----- Original Message -----

From: Michael Hudson

To: GANG8

Cc: david kelley ; Ellen Brown ; Jeffrey Sommers

Sent: Saturday, July 04, 2009 2:39 PM

Subject: [gang8] Richard Werner's excellent article

Richard has written a great article on how to reform central bank policy.
If we DO have a meeting and publication, I think this is the kind of
proposal we want to put into circulation.
Michael

Richard A Werner, ³Central banks rewarded for failure with new powers,²
Daily Yomiuri, July 3, 2009.
As Obama's campaign promise of finally introducing universal
provision of
basic health care in the United States (and thereby finally catching up
with 19th-century Germany) is being quietly shelved, the transfer of power
to the banking community is coming close to completion.
The former head of the Federal Reserve Bank of New York - for
all
practical means and purposes the true central bank of the United States -
in his current role as US treasury secretary has proposed to give more
powers to the privately owned US central bank. The ostensible excuse is
that it should be given the allegedly new brief of ensuring the health and
stability of the overall financial system - as the "systemic risk
regulator". Apparently the Federal Reserve Board needs more staff, more
resources and greater legal powers to do this.
But this brief was precisely why the Fed was founded in the
first place in
1914, against much resistance from Congress. It was argued at the time
that only by having a privately owned cartel of bankers' interests, which
is given the government's prerogative to create and allocate money, can
the bankers ensure that their speculative excesses won't create massive
recessions, bankruptcies and large-scale unemployment. It was hardly a
convincing argument - just as it has hardly been a convincing case that
bankers need to be given billions and trillions of taxpayers' money in the
past half year or so as soon as some of their big bets went sour, after
they had made billions and trillions of profits from their speculative
gambling. Then, just as now, the bankers got their way nevertheless. They
are a persuasive lot. Their powers of persuasion may have to do with the
fact that already at the time (just as today) they were the creators of
the majority of the money supply. If money speaks volumes, money creators
have a monopoly on the library.
The Bank of England is now also asking for more powers. A
similar proposal
to give more unaccountable power to the European Central Bank has been
signed off in Europe: The ECB will be given new scope to influence the
European economy and government policies in an additional role as
pan-European "systemic risk supervisor", as if it not already wielded the
greatest power concentration in banking history. Central bankers like the
ECB, the Bank of England and the Fed talk about little else but
"stability" and how they are always concerned with it.
The problem is that this is not what they have delivered. Has
that been
because they just did not have enough power? The political and legal
powers of central banks worldwide have increased dramatically in the past
thirty years.
While deregulation, liberalization and privatization have
consistently
eaten away the former powers of governments and elected representatives of
the public, unelected central bankers have managed to amass increasing
powers and influence over the economy and people's lives. The ECB is the
world's most powerful, unregulated, unaccountable and untransparent
central bank since the Reichsbank (which could not be reined in by laws
made in the German parliament and was only accountable to external
interests, namely the J P Morgan-controlled Reparations Committee - today
known as the BIS). Central banks have long had enough power to prevent
asset bubbles and banking crises - if only they had put their minds to it.
But do they have any incentive to do so?
The powers of former Fed Chairman Alan Greenspan to influence
the economy
were virtually boundless. He was able to block any regulation of the
credit derivatives market and interfered in attempts by other public
sector entities to rein in the exploding speculative activities of
bankers, loan sharks ("subprime lenders") and second-hand debt dealers.
The main constituency of the Fed are its banking shareholders. It has
little to gain from restricting the bankers' profiteering. And it has much
to gain from erring on the side of laissez-faire.
The fact is that central banks chose to ignore warnings by
critics who had
argued consistently since the early 1990s that central banks needed to
intervene in the inefficient and rationed credit markets to restrict bank
credit extension for purely speculative purposes and encourage bank credit
for productive investment.
This can be achieved by simply imposing a rule that banks are
only allowed
to create credit for transactions that are classified as contributing to
gross domestic product. Financial transactions don't. This proposal does
not directly restrict financial speculation: let there be a free market
for speculators to speculate as much as they wish to do so.
However, let them not lay claim to newly created money for their
activities and let them raise their funds in the supposedly efficient and
deep capital markets or from other nonbank financial institutions that in
turn must not receive credit from banks. This simple rule will prevent
asset bubbles and banking crises.
Central banks not only ignored this advice (detailed in many of
my
publications since the early 1990s, as well as in my 2005 book), but took
policies that encouraged bank credit creation for speculative purposes.
Predictably, this led to asset inflation and - with mathematical
precision
- banking crises. Central banks thus were responsible for the biggest
resource misallocation in peacetime history. The central banks lobbied to
fight the ensuing pandemonium with vast new money injections, for the
benefit of the financial sector, and most of which was put on the taxpayer's
tab again.
Taxpayers now have to face multiyear belt-tightening programs
that will
continue the agenda of rolling back useful government activities and
exposing ever increasing parts of society to predatory raids by profiteers.
How were central banks called to account for their massive
mistakes? Have
there been any serious inquiries into the responsibility of central banks?
Have any disciplinary or legal measures been imposed or proposed against
the responsible central bankers?
Instead of punishment, central bankers are about to be rewarded
with new
and greater powers. This is at least historically consistent: whenever
bankers and central banks mess up on a large scale, they are not punished,
but usually rewarded with greater influence and powers. Thus it happened
after the Reichsbank's hyperinflation, the coordinated aggressive money
printing policies of central banks in the early 1970s which created the
high inflation of the first half of the 1970s, the Bank of England's
policy to encourage speculative credit expansion since the early 1980s;
the Bank of Thailand's catastrophic creation of what grew into the Asian
crisis, the Bank of Japan's active propagation of the bubble economy and
subsequent unprecedented slump with record deflation. Even the Fed's
shocking policy of bankrupting tens of thousands of banks, causing the
Great Depression and bringing starvation upon a previously healthy farming
sector did not lead to any serious restriction on central bank powers or
stricter accountability for central bank failures.
By contrast, the few central banks that had remained prudent and
failed to
create bubbles and busts were not rewarded with greater powers: the
Bundesbank had dared to be the odd one out among central banks and through
its refusal to create an asset bubble in Germany was becoming increasingly
isolated. It started to make other central banks look bad. It got its just
reward: it was stripped of all its powers with the introduction of the ECB.
Rewarding the Fed for its massive failure by giving it yet more
powers and
control levers will increase regulatory moral hazard. It will not reduce
systemic risk, but is the surest way to increase it: When those who mess
up don't have to pay up, but instead are being bailed out or rewarded,
they have little incentive to change their behavior. To the contrary, the
reward is likely to encourage them to take risks and mess up again. As I
have warned for the past decade: By increasing central banks' powers, the
risk that central banks will do more of what they do best - create massive
cycles - is likely to rise; hence since 2001 I have warned of the risk of
ever bigger boom/bust cycles and banking crises (what I call "central bank
risk").
The plan to give more powers to the Fed, right after it has been
responsible for the global financial crisis, is sending a clear message to
central bankers across the globe: Messing up on a grand scale is highly
advantageous.
Little failures such as some consumer price inflation here or a
minor
recession there will draw public criticism. But catastrophic blowups have
unimaginable potential to further increase the unaccountable powers of
central bankers.

Werner is professor of international banking at the School of Management,
University of Southampton and author of Princes of the Yen (2003) and New
Paradigm in Macroeconomics (2005).