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Post details: Central Banking 2.0

Central Banking 2.0

Europe is slowly choking on its debt.

In the ensuing political dance of thousand headless chickens, bouquets of poppycock are flying across the ball room in all possible directions. And some impossible too. A truly grand legacy to leave to our preposterity. Apparently, the European political and financial elites think that the best way to fix a leaking pail is to pour more water into it. And there are many leaks in the collective pail of the European incontinent: bleeding health care system, wasteful if not outright fraudulent management of public resources, unrealistic promises made to all segments of the society, poorly managed immigration policy, inept bureaucracy, etc. But you never hear politicians mulling over solutions that would actually mend these problems. You know - a little welding job here, a little putty fix there. All they want is to pile more and more debt on top of a stinking heap of the debt already on the books. In other words, keep throwing good money after the bad. You don't have to be a policy wonk to figure out that such cavalier attitude towards money rewards and encourages irresponsible behavior. Not only it never fixes the leakage, it may actually entice a couple of smart cookies to drill more holes into the pail.

While the contours of the eventual solution are still hidden somewhere in the morning mist hovering over Brussels' administrative district, you can bet that it will involve printing nice amounts of money somewhere in the dark soft underbelly of the world's banking system - all perpetrated under noble pretexts of saving the people of Portugal, Ireland, Italy, Greece and Spain. Never mind that the people of Portugal, Ireland, Italy, Greece and Spain probably won't see a single penny of any rescue package. They are not supposed to. They are supposed to join hands in the Holy Parsimony and let the proceeds of this financial bamboozlement - wherever they may come from - go straight to European banks, mostly German and French.

It is banks' job to lend "responsibly". It may be Greek to them, but extending oodles of credit to a nation of notorious tax evaders is not prudent, especially when the local public servants are wont to retire at the age 50. They might have just as well loaned that money to a bedraggled drunk waltzing into a Las Vegas casino at 3am. It was private investors who made such daffy decisions, but it will be central banks who will have to rescue these pecuniary nincompoops. Whether it is Maestros at the Fed, at the Bank of England, the Bank of Japan or the Swiss National Bank, the central bankers will roll up their sleeves and crank up those printing presses. Because that's what they do best. That's how they solve problems that their lesser non-central brethren have created. The fact that hard working taxpayers will have the value of their money decimated in the process is of little concern to them. Hey Benny - pour more water into that pail, will ya?

And the funniest thing is that when you ask them where they got the mandate for such shenanigans, you will learn that we, the people, gave it to them. Yep, they are just taking care of the business we entrusted them with. The business of managing our money. But don't expect any apologies. Only if you get lucky and find that one financier whose soul hasn't been foreclosed on by the devil yet you may elicit a sheepish "I feel your pain" look followed by the well rehearsed fatalistic sigh "but there is no other solution, pal, sorry".

Fancy that. No other solution. So they just whip up vats of dough out of the goodness of their hearts and fork it right over to the politicians, who selflessly sanctioned this process to begin with. Casual examination of financial flow charts will quickly reveal that this operation benefits Wall Street and K Street tremendously, while Main Street gets the short end of the stick. But the funniest part is that central banking of this kind is presented to us as some sort of natural physical process which is beyond our control - like precipitation of moisture or gravitational collapse of a burned out star. And that means that all we can do about it - and let me put it in precise economic terms - is diddly squat.

Well, in that case let me make a suggestion.

From now on, the central banks keep their money stock constant. They don't even think about printing a single dime without our consent. They don't take on their balance sheet any toxic manure from private enterprises either. And if they do need to increase the amount of money or credit in circulation - and at times of crisis such need may arise - they don't just dish the freshly minted smackeroonies out to the big boys to speculate with. They give them to us, the people, first and then let the banks compete for the prize. Yes - compete - that magical word which used to be the driving force of economic progress.

It's only fair, right? If they manage the money supply on behalf of us, the people, then any unbacked expansion of that supply should indeed benefit us, the people. Not just the narrow group of well connected banksters. It's not all that difficult. The Fed will just send their electronic monies to the Treasury and that in turn will cut every taxpayer a warm and fuzzy refund check. For instance during the last money puffing operation, a charade known as Quantitative Easing, Ben Bernanke conjured up roughly 600 billion brand new dollars. Now divide that into 300 million people and you get about $2,000 to every man, woman and child in this country. Imagine what good could have been done with that kind of scratch.

The people would decide whether to buy local stuff (stimulating economy), or whether to put the windfall in the bank (recapitalizing our malnourished financial institutions). But remember that banks are businesses - they should have a plan. No more cheap handouts straight into their coffers without any strings attached. If they want to get their hands on our capital, they better offer us (gulp!) decent interest rates. That is the kind of capitalism I could believe in.

How about that, Dr. Bernanke?


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