THE CENTRAL PROBLEM

Interesting piece over at Jesse's Cafe Americain the other day. Seems a UK newspaper reported on a FT/Harris poll of European public opinion in which a whopping 74% of respondents placed most, if not all, of the blame for the current financial crisis on central bankers. "Only" 60% blamed regulators or governments.

Now, in my opinion (and Jesse's, as you'll see), this is remarkable. For two reasons. First, to anyone with a basic understanding of modern economics, central banking policy, and institutional finance/banking, this is a no-brainer. Not even profound, really. Debates may exist over matters of degree, but it's not really controversial. That's why 3/4 of Europeans agree.

Which brings me to the second reason this poll is remarkable: how many Americans could even tell you what a central bank is? What one does? What the name of America's central bank is? Whether it's public, private, or quasi-public? How its charter works? When it was established? Why? What its official mandate is? Whether it's lived up to that mandate? Who heads the central bank? Who proceeded him? Who headed it during the depression? When we went off the gold standard? When we fought inflation almost 30 years ago? Who headed its (completely) private NY Branch which fed money straight to Wall St. as recently as early January?

Let alone know enough to offer an intelligent opinion as to its role in the current crisis?!

As Jesse said, quite comically:

A similar poll in the States, however, had very different results:

Q: Who is responsible for the financial crisis sweeping the world?

34% Whatever is wrong, Obama will save us.

33% Will they reschedule American Idol because of the President?

11% Sorry I'm in a hurry to buy 'supplies' and apply for a passport

22% Can I have a bite of your sandwich?

As he also said, suggesting that the role of central banking was so huge, it's amazing every American isn't demanding answers now:

Our interpretation of the poll is that the European public believes that the financial crisis was caused undoubtedly by the commercial and investment bankers, but that the central bankers promoted the environment that allowed it to occur and had the responsibility for preventing it.

That is rather surprising, because Trichet and his predecessors have been as Jacksonian stalwarts compared to Easy Al [Greenspan] and Zimbabwe Ben [Bernanke].

It would have been interesting to see the poll, and to have added a question about monetary policy and a return to 'hard money.'

* * *
One might infer that the Federal Reserve and Wall Street have a much closer relationship with the mainstream media, among other things.

As usual, I'm not gonna try to sum up in one short blog post the particulars of Federal Reserve banking, policy, lending, and stimulating under Greenspan and Bernanke (let alone under Volcker or William McChesney Martin). Poke around on Google for "Fed and housing bubble," or "Fed and tech bubble," or "acceptable rates of inflation," or "Chicago school" (plus Milton Friedman & Irving Fisher), or "discount window" (plus Federal Open Market Committee), or "fractional reserve banking" and start piecing it together. It's not easy, but it's not that hard either.

And if you really attempt to understand it, to acknowledge the Federal Reserve's dual policy of expanding and extending money & credit to a handful of privately-owned banks that are first in line, you'll understand exactly why banks and other institutions were able to engage in the practices that destroyed the financial system:

* Extend cheap credit
* Spend lavishly on risky "assets" and compensation
* Spin off derivatives and other creative financial vehicles with tenuous connections to reality

In other words, without cheap money and cheap credit -- from the Federal Reserve -- in a barely-regulated fractional reserve system, the banks & Wall St. could not have practiced their trade as loosely, riskily, and irresponsibly as they did. Why? Because they wouldn't have had either the upfront capital or the knowledge that the "lender of last resort" had their backs if they got into trouble.

And all of this went on before the crisis started, and none of it was hidden. Except for the parts that the American public, press, and congress willfully hid from their own eyes.

Fiscal policy is important. At the governmental, institutional, and personal level. We've lost our way in that area. We've lost our minds, as the $1.75 trillion deficit in the proposed budget demonstrates. But monetary policy -- as implemented by a quasi-governmental entity that doesn't have to answer to the democratic process -- controls everything. It has had undue control over the economy. And it drove that economy straight into the ditch for the benefit of a very small cadre of Insiders.

We need to wake up. We need to speak up. We need to fix things.

By the way, the answer to three of the questions I asked above are Ben Bernanke, Tim Geithner, and Paul Volcker. All three of whom are "in the mix" right now. You can guess how I'd like to see those three shifted in and out of positions of power.