United Liberty

As originally published in the Los Angeles Business Journal-

Big Los Angeles companies such as Countrywide Financial Corp., Fremont General Corp. and IndyMac Bancorp - which are among the country’s biggest mortgage players - have fallen on tough times.  While man harsh words have been bandied about blaming them for much of the financial panic that we’ve seen in recent weeks, few critics look below the surface to find the true culprit; the Federal Reserve Board of Governors.

It is not Countrywide that lowered the target interest rate from 6.50 percent to 1/75 percent, i.e., almost five whole percentage points, in the space of one year from Jan. 1, 2001, to Jan. 1, 2002.  Nor did Fremont come up with the idea of lowering that rate to 1 percent by July of 2003.  And it was the Fed that didn’t start retracting credit until July 1 of 2004, and only slowly lifting rates back up to 5.25 percent of July of 2006.

The Federal Reserve is useful in times of panic as a kind of overseeing clearinghouse, i.e., to safeguard the day-to-day machinery of banking operations and issue temporary emergency credit to avoid useless trauma to the system.  However, beyond that, the Fed is helpless - indeed harmful -when, in addressing its government-appointed mission, it attempts to influence the business cycle, employment, prices, and the general economy.

Why are their attempts so futile?  There are several well-known, but forgotten reasons.

Their methodology is in direct conflict with their mission.

They act upon statistics, and statistics by nature are a molasses-in-winter, after-the-fact phenomenon, whereas their idea of management of the economy requires preemptive measures.

Their powers of intervention are in direct conflict with the mission of all market players.

As Friedrich A. Hayek wrote in “The Road to Serfdom;”“If the individuals are to be able to sue their knowledge effectively in making plans, they must be able to predict actions of the state which may affect their plans.”  This implies that any arbitrary or unpredictable actions on the part of the Fed throw a wrench into the plans of those whose goal is to succeed within the “invisible hand” marketplace.

If everyone has one eye on the profit line and the other on the Fed, obviously they are focused only half of their attention where it should be.  They must include in their plans sufficient reserves to cover the unpredictability of the Fed’s actions.  Surely this is an expensive and unnecessary handicap.

Outguessing Fed

The Fed’s interference in the marketplace has created a whole new profession: That of outguessing the Fed.

Departments of every bank and financial institution in the world, and even some whole companies, are devoted to analyzing global markets as they gyrate around central bank intervention.

Fed interference creates imbalances in business cycles that encourage otherwise useful market players to become reckless and spendthrift.

Hedge funds, credit derivatives, mortgage companies, and those bank departments that trade in them, in spite of their potential usefulness, has created the problems we are experiencing today; but they based it on the latest ballooning of credit made available by the world’s central bankers since 2001.

Fed interference creates moral hazard.

It is reliance up the Fed’s capacity to bail out financial crises - power well over and above their supervisory duties - that encourages risk-takers to assume too much risk at the expense of the taxpayers.

Central-bank-created fiat money, by definition, has no anchor.

Banks and central banks have lost the magnetic north that was the standardization of the monetary units of the world.  It is no wonder indeed that we are now facing the collapse of the Ponzi scheme, just as have all those civilizations in the past that have succumbed to the temptation to debase their currency to bail out debtors.

Why has everyone forgotten these self-evident and self-destructive characteristics of centralized monetary control?  How short-sighted humanity is.