``The deepest policy errors are lodged in the public’s expectation and belief that central banks and governments can alleviate recessions and in the public’s giving these organizations the legal power to do what they do (or tolerating their power grabs). Further errors lie in listening to mistaken experts who continue to justify these counterproductive methods and laws, and in failing to learn from experience that the policies that central banks and governments use to fight recessions make them worse and turn them into deeper recessions and depressions.”- Michael S. Rozeff, The Fed’s Exploding Balance Sheet: What It Means and Reviving the Revolution
Dictatorship means absolute rule.
Given the recent turn of events, it is noteworthy to point out that the recent actions undertaken by the US Federal Reserve appear to be evolving towards such an end.
While one may argue that given today’s emergency conditions, rapid responses from central authorities may be required to help ease the crisis, such assumption is fallaciously grounded on the infallibility of the central authority, where wrong decisions may present as systemic risk for our globalized society.
To quote Friedrich A. Hayek in Pretense of Knowledge, ``To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the overconfident because their experiments may after all produce some new insights. But in the social field, the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous-ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims.” (italics mine)
Some of the recent events indicative of the dictatorial tendencies:
One, the Fed has activated the use of its emergency powers to bypass legal requirements or procedures,
This from Bloomberg, ``The Federal Reserve took advantage of emergency powers to authorize the auctions that officials felt were necessary to ease a credit squeeze, concluding it otherwise lacked legal permission to do so.
``The Fed bypassed requirements for prior notice and public comment when writing the regulations to implement today's agreement with the European Central Bank and three other central banks. The Fed's official notice today said any delay caused by following standard procedures would have been ``contrary to the public interest.''
``Such actions, while used ``sparingly'' over the years, were justified today because the new rules probably carry few costs, a former Fed attorney said. The action today was part of a coordinated effort with other central banks to alleviate a global growth slowdown, acting after interest-rate cuts failed to allay concerns that banks will reduce lending.
``It's something that they normally don't do,'' said Oliver Ireland, who worked as a Fed counsel for more than two decades and is now a partner at Morrison & Foerster in Washington. ``If you look at doing things to stabilize volatile markets, I don't think it's very hard to find good cause. There's no tangible harm to anybody.''
``The Fed uses the bypass powers regularly when changing the rate on direct loans to banks, though rarely when publishing broader rule changes. The Administrative Procedure Act requires federal agencies to give public notice and solicit comments on regulatory changes though with exceptions, Ireland said.
Two, the Federal Reserve has used its ‘war powers’ to also bypass its organization’s hierarchal decision making process.
Again from Bloomberg (italics mine), ``The district chiefs’ authority over borrowing costs has been marginalized in the past two months as Chairman Ben S. Bernanke and the Fed Board of Governors in Washington made their own decisions on emergency measures to flood the economy with cash.
“The Board has usurped authority,” said William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington. “This dramatic change in policy direction has not been announced or even acknowledged.”…
``A conference call last month showed how little say the central bank’s 12 regional presidents now have in some of the Fed’s biggest decisions…
``Regional bank presidents don’t have a vote when the Board uses emergency powers to lend to firms other than banks in “unusual and exigent circumstances,” as it’s done repeatedly this year.
``The district-bank chiefs by design are supposed to offer a counterbalance to the Board, and in the past haven’t been shy about challenging chairmen. In February 1994, former chairman Alan Greenspan had to argue against four presidents who wanted to raise rates at least a half percentage point, compared with his own preference for a quarter-point move.
Three, the Federal Reserve has remained intransigent to repeated requests for transparency or the disclosures on the recipients of the recently extended loans.
Again this from Bloomberg, ``The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
``Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
``The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
These acts of suppression of the access to information signify as common traits for dictatorships. To quote Ronald Wintrobe in “The Political Economy of Dictatorships”,
``Democratic institutions (such as freedom of speech, freedom of information, elections, a free press, organized opposition parties and an independent judiciary) all provide means whereby dissatisfaction with public policies may be communicated between citizens and their political leader. The dictator typically dispenses with these institutions and thus gains a freedom of action unknown in democracy.”
Lastly, the Federal Reserve is now mulling the path to issue its own debt instruments,
This from Wall Street Journal, ``The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.
``Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.
``Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.
``It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.
While others don’t see anything sinister to the possible intent of the Fed to issue debts in lieu of the rapidly depleting holdings of the US treasuries in its portfolio (see figure 2) or to “destroy” some of the paper it has recently been printing or as added arsenal for contingent use, the obvious consolidation of power seems to be giving rise to an all powerful “omnipotent” institution.
Why is this important to us even when are about 7-8,000 miles apart?
Because the world’s monetary system is anchored upon the de facto international currency standard in the US dollar. And anything that impacts the state of the US currency will likely send ripples across the world.
To quote Axel Merk of Merk Investments, ``The only leadership that seems to be emerging is from the Federal Reserve determined to print not just billions, but trillions of dollars to provide the backstop to all economic activity; at the same time the policies are an insult to any potential buyer of securities the Fed has targeted, as the intervention keeps yields artificially low. As China has been one of the premier buyers of these securities, namely Treasury bonds and agency securities, this is a clear message by the Fed that Chinese investments to finance U.S. deficits is no longer welcome; why else would the Fed depress the return for potential buyers during a time when unprecedented amounts of debt need to be raised? While we are provocative in our allegation, it is at best an unintended consequence, at worst highly deliberate. Intentional or not, it may coerce Asian buyers of U.S. debt to reduce their holdings to allow the U.S. dollar to weaken. The Fed may believe that it does not need the free market to set rates as it can use its own balance sheet to set economic policy; this ill-perceived view is also shared by economists that believe modern central banking is stronger than market forces.” (bold emphasis mine)
And as we have long predicted, all these point towards more evidences of a seismic shift towards politically based actions than just targeted at economic concerns.
Central banks all over the world have been seemingly desperate enough to resort to “saving” the status quo, an attitude founded on the modern day central banking paradigm of economic growth brought about by credit or inflation and foisted to the public, by flooding the world with money (see figure 3), absorbing much these losses and adopting more innovative “socialistic” means to flex its recently acquired muscles in order to salvage a rapidly festering system.
As Jesús Huerta de Soto, professor of economics at the Complutense University of Madrid, wrote in Financial Crisis and Recession, “…nothing is more dangerous than to indulge in the "fatal conceit" — to use Hayek's useful expression — of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine-tuned at all times. Hence, rather than soften the most violent ups and downs of the economic cycle, the Federal Reserve and, to a lesser extent, the European Central Bank, have most likely been their main architects and the culprits in their worsening.”
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