sábado, 26 de septiembre de 2015

What is the most financially dangerous institution in the world?

Foreword to Brendan Brown’s ‘A Global Monetary Plague’

What is the most financially dangerous institution in the world? Brendan Brown shows us that it is the Federal Reserve.

The Great Monetary Experiment designed and administered by the Federal Reserve under the Obama Administration unleashed strong irrational forces in global asset markets. The result was a 'monetary plague' which has attacked and corrupted the vital signalling function of financial market prices.

Nothing else can or does create as much systemic financial risk as the Fed does by its monetary manipulations. Since the dollar is the dominant international currency, the risk is created not only for Americans, but for people all over the world. The scale of the current manipulation, or in Dr. Brown’s phrase, the “Great Monetary Experiment,” which the Fed is imposing on everyone, is unprecedented. But there is nothing new in the Fed’s creating systemic risk, and blundering while it’s at it. As the book relates in detail, this has been going on for nearly a century. For example, the “powerful global asset price inflation” of the mid-1920s was “fueled by the monetary disequilibrium created by the Benjamin Strong Fed.”

The Ben Bernanke/Janet Yellen Fed of our day has explicitly sought to inflate bond, stock and real estate prices. Other central banks, especially the European Central Bank and the Bank of Japan, have joined in, and a vast asset price inflation has indeed been achieved. As one financial market observer has said, bonds internationally have surpassed “any known previous high of any recorded era,” and “every department of the credit markets is making all-time lows in yield.” Dr. Brown reasonably characterizes this as yet another cycle of irrationality in asset prices stoked by monetary expansion—or more rhetorically, as a global, viral disease infecting financial markets. What the final outcome of the Great Monetary Experiment will be is uncertain, but it certainly risks being ugly.

One of the most remarkable religious developments of modern times is the widely held faith in the Federal Reserve. This odd faith results in many otherwise intelligent people, especially professional economists, ardently maintaining that the Fed should be an “independent” or virtually sovereign fiefdom, free to carry out without supervision from the Congress or anybody else whatever monetary experiments it wants. But no part of a democratic government should be such an independent power.

The promoters of Fed independence, including of course the Fed itself, share a common, unspoken assumption: that the Fed is competent to have the unchecked power of manipulating money, or in a more grandiose version, of “managing the economy.” It is assumed that the Fed knows what it is doing with its experiment of monetizing $1.7 trillion in real estate mortgages and $2.5 trillion in long-term government bonds, and blowing its balance sheet up to $4.5 trillion. Dr. Brown maintains to the contrary that the Fed does not know what it is doing, that it is flying by the seat of the pants, and he works through a hundred years of financial history to show that it was ever thus.

Indeed, there is no evidence at all that the Fed has the special economic knowledge to make it competent to be entrusted with its enormous power, and a lot of evidence to show that it does not. Believers in the Fed’s special competence are operating purely on a credo: “I believe in the Fed; I believe in a committee of economists manipulating money according to unreliable forecasts and debatable and changing theories from time to time in fashion.”

The Fed has no credentials to merit faith. But the Fed is excellent, Dr. Brown shows, at causing financial instability while claiming to be promoting stability. It is also excellent at allocating resources to big government spending.


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