"You are lucky, if I may say so, that I'm the one who's
standing here and not the ghost of Sen. Carter Glass. One hesitates to speak
for the dead, but I am reasonably sure that the Virginia Democrat, who regarded
himself as father of the Fed, would skewer you."
-James Grant, addressing the staff of the New York Federal
Reserve, March 12, 2012
Once upon a time (but not so long ago), the New York paper-pushers who deem
which textbooks public-school children will read fell upon a history book that
posited some fashionable minority had broken bread during an important
historical event. It was pointed out there was no evidence of such, to which
the paper-pushers agreed: "We know they weren't there, but it's a
good idea."
In this spirit, Craig Torres at Bloomberg wrote, or was handed, a historical
account of the Fed's founding that is a "good idea," according to the
Fed. (See: " Fed's
100-year Roots Grew From Virginia Congressman.")
The article is wrong throughout, although, the first sentence may be true:
"As Carter Glass began to sketch out plans for a central bank in 1913, all
the U.S. representative from Virginia had to do was read his mail to know he
had nationwide support." The gist of Torres' reconstruction is the mailbag
in Carter Glass' office, from which the little people (a converter of cotton
goods, a hardware proprietor, a butcher, and a candlestick maker) urged the
Senator to pass a currency reform bill. The Federal Reserve Act became law on
December 22, 1913.
Skipping over Torres' study of why we needed the Fed ("America's strong
growth potential was hobbled by a banking system that Glass called 'a rank
panic breeder'"), one is left thinking Senator Glass went to his grave
pleased with his accomplishment. Towards the end of the reporter's
interpretation, we read: "For his part, Glass continued to defend the Fed
during its early years. Speaking in the Senate, where he represented Virginia
from 1920 to his death in 1946, he assailed the old system as 'bank reserve
evil' and called the rigid currency and lack of flexible reserves 'the Siamese
Twins of disorder.'"
"Early years" may be taken to mean 1946, still early, from the
vantage point of 2013. By 1917, Senator Glass was distressed with Fed's
unaccountable usurpation.
The Federal Reserve Act of 1913 did not
permit the bank to buy or hold government securities. The Federal Reserve Bank
was formed to serve the needs of its constituent commercial banks. Commercial
banks dealt in commercial receivables. Economists were not needed.
H. Parker Willis was Senator Glass' aide-de-camp when the Act was negotiated.
In 1936, he wrote The Theory and Practice of Central Banking. Willis
fumed: "Central banks will do wisely to lay aside their inexpert ventures
in half-baked monetary theory, meretricious statistical measures of trade, and
hasty grindings of the axes of speculative interests with their suggestion that
by doing so they are achieving some sort of 'vague' stabilization, that will,
in the long run be for the better good."
Torres writes the Federal Reserve System would "provide backup
currency and credit - in effect creating a liquid market for the assets held by
banks when they needed money." The system of semi-autonomous regional
banks was funneled into a national bureaucracy. The centralized, open-market
operations of the 1920s spawned the illiquid banking system of the early 1930s.
Willis (1936) explained the inevitable consequence of having turned commercial
banks into casinos. In the words of James Grant: "The idea of liquidity,
too, had a hard time of it in the 1920s. A liquid asset, as Willis and his
peers defined it, was a short dated commercial IOU - a money-good industrial
purchase order, for example. Banks had no business owning any asset that did
not, upon its maturity, generate a cash payment. Leave bonds, mortgages, and
other long-lived capital instruments to the savings banks and insurance
companies, Willis preached. Commercial banks were put on this earth to
facilitate the exchange of goods, not to 'create' credit or finance
speculation."
Putting oneself in Craig Torres' shoes, what might he write in an unauthorized,
Fed Centennial piece? It might not be much different. Where would he look? The
current "literature" (per Ben S. Bernanke, ad nauseam)
of economic "science" (BB, ad etc.) has blotted history. In
Federal Reserve Chairman Ben S. Bernanke's Essays on the Great Depression,
neither Glass' nor Willis' names are in the index. This is quite a feat, given
that Carter Glass was co-author of the Glass-Steagall Act of 1933. The World's
Greatest Authority on the Great Depression missed the most important bank
reform of the Great Depression. Banking is central to his blunderbuss theories.
Bernanke is not atypical. The
seventh-grade spelling bee champion from South Carolina undoubtedly received an
"A" in conduct from romper room until he received Stanley Fischer's
thumbs-up at M.I.T. It is not an accident that almost all Bernanke's academic
references (the 'literature") are post-1980 academic papers written in the
sandbox of such power-seekers as Professor Stanley Fischer, who has since gone
on to destabilize banks and central banks on two continents. (Now heading the
Israeli central bank, he is buying up the U.S. stock market.)
It might not be literally incorrect, but worth extrapolating the proposition,
that Ben S. Bernanke has never asked a question in his life. He may have asked
if he could go the bathroom or if he could decant extra-credit projects at
Harvard, but he would never put one of his betters on the spot. He pontificates
among a generation of economists who all received an "A" in conduct.
(What is worse, so an insider informs, the next generation of students that has
studied under Bernanke is even more faint-hearted. They are now filling the Fed
and Berkeley faculty ranks.)
This is the way of the world, spinning east, now, to the People's Republic of
China. On the same day Torres' history lesson was released, Bloomberg
published: "China Credit-Bubble Call Pits Fitch's Chu Against
S&P." Charlene Chu, at Fitch Ratings in Beijing, had the nerve to
publish some unseemly ratios. Total lending from Chinese banks and financial
institutions rose from 125% of GDP in 2008 to 198% in 2012.
Chu explained: "You just don't see
that magnitude of increase" in the ratio of credit to GDP. "It's
usually one of the most reliable predictors for a financial crisis." To
ensure there was no question of her forecast, Chu told an interviewer: "There
is just no way to grow out of a debt problem when credit is already twice as
large as GDP and growing nearly twice as fast"
S&P and
Moody's do not, and will not, mention "no way out" assessments for
U.S. Treasury bonds. Until they default, that is. Even then, they hedge and
haw, the unvarying unlanguage within large bureaucracies. (A sample: March 14, 2008 (Bloomberg) - "Bear
Stearns Cos.'s credit rating was reduced three levels to BBB [still investment
grade - FJS] by Standard & Poor's after the securities firm was
forced to seek emergency financing from JPMorgan Chase & Co. and the New
York Federal Reserve.... 'Although we view the liquidity support to Bear as
positive, we consider it a short-term solution to a longer term issue,' S&P
analyst Diane Hinton said.") [My bold - FJS]
Other headlines drummed home the presumptuousness
of Fitch's analyst: "A China Credit crisis? Yes, Says a Lonely
Fitch analyst" "Fitch Defies S&P on China's Credit
Bubble" [My italics - FJS] Channels that fear losing government
"access" bear the state's message. There is Hilsenrath at the Wall
Street Journal. America's most notable business-news channel suspends
appearances by analysts who are unconscionably bearish. Hitler was asked when
he would nationalize industries. Herr Schicklgruber responded he had no
intention of doing so; He would nationalize the people instead.
Bloomberg TV interviewed S&P's leading
light on Chinese credit: concerning Chinese banks, the pop-eyed fellow earned
an "A" in conduct: "This is a good story unfolding here."
When he was asked about Charlene Chu's forecast, the rising star at S&P
spoke with the timidity we've come to expect from government-aligned
corporations: "We will not be the one who will be giving those scare
signals."
Shifting continents, a May 25, 2013,
Economist editorial certainly went down well in Brussels and Strasbourg,
but did its readers no good. It should be remembered the European media
operates under the fist of ECB President Mario Draghi, a good reason to find a
"good story unfolding here," no matter how improbable.
The opening paragraph of the Economist's
latest Euro assessment: "You may have missed it, but the European Union
held a summit this week. Taking in a nutritious working lunch, Europe's prime
ministers, presidents and chancellors devoted half of Wednesday to weighty
issues of energy and taxation. Gone are the panic-stricken sessions of last
year, dogged by talk of the euro's imminent failure. Today, Europe's leaders
note, reform is under way across most of the euro zone and some southern
European countries are regaining their competitiveness. The government-debt
market is back in its box, where it belongs. And over the past year share
prices are up by a quarter. Nobody could pretend that life is easy; Europeans
understand that hard work and sacrifices lie ahead. But the worst of the crisis
is now safely in the past."
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