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Central Banking Is The Problem, Not The Solution
Submitted by Richard M. Ebeling via Ludwig von Mises Institute,
Since the economic crisis of 2008-2009, the Federal Reserve — America’s central bank — has expanded the money supply in the banking system by over $4 trillion, and has manipulated key interest rates to keep them so artificially low that when adjusted for price inflation, several of them have been actually negative. We should not be surprised if this is setting the stage for another serious economic crisis down the road.
Back on December 16, 2009, the Federal Reserve Open Market Committee announced that it was planning to maintain the Federal Funds rate — the rate of interest at which banks lend to each other for short periods of time — between zero and a quarter of a percentage point. The Committee said that it would keep interest rates “exceptionally low” for an “extended period of time,” which has continued up to the present.
Federal Reserve Policy and Monetary Expansion
Beginning in late 2012, the then-Fed Chairman, Ben Bernanke, announced that the Federal Reserve would continue buying US government securities and mortgage-backed securities, but at the rate of an enlarged $85 billion per month, a policy that continued until early 2014. Since then, under the new Federal Reserve chair, Janet Yellen, the Federal Reserve has been “tapering” off its securities purchases until in July of 2014, it was reduced to a “mere” $35 billion a month.
In her recent statements, Yellen has insisted that she and the other members of the Federal Reserve Board of Governors, who serve as America’s monetary central planners, are watching carefully macro-economic indicators to know how to manage the money supply and interest rates to keep the slowing general economic recovery continuing without fear of price inflation.
Some of the significant economic gyrations on the stock markets over the past couple of months have reflected concerns and uncertainties about whether the Fed’s flood of paper money and near zero or negative real interest rates might be coming to an end. In other words, borrowing money to undertake investment projects or to fund stock purchases might actually cost something, rather than seeming to be free.
When the media has not been distracted with the barrage of overseas crises, all of which seem to presume the need for America to play global policeman and financial paymaster to the world at US taxpayers’ expense, the presumption by news pundits and too many economic policy analysts is that the Federal Reserve’s manipulation of interest rates is a good, desirable and necessary responsibility of the central bank.
As a result, virtually all commentaries about the Fed’s announced policies focus on whether it is too soon for the Federal Reserve to raise interest rates given the state of the economy, or whether the Fed should already be raising interest rates to prevent future price inflation.
What is being ignored is the more fundamental question of whether the Fed should be attempting to set or influence interest rates in the market. The presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending. The only disagreements among the analysts and commentators are over whether the central banks should keep interest rates low or nudge them up and if so by how much.
Market-Based Interest Rates Have Work to Do
In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market. Market prices serve as an incentive for producers to supply more of a good when the price goes up and to supply less when the price goes down; similarly, a lower or higher price influences consumers to buy more or less of a good. And, finally, the movement of a market price, by stimulating more or less demand and supply, tends to bring the two sides of the market into balance.
Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods. This assures, on the one hand, that resources that are not being used to produce consumer goods are available for future-oriented investment, and, on the other, that investment doesn’t outrun the saved resources available to support it.
Interest rates higher than those that would balance saving with investment stimulate more saving than investors are willing to borrow, and interest rates below that balancing point stimulate more borrowing than savers are willing to supply.
There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage; that is, suppliers offer fewer hats than the number consumers are willing to buy at that price. Some consumers, therefore, will have to leave the market disappointed, without a hat in hand.
Central Bank-Caused Imbalances and Distortions
In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken.
Investors who borrow the newly created money spend it to hire or purchase more resources, and their extra spending eventually starts putting upward pressure on prices. At the same time, more resources and workers are attracted to these new investment projects and away from other market activities.
The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inflation and an initial investment boom, both of which are unsustainable in the long run. Price inflation is unsustainable because it inescapably reduces the value of the money in everyone’s pockets, and threatens over time to undermine trust in the monetary system.
The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.
The Central Bank Produces Booms and Busts
The unsustainability of such a monetary-induced investment boom was shown, once again, to be true in the latest business cycle. Between 2003 and 2008, the Federal Reserve increased the money supply by at least 50 percent. Key interest rates, including the Federal Funds rate, and the one-year Treasury yield, were either zero or negative for much of this time when adjusted for inflation. The rate on conventional mortgages, when inflation adjusted, was between two and four percent during this same period.
It is no wonder that there emerged the now infamous housing, investment, and consumer credit bubbles that burst in 2008-2009. None of these would have been possible and sustainable for so long as they were if not for the Fed’s flood of money creation and the resulting zero or negative lending rates when adjusted for inflation.
The monetary expansion and the artificially low interest rates generated wide imbalances between investment and housing borrowing on the one hand and low levels of real savings in the economy on the other. It was inevitable that the reality of scarcity would finally catch up with all these mismatches between market supplies and demands.
This was, of course, exacerbated by the Federal government’s housing market creations, Fannie Mae and Freddie Mac. They opened their financial spigots through buying up or guaranteeing ever more home mortgages that were issued to a growing number of high-risk borrowers. But the financial institutions that issued and then marketed those dubious mortgages were, themselves, only responding to the perverse incentives that had been created by the Federal Reserve and by Fannie Mae and Freddie Mac.
Why not extend more and more loans to questionable homebuyers when the money to fund them was virtually interest-free thanks to the Federal Reserve? And why not package them together and pass them on to others, when Fannie Mae and Freddie Mac were subsidizing the risk on the basis of the “full faith and credit” of the United State government?
More Monetary Mischief in the Post-Bubble Era
What was the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September 2008 and June 2014, the monetary base (currency in circulation and reserves in the banking system) has been increased by over 440 percent, from $905 billion to more than $4 trillion. At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 35 percent during this time period.
Why haven’t banks lent out more of this huge amount of newly created money, and generated a much higher degree of price inflation than has been observed so far? Partly, it is due to the fact that after the wild bubble years, many financial institutions returned to the more traditional credit-worthy benchmarks for extending loans to potential borrowers. This has slowed down the approval rate for new loans.
But more importantly, those excess reserves not being lent out by banks are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health care costs, the burden of the Federal debt and other government unfunded liabilities (Social Security and Medicare), as well as other possible political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle with first Ben Bernanke and now Janet Yellen has seemed the more profitable way of using all that lending power.
Even under the heavy-handed intervention of the government, markets are fundamentally resilient institutions that have the capacity to bounce back unless that governmental hand really chokes the competitive and profit-making life out of capitalism. Any real recovery in the private sector will result in increased demands to borrow that would be satisfied by all of that Fed-created funny money currently sitting idle. Once those hundreds of billions of dollars of excess reserves come flooding into the market, price inflation may not be far behind.
Central Banking as the Problem, Not the Solution
At the heart of the problem is the fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources — land, labor, capital — are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures?
Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.
Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.
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what about decentralized banking?
Any system build upon the basis of interest attached to your medium of exchange has a limited shelf life, whether a bank even exists.
"Central Banking Is The Problem, Not The Solution"
The title of the article is wrong, so why would I read the rest of the article. Not a question. I guess clickbait for ZH.
1. Central Bank is not the solution, partially true.... its the solution until the equation meets max potential.
2. Central Banking is the Problem. Mostly irrelevant, I would say incorrect and more like a strawman argument, banks centrallized or not are only symptoms of the problem.
Sorry folks but you can't talk, write or pray out of the equation.... you certainly can parish or be liquidated. Boy, the liquidation phase is going to be real interesting this time. I mean the people that run this website are still convinced that you can call Bullshit.... Apple Pie.... and that somehow I am going to eat it. But you did probably make .001 FRD on all the ads you have on here for my presence... you're welcome by the way.
Article: “In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance.”
What nonsense!
Interest causes imbalances… Because it’s parasite!
Correct, the attaching of interest distorts and imbalances which pulls forward or unleases potential.... however the growth must be maintain exponentially.... unfortunately or fortunately, humans have no such ability.
The only questions are:
1. How high/big?
2. How long?
3. Final tally on walking unfunded liabilities that will be liquidation? My guess 1-2 billion this time.
I thought the real number is $100 Trillion......
"Interest causes imbalances… Because it’s parasite!"
Wrong.
Interest is compensation to the lender, for the risk of principal loss (credit risk) and for forgoing other other investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to pay for them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. In economics, interest is considered the price of credit.
JuliaS,
So, your post tell us that:
a) You are not a good Christian or, Christian at all, because Jesus was against usury
b) You are a propagandist, because you’re part of the financial system
c) Or, you are ignorant of how this ‘Sausage’ (and its compounds) is put together
Let me give you a couple examples:
Margrit Kennedy on interest rates [serfdom]
If Joseph the father of Jesus would have invested one penny at his birth at 5% interest, and Jesus would have returned to the same bank in 1990 - at the time of the German unification - he would have been able to buy, with the money accrued in the meantime, 134 billion balls of gold of the weight of the earth, based on the official price of gold at this time.
This shows mathematically that the continual payment of interest and compound interest over a longer period of time is practically impossible. And explains why we have economic and social breakdowns.
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCAQFjAA&url=http%3A%2F%2Fwww.converge.org.nz%2Fevcnz%2Fresources%2Fmoney.pdf&ei=YEUlVJKWN9CUsQS8qoG4Cw&usg=AFQjCNE5OvSWx2rSJhlyngc1nFrJFgV_1w&sig2=JFevCL8UtTx3uDHNC-ScJg&bvm=bv.76247554,d.cWc
Anthony Migchels
At 4% the National Debt is payed in interest every 25 years, without even denting the principal itself.
http://realcurrencies.wordpress.com/2012/03/01/debt-repudiation-or-an-interest-strike/#comment-2123
Taxation (along with bailouts) is the real problem. I do not see how interest is relevent.
The most important effect of taxation is to force people to use a specific fiat currency which in turn is inflated. The actual collection of funds is only secondary.
Without taxation, people would likely trade in multiple currencies. If the Central Bank's currency was being inflated, people would move away from it. If any bank charged interest, their custormers would be their only risk-takers.
Charming Anarchist,
You need to get 'Curious' about some things.
Please, start with the link below.
http://realcurrencies.wordpress.com/
You could solve a lot of issues if you just started executing Banksters.
The crimes that are the norm now, would be lots less common.
.
Only thing worse than a banker is a group of them.
Bitcoin crypto-currency conference this weekend at UCLA.
agreed.
But public central banking would be a vast improvement over the private central banking system we have now.
And yes - the owners are almost certainly disproportionately European Jews. The foundations for such were laid centuries ago, and should not even be particularly controversial.
Poland may have suffered more than any other nation state from the moneylenders (at least according to a busty ex girlfriend of mine). It certainly survives in the folk memory, buttressed by historical accounts, and is not dismissed by people of average intellect as mere 'anti-semitism.'
Ditto for a heavily Jewish role in various revolutionary movements. Movements which were infrequently in the best interests of the people it purported to be on behalf of [the Bolshevik one being maybe the best example of a revolutionary movement being wholly dishonest about its interests and goals]
Too bad we're not allowed to find out who owns the Fed for realsies.
problem - Central Banksters
solution - guillotines
So, the elimination of the 7 billion bankers would solve the problem, maybe so. Depends what you believe the problem is, I would imagine.
Central Banks cause booms and busts on purpose - they work for the banks and banksters.
In order for the bankers to fleece the populace they needed an intermediary who would rob the public treasury.
Enter the Central Banks and the mythos built around them that they are "Federal" and are there to "control inflation and promote employment".
What good plebeian wouldn't want that? The bankster skullduggery has worked perfectly.
Funny the system has been going through booms and busts before there were things called banks.... let alone worrying about whether they are centralized. Good luck next time.
Right, and the busts cleaned out individual risk takers, not the public treasury.
Each cycle is different as to the details of the liquidation, the simplicity of the problem remains.
And?
Usury... it's what's for dinner.
And banks don’t lend money… it’s what's for dessert.
So, will they ever learn?
Since humans who believe they are so mighty, smart and great can't figure the "problem", I highly doubt they will figure the simple "solution". Which is why the cycle will most probably repeat unless nukes are used.
My guess... this downcycle and liquidation phase last 35-60 years, in general.
Landotfree,
You brought up an interesting word: Believe
All humans are born ignorant.
They became mediocre and stupid, because of believes.
Mass Fraud should be a crime against humanity.
Please support this petition at whitehouse.gov.
https://petitions.whitehouse.gov/petition/mass-financial-fraud-should-be...
Sign-it, Share it, repost it, pass it on.
Stop paying interest on the excess reserves....
So completely TRUE...but pissing at the moon. They're all complicit.
All we can try to do is de-dollarize: don't use USD, don't quote prices or values in USD, don't accept payment in USD.
Don't worry guys. It's contained.
The banksters had their stooge guarantee they would never be prosecuted, but now as the system starts un-raveling, he decides to get out.
They got more then their money's worth in Eric.
MORE date rape drug for the sheeple!!!
DO NOT show them this
http://patrick.net/forum/?p=1223928
Balance is important and like so many things in life when it comes to economic policy it is very important to balance the markets reward when it comes to savings and debt. Savings plays an important role in the economy and has been shortchanged, this will come back to haunt us.
The idea of being frugal and living within our means has not been given due credit, living by increasing debt is far too acceptable. When we find it necessary to discuss savings we are back to basics and it is a sign we have strayed far off course in our economic policy. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/09/savings-and-role-it-plays-in-econ...
hitler said the same think about central banking. and then he started his own central bank with its own money.
central banking is a tool. it is not an end in itself.
the fed might be a moloch evil baal worshiping vampire squid. the solution is to destroy the fed, liquidate the fed's charter members that own it THE TBTF BANKS THEMSLVES. and then start all over again with a government that seeks to prevent usury of the american people instead of encouraging it and taking money in the form of bribes from the old userers.
some amount of abuse is to be expected. when all there is is abusive thieving behavior; the system will fall apart on its own; the question is------how do you try and reboot the system in a way that makes things better ; rather than what happened when the soviet union became 'russia'. because the abuse only got worse when the soviet union collapsed.
Oh, you’re so gentle.
Not mentioned is the fact that central banking facilitates cannibalization of following generations of taxpayers, in the case of America, to the end of time; the duration I specify is derived from data, assumptions and formulas provided by Financial Reports of the US Government. You see, government debt is the means by which a current generation of tax consumers financially cannibalizes following generations of tax payers. Central Banking allows men to visit their sins on their children – not to the third and fourth generations (the Old Testament limit), but – to the end of time.
Also not mentioned is the fact that the Fed triggered the financial crisis begun 2007 December. During the week ended 2007 Dec 7, the Fed sold, unnecessarily, exactly $5 billion of Treasuries. This sale caused bank reserves of the American banking system (on deposit at the Fed) to shrink from $8 billion to near $5 billion, an almost unprecedented amount. The following week, another $5 billion was sold, exactly; the original bank reserve amount of $8 billion was cut in half. The third week the Fed sold slightly over $15 billion; and American banks had to borrow $25 billion from the Fed to replace lost reserves… nothing came close to these numbers during the previous fifty years. Panic had set in, a product of Fed policy; and leads to several questions, ‘How did a gaggle of bandits and idiots gain control of the Federal Reserve?’; ‘Who dares answer that question?’ and, ‘What role does Communist China play in this treason?’
dear cless,
you are typical of many commenters on here. i get your anger. I DON'T DISAGREE with what you are saying. but what is your point?
gentle? you want to hang and kill the guys who run the fed. the time for that is past. their crimes were enshrined and elevated to 'god's work'.
their assets are largely secreted away in offshore banks as they overleverage their banks again to continue usury profiteering.
like drug dealers, you can kill or jail some of them, but what will you do when the system keeps perpetuating itself. you and so many others including jim grant don't think clearly when they say that simply 'backing the currency with gold' or 'ending the fed' will change everything for the better.
you are forgetting the fed indeed DID BACK THE CURRENCY WITH GOLD WHEN IT SUITED THEM. and 'ENDING THE FED' could result in the PRECISE SAME SITUATION WE HAVE NOW.
MONEY IS FUNDAMENTALLY POLIITICAL IN NATURE. BECAUSE MONEY, WHETHER IT BE GOLD OR FIAT, IS GOING TO BE FOUGHT OVER AND CONTROLLED.
THE QUESTION IS HOW TO PLAN OUT A BETTER SYSTEM IF THAT IS EVEN A POSSIBILITY-------BUT THE TIME FOR 'PUNSIHING' THE BANKERS IS PAST. YOU CAN KILL THEM ALL RIGHT NOW AND IT WOULDN'T NECESSARILY MAKE A DIFFERENCE WHEN THE WHOLE THING REBOOTED.
THE QUESTION IS HOW TO CHANGE COURSE, NOT HOW TO RATCHET FORWARD INTO A FUTURE OF GANGSTERISM WHERE FEWERE AND FEWER SURVIVING TBTF BANKS USE THE FED, OR THE LACK OF A FED, TO DICTATE THE DEMISE OF THE CONSTITUTIONAL REPUBLIC THAT SERVES THE AMERICAN PEOPLE.
I'M NOT SO SURE IT'S SALAVEABLE ANYMORE. AND THERE ARE TIMES THAT I BELIEVE IF YOU CANNOT BEAT THEM---JOIN THEM.
NO MATTER WHAT IS POSSIBLE---THE WORLD IS IN FOR A FUTURE OF HURT AND PAIN......
Thanks for your reply.
First of all, I can't explain everything a 5 or 10 paragraphs. My alternative is far more comprehensive than what appears in my comments. All I aim at in my comments is to INTRODUCE others to real facts and laws of history, mainly American/English history and law.
Secondly, where did you get the idea I recommend killing anyone. The fact is, I don't, it would put them out of their misery too quickly. I recommend that we recover as much of the missing Trillions as possible, according to historically-proven procedures.
Thirdly, my main focus is providing alternatives to current social structures that only benefit criminal and useful-idiot classes.. again, according to historically-proven methods.
If you'll perform due diligence on my findings, you'll find that my work is lawyer-proof, professor proof, and accountant-proof; and you will avoid further embarrassment.
It is better to perform due diligence in private, rather than let someone make a damn fool of you on a public stage. It's a lesson I learned many years ago.
I see probltunities.
I'm starting to think Zeroshit is part of the Problem-Reaction-Solution with a whole lot of Intellectual bullshit.Its easy-all Lizards and there Allies need to be exterminated of the face of this planet once and for all,Or humanity will never have peace.
We should get rid of central banks altogether and start using Bitcoin. The bitcoin koers has stabalized lately, which is positive.