The Pusher Has Made Us All Junkies

Monty Pelerin * Economic Noise

A recent post on this site described the Federal Reserve (not Goldman Sachs) as the true vampire squid.

A Predator By Intent

At the Fed’s founding, a few astute critics saw the Ponzi Scheme that it represented. Congressman Lindbergh had this to say:

This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized….the worst legislative crime of the ages is perpetrated by this banking and currency bill. — Charles A. Lindbergh, Sr. , 1913

Lindbergh was hardly alone. Here is another comment by a legislator:

We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it. — Congressman Louis T. McFadden in 1932 (Rep. Pa)

These were two of several  US legislators who objected vehemently to the creation and operations of the Federal Reserve.

These objectors  were neither prescient nor lucky in their assessment of central banking. Central banking had always been the goal of the monied and financial classes. The most successful banking empire stated:

The few who understand the system, will either be so interested from it’s profits or so dependant on it’s favors, that there will be no opposition from that class. — Rothschild Brothers of London, 1863

This position was stated a half-century before the Federal Reserve was instituted.

Today’s Federal Reserve

Today Fed critics are growing to a large and vocal force. Before this crisis ends, I suspect that many more will have joined this group.

The Fed is at a critical point, one would hope an existential one,  in its history. Its necessity and value are no longer blindly assumed. Its ability to affect positive economic outcomes are correctly seriously in doubt. Its importance and necessity are under fire.

The Fed is now beginning to be likened to the phony wizard in “The Wizard of Oz.” It increasingly is disbelieved in its claims and seen by a large minority of the population as a charlatan. Ron Paul is responsible for getting his views through to the masses, including popularizing the notion that the Fed is an evil force rather than one for good.

The Fed reached a decision point recently regarding its QE policy. They came to a fork in the road and, in effect, punted. The left fork represented additional stimulus while the right was a reduction in stimulus. The Fed did nothing. It was paralyzed and chose neither fork. They still stand at this juncture, unsure of which path to take.

The Reason For Paralysis

The Fed should never have set out on this road to perdition. At this point neither fork is palatable. That is because of the dependency effects created by monetary expansion. Alasdair MacLeod describes the problem:

What is not generally appreciated is that once a central bank starts to use monetary expansion as a cure-all it is extremely difficult for it to stop. This is the basic reason the Fed has not pursued the idea, and why it most probably never will.

Years ago, I remember Milton Friedman discussing the point made by Mr. MacLeod. Friedman was careful to distinguish between the level of the money supply and the rate of change in the money supply. He believed that the rate of change was the important variable in regard to short-term economic activity. A decrease in the rate of money production, in Friedman’s opinion, would slow economic activity.

That summary is an oversimplification of Friedman’s position. Friedman did not believe that changes in the money supply could influence economic activity in any long-term sense. To the extent that changes in the rate of money creation surprised the public, economic actors would be forced to alter their expectations and behavior. That view was the basis of McLeod’s comment.

continue article at Economic Noise:

http://www.economicnoise.com/2013/09/22/pusher-made-us-junkies/