[kitchencabinetforum] INTEREST-RATE PRICE-SETTING IS STUPID

If dollar devaluation becomes too pronounced, Washington threatens to kill the goose that lays the golden eggs: namely, the dollar's reserve status. If that were to happen, a global financial crisis of staggering intensity would surely erupt, the resolution of which would not favor the United States. http://venitism.blogspot.com

Eurokleptocrats are losing touch with reality. Greece is broke, and yet Brussels wants to send Graecokleptocrats billions in new loans. This is understandable, given that abandoning portions of their claims against Greece would translate into substantial losses. But cutting losses short is the golden rule of markets.

Fiat currencies trade people's freedom and security for the government's freedom to squander the wealth of the nation on wasteful pet programs, wars, and corruption. This is why the freedom of the people is so intertwined with a sound monetary unit. This is also why we like gold and silver, and supporters of big government hate them.

Ron Paul points out the Federal Reserve's interest rate price-setting board, the FOMC, met last week. They will continue to set the federal funds rate at well below 1%, and plan to keep it low until the end of 2014. That's a year and half longer than they planned when they met just last month. Chairman Bernanke says they are keeping interest rates so low for so long because the economic outlook warrants it.

Basil Venitis, venitis@gmail.com, muses the Greek bailout is the heroin of Graecokleptocrats. It feels good in the short term for the Graecokleptocrats, but it doesn't help repair the Greek economy, causing more damage, because it gets in the way of a proper recovery. Graecokleptocrats hoodwink that acquisition of its heroin is a heroic act, but heroin is not heroine!

Graecokleptocrats consider Fourth Reich a processor of ESM poppies. But EU's poppy tears bring Greek tears! ESM is not the opium of the masses. ECB is not a morphine exchange, and Fuehrer Merkozy is not a heroin trader. Dehydrated Greek economy must drink water, not opium latex. http://venitism.blogspot.com

Ron Paul notes the fallacies in their reasoning would be amusing if they weren't so dangerous. The Fed wants to keep the price of money at essentially zero – in other words "free" – to boost the economy. But the boost they are attempting won't get here for another three years. That's not a recovery. And we've already tried this tactic. That's how we got into this mess in the first place: with interest rates artificially low for a very long time. Free money doesn't stimulate growth, as Japan's two lost decades clearly show.

Kleptocrats are creating zombie banks and companies that are kept alive artificially. We started with a too-big-to-fail problem, and part of the policy response to the crisis has been even more financial consolidation. JP Morgan took over Bear Stearns and Bank of America took over Merrill Lynch. What we have now is financial institutions that are even bigger. Those institutions, even more than before, know if they do something very risky, something reckless, they will be bailed out again.

Artificially low interest rates only serve to punish saving, distort market signals, and cause further malinvestment. They also do nothing to address the only real solution to our economic woes: liquidation of the bad debt that hangs around the neck of the world's economy, preventing recovery. Artificially low interest rates merely ensure that we remain a debt-financed consumer economy guaranteed to end up with a weaker economy and higher prices.

What baffles Ron Paul even more is that two decades after the collapse of Soviet planning and decades more since the U.S. and economists purportedly rejected the idea of price setting, we find nothing wrong with the Fed setting the price of money. We all agree it is a bad idea to have a board saying the price of wheat should be $250 a ton today, or carpenters wages should be $25 an hour until the end of 2014. But we are perfectly comfortable with having a board set the price of one half of every transaction in our economy. And our markets are supposedly free.

Ron Paul says the Fed policies of low interest rates, Operation Twist, and rounds of quantitative easing are all attempts to keep the economy alive artificially. But the 12 FOMC participants cannot manage the economy any better than the bureaucrats of the Soviet Union. The policies haven't worked. They won't work. Real economic recovery cannot come until we liquidate the bad debt, until we eradicate the poor decisions we made over the last decade, and start with a sound foundation. It is time we acknowledge the truth of the Fed's activities: they are merely using fancy words for price setting.

Treasury Secretary Andrew Mellon was correct in the 1920s when he said "liquidate everything." That's what we did in the severe depression of 1920-21, and we recovered so quickly it is never even talked about. We didn't take his advice after the 1929 crash, and ended up with the Great Depression. We are committing the same mistakes, destined to live in this Great Recession for a decade or more — it has already been four years, the Fed says it will be at least three more! It's time we start rethinking what the Fed's policies are really doing to our economy, because obviously, by their own admission, they haven't helped.

The Federal Reserve refuses to give a public accounting of the trillions in recent taxpayer-backed loans. Congress has the responsibility to force a public audit of the Federal Reserve, and the American people deserve to know how their tax dollars are being spent. Allowing the Fed to remain out of control and shrouded in secrecy clearly allows for abuse and the continued stealing of our tax dollars through inflation and unaccounted electronic bank loans.

The Federal Reserve's abuses lead to constant economic crises like the current housing crisis, international banking crisis and the resulting chaos. The Federal Reserve System forces fuel, food, housing, medical care and education costs upward, meaning that everyone who is not on the government dole is forced to make do with less as the value of money slowly decreases. History shows us that riots, violence and full-scale police states can result when people finally realize fiat money isn't worth the paper it's printed on and refuse to accept it.

There is no suggestion that interest rate swaps, the largest category of OTC financial derivatives, or foreign exchange swaps played any role in the financial meltdown. Yet the kleptocrats' proposals extend regulatory rules for futures to these bank-based products. Want only extending futures regulation to swaps applies the wrong tool in the wrong application. The result would be ineffective regulation damaging everything involved.

Individuals and banks should be free to choose what money they use. This is an especially controversial, but absolutely essential, component of a truly free society. The government may not force us to use infinitely-inflatable, green pieces of paper. Historically, when left free from government-dictated currency, the overwhelming choice of individuals has been gold money, which has objective value, a stable quantity, and other qualities that make it an excellent form of money. Interest rates on a gold standard are set by supply and demand in the marketplace; there should be no governmental manipulation of interest rates, and thus no ability of the Federal Reserve to create massive bubbles such as the dot-com and housing bubbles.

Since its inception in 1913, the Federal Reserve has helped to devalue the dollar by 96%. During the recent economic crisis, it has poured trillions of dollars into the economy with no oversight, made secret agreements with foreign banks and governments, and has refused to tell Congress who is getting the money or to give it the details of what deals are being made. We demand full transparency from the central banks.

Wages and prices need to be free to fluctuate, so labor and other resources can be swiftly shifted away from bloated, bubble sectors of the economy and into sustainable sectors of the economy where consumers want them. Bailouts obstruct that process by preventing the reallocation of capital into the hands of firms that genuinely cater to consumer demand, and by propping up instead those firms that have deployed resources in ways that do not conform to consumer preferences. Fiscal and monetary stimulus do nothing to address the imbalances in the economy, and indeed only perpetuate them.

There has been much discussion of moral hazard in connection with the flurry of bailouts that began in 2008. Moral hazard refers to people's readiness to act with an artificially elevated level of risk tolerance because they believe that any losses they may incur will be borne by other people. Hence the bailouts will tend to make major market actors even less likely to behave prudently in the future, since if they believe they are likely to be considered too big to fail, they have more reason than ever to believe that they will not be allowed to go out of business, and therefore that they may continue to make risky bets. http://venitism.blogspot.com

The very existence of a central bank such as the Federal Reserve and ECB aggravates, indeed institutionalizes, moral hazard. Since there is no physical limitation on the creation of paper money, firms know that no natural constraint exists on the power of the central bank to bail them out of any serious trouble. The Central Put is the implied promise that the central bank would intervene to assist the financial sector in the event of a serious downturn. No one has a right to be surprised when market actors behave accordingly.

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