banks, and bailing out cronies, all to the detriment of the taxpayer, and to the enrichment of themselves. I am happy to challenge this type of “independence.â€

They claim the Fed is endowed with special intellectual abilities with which to control the market and that central bankers magically know what the market needs. We should just trust them. This is patently ridiculous. The market is a complex and intricate thing. No one knows what the market needs other than the market itself. It sends signals, such as prices, that should be reacted to and respected, not thwarted and controlled. Bankers are not all-knowing and cannot ignore the rules of supply and demand. They might act as if they are, but their manipulation of the market just ends up throwing it wildly off balance, which gives us the boom and bust cycles.

They claim the Fed must remain apolitical. No organization is apolitical that relies on the President to appoint the Chairman. In fact, it is subject to the worst sort of politics – power to create trillions of dollars and affect the value of every dollar in the country without the accountability of direct elections or meaningful oversight! The Fed typically enacts monetary policy that is favorable to particular administrations close to elections, to the detriment of long-term considerations. They do this partly because of the political appointee process for the Chairmanship.

The only accountability the Federal Reserve has is ultimately to Congress, which granted its charter and can revoke it at any time. It is Congress’s constitutional duty to protect the value of the money, and they have abdicated this responsibility for far too long. This was the issue that got me involved in politics 35 years ago. It is very encouraging to finally see the issue getting some needed exposure and traction. It is regrettable that it took a crisis of this magnitude to get a serious debate on this issue.

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Kill The Monster, that causes boom and bust

Oh poor Hamish :(

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and no its not Gordon Brown

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interesting. however, boom and bust existed before central banks.

if Mises is right and it is fractional reserving that is the cause, then that should be ended. fractional reserving is symptomatic of a truly free market - a clear case for not having a free market in all things...

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interesting. however, boom and bust existed before central banks.

if Mises is right and it is fractional reserving that is the cause, then that should be ended. fractional reserving is symptomatic of a truly free market - a clear case for not having a free market in all things...

Can't be done. :(

Anyone can pretend to have money they don't really have. All it requires is a bit of knowledge of hypnosis, stage magic or sometimes just a good suit and the right accent.

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interesting. however, boom and bust existed before central banks.

if Mises is right and it is fractional reserving that is the cause, then that should be ended. fractional reserving is symptomatic of a truly free market - a clear case for not having a free market in all things...

tis human nature for booms and busts

but central banks make it far worse (but insiders know how to profit from it e.g. Goldman Sachs)

Edited by lowrentyieldmakessense(honest!)

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tis human nature for booms and busts

but central banks make it far worse (but insiders know how to profit from it e.g. Goldman Sachs)

are there boom and busts in cuba?

ending the fed and bank of england etc... would be a step in the right direction. my guess is the fed will be gone in the next 20 years.

would also need to get rid of fractional reserve banking which would require a regulator, auditors etc...

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fractional reserving is symptomatic of a truly free market - a clear case for not having a free market in all things...
Hardly! It's allowing a select group of people the ability to make promises they know they can't keep. If everyone asks to withdrawl their money then there's not enough money.

It's like saying that people who sell you the deeds to a house that isn't there is 'truely free market'. It's not. It's simple deception, and could be viewed as illegal.

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Fiat money appears to be the actual culprit, I think Fractional reserve banking and central banks probably do exacerbate the problem but they don't seem to be in themselves the cause.

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Hardly! It's allowing a select group of people the ability to make promises they know they can't keep. If everyone asks to withdrawl their money then there's not enough money.

It's like saying that people who sell you the deeds to a house that isn't there is 'truely free market'. It's not. It's simple deception, and could be viewed as illegal.

in the absence of any market interference, fractional reserving was rife. lies, deception, cheating these are inherent in a free market. fractional reserving is part of that. making it "illegal" would imply some outside control on the market (i.e. no longer a free market)

look at the way things are sold even in our not so free market. if you want to sell a car you do not specify its 10 key features and compare these to a competitors, you show a blond in the front with her boobs out, or it driving up a sheer cliff or something

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Hardly! It's allowing a select group of people the ability to make promises they know they can't keep. If everyone asks to withdrawl their money then there's not enough money.

The same goes for insurance -- if everybody claims, then the insurer is bust. A truly free market would allow this to happen ;)

BTW I see banks primarily as underwriting other people's promises with bank capital, rather than making direct promises of their own. It's a fine distinction but an important one -- and obvious when the bank is doing something like underwriting a share issue, less obvious when they are underwriting a borrower's ability to repay debt.

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The same goes for insurance -- if everybody claims, then the insurer is bust. A truly free market would allow this to happen ;)

BTW I see banks primarily as underwriting other people's promises with bank capital, rather than making direct promises of their own. It's a fine distinction but an important one -- and obvious when the bank is doing something like underwriting a share issue, less obvious when they are underwriting a borrower's ability to repay debt.

it is not really the same with insurance. people cannot claim at will, whereas they can with draw from a bank at will.

insurance companies hold capital to reflect probabilities of the claims, plus some fat margins.

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it is not really the same with insurance. people cannot claim at will, whereas they can with draw from a bank at will.

insurance companies hold capital to reflect probabilities of the claims, plus some fat margins.

Banks use capital in exactly the same way; in effect they are insuring against borrower default (the premium being the interest rate spread between depositor/lender and borrower). Both banks and insurance cos run into trouble when they misjudge risk.

The businesses have a lot in common in terms of leveraging a large book off limited capital.

Edited by huw

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slighlty related

for those who think more regulation is the answer

from howard ruff

Thomas Sowell, one of my favorite economists, has commented in his new book and an Op-Ed piece that the financial crisis is caused “by members of the Congress who are lecturing them.

“… the idea that it was a lack of government supervision that allowed ‘greed’ in the private sector to lead the nation into crises that only our beltway saviors can solve is utter rubbish.

“… government regulators were precisely the ones who imposed lower mortgage lending standards— and it was members of Congress (of both parties) who pushed the regulators, the banks and the mortgage-buying giants, Fannie Mae and Freddie Mac, into accepting risky mortgages, in the name of "affordable housing" and more home ownership. Presidents of both parties also jumped on the bandwagon.â€

DUCKING FOR COVER

Sowell tells us how the ugly truth is being covered up by the blizzard of lies coming out of Washington and echoed in much of the media. He especially singles out Congressman Barney Frank, who was proud to be one of those who were pushing Fannie Mae and Freddie Mac into more adventurous financial practices.

Here’s what Frank said in 2003: "I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals." He added: "I want to roll the dice a little bit more in this situation towards subsidized housing."

Of course, now that those dice have come up “snake eyes,†Frank is looking down at us, pontificating that, “the subprime crisis demonstrates the serious negative economic and social consequences that result from too little regulation."

Said Sowell, “Don't politicians ever learn? Why should they? What they have learned all too well is how easy it is to get credit for promoting home ownership and how easy it is to escape blame for the later foreclosures and other economic disasters that follow.

â€

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Banks use capital in exactly the same way; in effect they are insuring against borrower default (the premium being the interest rate spread between depositor/lender and borrower). Both banks and insurance cos run into trouble when they misjudge risk.

The businesses have a lot in common in terms of leveraging a large book off limited capital.

the key difference is that a bank is exposed to a bank run. how much capital do you need to protect against that? 100% of deposits.

insurance companies do not need to hold 100% of sum insured unless everyone on their books dies at once... they work in similar ways but (holding capital to match risk); but insurers have liabilities that match assets in terms of term structure; whereas banks have short term liabilities and long term assets (they are insolvent at all times)

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slighlty related

for those who think more regulation is the answer

from howard ruff

â€

a lot depends on the type of regulation. we saw that the banking side of the FSA was basically run by one of the fools in charge at HBOS. that is not good regulation - it is far to close to a totally free market with inevitable results.

a truly independent regulator is needed. like auditing is very independent from the companies audited. you cannot be at company Z one year, then audit it the next - the same thing should be in place for regulators.

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the key difference is that a bank is exposed to a bank run. how much capital do you need to protect against that? 100% of deposits.

insurance companies do not need to hold 100% of sum insured unless everyone on their books dies at once... they work in similar ways but (holding capital to match risk); but insurers have liabilities that match assets in terms of term structure; whereas banks have short term liabilities and long term assets (they are insolvent at all times)

I'm not saying the businesses are identical, just that the underlying principle in both cases is the leveraging of capital to underwrite risk, so that neither business can be sure of meeting its liabilities under every eventuality.

The bank-run equivalent for an insurer might be a flu pandemic (life insurer) or a mass bond-default (monoline insurer). Arguably, the bank is sounder because at least the risk of its particular catastrophic event is somewhat under its own control.

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I'm not saying the businesses are identical, just that the underlying principle in both cases is the leveraging of capital to underwrite risk, so that neither business can be sure of meeting its liabilities under every eventuality.

The bank-run equivalent for an insurer might be a flu pandemic (life insurer) or a mass bond-default (monoline insurer). Arguably, the bank is sounder because at least the risk of its particular catastrophic event is somewhat under its own control.

insurers hold risk capital for flu pandemics and a large host of improbable events. in fact flu pandemic is one of the specific risks they are required to demonstrate they can survive as part of ICA regulation in the UK. i maintain insurers have no risk equivalent to a bank run; and that they are technically solvent unlike banks

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a lot depends on the type of regulation. we saw that the banking side of the FSA was basically run by one of the fools in charge at HBOS. that is not good regulation - it is far to close to a totally free market with inevitable results.

a truly independent regulator is needed. like auditing is very independent from the companies audited. you cannot be at company Z one year, then audit it the next - the same thing should be in place for regulators.

auditors independent?

i know they are supposed to be but in reality

Enron

Madoff

Worldcom

Stanford

the list could go on

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Banks use capital in exactly the same way; in effect they are insuring against borrower default (the premium being the interest rate spread between depositor/lender and borrower). Both banks and insurance cos run into trouble when they misjudge risk.

The businesses have a lot in common in terms of leveraging a large book off limited capital.

If they hadn't been so dumb - and so greedy - and, above all, DISHONEST, the sytem could well have worked OK. If they hadn't manipulated the market by shocking fraud via LIAR LOANS - and instead had rigidly stuck to 3 x verified income - everyone would have been reasonably happy - the "market" would have worked - and all would have been ok'ish.

But no, they had to screw it all up.

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