Bernanke Prints On! How Do We Change The System?

You can’t stop us on the road to freedom
You can’t stop us ’cause our eyes can see
Men with insight, men in granite
Knights in armor intent on chivalry – Van Morrison, Tupelo Honey

A few days back we wrote “The Oppressed Worker and the Fed Chair” discussing how the debate over free markets and living wages often overlooks the impact of expansionist monetary policy on the lives of the poor and working class – especially minimum wage workers. To this, our friend Jefe Ocho responded with a simple question: “So how do we change the system?” Good question.

The Playoff Comes Slowly, and at Some Price …

For decades now college football fans (like myself) have been calling for a playoff to determine the national champion. Division III has one, Division II has one, Division IAA (now “FCS”) has one – but somehow major college football does not have a playoff. Instead, the national champion is determined by a year-long beauty pageant followed by a one-game showdown of the top two finishers (with plenty of wrangling along the way about just who the top two should be).

Years ago (10-ish I think) there was a study published indicating that the revenues generated from a college football playoff would vastly exceed the revenues generated by the current bowl system. Seems like this would be a match made in heaven: the fans want it and there’s more money to be made. The problem was simple: the money would be made by a different set of people. The bowl games wouldn’t necessarily be a party to all of the new revenues – at least not in the same proportion they had grown to love. And so, here we are in 2013 and still no playoff. Next season there will be a small four team playoff, but nothing like the 16 team playoff we should have.

So it is with central banking and the fiat currency system. There are certain people, groups, and interests who make an absolute killing in the current system. They also happen to be the people with the money and power to keep the system going. Don’t expect change to come rapidly and smoothly, even if a majority of people wanted it and it could be demonstrated that we would all be better off.

Audit the Fed …

To see the entrenched interests in action one need look no further than the “audit the Fed” movement from a few years back. The movement had massive public support, but the banking lobby was able to shut it down in Congress.

Auditing the Fed doesn’t definitively change the system, but light drives out darkness and anything that opens the shadowy world of the banking cabal to public scrutiny is a good thing.

The Power to Distort …

The power of the fiat currency system is the ability to distort the market. The central bank can invent debt instruments out of thin air and use them to purchase various other assets and debt instruments. This distorts the supply/demand relationship between dollars, government debt, and now mortgage-backed securities … and therefore just about every asset under the sun. People with first access to the newly printed money, and all of the other financial assets, get a very nice payday from the distortion – the poor and middle class get whacked.

To start to change this, we need to reduce the Fed’s power to distort the markets. It’s a tall order, but we’re closer than you might think. In the modern trading world even small players can enter the distorted asset market. What we need next is to extricate that market from the tax structure – eliminate capital gains taxes.

I understand why this would be displeasing to the social crusader: the wealthy would be getting a tax break. But removing the tax burdens, coupled with a lower barrier to entry (electronic trading and small accounts) would let the common man get out in front of the distortion.

Demand Accounts …

At the heart of how the central bank percolates credit liquidity through the market is fractional reserve lending. When you deposit money into the bank they lend it out to someone else, at interest, and consider the money owed back to you “on demand” as a liability. In a fractional reserve system, they only have to keep enough money around to cover normal transactions, not enough to cover all liabilities.

This is basically a freebie for banks. They get to lend your money out for some interest return, with you bearing the risk of default (though, the risk is spread to all depositors), but they don’t compensate you for the risk. Well, they may claim that “free” checking is compensation, but even that is disappearing these days (minimum account balances are coming back en vogue).

The system only holds together if withdrawals are lower than the fractional reserve requirements. If we all went down to the bank and took our money out it would shake the system down. Naturally I’m not proposing that we attempt to scuttle the banking system to prove a point, but we do need to move away from fractional reserve lending. Just as with capital markets, modern technology makes the prospect of separating the two banking functions (safe storage and for-profit lending) from one another. People can lend money to borrowers, bearing just as much risk as they do by “lending” to the banks, but reaping greater rewards. Further, the ability to provide safe storage function could be accomplished with next-to-no “brick and mortar” costs, and a full-reserve banking system could function without risk to depositors.

The Bernanke Decision Tree …

Just today the Fed Chairman Ben Bernanke announced that the Federal Reserve would not taper its $85,000,000,000 a month of money printing / asset purchases / transfer of wealth from poor to rich. Of course “taper” and “stop” are not the same thing, and most prognosticators were expecting a reduction to perhaps $75,000,000,000 a month of thing air interventionism. Alas, the chairman and the board have concluded that the struggling economy cannot sustain the pain induced by a paltry $10,000,000,000 less in printed cash per month. This led me to generate the Ben Bernanke decision tree:

Slide1

The existence of the FOMC seems to be a continuing saga of changing the markers to keep the printing presses going. First it was “price stability” – defined as some arbitrary constant rate of price increases. Then it was “price stability” excluding essential things. But that wasn’t good enough and we needed a new out, so we added the “dual mandate” of full employment. Alas, if employment is improving we get statements by the chairman about how the unemployment rate doesn’t represent the true weakness of the job market (he’s not wrong by the way). And, eventually, we get to the true decision point: if things are about to get out of hand, stop printing.

Imagine the New …

Back during the slavery days of the old south there were plenty of Christians in Dixie. Yet somehow we allowed slavery to continue – something the Christians of the south would find appalling today. At the time it was just part of the way things were and nobody could conceive of a different way of doing things. Eventually though, a change came.

The system can change, and quite frankly I believe it will. But there is a great deal of growing pain between now and then. I also think that part of that journey is for the church to begin to address the problem, to actually take up a message of fair weights and standards (a Biblical message) and conceive of a country where fiat currency doesn’t rule the day.

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One Response to Bernanke Prints On! How Do We Change The System?

  1. Pingback: Obamacare vs The Fed – Maybe He’s Playing the Long Game | Freedom at Bethsaida

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