The Great Swindle (From Both Right and Left)

Comes now this morning into my email notification that The Daily Bell has not only ripped off my commentary and opined upon it (legitimate) they further attributed it to CNBC (not kosher folks.)

But let’s examine their opinion a bit, shall we?

Dominant Social Theme: By expanding the regulatory state, we can make things better.

Free-Market Analysis: One of the main emergent US dominant social themes is that the government and regulators must step in to clean up the market and make it safe for investors. The idea is that the larger modern marketplace is very necessary for the functioning of modern society and that one must “clean up fraud” so that people will “trust” the market again.

This meme is being enunciated aggressively all over the place lately, and we have done our best to point it out. It is based on a misapprehension and is placing good people into rhetorical boxes where they decry modern finance but turn to the US’s penitentiary-industrial complex for solutions. Here’s more from the article excerpted above:

Uh, no.

Expand the regulatory state?  How about we actually enforce the laws that already exist?  And for those that are not laws but written as laws, how about if we either turn them into actual laws (instead of lying about what they are) or repeal them so that nobody thinks they’re a law when they are not?

It is against the law, for example, to swindle people.  It’s a crimeAnd as I pointed out here, the Right side of the aisle, including the Tea Party, refuses to address the fact that our nation’s largest financial institutions are serial violators of the law to the point that nearly all would have committed their “third strike” and be disbanded (the equivalent to life imprisonment) by now.

There is no shortage of laws under which to actually prosecute.

The Daily Bell goes on to sling around the common mud of “fiat funny money” and allege that but for The Fed there would be no problem at all.  This, however, is a lie, for two simple reasons:

  1. The Fed is already constrained in what it can do — it has a mandate for stable prices (that is, zero inflation) that it has serially and repeatedly violated for its entire 100 year history, even prior to the implementation of the so-called “dual mandate”, and yet there has been no enforcement.  Why not?  There is no punishment called out in that law, just as there is no punishment called out in the former enabling law for the OTS and thus “backdating” deposits by IndyMac bank didn’t lead to a criminal indictment against either IndyMac or the so-called “regulator” who did it.  A “law” or “regulation” without a punishment for violations is no law or regulation at all — it is a mere suggestion.  As such these so-called “laws” are nothing more than sops for the fools at places like The Daily Bell who love to point to all these “laws” and then claim that “more regulation” is futile.  That would be true if those were actual ineffectual laws but due to the lack of a punishment clause they stand as nothing more than blank pieces of paper.
  2. The proffered solution, free market currencies, is just another sop to idiocy.  Government will always denominate its current taxes due in something.  Whatever that something is will be the defacto currency of the nation and will be the majority — by far — currency that is used for transactions.  The “why” is simple: Nobody in their right mind wants to wake up some morning and find that their currency du jour has been devalued by some sort of debauchery and their taxes due but not yet paid have suddenly doubled or more, instantly bankrupting them.  The simplest and “zero cost” way to hedge against such an event is to transact in the currency you pay your taxes in.  Sorry folks, but logic resolves this conflict and it doesn’t go where the Paulites would like; you must employ magical thinking to get to their claimed nirvana.

Indeed, the problem with the “free market” currency solution is that if you do not resolve the actual problem — the lack of The Rule of Law (that is, #1) so-called “free market” people will intentionally create the situation in #2 and get away with it!

That, incidentally, is the history of monetary systems going all the way back to the American Revolution and beyond.  Indeed if you look at historical inflation rates prior to The Fed you will find ridiculous changes in the valuation of the currency over very short periods of time.  10, 20, even 30% swings in valuation were common.  If you happen to believe that the fact that over the long haul the “more or less stable value” was preferable to what we have today you’re cherry-picking your timeline — get it wrong by a year or so and you’d either have made a bundle or been bankrupted.

Unfortunately life doesn’t work this way; you fall in love, you get sick, you get well, you find a job, you lose a job, your roof leaks, you get hit by a bus and you die all on a very unpredictable timeline.  But those who pull the strings through government are more than happy to use your series of unfortunate events to screw you blind and steal everything you have — and absent The Rule of Law, they will.

Our latest little corruption was sent to me here, from the Fed weekly balance sheet:

Where did that $45 billion go?  Oh, in the nice catch-all bucket called “Other”, right?  What’s in “Other”?

Let’s see…. the GSEs are in there (Fannie/Freddie), the IMF is in there, the UN is in there, a lot of things are in there.  So which “other” was this and why wasn’t it identified with specificity?  Oh that’s simple: There is no rule of law when it comes to Fed operations as there is no “or else” to be found anywhere in the Federal Reserve Act of 1913, as amended.

Thus The Fed could “decide” that Fannie and Freddie paper was “ok” to buy, even though the black letter of the law says otherwise.  They could point to their own “interpretation” and since there was no “or else”, if they interpreted wrong, even intentionally wrong, there was no cost to them personally that could be imposed.  Ditto for “Maiden Lane” and their other machinations.

In this case it appears they bailed out someone yet didn’t tell us who it was.  Gee, with all the turmoil in the markets you can’t find someone who needed to be bailed out, can you? smiley

Those who argue for “End The Fed” have yet to reconcile the fundamental nature of the problem: It is not The Fed that is the issue, it is the presence of so-called “laws” with no penalty for non-compliance that is where the problem resides.

In point of fact The Fed’s actual mandate for stable prices is exactly correct.  Followed to the letter we have no debasement of the currency over time, no inflation, and you can save a mere 7% of your income — if your Social Security taxes were then to be merely returned to you in retirement along with that 7% you would have an effective 20% saving rate for retirement and would need exactly nothing beyond that for a reasonable retirement lifestyle similar to that of your working years!  If you saved nothing you would still have a 13% saving rate and we would meet the mandate of the “social safety net” allegedly to be provided.

If the “law” had actually been followed there would have been no ramp in credit compared to GDP because it could not have been funded.  There would have been no Internet bubble, no Housing bubble and no crash.  House prices never would have gone materially over 2x incomes and likely would be between 1x and 2x.  Medical and college costs would be what they were then.  Wages would have risen with productivity but not beyond, and you would have kept that standard of living increase instead of having it stolen by the vipers of Wall Street and the Capitol.  Jobs would not have been offshored and there would have been no incentive to hire illegal aliens and displace American workers.

So why didn’t it happen this way?  That’s easy: There is no “or else” in these so-called “laws.”

Ending The Fed will do exactly nothing without fixing this problem.  Competing currencies will do nothing without fixing this problem.  In point of fact essentially every current economic issue we face is found, at some point, in this singular premise.

Those who continue to beat on the “End The Fed”, “Competing Currencies” and other similar-sounding drums are either missing the mark because they fail to analyze the problem or worse, they’re shilling for those who are looking for yet another way to rob you blind when the current scam, which is about to collapse, comes down around their ears.

Don’t fall for it.

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