Power & Market
Goldman Sachs was fined $2.9 Billion while pleading guilty to bribery charges involving the Malaysian government, breaking a record for the largest penalty under the Foreign Corrupt Practices Act. Under US law it is illegal to bribe foreign leaders, as reported by CNN. They quoted Goldman’s CEO who is “pleased to be putting the matter behind us.” Widely recognized as one of the most important financial institutions in the world, Goldman will survive, as the firm has approximately $153 Billion in cash and will likely claw back executive bonuses.
It could have been worse, considering the case centers around $4.5 Billion that was stolen from Malaysia’s Sovereign Wealth Fund, in which:
The money was used to buy New York condos, hotels, yachts and a jet, and to fund movies such as "The Wolf of Wall Street."
The fine is less than the money allegedly stolen! Even more serendipitous for shareholders, Forbes notes:
The settlement amount is lower than the $3.2 billion Goldman set aside for ongoing regulatory and legal matters as of Sept. 30 and was largely accounted for in its 2020 financial results.
As far as continual compliance is concerned:
Goldman is not mandated to hire a compliance monitor… which would be costly and could have been long-term.
Is this an isolated incident? Or does it reflect systemic issues of power, corruption and theft? And what, if anything, does this have to do with the Federal Reserve?
On Thursday the Fed announced a fine:
$154 million for the firm's failure to maintain appropriate oversight, internal controls, and risk management with respect to Goldman's involvement in a far-reaching scheme to defraud a Malaysian state-owned investment and development company…
We know the Fed “conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates,” but there are additional functions beyond what the central bank is charged, including regulation and supervision of financial institutions. Per the 10th edition of The Federal Reserve System Purposes & Functions:
Regulation entails establishing the rules within which financial institutions must operate… Once the rules and regulations are established, supervision… seeks to ensure that an institution complies with those rules and regulations, and that it operates in a safe and sound manner.
The Federal Reserve is one of the few, or only, regulators who literally pays the entity which it regulates! Under section 7 of the Federal Reserve Act:
Dividend Amount. After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders of the bank shall be entitled to receive an annual dividend on paid-in capital stock…
Typically when an entity is mandated to be regulated by the government, that entity must pay the government (or its agency) an annual fee to cover the costs associated with the regulatory burden on the taxpayers. This is not true for the Fed. Despite having free reign on money creation, it is also funded via paid-in capital stock. The list of stockholders remains an elusive find, but it is well understood to be the very banks in which the Fed regulates. There is no secret nor conspiracy to this, as seen on the 2019 KPMG annual audit report, showing “Dividends on Capital Stock” was $999 million for 2018 and $714 million for 2019. Per the Act, this dividend is cumulative and paid out before the US Treasury receives its surplus payout. Perhaps an act of Congress will one day change the payment structure of the Fed. Until then, it’s the Fed’s world, taxpayers are just footing the bill.
…As for Goldman Sachs, they’ll be okay. Luck for them, it appears no jail time will be served for what could be a billion dollar theft.
While not explicitly defined, the “housing challenge” invokes an idea of “inequality,” and the Fed aims to fight it. Like all problems, we must find the root cause should we wish to find resolution. If housing unaffordability is an issue the Fed chooses to combat, perhaps they should look into their own monetary policies first. Should their interventions be the cause of the problem, refraining from intervention becomes the viable solution. Nevertheless, when the Fed champions a cause, even beyond the scope of their mandate, there is little anyone can do to stop it.
At the National Housing Conference on Tuesday, Governor Lael Brainard harkened back to days of the last financial crisis:
During the mortgage foreclosure crisis, many families around the country suffered the devastating loss of their home through no fault of their own, and homeownership rates have not recovered to pre-crisis levels for the affected groups.
She likens the current crisis to the previous, where, through no fault of the public or the Fed, external events caused financial hardship, targeting minorities and those in the lowest income bracket the most. Due to COVID, we are told, rents and home prices have continued to rise while the supply of “affordable housing” has decreased. Brainard mentions several interventions such as unemployment benefits and various subsidies in an attempt to fight unaffordability. Of course, it’s easy for a Governor to place the blame of a housing crisis on everything except the Fed and propose more intervention. But when interest rate manipulation and inflationist policies are considered, it becomes a tough sell.
Beginning with the Effective Federal Funds Rate, since 2008 rates have stayed near zero. In this time, these abnormally low rates contributed to the perpetual rise in asset prices. For anyone in a low to middle income, the last thing they’d want is for housing prices to continually increase as it makes life that much more expensive. Rising house prices are even addressed in her speech:
Many households have been unable to purchase a home since the last financial crisis due to a confluence of factors, including higher home prices and stricter lending standards. For those who have purchased a home, higher home prices have translated into higher debt levels relative to household income.
Few seem to ask why housing prices are inexplicably increasing and what effect artificially low interest rates have on fueling this housing boom (bubble). As for lending standards, as higher home prices require a greater debt burden, it’s not surprising lending has become tighter than the decade prior.
What of increases to the money supply and how does this affect housing? The Fed’s balance sheet currently sits north of $7 Trillion, with no promise to decrease it any time soon. This was reiterated by Vice Chair Clarida a day before Brainard’s speech, who promised to “maintain an accommodative stance of monetary policy until these outcomes” are achieved; the outcomes being maximum employment and:
until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.
In other words, expect continual asset purchases for a very long time. Yet no one at the Fed seems to consider the disconnect in perpetually claiming low consumer prices despite balance sheet expansion, while household debt levels and those dependent on financial aid appear to be increasing.
The failure to understand money supply vis-a-vis the unaffordability of life is displayed by Brainard who notes that “22 percent of renters pay more than half of their income toward rent.” This leaves little room for families to save. It’s debatable whether rent should be half of the average person’s income and it’s the price of consumer goods that are too high, or whether goods are priced “just right” but rents are too high.
Either way, any mention of inequality requires citing the $7 Trillion of money created since the last crisis. Of this amount, we know the overwhelming majority did not go to the disenfranchised. Not to say this money should have been better allocated, but to say this money should have never been created at all. If inequality is a problem in America, then look to see who received the $7 Trillion first and how their lives were bettered at the expense of the masses. Only then can we have a serious discussion about inequality in this country.
Even if Trump somehow manages to win in November, the Left (i.e., "progressives" and social democrats) can rest easy knowing that the Left's influence over the country's institutions and ideological views have only increased in recent years.
Naturally, the Left has portrayed itself as somehow victimized, declaring itself to be "the resistance" and making numerous predictions of doom in which the opponents of the Left would gain untrammeled control over the population. In this view, the nation is always just a few days away from enduring a mixture of social Darwinism and theocracy as imposed by libertarians and conservatives, respectively.
After four years with the Trump administration in power, of course, the nation isn't even heading in this direction. Government control over healthcare isn't going away. Most states have only expanded Medicaid. Gun control laws have become more stringent, not less. Government spending has risen to unprecedented levels and almost no political candidate at the federal level would seriously argue in favor of any substantial cuts. Anti-Christian rhetoric has become more fashionable than ever, so that now any Christian who actually practices his or her religion—i.e., Amy Coney Barrett—is portrayed in the media as a religious zealot. Even minor deviations from the demanded orthodoxy—such as actor Chris Pratt’s lack of enthusiasm for Joe Biden—earns hate campaigns from the guardians of acceptable public opinion.
These trends have only accelerated in recent years. The Left has consolidated and increased its control over academia, the media, social media firms, Hollywood, the recording industry, and corporate America. In other words, outside some legislative and legal institutions—and a shrinking handful of religious institutions—the Left’s control of the nation’s educational, cultural, artistic, and media institutions is very safe indeed.
If the electoral success enjoyed by Donald Trump and his supporters has offered any meaningful opposition to this, it lies only in the fact that the Trump party has in some ways slowed these trends. But by no measure has the trend leftward been stopped or reversed.
But why has the Left been so successful in this?
The reasons for this are many, but there are three reasons that stand out: the Left recognizes the importance of education in forming Americans’ ideology. The Left takes a long-term view. The Left accepts partial victories.
One: The Left Understands the Importance of Ideas and Ideologies
The Left long ago mastered the art of intellectual activism. What is intellectual activism? Legal scholar David Yamada offers a helpful definition: “intellectual activism involves conducting and publishing original research and analysis and then applying that work to the tasks of reforming and improving the law, legal systems, and the legal profession.”
Yamada is referring to intellectual activism within the field of law. But, of course, it can be applied to any number of fields. Within economics, intellectual activists conduct research, provide analysis, and then apply that work to reforming political and economic institutions. Historian often do similar work within their own fields.
In recent decades, the Left’s dominance of intellectual activism has grown to the point of dominating most fields. Left-wing (i.e., anticapitalist) historians, sociologists, anthropologists, legal scholars, and economists routinely publish studies illustrating their views. But the activism doesn’t stop there. Journalists, pundits, and artists then cite these studies, rehash them, popularize them, and repackage them for public consumption.
These views are then passed on to the next generation of scholars, imbibed by schoolteachers-in-training, and parroted by elected officials. These views filter down to the voting public, the TV viewer at home, and schoolchildren in the classroom.
Certainly, there are other intellectual activists offering differing views. There are still courageous scholars who attempt to do the work of fighting the Left’s dominance through research that dissents from the usual zeitgeist.
If these intrepid scholars did not exist, the Left’s success would be even more complete. Dissenting views would be even more marginalized, and even more in the minority. As Lew Rockwell noted:
A new BBC poll [reported November 2009] finds that only 11 percent of people questioned around the world—and 29,000 people were asked their opinions—think that free-market capitalism is a good thing. The rest believe in more government regulation….
As to those who would despair at this poll, consider that it might have been much worse were it not for the efforts of a relative handful of intellectuals who have fought against socialist theory for more than a century. It might have been 99% in support of socialist tyranny. So there is no sense in saying that these intellectual efforts are wasted.
And yet, there are many on the Right who want to completely abandon the field to the Left. For those of us involved in the work of intellectual activism, we’ve heard something like this many times: “We don’t have time to read books or spread ideas! We need to win elections now! All this stuff about spreading ideas and changing ideology will never work!”
Of course, what these people might as well be saying is “stop using the methods that the Left has employed so successfully for decades! Sure, after 12 years of public schooling, four years of university education, and a lifetime of watching TV news and Hollywood movies, most people are fully steeped in the Left's ideology. But I have a newfangled plan that will magically undo all those years of ideological conditioning just in time for the next election!”
Needless to say, this isn’t exactly a recipe for success.
The Left wins because leftists understand that if the goal is to “win elections now!” one must first lay the groundwork that makes the public open to one’s ideological agenda. Sometimes this work takes decades. Without doing this necessary and time-consuming work before hand, however, long-term failure is assured.
This is why leftists have spent so much time writing books, teaching classes, getting graduate degrees, becoming journalists, and editing newspapers. They know that ideas matter, and that the long term goals of any ideological movement depend on spreading ideas through scholarship, media, and art.
In other words, the Left has long understood that ”politics is downstream from culture.” If we want to change political institutions, we must first change cultural, educational, and intellectual institutions first. Once the public’s ideas have been changed, then political change will follow.
Two: The Left Takes a Long-Term View
It seems if there’s anything conservative and libertarians like to do, it’s to declare defeat at the earliest opportunity.
We see it in the language employed by conservatives and libertarians all the time. Every time the state seizes some new socialism-inspired powers, conservatives and libertarians frequently response by saying “oh, we’ll never get those freedoms back. The government will never give up those powers!” To quote Yoda when Luke Skywalker declared he’d never get his spaceship out of the swamp: “So certain are you.”
After all, “never” is a very long time. Consider the following two statements:
- “The Soviet Union will never give up its rule over Russia and all the other republics of the USSR.”
- “The Roman Empire will never allow Christians to worship legally and in peace.”
Both statements, of course, were wrong when uttered in that time and place. It’s true, the timeframe for breaking Soviet rule was 70 years. It took the Christians three centuries to obtain an edict of toleration from the emperor. But it’s a good thing the freedom fighters in the old USSR and the Roman Empire didn’t have modern-day conservatives and libertarians around to assure them that their attempts at gaining more freedom were futile and impractical.
Yes, I get it. In many cases, these people who insist good things will never happen recognize things are different in the long term. But if that is the belief, why not be clear about it?
Leftists, in contrast, are often quick to emphasize their belief that it will have the long-term victory with phrases like these: “It’s just a matter of time until we win! We’re on the right side of history! When we take over we’ll machine-gun everyone we don’t like!”
Meanwhile, many conservatives and libertarians spend their time debating whether or not they should give up and retreat to a mountain compound right now, or maybe wait until after the next election.
Successful ideological groups, of course, are in it for the long haul. Any modern day political or ideological activist who gives up after ten or twenty or thirty years simply was never serious to begin with.
Three: The Left Pursues Partial Victories
And how exactly do the leftists execute their long-term strategy? They accept partial victories.
Here’s something we never hear from the left: “Well, we got the legislation we wanted. It’s time to declare victory and rest on our laurels.”
Here’s the reality: the Left pushed and pushed for Obamacare. And then, when it was passed, not more than five minutes passed before the Left began advocating for Medicare for All.
Imagine also if the Left managed to win a federal mandate for a $15-per-hour minimum wage. Does anyone seriously believe the demands would stop there? We’d never stop hearing about the need for a $17-per-hour wage. And then one at $20.
In other words, leftists are willing to take partial victories, one step at a time. What we don't hear leftists say is "If I call for a $15 minimum wage, that implies I don’t think a $20-an-hour wage is needed. Therefore I will oppose any wage mandate below $20 per hour!”
Yet, a sizable and vocal contingent of conservatives and libertarians use this line all the time: “Why, if I support a ban on late-term abortion, that implies I think abortion is fine!" Or, "if I support a cut to the income tax, that implies I think income taxes are fine!"
[RELATED: "We Must Be 'Opportunists' In Dismantling the State" by Joseph Salerno]
Here’s a real world example: in 2015, Colorado pro-gun activists had almost everything they needed to increase magazine limits to thirty rounds, almost totally undoing a 2013 Democrat-passed bill reducing magazine limits to fifteen rounds. Clearly, this would have been a significant victory for gun freedom. But then Rocky Mountain Gun Owners stepped in to prevent the passage of the bill by threatening elected officials with primaries if the officials voted for the change. “If you let them limit mags to thirty rounds, that implies we accept limits of any kind,” the “pro-gun” activists huffed. So, they killed the bill. To this day, the magazine limit is fifteen rounds instead of thirty. Gee, thanks, Rocky Mountain gun owners!
This shortsighted and half-witted strategy can be contrasted with the strategy of the abolitionists—the strategy recommended by Murray Rothbard.
Rothbard understood that it is important to always “hold aloft” the ultimate goal, which is the evisceration of state power. But as with the abolitionists, it is important to also accept even partial victories, so long as these partial victories move us closer to the goal.
The Left understands this. A great many libertarians and conservatives, on the other hand, have apparently not yet figured this out.
Nicolas Petit's forthcoming book, Big Tech and the Digital Economy (Oxford, 2020) offers an interesting new take on antirust and regulation in the digital economy. Here's one wise reviewer:
Introducing the concept of "moligopoly" Petit shows how firms with big market shares -- even so-called "entrenched monopolists" -- still face vigorous competition in adjacent markets. Weaving together insights from industrial organization economics, strategic management, and theories of dynamic competition and building on thinkers from Joseph Schumpeter to David Teece, Petit provides not only an overview of key issues related to digital markets and technologies but also a provocative and useful guide for making competition policy better.
OK, that's my own dust jacket blurb. The law and economics blog Truth on the Market is running a symposium to celebrate the launch of the book and I contributed a short piece, "It’s Not So Simple Who Owns 'Your' Data," which elaborates on a point I made in my Mises University lecture on data privacy.
On October 5, Ryan McMaken’s article "Police Officers Threaten to Quit If the Public Keeps Demanding Accountability" managed to hit the top spot on Reddit. It was soon removed from the popular social media platform under very suspicious circumstances.
For those not familiar with Reddit, the platform consists of “subreddits” based on a particular topic or theme. The best performing posts within a subreddit are then highlighted on the front page. In this case, the subreddit was one titled "Not the Onion," which features “true stories that are so mind-blowingly ridiculous that you could have sworn they were from The Onion.” The headline to Ryan’s article seemed like a natural fit; users of the subreddit agreed, but the thought police of Reddit disagreed.
Despite Reddit’s actions against the article, the piece managed over a hundred thousand views.
Unfortunately, Reddit hasn’t been the only Big Tech actor seemingly interested in downplaying Mises Institute content. In recent weeks, Google has made changes to its search engine that makes Mises Institute articles harder to find. This seems particularly true for articles on Big Tech and social media. The content itself doesn’t seem to be the issue—links to websites that republished our articles still appear on the front page—but the mises.org link has been buried.
While disappointing, none of this is surprising. The ideas of the Mises Institute are particularly dangerous to would-be central planners of all kinds. While social media and Big Tech have been useful tools in the promotion of our ideas, we have long understood the dangers of relying upon these platforms for distribution.
In the words of our founder, Lew Rockwell, “we don't beg for scraps from the imperial table, and we don't seek a seat at that table. We want to knock the table over.”
To those ends, we have actively worked to improve our internal email lists and search engine. We are lucky that a large portion of our frequent user base visits our site directly, which is the surest way to avoid the censorship of third parties. We also have backups of our online video library on censor-resistant platforms, such as Bitchute.
No matter how the landscape of future politics and power unfolds in America, the ideas of the Mises Institute will not be silenced so long as there are those interested in finding the truth.
If you believe in these ideas, please consider becoming a Mises Institute member for just $5 a month at Mises.org/censor.
Back in August, European politicians were threatening lockdowns and calling for "vigilance." But given the economic devastation wrought by full, nationwide lockdowns, politicians have become fearful of going down that road again. For example, in the Czech Republic, where the seven-day average for reported covid deaths has surged from 7 to 66, the central government has stated it won't make a decision about lockdowns for two more weeks. Meanwhile, Czech citizens are protesting against what restrictions are in place.
But elsewhere in Europe, restrictions are quickly escalating.
Belgium: all bars, cafes, restaurants must close.
Ireland: people are required to limit movement, stay out of each other's homes.
France: new nighttime curfews.
Spain: people can't leave or enter Madrid for nonessential reasons.
Netherlands: a maximum of three people in your home per day.
It should be noted that Spain, Ireland, and Belgium have had some of the strictest lockdowns in Europe. Belgium never really ended strict measures and has always had very draconian measures on gatherings, even during the summer, as other countries were raising restrictions. Belgium now has the worst national covid death rate in Europe.
In Spain, of course, the lockdowns were notoriously strict during spring 2020, with families not even permitted to leave their apartments to gather with family outside.
It was claimed this would all "beat the virus." Of course, lockdowns do no such thing.
As Dr. Gilbert Berdine has noted here at mises.org:
The data suggest that lockdowns have not prevented any deaths from covid-19. At best, lockdowns have deferred death for a short time, but they cannot possibly be continued for the long term. It seems likely that one will not have to even compare economic deprivation with loss of life, as the final death toll following authoritarian lockdowns will most likely exceed the deaths from letting people choose how to manage their own risk.
In Sweden, there is still no sign of any resurgence of covid deaths. There is no lockdown, and no general mask mandate. Death rates in Spain, Belgium, Italy, and eastern Europe continue to get worse while Sweden's rate remains stable.
As we noted back in July, Americans are buying guns in record numbers, with millions of Americans buying guns for the first time in recent months. Now, the New York Post reports that California is very much part of this trend:
About 47,000 Californians bought guns for the first time because of the coronavirus pandemic, according to researchers who also found a staggering amount keep their weapons locked, loaded and readily available.
But the Post article also makes some rather odd assertions, implying people are buying guns because of a "health crisis":
An estimated 110,000 people in the Golden State recently purchased firearms and did so because of the global health crisis, including the 47,000 new owners.
But why would people buy guns because of a public health crisis? It's a safe bet new gun buyers don't think guns will protect them from a disease. If we look a little further, we then see it's the lockdowns that are the problem, not the disease:
The coronavirus pandemic and efforts to lessen its spread have compounded this burden. (emphasis added)
So there it is. By destroying the economy, social services, churches, and commerce, governments have laid the groundwork for more violence. Consequently, many more Americans now feel unsafe:
People who bought guns during the pandemic cited concerns over lawlessness, prisoner releases, the government going too far, government collapses and gun stores closing, the research found.
Not surprisingly, we have seen real-world increases in crime this year over last year. In some cities, the increases in homicide have been substantial, although overall homicide continues to be relatively low in a larger historical context. Moreover, many Americans have figured out that if civil unrest comes to your neighborhood, the police won't be doing much to protect you. The smoking ruins of Minneapolis have made this abundantly clear to many.
So much for that mythical "social contract" the governments keep talking about whenever it demands more power over the people it allegedly "keeps safe."
As is often pointed out by prolockdown publications like the New York Times, Sweden has experienced covid-19 deaths at a rate above that of some of its neighbors that imposed relatively strict lockdowns, such as Denmark.
What is rarely mentioned, however, is that Sweden's deaths per million are also similar to or lower than many countries that did impose harsh lockdowns. For example, as of October 18, the deaths per million in the United Kingdom were 643 in the UK for only 585 in Sweden. Meanwhile, Belgium's death rate was 897 per million, and Italy's rate was 606. Moreover, while cases and deaths are increasing in the UK, Spain, Italy, and Belgium, deaths are apparently flatlining in Sweden. Sweden has reported fewer than ten deaths in the past week.
Clearly, this trend calls into question the official narrative, which is that any country without harsh lockdowns will experience far higher death rates than the countries that lock down.
That narrative having failed in the case of Sweden, prolockdown critics have attempted other explanations. One is that population density is lower in Sweden, so therefore it will have lower deaths per million. This claim leaves much to be desired. New research suggests the data is, at best, inconclusive on that matter. While density is like a factor of some kind, there's no evidence it is a factor to the extent that would be necessary to explain why Sweden has performed better than the UK and Spain, for instance.
Another theory is that the Swedes have voluntarily practiced social distancing so studiously, that this explains away the apparent failure of the "forced lockdown or die" narrative.
As one reporter at Quartz claimed: "Citizens seems to be taking their responsibility seriously. Residents point out that they are practicing social distancing, with the elderly isolated, and families mostly staying home, apart from kids in school."
Or in an article at MedPageToday: "'Swedes in general have changed their behavior to a great extent during the pandemic and the practice of social distancing as well as physical distancing in public places and at work has been widespread,' said Maria Furberg, MD, PhD, an infectious diseases expert at Umea University Hospital in northeastern Sweden."
But, again, the data doesn't show this.
Using the Google Community Mobility Trends data, we find that the Sweden practiced social distancing far less than countries that had strict lockdowns in place.
For example, the amount of time spent at home surged 30 percent in the UK, Spain, and Italy during the harshest lockdown period. Yet during this same period, the Swedes's amount of time spent at home never exceeded 15 percent.
Meanwhile, the decline in workplace visitors has tended to be relatively small compared to countries with stricter lockdowns and with higher death rates.
We find similar trends in recreation and retail:
And in the use of transit:
With all the history, lore and media spotlight the Federal Reserve receives, how many people stopped to ask: What is the Fed’s purpose?
According to their website’s FAQs, the Federal Reserve system exists to:
provide the nation with a safer, more flexible, and more stable monetary and financial system.
It aims to carry this out through free market intervention including:
influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
While the method of operations may leave some questioning the efficacy of its ability to reach its goals, it’s still much different than what San Francisco Fed president Mary Daly told the Wall Street Journal, in a one-on-one interview on Thursday:
If you go back to our forefathers, in 1913 they created the Federal Reserve and created clear roles. The Federal Reserve’s job is to use the short-term interest rate and its asset-buying capabilities to stimulate the economy, accommodate and stimulate the economy, through the interest-rate channel, making it cheaper for households and businesses to buy and sell goods.
The problem with “stimulate the economy” is that it signifies very little, as all platitudes do. How much stimulation does an economy need? And whether they may over- or understimulate can hardly be articulated. Concluding the Fed makes goods cheaper is an untenable position to hold considering they seek to fight deflation. What is possible to explain are interest rates and asset buying. Once understood, the redundancy of the Fed is exposed.
The first tool is interest rates, in which there is either an ideal rate or not. If the position of an “ideal rate” is believed, the question to follow is: How is this calculated? With over a hundred years of experience, we still have yet to find a verifiable method. No one can prove why a 0.25 percent rate is preferred to 0 or 0.50 percent.
If there is no ideal interest rate, we must come to terms with understanding that the Fed has no business in setting benchmark rates for an entire nation, if not the entire world.
The second key tool is the “asset-buying capabilities,” the act of money creation for the purpose of buying real assets. This is an act that, if done by anyone except the Fed, would lead to lengthy prison sentences.
Similar to the notion of an ideal interest rate, there is no such thing as the “optimal money supply.” Like interest rates, if such a number exists, it still has yet to be proven. Money creation comes with side effects such as rising inequality, as those who receive the new money first have an advantage over those who receive it late, while allowing central planners to pick favorites. At $18.7 trillion, the M2 money supply has increased by over $3 trillion since the start of 2020. It appears to be on a path to growing exponentially!
Once understood there exists no ideal interest rate or optimal money supply, the Fed’s value to society gets called into question. Of course, there may be value to some members of society as Vice Chair for Supervision Randal K. Quarles said in a Q&A on Wednesday about the Treasury market:
It could be that “the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there.”
In other words, the private market for treasuries can no longer function without the help (asset buying) of the Fed. Hardly shocking, considering the mortgage crisis was over a decade ago. Yet the Fed still buys mortgage-backed securities. And, like the Bank of Japan, which cannot exit the stock market, or the European Central Bank, which can never exit the corporate bond market, in 2020 the Fed entered territory it will never be able to leave, while simultaneously advancing in areas it never belonged in in the first place.
I spent a little time at Jekyll Island, Georgia, the weekend before last. I looked hard, but I didn’t find the mythical creature from Jekyll Island. From what I hear, it’s taken up permanent residence in Washington, DC. But I did locate its birthplace.
If you don’t get the reference, I’m referring to the Federal Reserve.
The central bank was conceived during a secret meeting at a private club on Jekyll Island. According to an NPR article, Sen. Nelson Aldrich, chairman of the Senate Finance Committee, organized the clandestine meeting.
“He told a handful of New York bankers to go on a given night, one by one, to a train station in New Jersey. There they would find a private rail car hitched to the back of a southbound train. To conceal their identities, Aldrich told the bankers to come dressed as duck hunters and to address each other only by first name.”
No. That’s not sketchy at all.
Anyway, the rest, as they say, is history. The plan drawn up during that secret meeting was put into action and today the Fed is running off dollar bills at a dizzying pace in the basement of the Eccles Building.
OK. Not literally. But basically, that’s what’s happening.
At any rate, I wasn’t at a secret meeting on Jekyll Island to hatch a plan to control the world’s financial system. I was hanging out with a bunch of libertarians who would prefer to concoct a plan just to leave you alone.
The Mises Institute held its annual supporters’ summit there.
Given the location, you won’t be shocked to know that there was a lot of discussion about the central bank and its pernicious effects. As I have written, the Fed is the engine that powers the most powerful government in the history of the world.
But the event wasn’t just about the Fed. The broader theme was the danger of centralizing government.
Historian and author Amity Shlaes kicked things off with a talk about Arthur Burns. He was the Federal Reserve chairman appointed by President Richard Nixon. He was supposed to be one of the “good guys.” He was an advocate for free markets, sound money, and the gold standard. But over time, Nixon badgered and bullied him into artificially lowering interest rates and signing off on economic “reforms” that included severing the dollar from its last connection to the gold standard. Burns cared more about maintaining his reputation and popularity among the ruling elite than his principles. His position went to his head.
The lesson here is that we aren’t going to fix things by putting “good people” in positions of power. Power corrupts. The problem is a system that places too much power in the hands of corruptible individuals. The solution is to decentralize and limit the power, not vain attempts to find the right guy to fill certain positions.
That theme carried over through the rest of the event and a number of speakers touched on this subject. Peter Klein talked about the expansion of government during crises, noting that, “The New Deal is a logical extension of policies that came about in World War I.” Tom Woods carried that idea forward in his talk about government shutdowns of the economy in response to covid-19. Judge Napolitano talked about the constitutionality of a central bank, taking the discussion all the way back to the establishment of the First Bank of the United States over the constitutional objections of James Madison and Thomas Jefferson. His narrative reinforced the sad reality that power often corrupts even those with the best of intentions.
Mises Institute president Jeff Deist tied everything together in his talk about decentralization. He noted that centralized authority leads to never-ending fights over control of the power levers, pointing out that “politically vanquished people never really go away.” The only real solution is to split into smaller units and let different groups of people do their own thing. As Deist said, “Political arrangements exist to serve us, not the other way around.”
This captures the essence of the American constitutional system. It was intended to be decentralized with very little power vested in the general government. Most decision-making was intended to happen at the state and local level.
The Constitution serves as a starting point for decentralization.
This post originally appeared here.