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The Fixed Economy and Central Banking

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Last month Rolling Stone carried an article by investigative journalist Matt Taibbi with the provocative title “Everything Is Rigged: The Biggest Price-Fixing Scandal Ever.” Taibbi begins the piece by writing,

Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world’s largest banks may be fixing the prices of, well, just about everything.

You may have heard of the Libor scandal, in which at least three — and perhaps as many as 16 — of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that’s trillion, with a “t”) worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history — MIT professor Andrew Lo even said it “dwarfs by orders of magnitude any financial scam in the history of markets.”

That was bad enough, but now Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world’s largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world’s largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps.

Taibbi has done yeoman’s work in breaking down a rather complex subject and exposing to his readers the myriad moral hazards and conflicts of interest that pervade the financial sector. Indeed, with one scandal occurring after another, it is difficult to disagree with his conclusion that the financial system is rotten to the core.

Yes, interest rates are effectively rigged by a few large, well-connected, financially interlocked corporations. We get that.

But Taibbi glosses over the key role central banks play in concentrating wealth in the hands of a few corporations and enabling the insider deals, shenanigans, and rampant corruption he rightly condemns. Rent-seeking firms like Goldman Sachs, Citigroup, and JPMorgan Chase would have gone out of business — or at least been greatly downsized — by competition long ago if not for their benefactors at the Fed and the U.S. Treasury.

In short, interest rates could not be so easily manipulated or “fixed” unless someone or some institution was able to control the volume of money. And who or what is able to do that?

Well, it’s the government-chartered central banks that have been given a monopoly privilege in the creation of money. Rather than letting the free market determine what money is and how much of it is in circulation, our central-banking, fiat-money system has entrusted that power to a tiny, state-sponsored elite.

The speculative excesses and corruption witnessed in recent years are a natural outcome of the artificially low interest rates that the central banks have created through inflation. If more-disciplined monetary policies been in place (as they would have been in the absence of central banks), much of the economic destruction of the past few decades would have been averted.

Concentrating such immense power in the hands of a few individuals is a very bad idea, and, here in the United States, it also happens to be very unconstitutional.

Article 1, section 8 of the United States Constitution grants Congress the authority “to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Nowhere is Congress granted the authority to charter a central bank. Yet that is what Congress did when it created the Federal Reserve System in 1913.

Sure, one cannot help being aghast at the unbridled greed and pervasive corruption that Taibbi’s article explores, but such spectacles of depravity do not explain what has gone wrong in the economy.

If the market had been allowed to correct for the “irrational exuberance” of the Greenspan years, the ensuing deflation would have forced widespread liquidation, which would have brought the economy into equilibrium. Wages would have fallen, but so would have prices. Many unsound businesses would have closed, but this would have freed up resources to be invested more productively. This “creative destruction” coupled with government spending cuts would have allowed the economy to genuinely recover.

Prior to the Great Depression, this was how financial panics were usually resolved. Whether out of prudence or impotence, politicians generally took a hands-off approach. The result of each panic was thus usually an acute but short market correction. But, like the financial crisis that struck the industrialized world in 1929, the crash of 2008 was not met with benign neglect. Rather, central banks and governments have attempted to reinflate the bubble. The result is a moribund economy and a nation indebted to the hilt.

So, as long as you have central bankers conspiring with politicians to debase the currency, money will not function properly, and you will suffer periodic financial panics. Along with the corruption of money, you will see a corruption of morals as people begin to understand that the only way to get ahead is to play along with the inflationary scam. The market, rather than allocating capital efficiently and thereby boosting productivity, becomes a vast “pump and dump” scheme; financial maneuvering and regulatory arbitrage supplant manufacturing and production.

The corruption of money is the problem. In order to function properly, a currency must be a reliable store of value. Central banking robs money of this important property by continually debasing it. It should also come as no surprise that in such an inflationary system, insiders will leverage their “financial intelligence” to get rich quickly — and at the expense of the public.

This is the effect of the Fed’s successive rounds of “quantitative easing” and “twisting.” The $85 billion per month fix the central bank gives to the market inflates stock and bond prices, but does nothing to stimulate genuine economic growth, because the “liquidity” represents money created out of thin air. Sure, the Fed’s inflation is pushing down interest rates, which makes it easier for the federal government to borrow, but it also makes saving money virtually impossible. And without savings, you will not have capital to finance future economic growth.

Taibbi closes his article with this observation:

The only reason this problem has not received the attention it deserves is because the scale of it is so enormous that ordinary people simply cannot see it. It’s not just stealing by reaching a hand into your pocket and taking out money, but stealing in which banks can hit a few keystrokes and magically make whatever’s in your pocket worth less. This is corruption at the molecular level of the economy, Space Age stealing — and it’s only just coming into view.

But such “molecular level” corruption is a normal function of central banking. For almost a century the Federal Reserve has been looting America. Central-bank inflation has resulted in the seizure of the people’s gold (1933), led to the imposition of a completely untethered fiat currency (1971), and brought into being an economy dependent on government deficits and consumer debt.

This post was written by:

Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.