Introduction
If you talk to some monetary, fiscal, macroeconomic, and financial institutional and capital market economists, some would argue that Central Banks are at the end of their rope; have lost their credibility and risk losing their independence.
Dr. Jack Rasmus book, Central Bankers at the End of Their Rope? Monetary Policy and the Coming Depression is the latest in a growing literature building the case against the U.S. Federal Reserve (the Central Bank of Central Banks), European Central Bank, Japanese Central Bank, The Bank of England, People’s Bank of China, etc.; their unorthodox monetary policy response to the financial crisis; policy response to asset price bubbles, financial (market) crisis (crashes), and recessions since 1995; lack of macro-prudential supervision and oversight; and consistent policy mistakes based on their lack of understanding of how the world and economy really works, dates back as far as 1929 (See supporting Literature in the Appendix).
In Dr. Rasmus book, he looks at:
1. Problems and Contradictions of Central Banking
2. A Brief History of Central Banking
3. The U.S. Federal Reserve Bank: Origins and Toxic Legacies
4. Greenspan’s Bank: The Typhon Monster Released
5. Bernanke’s Bank: Greenspan’s Put (Option) on Steroids
6. The Bank of Japan: Harbinger of Things That Came
7. The European Central Bank under German Hegemony
8. The Bank of England’s Last Hurrah: From QE to BREXIT
9. The People’s Bank of China Chases Its Shadows
10. Yellen’s Bank: From Taper Tantrums to Trump Trade
11. Why Central Banks Fail
12. Revolutionising Central Banking in the Public Interest: Embedding Change Via Constitutional Amendment
Dr. Rasmus builds a methodical case against historical and current central bank ideologies and orthodoxy; and makes prudent and wise recommendations for structural and institutional macroeconomic, monetary policy and political change.
The conclusion, it’s not too late to address the systemic and systematic risks to central banking, regulation and supervision, financial institutions and capital markets, and the real economy and labor markets.
However, considering the real economic realities of the current political, party and policy environment, along with Wall Street’s control over monetary (Federal Reserve), fiscal (Treasury) and regulatory (Comptroller/SEC/FDIC/etc.) policy in Washington, that a political solution could actually be accomplished. Dr. Rasmus is correct in his recommendations and his analysis.
We are all at the end of our rope, and thank you Dr. Jack Rasmus for bringing another critical analysis of the current and future state of global central banking, and for proposing bold policy recommendations to avert another severe financial crisis, great recession and depression.
REVIEW
Rapid technological, demographic, economic, cultural, sociological and political change has changed the way central banks analyse, manage and respond to business cycle peaks, troughs (recessions), financial crisis, and macro-prudential bank supervision; and central bank policy responses have failed consistently over time, due to limitations of their data, models, ideology, epistemology, bureaucracy, and politics.
But one modern response to these limitations has been consistent over time, inject or try to inject massive amounts (trillions of U.S. Dollars, Yen, Euros, Pounds, Yuan, Peso, Rubble, etc.) of liquidity (credit) to back-stop and set a support under asset prices. Since these asset price bubbles and asset price collapse (financial/currency crisis) have become more frequent since 1995 (Peso Crisis, Thai Baht, Russian Default, Y2K/911, Housing Bubble, Financial Crisis, etc.), global central bankers do not have the intellect, culture, knowledge, data, models, tools, resources, balance sheet, etc. to deal with crisis going forward.
Dr. Rasmus recommends limiting the independence (ad hoc decision making) of central banks by instituting a (rules based) Constitutional Amendment defining new functions for the central bank, new monetary targets and tools to modernise and drive global central banks into the 21st century.
Problems and Contradictions of Central Banking
Globalisation, technologicalisation and deregulation/integration have accelerated capital flows and accumulation, and concentration to targeted and non-targeted markets across the world. This process continues at a rapid pace, and depending on the recipient, can be economically, financially and politically (institutionally) destabilising, destructive and deconstructive. It is not a matter if this will happen, but when, again! Which country, industry, company, and demographic will be affected, disrupted, destroyed and wrecked.
In response to these economic and financial disruptions, central banks have responded consistently by injecting massive amounts of liquidity into the system, with no limitations due to their misunderstanding of how the economic and financial system really works. Through the use of unorthodox monetary policy tools and targets, in the face of total deregulation and free flow of capital (shadow banking and derivatives trading), central banks are at this point where they cannot control or manage the system. We are in unchartered territory.
Only to bail it out, the private banking system – other strategic affiliated institutions, corporations, businesses and brokerages – again and again, by printing massive amounts of fiat currency (seigniorage), to buy (defective/defaulted) securities product (derivatives), accumulate more sovereign-corporate-personal debt, with even more crowding out effects, has had no real eventual long-term impacts on real economic growth, wages, and productivity; and social welfare or standards of living. Only asset prices bubbles and a massive redistribution and concentration of wealth.
It is estimated, between the U.S. Federal Reserve Bank, Bank of England, and European Central Bank, $15 trillion direct liquidity injections, loans, guarantees, tax reductions, direct subsidies, etc. have been used. If you add in China and Japan, the total gets to as high as $25 trillion, and if you add in other emerging country (Asian, Latin America, and Middle-East) central banks, the total gets as high $40 trillion.
This is only the present value (cost basis), if you project the total cost (interest and principal payments) out over a 30 to 40 year period, the estimate total cost is as high as $80 to $100 trillion. Thereby, making the global financial and economic system eventually insolvent and bankrupt, and central banking ineffective and perpetually in a liquidity trap, as the velocity of money has collapsed. There is no real money going into real long-term (capital budgets) assets, only short-term financial assets.
This is the contradiction of Central Banking: liquidity-debt-insolvency nexus, the moral (immoral) hazard of perpetual bail-outs, growing concentration of wealth at the extremes, growing perception that Negative/Zero Interest Rate Policy (N/ZIRP) can fix under-investment in capital (human/physical) and deflationary (disinflationary) trends, and that bank regulation-supervision is bad for the economy, financial services (institutions) industry, and for institutional and retail investors (savers) in the long run.
A Brief History of Central Banking
A Brief History of Central Banking, walks us through the origins of central banking, from the Bank of England (1694) as the lender of last resort for private banks, and its monopoly position in issuing government bank notes and currency (1844/1870s), and bailing out the banking system due to crashes and development of new types of currencies (paper, gold, notes, etc.).
An uncontrolled growth in the money supply in the U.S. led to financial speculation in gold and bonds (1830), and depression (1837-43). No central bank was established, not even after banking crashes (1870/1890s/1907-08), but only by 1914 as the U.S. entered WWI, and needed to decouple its currency from gold, raise tax revenues, and be able to monetise its sovereign debt through the use of a fractional reserve banking system, did the government then decide that they needed a central bank.
The role of the central banks were to maintain monopoly control over the production of money, act as a lender of last resort and fund raising agents, provide a clearing-payment services system between banks, and supervise bank behavior.
The goal, was price stability, supply of money growth targets, full employment, interest rate and currency exchange rate determination. They were to do this though the use of tools (rules): reserve requirements, discount rates, and Open Market Operations (OMO); and now, Quantitative Easing (QE)/Tightening (QT) and special auctions and re-purchase agreements.
The U.S. Federal Reserve Bank(s) was also given this monopoly position, along with tools and independence. This has led to some toxic legacies (credibility issues).
The U.S. Federal Reserve Bank: Origins and Toxic Legacies
The U.S. Federal Reserve Bank system was originated from a consortium of private banks looking to centralise the Federal Reserve System: JP Morgan, Kuhn, Loeb, Chase, Bankers Trust, First National, etc. Particularly after financial instability (illiquidity/capital/reserves), bank crashes (lack of supervision) – 1890s/1907, and the rise of the U.S. as a global economic power.
Congress passed the Federal Reserve Act on December 13th 1913: twelve district banks and national board located in Washington D.C. The real power resided in the member banks that owned their respective districts. They could issue their own currency and notes, exchange for gold and foreign currency, invest in agricultural and industrial loans, and received dividends from earnings.
After the Great Depression and bank reform acts (1933/1935), the Federal Reserve Board of Governors and the Open Market Committee became the two powerful institutions within the Federal Reserve System.
However, the Fed experienced two decades of failure (1913-1933) due to lack of supervision, stock market and loan speculation, asset price bubbles/crashes, depressions, bank closures and bailouts, excessive extension of liquidity (margin), protection of government finance and wealthy investors, hyperinflation (deflation/disinflation), false targets (gold peg/production/employment), inaction and incompetence (discount rate/open market operations), institutional narcissism and egotism, power and elitism, bureaucratic control, etc.
Bank acts were put in place by Roosevelt, and other regulation and operations were put in place through the 1970s and 1980s: Glass-Stegall, 1935 Bank Act, Reg U, tax reform, policy, Treasury-Fed Accord, Operation Twist, Bretton Woods, Humphrey-Hawkins/Resolution 133, fighting hyperinflation-stagflation-recessions, Reg D, Plaza Accords, state and shadow bank regulatory efforts, international banking (currency/note) issues, liquidity escalations, and eventually the Greenspan typhon.
From 1913 to 1933, the two decades of failure after the Federal Reserve was created; it continued into the 1940s-1950s, 1960s-1970s, 1980s-1990s, 1990s-2000s, it continued and continues to this day, and looks like it will continue into the future.
Greenspan’s Bank: The Typhon Monster Released
Greenspan, influenced by Ian Rand – liberal-post-modern philosophy – set in motion an un-orthodoxy in Federal Reserve, Monetary Policy, and Macro/Political Economic rationalisation, a stark contrast to the Volker era. Greenspan believed in markets, and lase fair-free hand economic ideology (deregulation); and did not believe in limits to the Market and Technology-Labor Productivity, limits to the Federal Reserve’s power to dictate markets and the economy, and limits – in the end – to the ability to inject massive amounts of liquidity into the financial system to drive (support) asset price bubbles. This belief, or lack of, lead to multiple crisis and bailouts of the system.
The continual mismanagement, ideological mistakes, and lack of understanding of how the real world works, was witnessed again under Bernanke, now Yellen, and who knows who is next (Powell)?
Bernanke’s Bank: Greenspan’s Put on Steroids
Bernanke was minted from the same Greenspan mold, a true believer that excessive liquidity injections cold solve massive capital market and economic failures with little cost. It was the financial crisis and the coordinated efforts between the Federal Reserve and the Treasury (and other hidden interests), that was the test case in the Federal Reserve ability to manage severe man-made financial-economic crisis. The result, a new nationalisation-corporatist-financial oligopoly industrial model, leveraged through Zero Interest Rate Policy (ZIRP)/Negative Real Interest Rate Policy (NRIRP), Quantitative Easing (QE), and Credit Enhancements/Liquidity Injections.
However, the outcomes from these efforts were disastrous:
1. Political Populism (Political-Economic Institutional Deconstruction/Destruction)
2. Massive Capital-Labor Substitution (Productivity Lag)
3. Massive Concentrations of Wealth (Inter-Generational Wealth Transfer)
4. Flat-Declining Real Wages (Social Welfare/Standards of Living/Poverty)
5. Unfunded Pension Liabilities (Crisis)
6. Recession(s) Twice as Deep/Twice as Long (Structural)
7. Rising Un-Funded Pension Liabilities
8. Collapse in Labor Participation Rates (High Under-Employment)
9. Collapse in Velocity of Money (Currency Turnover)
10. Rise of Shadow (Unregulated) Banking System (Disintermediation)
11. Massive Use-Trading of Un-Collateralised (Over-The-Counter/OTC) Derivative Trading
12. Excessive Use of Financial Engineering to Support Asset Prices
13. Global Economic-Political Instability (Global Cyber-Cold War)
14. Global Hyper-Inflation/Banking Crisis/Credit Defaults (Sovereign)
15. Massive Over-Leveraging of Government, Corporate and Personal Balance Sheets
16. Over Accommodative Monetary/Fiscal Policy (Negative Nominal/Real Interest Rates/Change Accounting Rules/Low Effective Tax Rates)
17. Global Tax Evasion (Avoidance)
18. Ballooning of the Federal Reserve Balance Sheet (Bonds/Reserves)
19. Ballooning of the Federal Budget Deficit and Debt ($500-800 Billion Per Year/+$20 Trillion)
20. Continuous Belief in Supply Side Economics (Trickle Down Theory/Deregulation)
21. Continuous Belief in Monetary System/Real Economy Aggregates (Inflation/Interest)
22. Continuous Bail-Outs of Financial/Economic System (Insolvency/Bankruptcy)
23. Etc. Etc. Etc.
All of these beliefs, techniques and tools have been used by other Global Central Governments and Banks (BOJ/ECB/BOE/PBOC), with similar, disastrous, and disappointing outcomes. A focus is on saving the financial institutional system in the short-run, using extreme and un-orthodox monetary policies (tools), with a lack of concern or understanding of long-run economic, social, cultural, and political consequences and outcomes.
A perfect example, are policy responses of the Bank of Japan (BOJ).
The Bank of Japan (BOJ): Harbinger of Things That Came
Over the last 17 years (1990 – 2017) the BOJ has implemented an aggressive form of unorthodox monetary policy (Negative – Nominal/Real – Interest Rate Policy/Quantitative Easing): printing massive amounts of money, buying massive amounts of sovereign-corporate (infrastructure) bonds, driving bonds yields negative, and driving domestic investors/savers and financial institutions literally crazy.
With no real effect on the Real Business Cycle (RBC), resulting in perpetual recessions and disinflation/deflation. These unorthodox monetary policies (mistakes/failures) have had the effect of causing asset price bubbles/busts (banking crisis), negative effects on standards of living, and negative effects on financial (dis)intermediation and fiscal policy (mistakes).
The BOJ has responded to these failures by introducing more accommodative (QE) policies, along with over accommodative fiscal policies (sovereign debt levels at historical levels) with no real positive effects. Fiscal policy mistakes (tax increases in a recession), have only exacerbated economic outcomes.
Japan will be the ultimate experiment in monetary-fiscal policy mistakes, as they will have to resort to even more extreme measures to try to get themselves out of their existential structural crisis. The ultimate fiscal-monetary response could be, with unintended political-economic-cultural consequences, associated with a massive and coordinated debt forgiveness, by both fiscal/monetary authorities.
At some point they will not have the tax revenues to service the sovereign debt payments, and will theoretically fall into default, and will ask for forgiveness, not from bond holders, but from the BOJ, that owns the majority of the debt.
Monkey see, monkey do. The BOJ has set the (bad) model for other central banks to follow, not only the U.S., but also the European Central Bank (ECB).
The European Central Bank (ECB) under German Hegemony
Years after the financial crisis, the ECB finally started the process of cleaning up its banking system, and started an aggressive process of Quantitative Easing (QE), introduction of other unorthodox policies (Refinance Options/Covered Bond Purchase/Securities Markets, etc.), and drove nominal interest rates negative as far out as 10 year maturities; negative; with a limited effect of driving down the value of the Euro to stimulate exports, economic growth, and hit inflation and unemployment targets.
The actual ECB structure (dominated by Germany – Bundesbank) was a major impediment to its ability to respond to the crisis: austerity, inability to devalue the Euro, fear of hyper-inflationary trends, and misspecification of monetary policy targets: inflation, productivity, employment, wages, and exchange rates.
Poor performance (contagion), bank crisis (runs on banks), social unrest (populism), massive debt issuance, and deflation (liquidity trap/collapse of money velocity) was the costly (stagnation) result of these policy mistakes. This – along with their lack and hesitant response to bank runs in Spain-Greece-other EU countries – has had a negative impact on the central bank’s independence and credibility, in regards to their ability to respond to future financial and economic crisis.
When the ECB was dealing with the aftermath of the financial crisis, the Bank of England (BOE) across the pond, was trying to immunise itself from the global crisis and its aftermath, only to vote itself into another existential crisis of national identity (BREXIT from the European Union), with long-term economic consequences, testing the limitation of the BOE.
The Bank of England’s (BOE) Last Hurrah: From QE to BREXIT
The Bank of England (BOE) was founded in 1694, the first central bank, and in 1844 under the Bank Charter Act, was given independent monopoly control over bank notes and currency, money supply, bank supervision, lending of last resort, and fiscal government bond-placement agency. By the 1990s, monetarism took hold and the main target was inflation (price stability), and the Monetary Policy Committee was established to conduct open market operations, set interest rates, and reserve requirements.
Globalisation, and having London as the center of money center global trading – currency, credit and interest rate derivatives and floating rate Euro notes and bonds – created excessive liquidity/credit and asset price bubbles, particularly in the U.S. commercial property markets from 2004-2007, eventually led and met with an asset price (housing/mortgage/RMBS/CMBS/equity) bubble and banking collapse (insolvency/QE, nationalisation, etc.), similar to the other industrialised economies.
The total cost of these QE (negative real and nominal interest rates) programs, in addition to other credit facility programs, is well over a trillion pounds, with no real ability to achieve their inflation, Gross Domestic Product (GDP), or employment/labor participation targets. The global push toward deregulation (giving Wall Street back its ability to lever up and take down the system, again) and BREXIT, is certainly making the BOE’s job of conducting monetary policy problematic, leading to policy ineffectiveness (failure), lack of credibility and jeopardising its independence.
These events, have contributed to the significant devaluation of the pound; yes, making U.K. exports cheaper, stimulating export growth as a contribution to GDP; but has caused political-populous parliamentary uncertainty and economic stagnation (high deficits/debt levels); and import price inflation, pushing down consumer purchasing power, standards of living and social welfare in the short and long run.
The big worry, not only for the BOE, but also for the Fed, ECB, BOJ, etc., is the coordinated unwinding of the bank balance sheets (sovereign and MBS bond portfolios), one mistake, could shift and invert global yield curves, pop asset price bubbles in stocks, bonds and real estate, and send us all into a global recession-depression.
Similar policy responses to the global economic-banking crisis, is also being witnessed in Asia. Yes, we already talked about the BOJ being the first mover in applications of unorthodox monetary and fiscal policy, with no real outcomes on wages, growth or inflation, other than fiscal debt levels and continued stagnation, the other, is the People’s Bank of China (PBOC).
The real difference between the PBOC and the rest of the global central banks, is total lack of transparency (opaque) into the balance sheets of the government, financial institutions, government (State-Owned Enterprises – SOEs) owned corporations, public and private Multinational Corporations (MNC), and state and local finance.
The People’s Bank of China (PBOC) Chases Its Shadows
The modern era of the PBOC started in the early 1980s – as a fiscal agent (under Ministry of Finance), public-private bank, clearing foreign currency exchange transactions, etc. in coordination with the China Construction Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China.
Opening up the economy to massive (speculative) extension of credit and Foreign Direct Investment (FDI), under a neo-liberal model, resulted in speculative asset price (real estate, equity and debt) bubbles and busts (defaults) in the 1980s and 1990s, resulting in government intervention and deflation.
The Asian Contagion of the late 1990s required massive bank and corporate bailouts (recapitalisations). The 2000s, have seen a modernisation of the PBOC as a central banking institution through banking reforms, conversion of SOEs to private-public firms (privatisation toward a more Japanese Keiretsu system), push for more export oriented policies (higher-value commodities-services), and large government sponsored infrastructure projects (commercial-residential-dams-roads-power plants, etc.),
Prior to the Financial Crisis (FC), the PBOC was moving to a modern rules-tools oriented application of monetary policy: interest rate and price targeting, constant growth in the money supply, and use of open market operations. Low borrowing costs spurred massive amounts of lending and borrowing (money supply growth) by both fiscal institutions, government and state-private owned enterprises, leading to asset price bubbles.
Which also lead to over-capacity, miss-allocation of resources, inflation, environmental degradation, political-economic corruption, currency manipulation (peg), etc. Since the China economy was still at this time decoupled from the Western global financial system, it was able to avoid most of the damage caused before the Financial Crisis.
But after the Financial Crisis, the PBOC had to accelerate the move toward liberal monetary finance, driving interest rates extremely low (real interest rates negative) to keep government and corporate (personal) borrowing costs low, to stimulate the economy/consumption/investment, to keep it from falling into a severe recession (depression/deflation), and had to deal with Non-Performing bank Loan (NPL) portfolios to avert a banking crisis. Rapid growth helped to mask these problems, but these were only land mines, waiting to be found and dealt with at a future date.
Banks and asset management companies had to be bailed out, dissolved, liquidated, etc. Trillions and trillions of monetary liquidity and fiscal stimulus had to be injected to the economy, targeted toward housing, infrastructure and manufacturing, causing asset prices again to inflate. By 2014, only to deflate again by 2016. These injections of fiscal and monetary stimulus exacerbated asset price volatility (real estate/equities/bonds).
The next financial crisis in China will come from the excessive extension of credit from both fiscal and monetary authorities, and will come from government and corporate bond market defaults, as the system is severely over leveraged. China is using more and more debt to fix bad debt problems, and the simulative multiplier-accelerator effect on the economy is deteriorating (decelerating) quickly.
Global central banks have been coordinating their monetary policy efforts over the past 10 years, and the U.S. Federal Reserve Bank has become the de facto Central Bank of Central Banks (CBCB). Based on new disclosures, we have found out that the U.S. Federal Reserve conducted global QE by buying other foreign sovereign debt during the financial crisis, and provided credit-liquidity facilities to global banks.
Yellen’s Bank: From Taper Tantrums to Trump Trade
There was Paul Volker, then there was Alan Greenspan, then Ben Bernanke, now Janet Yellen, and who knows who is next (Jerome Powell). All of these Fed presidents dealt with extraordinary conditions (some self-inflicted), wars, financial crisis, recessions, asset price bubbles/bursts, etc.
It was not till Alan Greenspan, that the Federal Reserve decided excessive accommodation and liquidity was the solution to all crisis, and asset price bubbles were not a concern if they were real, and not a monetary illusion. However, he now admits that he was wrong in the way he understood how the world really works, which means he made policy errors and mistakes.
Bernanke was a protégé of Greenspan, and responded to the Financial Crisis with the largest monetary response (QE Infinity) in modern monetary history combined; and Yellen, continued his legacy of over accommodation, to escort us into one of the biggest debt-asset price bubbles in modern Fed history.
And if history is any indicator of the future, once the Fed(s) decide to conduct a coordinated unwind of their balance sheets, the popping of asset price bubbles will be like balloons at New Year’s Eve party in Time’s Square, only everyone will walk away from the party with the worst hangover of their life, and no one will be able to sober up fast enough to drive to the next party.
In the end, the Fed accumulated over $4.5 trillion in bank reserves/balance sheet (bonds), made up mostly of mortgage backed securities and U.S. government Treasury notes and bonds, the average size of the balance sheet prior to the financial crisis was $500 to $800 billion. This is the largest subsidisation, and theoretically (and really) the largest nationalisation (Fed implemented) process, of the financial system and the economy in modern post-WWI history.
This could also be considered Fascist Finance (FF), as it involves the largest global money center banks, multinational corporations, and governments in the world – now a Global Corporatist System – operating under unorthodox monetary policy, outside pluralistic-democratic institutional oversight. As we can now see, again, the systematic dismantling, deconstruction and destruction of financial institutional governmental regulatory oversight, is in place.
Since these were mainly reserves creation, and an addition to the monetary base, and not really the money supply, the policy effects (QE/(Zero-Negative Real Interest Rate policy) have been mute.
The Fed has not been able to hit its inflation or GDP targets for the past 10 years (well below potential), there is secular and cyclical productivity declines, extremely low labor participation rates (high under employment rates), real wages are stagnant and still declining, and we are in a disinflationary/deflationary secular trend.
The cause is a collapse in the velocity of money, driven by alternative forms of money creation and flows across the globe (cryptic-digital currencies-shadow banking, etc.); the lack of fiscal labor market policy to lower under-employment and raise labor market participation rates; and other social, cultural, political and economic disruptions. Making it now impossible to conduct monetary policy.
The real risk going forward will be from a series of financial deregulation, coming from the Trump Administration and the Republican controlled House and Senate; along with a coordinated effort to unwind (Quantitative Tightening – QT) the Feds (and other global central banks) balance sheet, and a race toward interest rate normalisation, sucking liquidity out of the system, only to lead to a stock, bond and real estate bubble burst.
With the Fiscal Debt totaling over $20 trillion, the Feds Balance Sheet totaling $4.5 trillion, the potential for continued -perpetual war (defense spending) and entitlement expenditures, and political and policy uncertainty (next Federal Reserve President) there is little room for monetary and fiscal solutions to fight the next financial and economic crisis. Leading to the conclusion of continued stagnation, crisis, recession, wars and depression.
It is now obvious why Central Banks fail.
Why Central Banks Fail
After reading Dr. Jack Rasmus book, Central Bankers at the End of Their Rope? and if you read his book, Systematic Fragility in the Global Economy, along with other books and interviews surrounding this literature, it has been clear, and it is now crystal clear, why central banks fail, they:
- Are a creature of the global capitalist system;
- Support, promote and protect financial institutions and companies;
- Use myopic (static) intellectual and epistemological frames (models) to analyse economic data, markets, and institutions to develop and implement monetary policy;
- Are influenced by political (executive/legislative) parties and lobby when making and communicating policy;
- Are expected to support (moral hazard) and coordinate national fiscal policies (debt) and priorities (compromising their independence and credibility);
- And be the lender, portfolio manager, and market maker of last resort to mitigate capital market (economic) failures;
These failures emanate from the fact that they are given (have been given over) the monopoly power and authority (independence) to control the money supply, clearing system, exchange rates, interest rates, supervision, etc. However, we are finding out, that they are not as in control as we think, and are not looking out for our best interest.
There is a mythology surrounding the Fed, and illusion of omnipotence, and control, this is evident when measured by its balance sheet, lack of understanding how the world really works, and inability to hit monetary and real economic targets: inflation, labor participation rates, real wage growth, and higher broad based social welfare and standards of living.
We are finding that our Keynesian (Keynes) and Monetarist (Fisher/Friedman) economic ideologies are not correct, and are not working, deregulation and printing of massive amounts of money to bail out and subsidise inefficient and corrupt financial institutions (lobby), after every man-made and self-inflicted crisis, is not working, and we are at the end of our rope.
We now, cannot keep doing this, we are out of money. However, with Crypto-currencies, and other unproven systems of monetary accounting, could set the stage for monetary collapse, if this experiment turns out wrong.
The solution to the existential crisis in global central banking is not a technological solution, but a democratic-pluralistic political solution. Based on moral philosophy and ethical outcomes.
Revolutionising Central Banking in the Public Interest: Embedding Change Via Constitutional Amendment
What is needed is a revolution in central bank thinking. There are many excuses for monetary (central bank) failures:
- Too much discretion (money supply growth/credit expansion/asset price bubbles), and not enough adherence to monetary policy rules (money growth targets);
- Conflicting fiscal (expenditures/spending) vs. monetary (inflation/interest rate) policy;
- Asymmetric information (capital) flows (bottleneck) through banking system (adverse selection/moral hazard/principal agent problem);
- Wrong monetary targets (inflation); dual mandates (production/employment/inflation/wage trade-off);
- Global savings glut (uncontrollable off shore capital inflow);
- Need for new monetary tools (open market operations/QE/QT/discount rates/reserve requirements, etc.);
- Executive/legislative intrusion in monetary policy functioning;
- Etc.
However, the real reason why central banks fail are:
- Mismanagement of money supply (credit) growth and allowing banks, and other near- bank institutions, to access Federal Reserve credit/liquidity facilities;
- Fragmented, failed and non-existent systemic and macro-micro prudential systemic bank supervision (Dodd-Frank);
- Inability to achieve (real-nominal wage) inflation (labor participation) rates;
- Failure to address, mitigate and/or control run-away asset (real estate/equity/bond/commodity) price inflation (bubbles/bust);
- Deterioration, decomposition, and failure in the elasticity of (zero-negative) interest rates (liquidity trap/technology) to stimulate real economic growth (employment/wages);
- Re-direction of investment capital away from higher yielding real (long-term) capital investments to lower yielding-speculative monetary (short-term) financial investments (derivatives/floating-rate notes);
- Ineffectiveness of traditional monetary policy tools (federal funds rate/discount window/reserve requirements), and reliance on non-traditional un-orthodox (QE/credit-liquidity facilities) monetary policy tools with unintended negative consequences (deflation/asset price bubbles);
- Myopic political-economic monetary policy ideologies and errors in epistemological thinking (Taylor Rules/Philips Curve/Zero-Negative Interest Rate Policy/unlimited balance sheet expansion).
- Etc.
What is needed is a revolution in central bank thinking.
CONCLUSIONS
A revolution is needed, in mainstream ideological thought, in regards to Global Central Banking. A revolution in accepted institutional norms and beliefs of how central banking actually works. There needs to be a dialectical shift from the established and accepted thesis of central banking authority. If there is not, there will be a revolution against central banks, and a battle will occur to wrestle authority, control and independence from central banks. And this battle will no doubt be destructive and deconstructive, leading to economic and financial crisis, and eventually lead to some anti-thesis (executive or legislative branch control) over the central bank(s) for the next 30 to 60 years.
Currently, the Federal Reserve is:
- Controlled by private sector banker interests,
- Control of the Federal Reserve Bank of New York (Open Market Operations),
- Private sector banker selected leadership of Federal Open Market Committee,
- Private sector bank access to insider information on monetary policy,
- Iron-Triangles between Fed staff and private banking sector and lobby,
- Circularity between Fed private sector banks,
- Influence of private sector bank lobby in Fed Chair selection,
- Record campaign finance contributions to congressional committee members,
- Revolving door between the Fed, bank supervisors, Treasury, and banks,
- Etc.
Regulatory and legislative proposals have been brought, only to be blocked and abandoned, due to pressure from Wall Street lobby. And those policies that have been enacted (Dodd-Frank), the bank lobby has systematically reversed and repealed oversight over the years, or implemented bank friendly legislation. This legislation, and lack of supervisory regulatory oversight, has been passed through (and ignored by) executive and congressional initiatives, and the public administrative bureaucracy.
The solution, is the democratisation of the central bank, bringing it into pluralistic (public) oversight, with a focus on real, not financial, economic outcomes.
Proposed Constitutional Amendment
The solution, a proposed constitutional amendment to require the democratic election of the national Fed governors by U.S. citizens, serving six years; and the Treasury secretary shall decide monetary policy in the public interest; and be proactive in achieving stability for labor, households, businesses, local governments, and financial institutions and industry, etc.
Dr. Rasmus, recommends a constitutional amendment enabling legislation through five sections, and 20 articles:
SECTION #1: Democratic Restructuring
- Article #1: Replace 12 Fed districts with four, presidents elected at large.
- Article #2: FOMC replaced by National Fed Council (NFC), members limited to six-year terms, and 10 year limit on returning to private banking sector.
- Article #3: Fed districts to not be corporation, and issue stock, pay dividends, retain no profits. Taxes to be levied on Fed transactions to pay for operating costs.
- Article #4: No additions to Fed districts by legislative or executive orders, or appointments.
SECTION #2: Decision Making Authority
- Article #5: NFC and Treasury Secretary to determine monetary policy (tools).
- Article #6: QE to be used to invest in real assets.
- Article #7: NFC purchase of private sector stocks and bonds, and derivatives, prohibited.
- Article #8: No Fed bank supervision, a new consolidated banking institution created.
SECTION III: Banking Supervision
- Article #9: Same as Article #8.
- Article #10: Separate supervisory departments by banking and financial services industry segments.
- Article #11: Separate legislation by depository from non-depository institutions.
- Article #12: Supervision includes all markets and companies in derivative industry.
- Article #13: Conduct regular stress tests on banks and non-banks.
SECTION IV: Mandates and Targets
- Article #14: Replace current Fed targets with those targeting real wage growth.
- Article #15: Expand authority of NFC to lend directly to businesses and households.
SECTION V: Expand Lender of Last Resort Authority
- Article #16: Expanded to include non-banks businesses, local-state governments, etc.
- Article #17: Non-bailout of Non-U.S. domiciled banks and financial institutions.
- Article #18: Create a Public Investment Bank (PIB) as lender of last resort to provide liquidity to households and non-banks.
- Article #19: Create a National Public Bank (NPB) for direct lending to households and non-banks.
- Article #20: Bain-ins thresholds and limits protect depository diluted from bail-outs.
FINAL COMMENTS
In the post-World War II (WWII) era the economy and financial markets and institutions have gone through nine cycles. Over time the amplitude and volatility of these cycles have narrowed as our cultural, social, political and economic institutions developed. However, the most recent business, financial institution and credit cycle experienced a significant drop – and volatility – in aggregate demand and asset prices, not seen since 1949, a point in history when our central banking and financial institutions were developing.
The reality is we have witnessed the systematic deconstruction of pluralistic, democratic and capitalistic institutions – through the political process – by private interest in society and economy, creating perverse redistribution of wealth and resources, to the point of massive social and cultural, and economic and capital market failures.
It is believed by most neo-post Keynesian economists, that the current economic, institutional, and capital market failures could have been avoided through centrist political, monetary and fiscal policies, and that the recent financial crisis could have been averted through the separation of investment and commercial banking activities, and enforcement of public and private property rights through effective enforcement.
The long-term goal of effective formulation and administration of public, monetary and fiscal policies is efficient allocation of capital and resources, higher risk-adjusted returns, social and economic stability, and high and rising standards of living and social welfare.
Dr. Jack Rasmus’s book, Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression, enables us to understand historical and recent economic and capital market crisis, and how to recognise and understand the development, administration and deconstruction of financial institutions and markets.
Institutions were built on pluralistic political and capitalistic economic ideologies, and when these ideologies are confronted, come under attack by private interests, policy outcomes are distorted or destroyed.
The process of pluralistic, democratic and capitalistic institutional construction and development has taken 80 years; however, it took 30 years, and particularly the last ten years, to deconstruct these institutions to the point of systematic failure.
The process associated with institutional destruction, deconstruction and distortion, manifests in the extreme redistribution of political power, social benefits and economic wealth, and can reach the point where redistributions become so extreme, they cause systematic social, economic and market failure.
These failures are reflected in increased volatility in social and economic indicators, capital market pricing and investment risk, and resulting reductions in risk-adjusted returns, inefficient allocation investment capital and resources, and falling employment and real income growth rates, standards of living and overall social welfare.
“Over the past 95 years, society and the economy have witnessed great prosperity, wars, depressions, recessions and revolutions. We have just witnessed a revolution in economic ideological thought – from Keynesianism to Monetarism – and in its wake of institutional destruction and market failure… what synthesis will form and how will we as a society be remembered.” Dr. Lawrence A. Souza (2014).
About the Author
Dr. Lawrence A. Souza, DBA/CCIM/RICS/CRE is an Adjunct Professor in Finance at St. Mary’s College, School of Economics and Business Administration (SEBA). He has over 28 years of experience in the commercial real estate investment advisory industry, providing economic and investment consulting services to individual and institutional real estate investors. Prior to St. Mary’s College of California, Pillar6 Advisors, LLC, Johnson Souza Group, Inc., and New York Life Insurance Company/NYLIFE Securities LLC, Dr. Souza worked for Charles Schwab Investment Management (CSIM) as Managing Director – Index Services; Chief Economist – Managing Director with Global Real Analytics (GRA); and Investment Advisor for Quantum Financial Network (QFN).
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