Central Bankers to Prick Bubbles
By Staff News & Analysis - July 22, 2010

IMF Shifts Advice to Banks on Asset Bubbles …The International Monetary Fund's executive board said central banks may want to use interest rates in a "limited" way the next time they encounter an asset bubble that needs to be pricked, weighing in as the Federal Reserve and other major central banks reevaluate their bubble-fighting strategies. Before the global financial crisis, the Fed's main strategy for addressing bubbles was to mop up after they burst, lowering interest rates to cushion the blow to the economy and restart growth. That was a central conclusion of the academic work of Ben Bernanke (left) before he became Fed chairman and was an approach embraced by his predecessor Alan Greenspan. – Wall Street Journal

Dominant Social Theme: It is time to rethink and then recalibrate the wisdom of monetary management.

Free-Market Analysis: We have reported before on the propensity for central bankers to make the weakness of the process into a strength. Central banks, for instance, print more money than economies need. Since it is impossible to tell accurately how much money an economy needs – absent a marketplace environment in which gold and silver are dug up out of the ground based on supply and demand – central banks almost always print too much money.

Too much money (inflation) fools average investors and businesspeople into believing that the economy is better than it really is, resulting in over-expansion and rash investments. When markets realize that numerous investments are not going to pay off, then a contraction begins and markets sell off. The "bubble" is both revealed and punctured.

It is not a situation that central bankers enjoy discussing. They wish to pose as economic salvationists and thus wish to emphasize their after-the-fact roles in attempting to ameliorate the messes they have made. This gives rise inevitably, to a power-elite-initiated sub-dominant theme that central bankers are vigilant about inflation (the process of printing too much money). Some want to be known as "hawks," excessively concerned about the over-printing of paper and digital currency – and also resolutely opposed to what they consider to be overly-reduced central-bank controlled interest rates. Here's some more from the article:

The IMF, in a paper released Tuesday, urged central banks to use tougher regulation to head off asset bubbles, including tighter capital requirements for banks, limits to banks' use of short-term loans and tougher collateral requirements for loans they make. …

The Bank for International Settlements is also looking at how monetary policy could be used to deflate asset bubbles. One way may be to include risks to financial stability as part of the economic modeling used by central banks to choose optimal interest-rate policy, said the BIS 2010 annual report.

We can see from this excerpt that there is no limit to how far those involved with the central banking process will go to defend it. The systemic (artificial) complexity they are willing to tolerate and even encourage is mind-boggling. Of course it should be much simpler. In a market-driven economy, gold and silver are dug out of the ground to create money. If there is too much gold and silver in circulation, people begin to hoard gold and silver because the price is dropping. Mines shut down because it is not economically feasible to dig up more precious metals at lower prices. Gradually equilibrium reasserts itself. Thus it is that the free-market regulates the money supply based on supply and demand.

Unfortunately, modern Western societies have determined that supply and demand are not to be part of the process of issuing money. Over the past 100 years, Western countries, especially, have made it difficult for gold and silver to circulate as money. Gold and silver in the past were routinely deposited in warehouses (banks) and the warehouse would then provide a receipt that showed the gold and silver were in the vaults. This receipt – scrip – eventually became accepted in lieu of gold and silver. It is the basis of today's modern-day money.

By making it difficult or illegal for banks and other warehouse-oriented entities to issue private receipts that circulated as money, central banking proponents managed to substitute public-oriented money for private money and basically eliminated the supply-and-demand that governed the creation of money. The result has been a predictable explosion of ruinous side-effects, but such is the control that the powers-that-be have over the system, the actual effects of central banking are hardly ever made clear to the public or regularly reported on within a mainstream context.

These days, as criticism grows, the powers-that-be have begun to allow a bit more mainstream economic and media criticism of the central banking process. It is instructive to note in the excerpt above the following quote: "Some Fed researchers say that loose monetary policy can play a role in promoting asset bubbles by encouraging banks to take on too much leverage and that small changes in interest rates could help tame bubbles." This is of course a free-market analysis and one that has been around for close to a century now.

Central banking basically allows those in charge of the process to print as much money as they like, enriching both themselves and their chosen colleagues. The power elite that has put this destructive process in place will do almost anything to defend it because it is the key to power. Unlimited flows of money have allowed the construction of an aggressive form of regulatory democracy, one that touches every part of citizens' lives and ensures elite primacy. Without central banking, the almost limitless wealth and social control the elite enjoys would be significantly constrained.

Many have problems believing that there is an overt conspiracy by a hidden power-elite to regularly consolidate power and wealth as a byproduct of a march toward global government. How then is it that a financial procedure as blatantly destructive and unjustifiable as central banking remains at the core of Western power politics without being debunked either academically or by the mainstream press? Surely there is no greater evidence of the power of the elite conspiracy than the continued acceptance of central banking and aggrandizement of its bankers.

That the IMF feels compelled to suggest to the central banking community that bankers extend the farce of "inflation-fighting" to "bubble-fighting" only illustrates once more that the powers-that-be are now on the defensive – in large part thanks to the Internet. Here at the Bell we try to be disciplined meme-watchers and suggest that others practice the same discipline. It helps one understand how the larger system is faring (including financially) and how effectively its stakeholders (the power elite) will be able to defend it.

After Thoughts

We, of course, believe the system is degrading and the IMF's latest suggestions to central bankers on ways to defend it only further confirm our perceptions. In the US, the Federal Reserve remains under severe pressure from our perspective while the world second-most powerful central bank, that of the European Union's, staggers from crisis to crisis. Central banking, once the power-elite's crown jewel, is increasingly tarnished. It is most doubtful that posing as "bubble prickers" will help.

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