The Berger Memoranda

Yesterday morning, after not getting enough sleep, I sat down to listen to Federal Reserve Chairman, Ben Bernanke, testify before one of those ubiquitous congressional committees. Although I worried that this show might put me to sleep, I wanted to listen to what the nation’s money manager would say. The testimony began, and I heard this:

“Gentlemen, I have come before you today to resign my position as the Chairman of the Federal Reserve System. Before I describe how and when my resignation will take effect I want to explain why I made the decision to take this action.

“Several months ago a member of my staff came to me and ask the question, ‘What if everything we do here does more damage than it does good?’ I decided to pursue the question and asked the staff member to head a study of the question. I have included the details of our study in a paper that I will provide to this committee. I will simply summarize our findings.

“The artificial expansion of the money supply that occurs in the reserve banking system does nothing but harm to the national economy. This monetary expansion acts as a form of taxation for anyone who has any portion of their saving in cash or a cash equivalent. As a result we harm the very people we have claimed to help. In addition, continual monetary expansion sends false messages about capital formation throughout the system. People, believing available credit signals capital formation, make investment they should not make and borrow money that they should not borrow. In short, monetary expansion causes people to make all the mistakes that have lead to this and earlier economic down turns. You will understand this process better after you have read our report.

“In addition to discovering the generalized damage that monetary expansion causes, we came to realize that the two primary objectives of the Federal Reserve — stable prices and full employment — rest on flawed theory.

“First, contrary to what we have advocated for years, markets should not have stable prices. The movement of prices, up and down, provide the signals to the market as to where it should allocate capital. By attempting to stabilize prices we distort those signals thereby causing misallocation of capital resources.

“Second, attempting to stimulate full employment through monetary policy has the same effect I referred to earlier, but it focuses those detrimental effects on the labor market. Briefly, monetary expansion causes employment to increase in segments of the market based on unsustainable demand. We indirectly encourage the creation of dead-end jobs. The market will do much better at allocating jobs.

“I now return to the when and how of my resignation.

“In our research we discovered a little known regulation that allows the governors of the Federal Reserve to liquidate the Federal Reserve Banks. We have already set that process in motion, and my resignation will become effective as soon as the last Federal Reserve Bank has closed its doors. But, I caution the members of Congress that these actions will not by themselves solve the problems of artificial monetary expansion.

“Congress must take action to eliminate the fractional reserve banking system that exists in this country. This country will continue have these severe economic fluctuations until the government removes the legal support of fractional reserve banking.”

With a start, I suddenly awoke from the sleep into which I had slipped. I looked at the television to discover that what I had just heard did not match what Chairman Bernanke had actually said.

Well, I have the right to dream. Don’t I?

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I have heard a lot of chatter in the uninformed media about “economic multipliers.” I saw one particular commentator rant on for several minutes about how people who oppose the economic stimulus package don’t understand the impact of spending multipliers. The justification for government fiscal “stimulus” rests, to a large degree, on the theory of economic multipliers.

A brief explanation might help those who have started scratching their heads, asking, “Multiplier? What?”

A multiplier effect occurs in an economic system when new resources (usually in the form of money) enter the system from an external (exogenous, for systems freaks) source. This means that, if someone gives you $1,000 from outside your economy, you will spend most of it. The stores at which you spend this new found money will pay employees, suppliers, and maybe shareholders. Those people will, in turn, spend the money they receive at other stores. Those other stores will spend the money they receive in much the same fashion. When you sum the prices of all those transactions they will equal something more than the $1,000 that you originally received.

Now, some economist claim they can actually calculate multipliers based on who gets the money originally. If you got that money in the form of food stamps, some calculated that the economy would benefit by total spending of $1,670 (if my memory serves me.)

Sounds like a pretty good deal. Maybe we should keep stimulus going all the time. (Oh, sorry. I guess we do. We call it government spending.)

Whether you accept the multipliers calculated by economists, the whole theory suffers from one serious flaw: The government has no exogenous (external) sources for its money.

The government took the $1,000 that it gave to you from someone else in your economic system. This means that someone will not spend $1,000. The stores at which they do not spend the confiscated money will not pay employees, not pay suppliers, and not pay shareholders. Those people will, in turn, not spend the money they do not receive at other stores. Those other stores will not spend the money they do not receive in much the same fashion.

By taking money from the same economy they claim to stimulate legislators rob the economy of some unseen and unrealized benefit. (I have thought of referring to this as an “economic divider.”)

Politicians will probably argue that they can allocate resources more efficiently than that guy from whom they took the $1,000. Of course, they do not have to defend that statement. The losers cannot calculate the amount of their losses.

When I look at the track record of government spending, I continue to trust that unnamed guy who had his money stolen.

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Does the recent talk about nationalizing the banking industry surprise me?

No. The fact that people have not talked about it for years surprises me.

Remember, we live in the country that regularly confiscates peoples property through the tax system. We have seen the expansion of the “right of eminent domain.” And, with five minutes of research, I could come up with probably fifty examples of federal regulations that restrict your use of your own property. Also, legislators talk about “paying for” tax cuts as if your income already belongs to them.

So, one could argue that nationalization already runs rampant in this country, in fact if not in name. But, I find it particularly surprising the people express alarm at the idea of nationalizing the banking system. We have had a nationalized banking system for a long time.

First, where do you think the money that flows through the banking system comes from? The federal government has given monopoly power to the Federal Reserve and member banks to create money. You pick the time when you think private money ended: when Nixon severed the connection of dollars to gold for international transactions; when FDR confiscated all privately owned gold and fixed gold’s dollar value; when congress passed the Federal Reserve Act. The term “fiat money” means nationalized money.

Second, the government guarantees most bank deposits through the FDIC. So the deposit contract does not include only the depositor and the bank as it should. Making the government a party to that contract makes it a nationalized contract.

Third, all banks operate under monopoly charters from government — either federal or state. Bank owners run their banks at the behest of some government.

Fourth, banks must adhere to a laundry list of federal regulations (so what else is new) far more onerous than other businesses.

Finally (for now), because of the points listed above banks get inspected by various government organizations on a regular schedule. And these inspectors have the power to dictate which loans banks must classify as good, bad, or write-off.

So, what will nationalization, as now discussed, really do? I will simply pull back the thin veil of private equity ownership to expose the already nationalized banking system.

(By the way have you ever heard of names like The First National Bank, National Bank of Arizona, Montgomery County National Bank?)

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I must admit that, as a native of Denver, Colorado, I suffer a bit of embarrassment for our city hosting the Economic Stimulus Circus. President Barrack Obama, and his groupies, will arrive in a couple of hours. In a carnival display, that typifies of his young administration, he will waste an incredible amount of taxpayer money. He will cut into the productivity of our town by having streets closed. He will do all this so he can grandstand the signing of what people in government and the media call the economic stimulus package.

This nearly $800 Billion redistribution of wealth will not stimulate the national economy any more than the circus accompanying its signing will stimulate the economy of Colorado. The circus will cost the taxpayers of Colorado and the stimulus package will cost the taxpayers of the nation.

How do I know this? Have I, unlike the legislators who voted on this bill and the president who will sign it, actually read the bill?

No, I have not read this bill, and I do not need to read it to understand that it cannot work. That’s right: cannot work.

This stimulus cannot work for the simple reason that it will take resources from more productive people and organizations and give those resources to less productive people and organizations. We have this economic problem, in part, because we have made these redistributions in the past — it’s what government does. Doing more of the same will not get us different results. As a matter of fact, doing this in the middle of a recession will only aggravate the problems.

Do we need to get consumers spending more in order to get the economy going?

Consider this, then answer the question yourself:

Have you ever consumed something that you, or someone else, had not first produced?

Increased consumption in the face of declining production amounts to an economic dead end. Purchases of consumer goods might increase until inventories get worked down. Production will not then increase because productive businesses will no longer have the capital that government so generously took to give to consumers.

Think about it.

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The two big wigs in the financial community testify before congress on the same day and the market drops nearly 5%. What does that tell us?

If you listen to the commentators, you might think the market did not like precisely what those specific individuals said. On that basis Tim Geithner got the most criticism because he did not say exactly what the Treasury Department will do next. Markets definitely do not like uncertainty. But, markets also have more intelligence than most people realize. (See the Wisdom of Crowds.)

I think the market saw the symbolism represented by the testimony of the heads of these two government agencies. (Oh, don’t argue with me about the private ownership of the Fed. What private company has the CEO appointed by the President of the United States and gives its profits to the U. S. Treasury?) These two men symbolize the system that created this problem in the first place. Their appearance before congress reinforces the mistaken believe that the source of the problems can also provide the cure.

Ben Bernanke. The man and his beliefs symbolize faith in the reserve banking system, in which banks create money virtually at will. This system destroys the wealth of millions of U. S. citizens, distorts the pricing mechanism, and causes the booms and busts that rock the economy with too much regularity. The money supply has grown steadily through the tenures of all these Fed Chairmen:

As well as those who preceded them.

So don’t blame these men. The problem lies with the system in which they operate.

Tim Geithner. Most people, most of the time, don’t know who holds the position of the Secretary of the Treasury. The relative importance of these men depend a lot on the responsibilities given them by the President in office at the time. This guy and his predecessor, Henry Paulson, have the distinction of holding the position at a time in which it seems important. The position, however, has more significance than the man holding the position.

The Treasury Secretary symbolizes the foolish idea that government spending plays a positive role in the health of the American Economy. Government only redistributes economic resources to less than optimum utilization. Having the Treasury Secretary testify only verifies the fact that legislators have not given up the foolish idea of redistribute.

If Roadrunner and Wiley Coyote held the titles of Fed Chairmen and Treasury Secretary, the market would have reacted the same. Deep down the market understands that only the system matters; the men do not.

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