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Post details: The Unsung Villain

The Unsung Villain

Driving in the West makes you acutely aware of many things, not the least of which is the price of crude oil - currently hovering between $100 and $110. While on the East coast 200 miles moves you easily across several states, here it barely pushes you from one town to the next. And your gas tank is well aware of it.

In a country so depending on petrol, such price action calls for an immediate witch hunt. Every price conscious economic guru and a middle class champion spends considerable air time pointing their accusatory finger at various culprits - and there are quite a few to choose from. The industrial boom in developing markets consumes a lot of energy, especially in China and India. Hundreds of millions of their citizens are waking up to the pleasures of independent transportation. The specter of the Arab Spring circles around Saudi oil fields in ever tightening circles, while across the Mediterranean the control of the Libyan production seesaws whimsically between Colonel Gaddhafi and rebellious opposition forces. Recently, every talking head is slamming its forehead with a profound observation that the easy oil is gone and we'll all have to drill deeper into the sea, shale, arctic or some such hostile environment. Those are all valid reasons, but in the midst of all the learned handwringing, one culprit of skyrocketing gas prices is conspicuously missing. The monetary policy of the central bank - the Federal Reserve.

The heart of the matter is very simple. We pay for the crude with money. Under normal circumstances the value of that money is backed by the goods and services produced in the economy and as such it is relatively stable. However, if the central bank has to print (or electronically create) a lot of unbacked dollars, the value of each greenback tanks accordingly and with it the amount of stuff we can buy with it. Any monetary binge is like a flood, it lifts anything that floats. Anything that has an intrinsic value becomes more expensive - stocks, goods, oil, other commodities, grandfather clocks, you name it.

To paper over the costly blunders made in the runup to the banking crisis of 2008, the Fed chairman Ben Bernanke simply conjured up trillions of fresh dollars on the Fed balance sheet and handed them over to the perpetrators - without demanding that the bondholders, shareholders or officers that profited from this Ponzi scheme be punished first. Such omission made the final cost higher and the excessive risk taking more popular than ever. Thus the wealthy moneychangers went back to their old games while we, the taxpayers, are stuck with the bill. And we'll pay for it slowly over the coming decades with the loss of the purchasing power of our currency.

To add insult to injury, his noble rescue efforts ended with high financiers. Take Louisiana fishermen, for instance, the most recent victims of our endless quest for more oil. After the BP disaster, they were left floundering on the well lubricated beaches - just like many other small businesses struggling for survival. No low interest loans came their way, although large corporations, often of foreign origin, had virtually unlimited access to the Fed's magic purse.

Bernanke's ongoing efforts to mop up the financial mess with our money wreaked an obvious havoc on its value and effectively made each family pay for the financial triage he implemented through higher prices - whether at the gas station or at the grocery store. Not that money printing solves anything, but in a subtle and diabolically clever way, it spreads the problem over a wider population. Everybody chips in a bit, so that the ill gotten gains from the bubble years don't have to leave the comfortably deep pockets. To paraphrase Churchill, never before have so many paid dearly for the mistakes of so few.

The central bank's 100th anniversary is approaching fast (in 2013). Perhaps we could use this occasion to take a break and with the cool head reevaluate its utility. It is becoming clearer and clearer that the Fed's policies protect interests of the big banks rather than those of small depositors or the society as a whole. Bernanke's only excuse for the endless stream of bailouts has been the threat of a catastrophic financial collapse. Well, if that's the case then it is high time to redesign the monetary system in such fashion that our money would not be held hostage to the whims of the Wall Street cabal. Such reform might erase a zero or two from the size of their beloved bonuses, but for the rest of us, it will make the gas a little bit cheaper.

Curtailing the Fed's autocratic powers would be a good start.


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