Central Banking Was Responsible for 2008 Meltdown – Nothing Else

Tuesday, March 20, 2012 – by Staff Report, Daily Bell

The meltdown explanation that melts away ... Although our understanding of what instigated the 2008 global financial crisis remains at best incomplete, there are a few widely agreed upon contributing factors. One of them is a 2004 rule change by the U.S. Securities and Exchange Commission that allowed investment banks to load up on leverage. This disastrous decision has been cited by a host of prominent economists, including Princeton professor and former Federal Reserve Vice- Chairman Alan Blinder and Nobel laureate Joseph Stiglitz. It has even been immortalized in Hollywood, figuring into the dark financial narrative that propelled the Academy Award-winning film Inside Job. Bethany McLean is a contributing editor at Vanity Fair, and co-author with Joe Nocera of "All the Devils are Here: The Hidden History of the Financial Crisis." Her first book, "The Smartest Guys in the Room," co-written with Peter Elkind, became an Academy Award-nominated documentary. – Reuters
Dominant Social Theme: The meltdown was a catastrophe. It was caused by regulations ... taxes ... leverage ... big business ... big government ... mortgage products ... derivatives ... greed ... Satan ... but one thing is for certain, it wasn't caused by fiat-monopoly central banking. We know that for sure. Central banking had nothing to do with it ....
Free-Market Analysis: Following the 2008 global economic crash on an almost day-to-day basis, as we have, we've regularly made the argument that it was caused by central banking monetary inflation and that its result is bound to be the eventual demise of the dollar reserve system.
We believe we're being proven correct on both points. We've also pointed out that the crash itself was predictable and that the top elites that put this global central banking system in place know full well that cyclically it creates crashes, recessions and now depressions.
But, of course, there is plenty of pushback. Seems everybody has an opinion about what caused the 2008 crash. And most of these opinions, played out in the mainstream media, are focused eagerly on causes that have nothing to do with central banking.
In other words, these theories are PROTECTIVE of central banking and the damage that monetary stimulation can do. Inevitably, when we read these theories we tend to notice that those advancing them are apologists for the system as it is. The system of monopoly fiat. The system that crashes regularly and ruins peoples lives as part of its foundering.
This article, a long one (excerpt above), posted at Reuters goes into incredible detail about an obscure rule change that the SEC allowed in 2004. This supposedly allowed big banks to increase leverage that led to the crash. The article sets out to disprove it.
This article is a clever kind of dominant social theme, in our view. Why? Because in debunking a silly argument about why the 2008 crash occurred, it provides readers with the impression that Reuters is a really sophisticated and hard-hitting newswire.
The idea is that Reuters – which is actually a mainstream media mouthpiece for the power elite – would provide us with an article arguing that the removal of regulation was NOT the cause of the meltdown illustrates that top Reuters writers are truth seekers.
The power elite that is trying to set up world government is having a bad go of it. The Internet – what we call the Internet Reformation – is slicing away at its fear-based promotions. Many lucid thinkers that use the Internet for reading and writing don't believe mainstream media articles anymore.
The mainstream media is badly in need of a credibility "pick-me-up." Thus, we argue, articles like this begin to appear. They are very well written, economically literate and academically argumentative. They are meant to impress you and leave you thinking that Reuters itself is a credible and clever place.
Those who publish these kinds of articles are using them as a kind of glorified PR. They are good articles and those at the top of Reuters are hoping their goodness adds a larger luster to mainstream media brands tarnished by the Internet Reformation.
But because it is Reuters doing the writing and editing, these articles – no matter how good they are – inevitably leave stuff out. For instance, we would have less trouble believing that if the article mentioned central banking as the cause. But the article, in thousands of words, never gets to central banking. Coincidence?
The article does do us the favor of debunking a certain argument about leverage. But it doesn't take the next step and explain what really DID happen. Too bad.
The article, as we mentioned, does do us the favor of debunking one widely accepted reason for the meltdown, having to do with regulatory induced leverage.
We never believed it to begin with, of course. One reason we knew right off the bat that it wasn't true was because the financial media maven Simon Johnson was a proponent of this theory.
Anything that Mr. Johnson proposes, in our humble opinion, is likely to be incorrect or at least implausible. He is always trying to hide the culpability of central banking. He is an incredibly brilliant person and great writer, but in our view, he is an apologist for power. You can see some of our articles about his theories here:
EU Continues to Stagger
The Quiet Coup
The author writes thousands of words to refute the hypothesis of Simon and others. In fact, she could do it in a few sentences, as follows: "Monopoly monetary inflation is the proximate cause of economic ruin and has ruined economies large and small for thousands of years. There is no need to blame anything else. When power over-prints money, as it inevitably does, the result will be the eventual demise of the civilization in question."
See? That's not so complex. And it's the truth. Monopoly central banking systems are entirely unstable. Even non-monopoly systems offering pure fiat are likely unstable because they will generate price inflation. But within a competitive monetary environment, people should have the ability to choose – even clearinghouses that print money.
The REAL problem is when bankers use mercantilism to create and sustain monopoly money printing. Mercantilism is the bane of free-market economies. When bankers pass laws to provide themselves with legal support for their own interests, that economy is on its way to ruin.
This is why central banks are NEVER entirely private entities, from what we can tell. Some apologists claim central banks are entirely private but a quick look at almost any central bank shows that certain government laws are necessary to their existence and continued operation.
The Fed, for instance, has been called a private bank but it took an Act of Congress to establish the Fed and even today, Congress holds hearings and makes appointments to the Federal Reserve Board.
The Fed, like other central banks, is not private. It is mercantilist. It derives its power from the de facto endorsement of the government it helps to fund.
A purely PRIVATE central bank would be a great improvement, in fact, because such a bank would LOSE (or never have) the right to print monopoly fiat. It is this MONOPOLY that is so detrimental to the larger system. And by definition, legal monopolies are generated via government approbation.
How murderous mercantilism is! In a mercantilist monopoly environment, fiat money is like poison. It builds up in the system until it ruins it. This is an ineluctable occurrence. Nothing else is needed. As top bankers print too much money – and they always do within a monopoly fiat regime – the money causes first a great boom and then a great bust.
People lament, for instance, the demise of Glass-Steagall that allowed commercial banks and merchant banks to re-merge. But those same commentators never address the issue of WHY Glass-Steagall was re-addressed.
It was re-addressed because the MANIA surrounding the marketplace mandated that the "business cycle has finally been abolished." In other words, central bank money manias ALWAYS affect regulatory prescriptions. It is almost impossible to stand in the way of a bull market.
Thus, it is only after the fact that the finger-pointing starts. If only this or that regulation hadn't been abolished or changed, we wouldn't have had this terrible disaster.
But in fact, it is the mania generated by central banking money printing that sweeps away regulatory barriers the way a raging tidal wave sweeps away all obstacles in its path.
Of course, we are not making an argument for regulation in any case. Regulation can make business worse and more impractical. It can NEVER make things better. Why? Because all regulations – all law – is a price fix, transferring wealth from people who have generated it to people who have not.
This is the dirty secret behind Western regulatory economies, the secret that is never discussed. And thus, once a crash has taken place, the paid sophists come up with all sorts of reasons why "capitalism" failed.
But they will never explain the truth – capitalism there may be, but free-markets don't exist, nor can they so long as money is retained as a government monopoly.
Money is the most important stuff. It is the lifeblood of an economy. If the blood is poisoned is poisoned by monopoly fiat, then the corpus will be poisoned too.
It is impossible to have a free market within the context of monopoly fiat. Inevitably, you end up with economies that waste wealth on false schemes that are initially seen as viable only because of the wild, false optimism created by crashing waves of monetary fiat. Paper ticker money is like crack. Here's some more from the article excerpted above:
As Blinder explained in a Jan. 24, 2009 New York Times op-ed piece, one of what he listed as six fundamental errors that led to the crisis came "when the SEC let securities firms increase their leverage sharply."
He continued: "Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the SEC and the heads of the firms thinking?" More recently, Simon Johnson, a former chief economist at the IMF, said last November that the decision "by the Bush administration, by the SEC to allow investment banks to massively increase their leverage ... in terms of the big mistakes in financial history, that's got to be in the top 10."
It is certainly true that leverage at the investment banks zoomed between 2004 and 2007, before the near collapse. And this narrative of the rule change has plenty of appeal — it serves up villains. Stupid SEC people! Greedy bankers! It also suggests regulators were in the pockets of the big banks, and it offers support for the narrative of financial deregulation that many put at the center of the crisis.
There's just one problem with this story line: It's not true. Nor is it hard to prove that. Look at the historical leverage of the big five investment banks — Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley.
The Government Accountability Office did just this in a July 2009 report and noted that three of the five firms had leverage ratios of 28 to 1 or greater at fiscal year-end 1998, which not only is a lot higher than 12 to 1 but also was higher than their leverage ratios at the end of 2006. So if leverage was higher before the rule change than it ever was afterward, how could the 2004 rule change have resulted in previously impermissible leverage?
Of course, it wasn't leverage per se that destabilized Wall Street and caused the entire financial economy to collapse. What occurred was that an overabundance of money printed over the past 30 years or so eventually created an entirely phony economy.
At some point a tipping point is reached. The financial economy of the West remains the biggest bubble ever blown in the history of humankind. The world is not merely overbanked, it is drowning in financial services and products.
The "market" realized this in 2008 and the system locked up. It took something like US$50 TRILLION in liquidity to unlock it. This will never be admitted by the power elite's mainstream economic historians and theorists. But it is true.
The world is now not only drowning in dysfunctional and worthless financial facilities, it is drowning in as-yet-uncirculated money that – once it DOES circulate – will tend to destabilize what is left of the system further. The price inflation that will result from all this monetary inflation is fairly inconceivable. This is why we write the dollar reserve system is likely finished ... kaput.
One can come up with all sorts of theories as to why there was a crash in 2008 that continues today. But the real reason is because central banks have a monopoly over money and the elites that work for the dynastic families that apparently control these central banks can – and will – always overprint money.
What happened is very simple. The system froze up because so much money printing diverted real energy and resources into wasteful banking enterprises, houses that didn't need to be built, factories that didn't need to produce unnecessary and redundant junk, etc.
When the market itself recognized this, the system stopped working and needed tens of trillions of artificial liquidity to galvanize it again. It is still is not producing jobs properly however, because the system itself is distorted and the jobs that it tends to produce are unnecessary ones.
We don't expect much from the mainstream media anymore. In fact, over time we expect less and less. But it is worth repeating (to your friends and neighbors) that the economy worldwide is not complex. Get rid of monopoly fiat money printing, allow money to compete in the free market and many if not most of the modern economic tragedies will be avoided.
Conclusion: It's not complicated. But people don't understand because there is an entire industry of sophists and wily ones dedicated to generating confusion at the expense of truth.