Ben Bernanke's speech to the Council on Foreign Relations on March 10 was important both for what he said and for what he did not say. I want to pass quickly over what he said and get to the second category --- what he did not say.
What he said essentially was that the government has to better supervise financial markets to prevent financial crises like the one occurring now. Dealing with financial panics, Bernanke recognized, is why the Congress set up the Federal Reserve in 1913, but it clearly let this crisis blossom and no one wants that to happen again.
Bernanke discusses the Fed's 96 year old mandate in relation to four separate but interrelated issues: 1) Businesses that are "too big to fail", 2) "Strengthening the Financial Infrastructure," 3) "Procyclicality in the Regulatory System," and 4) "Systemic Risk Authority." What he said about these issues is worth reading, but the key point is this. These are issues that have to be addressed to avoid "financial panics" like the one that led to the creation of the Fed and that for hundreds of years have been the weak underbelly of our private enterprise system.
What Bernanke did not say, is that the Fed for more than 50 years has focused on something other than the dangers of financial meltdowns. Bernanke never mentioned inflation in his March 10 speech, yet his predecessors being with William McChesney Martin in 1951 and continuing through Alan Greenspan who left in 2006, hardly focused on anything else. Indeed when Bernanke inherited Greenspan's mantle, it was thought that he would have to be as concerned about inflation as Greenspan had been.
So the question is why since 1951 did the Fed's leadership, the gliterati of American business, the Republican Party and the deans of conservative economic academia led by Milton Friedman seem to forget the reason the Federal Reserve was created, and treat it as though it should have been named the Federal Anti-Inflation Authority. I answered this question in my book early in this decade (The Competition Solution: The Bipartisan Secret behind American Prosperity). My answer then and now is that blaming inflation on "the government," i.e. on the Fed's monetary policy and on "government spending," was a ploy to disguise the role of monopoly in the private sector in inflation. Blaming the Fed and the government for inflation was a way to disguise the fact that monopoly power in the private sector, uncontrolled by competition, was inflation's principal cause. Businesses did not want this dirty secret to get out. Nor did anti-government conservatives for whom the fear of inflation was a gift that kept on giving. They wanted to pretend that competition was always strong. Blaming the Fed and government spending for inflation and all other bad economic outcomes was a perfect political solution.
My book is full of examples of inflation as a result of monopoly. The OPEC cartel's role in driving up energy prices is a perfect example of the point, but there are plenty of purely domestic ones. The costs of telephone calls was too high in the U.S. until the AT&T monopoly was broken up, and they have been falling ever since. Transportation costs were too high until competition was restored to that sector between 1978 and 1980, after which transportation costs fell like a rock. Steel prices kept rising in the U.S. until 1982, when U.S. car companies, forced to compete with German and Japanese imports, told the steel companies they would have to compete for their business. Steel prices did not rise for the next 20 years, and quality improved enormously. Retail mark-ups were too big until Wal-Mart came along and drove costs out of that sector.
Health care costs are today's example of inflation as a result of market power. They rise relentlessly in America because there are hundreds of local monopolies feasting on the fact that it is impossible to compare health care prices. Only competition can force health care prices down. Nothing the Federal Reserve or the government does will bring them down unless there is more competition.
Bernanke's speech was important. He wants the Fed to do what it was created to do in 1913, police speculators to avoid financial meltdowns. What he has to remember, however, is that weak regulation of speculation was what powerful interests wanted and what they pushed politicians to support. Private enterprise, when there is competition, does amazing things, and I deeply believe in it. But what its champions refuse to admit is what Adam Smith recognized clearly, that governments have to make business compete so that they do not get so much power that they hurt others, and eventually themselves. Bernanke and the new administration will have to fight to get the kind of financial regulation that he calls for in his speech.
Milton Friedman didn"t believe in fractional-reserve banking.
He was totally opposed to private money creation and destruction, the problems of the day.
Being an extreme leftist ideologue, I am nevertheless proud to expound on the monetary thinking of Milton Friedman, which is unparalleled, and essential for exactly the soundness and stability you seem to promote.
READ : ""A Financial and Monetary Framework for Economic Stability"".
Economic stability " the NUMBER ONE mandate of the FED:
He OPPOSES the private creation and destruction of capital.
He OPPOSES the fractional-reserve banking system " exactly because of its pro-cyclical nature.
He OPPOSES the FED"s Open-Market Operations as monopolistic. Do you?
He eliminates Open-Market operations by FAVORING a 100-percent reserve bank lending system.
He FAVORS the direct government-issue of debt-free money as both anti-inflationary AND counter-cyclical, EXACTLY the type of monetary policies we need today.
He FAVORS exactly the type of direct federal transfer payments to States that Obama is proposing, unfortunately with BORROWED money. Do you?
And, he favors a very PROGRESSIVE income tax system, again because of its stabilizing nature vis-à-vis consumer spending. Do you?
Progressives need to pull their "collective" heads out.
YOU and WE need a sound and coherent MONETARY POLICY framework, and the Kuttners, Reichs, Bakers and Kleins are AWOL.
GREENBACKS !
Ugly problem number one is the practice of fractionalized reserve lending which allows banks to loan out 10 times more money then they actually have. If a bank has a thousand dollars and it loans it out at eight percent it is really making eighty percent because it loans it out ten times. The banks are lending out money they don’t really have.
Fractionalized reserve banking only works when the economy is expanding and the scam can be hidden by all of the profits. When the economy is shrinking people are defaulting on money that was not in the bank in the first place.
Ugly problem number two is that the Federal Reserve is an international banking system and so when the FED loans money to the government and the money is paid back the money goes out of circulation and often times leaves the country.
We need our money to stay here in this country and continue to circulate. A shrinking money supply is what causes a depression.
Julius Caesar took back the power to coin money from the money changers and minted coins for the benefit of all. With this new plentiful supply of money he built great public works projects. By making money plentiful Caesar won the love of the common man but the money changers hated him. With the death of Julius Caesar came the demise of plentiful money in Rome. People lost their homes and land.
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Lets hope he means the FED "being run by the Big Banks" is at an END!
Maybe the heat on the FED is getting too HOT so he has decided his Elite Banksters have enough of the 95% of Americans' retirements plans for this "HARVESTING" CYCLE!
This is like the OIL Men deciding to increase Production to lower the gas price to "KNOCK OFF" the Green Revolution!
We are AGAIN being Manipulated by the Elite Banksters through the renegade “FLUNKY” FEDERAL RESERVE BANK and its professional front men!
The FED operates like organized crime, taking a piece of everybody's action. The FED is the Root of Infation.
http://topics.nytimes.com/topics/reference/timestopics/organizations/f/federal_reserve_system/index.html
http://en.wikipedia.org/wiki/Federal_Reserve
Yup, and about as Fed as FedEx! I believe I've done justice in the past posts comparing them to the Mafiosi. Just like the Mafia clan families, the "stakeholder banks" in the Fed are wholly responsible for running the whole show and the mess we find ourselves in. Blame the public, the poor people or the uninformed as they might, the genie has indeed escaped the bag. You and I may not live long enough to see it through, but hopefully the younger generation will see the cancer the Fed has spread in our financial system - a serpentine embrace of private-sector-greed with the politicians' lust for power, a coupling worthy of even Satan's awe!
If only the US banks would get back into creating money through fractional reserve banking.
Just before President Obama took office, the US money multiplier dropped below 1:1, from a weak but still normal 1.6:1 six months before.
Inflation, you should not worry about inflation. Inflation is just a ratio between the growth in the money supply and the growth in the economy. You don't want the money supply to grow more slowly than the economy, because then you get deflation. And you know what a money multiplier below 1:1 will bring you, if you cannot convince the banks to re-engage in fractional reserve banking? Deflation, that's what.
You've noticed all those mass layoffs, the dropping prices, the overseas riots, the worry and fear, the bankruptcies, the home foreclosures? Inflation, oh, how we will wish for the simple problems of inflation, if we do not solve the crisis we are in.
Of course, the Investment Banks, empowered to create money since 1980s, have been at 30 to 1 for as long as they created SIVs.
Same basis - leveraged at 30 to 1.
These ratios EXIST on the balance sheets of these TODAY! Where is your data to show otherwise?
You present a snapshot figure WHILE THERE WAS NO LENDING HAPPENING.
It's called the credit crunch.
FED and Treasury are giving money away to banks, and banks are HOARDING the capital instead of making loans. It's exactly what the banks did during the Depression.
You correctly point out the pro-cyclical nature of fractional reserve banking.
During "contraction" , deflation is a threat. That IS one of the problems with fractional-reserve banking, which is exactly why it should be abolished.
So, NO, we don't want the banks to resort to fractional reserve banking.
We want 100 percent reserve banking.
Let the government create the money supply, debt-free, to provide stability to the financial markets.as Milton Friedman suggested
The American people are just coming to grips with the fact that WE are not in control of our economy and out money system.
WE THE PEOPLE are pushing taxpayer-funded capital into the pipeline.
The private bankers have the power to close the spigot, to shore up their own balance sheet?
Abolish the FED and fractional reserve banking.
And then you twisted that non-mention into agreement with your perspective on inflation, the current economic crisis, and your prescription which is to the right of Friedman himself?
Inflation is a ratio of the growth of the money supply versus the growth of the economy. If the money supply grows faster than the economy, you get inflation. You get inflation no matter why the money supply grew faster than the economy, it is a ratio.
How can you possibly fault the fed for managing the inflation rate; the fed manages the growth in the money supply, who else should manage the inflation rate?
You may cherry pick data as much as you like, but the end result of all of that competition you site, Wal-Mart, steel prices not rising for twenty years, etc., is the disaster all around you, while you go on remorselessly about inflation.
But in this race to the bottom for all of the rest of us, you know, who aren't wealthy, against those two boogy men of yours, inflation and monopoly, no, I take that back, against your fun-house mirror view of what inflation and monopoly are, your advice is more of the same, more competition, faster, faster, we must reach the bottom as fast as we possibly can?
Anti-inflation has always been only code for anti-worker and anti-fair wage. When prices go up that's call corporate profit. When wages go up that's called inflation. Disband the FED.
SINCE VIETNAM WHEN OIL COMPANYS WERE BUYING UP COMPETITION AND SHUTTING DOWN REFINERYS WE HAVE BEEN SCREAMING ABOUT LACK OF COMPETITION !
EVER BARRIER TO ENRTY LAW BROUGHT OUT SCREAMS FROM US.
GLAD YOU FINALLY WOKE UP !!!!!1
Are any of the following quotations in your book?
" … Deep down, we know that we have given our children a legacy of bankruptcy. We have defrauded our country to get ourselves elected." Senator John Danforth (R-MO)
"Every Congressman, every Senator knows precisely what causes inflation...but can't, [won't] support the drastic reforms to stop it [repeal of the Federal Reserve Act] because it could cost him his job." -- Robert A. Heinlein, Expanded Universe
“The great body of the people, mentally incapable of comprehending, will bear its burden without complaint, and perhaps without even suspecting that the system is inimical (contrary) to their interests.” Nathaniel Rothschild, founder of the FEDERAL RESERVE BANK, 1912.
When the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. …. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. - J. P. Morgan
“If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.” -Thomas Jefferson
http://www.scratchinpost.net/barefootbob/banking-fed-quotes.html
"The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages...will bear its burden without complaint, and perhaps without suspecting that the system is inimical to their best interests." - Rothschild Brothers of London communiqué to associates in New York June 25, 1863.
They were, of course, talking about the introduction of the 1863 National Banking Act, which proved such a disaster that the US government created the Federal Reserve to make sure it never happened again.