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Post details: The Big Bank Theory

The Big Bank Theory

The prices of commodities have been through the roof and in the popular hunt for culpable culprits the speculators got into public crosshairs. You know those clean cut quantitative wizards who keep churning unimaginable quantities of imaginary contracts at their computer screens until the resulting bubbles burst in the face of the huffing and puffing economy. But the thing to know about financial bubbles is that you can't really blow them up with a stack of old baseball cards. You need cash. Lots of it. And that is where central banks of the world step in - in an attempt to whitewash the skid marks of runaway greed they have been hosing the whole financial world with oceans of liquidity for three years now.

However, serious actions have serious consequences. While our authorized money magicians can pull as much liquidity from their hats as they wish, they cannot enforce where it goes. That is for markets to sort out. Can you blame the traders that they direct the money that is being showered on them to where it promises the highest returns? I don't think you can. They are traders - that's what they do for a living. That's like giving kids a set of matches and then chastising them for setting the barn on fire. The central banks should be the adult in this game. Easy money is a drug. But instead of being a responsible pharmacist, our beloved central bankers turned into unscrupulous pushers.

Commodity speculation isn't the only problem of our financial system. There is much that is wasteful or outright fraudulent - excess of unproductive money in politics, rampant misuse of public funds, poorly understood risks, non existent ethics - you name it - but if you follow the money trail it always leads to that one big bank in the center of it all. In our case the Federal Reserve and its ability to create money at will. When water is in infinite supply why would we conserve it, right? Being able to create money out of thin air is like saying "hey guys go ahead and take your insane risks, we will print more if need be".

Gold used to impose certain discipline, but it's rigidity lead to stress that was tearing the financial system apart. That is where the notion of elastic currency came from. Not a bad idea per se, except we gave control over it to the wrong group - we have entrusted our hen house to the foxes. Look at the irony of it: we will meticulously vote for the least important dude on a school board in some godforsaken district in rural Alabama - yet we let a bunch of unelected and unsupervised financiers unilaterally determine the strength of our national currency. And remember that any tinkering with the money supply dilutes the purchasing power of the money already existing. Yep, that would be those green pieces of paper residing in your wallet. We all literally walk around with bankers' bony hands in our pockets. They control the actual value of our wealth, but they do not answer to us in any meaningful way.

This lack of oversight also prevents establishing efficient mechanisms that would deal with their incompetence or abuse. Reading past statements of Maestros Bernanke and Greenspan makes your hair stand on end sometimes. But there is nothing you can do about it. Granted - economy is a very complex system and everyone makes a bad call once in a while. But then why not link the crucial decisions to some market mechanisms, rather than subject them to whims of a small group of self-proclaimed experts. Especially when that group earned a pretty shady reputation over the centuries. Bankers have been abusing their powers since the Middle Ages. And central bankers are no exception - they will always take care of their own first, even if it's exactly the same geniuses who created the mess. After the recent infusions of public (taxpayers) money into the clogged veins of the global financial systems even the most naive must see that banks are not here to serve people, people are here to backstop the foolishness of their management. We gave them keys to the world and they drowned it in debt. Maybe we should finally reevaluate this awkward arrangement and give custody over this lovely little planet to a group that will treat it with more respect - like architects, entrepreneurs, engineers or tigers.

In 1913, the Big Bank of modern financial times happened. The Federal Reserve was created and the idea of elastic currency was implemented to the benefit of bankers all over the world. A century later, a thorough review of this institution is in order. Why do we fret over every penny in our personal, family, community, company, city or state budgets and then let central bankers throw billions of dollars around as if they were paper confetti? Why would we want to be forever chained to irresponsible and arrogant macho sociopaths at the helm of the too-big-to-fail monsters? Even in biblical times it was understood that throwing money changers out of the temple was a pretty healthy activity that should have been practiced every now and then. Preferably now. Our schools have raised scores of smart economists in these past few decades - just the list of Nobel prize winners would fill a whole page of a decent newspaper - and I am sure if they put their enlightened heads together, they could devise a new and fair financial system. One where we won't be helpless cogwheels in the thingamajig of global machinations. One where banks will concern themselves not only with checks, but also with balances.


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