The Apologist


The year’s first six weeks have seen American equities and bond yields decline, contrary to most fund managers’ expectations. Some big hedge-fund groups, such as Bill Ackman’s Pershing Square, have made heavy losses. With everyone from former President Clinton to his wife, candidate Clinton appropriating Bernie Sanders' suggestion that the system is rigged in favor of wealthy elites;now comes "The Apologist" to the fray. Mr. Mohammed El-Erian, the Chief Economic Advisor at Allianz, (the parent company of PIMCO). 

An excerpt from Mr. El-Erian's book, The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse, published yesterday on this platform downplays the FED and Central Banks' meddlesome and efficiently corrupt role in global economics. Mr. El-Erian would have us believe that global economic uncertainty is not the fault of the Central Banks, but a shared responsibility of governments, investors, and the banks. This is correct, but many other economists feel it is not accidental. Those of us not trained at Princeton, Harvard or Yale might conject that the market when unubstructed does not behave with such predictable cyclicality. There is some merit to this theory, regardless of it's frequent confabulation with conspiracy from some quarters. There is sound economic reasoning behind the suspicion that things are not quite as they seem, and we ought to being pay more attention.

El-Erian apologizes kindly for his banking friends and their largesse when he writes:

"The central banks constructed the best bridge possible with the limited materials they possessed. However, no matter how long bridge they have built, the right destination was never theirs to deliver on their own."

In other words, the poor, hapless FED and ECB bankers were left to their own devices to bail us out of the mess they created with the complicity of the Reagan, Bush and Clinton administrations. Yes, the issues go that far back, if not further into the post-war administrations of Eisenhower and later, Johnson and Nixon. Indeed political economist like Hayek and von Mises predicted these cycles in the 1930-40's. Should the reader be so inclined, one might consider Hayek's Road to Serfdom and von Mises Theory of Money and CreditThese should be required reading actually. 

Let me present the reader with an analogy so that I avoid the over-simplification El-Erian presents.

Most adults know that things are not often as they appear. If you fly over the Hawai'ian islands for instance, you will see such incredible scenery, mountains and verdant hills that you will want to move there. However, part of the picture is missing. If you could somehow drain the water around the islands or went below the surface in a submarine, you would find an equally if not a more impressive landscape of active volcanoes and deep caverns, dark pools and plumes of gas.

I make this relatively straightforward comparison so that the reader might consider that there is a difference in how we see things depending on where we are sitting. There is a difference between how you or I might see things and how the Head of Central Bank sees them, just as there is a difference between what the wolf on the hill sees as he surveys a flock of sheep, and what the sheep sees. I'm going to bet the sheep are mostly concerned with mowing than they are on the look out for that wolf; to their eventual and collective detriment. 

I have been advised to shy away from topics such as these as I have clients of many different political stripes. More specifically, if I wanted to grow my audience on this platform I'd certainly not take on the likes of Mr. El-Erian. I am also not a sheep inclined to listen to what the wolf is saying when there is blood on the ground at my feet, and several of my friends have gone missing.

I am not a trained economist, nor an investment banker but I have read and studied political economics-in particular the theorists I menton from the Austrian School of thought who predicted this sort of behaviour in the markets a very long time ago, before Mr. El-Erian was even born.

I think we will agree that El-Erian, who, as the Chair of President Obama's Global Development Council, a Bloomberg View columnist, and a Financial Times contributor has a tremendous responsibility to the investing public. 

He writes:

Policy making often entails difficult trade-offs. This phase of mod­ern central banking has been no different, though with one major qualification: This time around, central banks have not been able to resort to reliable insights and information from historical precedents, analytical models, or past policy experience. There are none that can guide them properly and inspire well-placed confidence.

Essentially, Mr. El-Erian claims that the most powerful financial institutions in the world, led by the the very brightest individuals in it, is ill-equipped to deal with  cyclical weakness in the global economy. It's a bit late to tell us this don't you think, Mr. El-Erian? 

I should like to know what Mr. El-Erian (and others) plan to do about the real structural economic issues that keep us moving from asset bubble to another. I should like him to be forthcoming about why the uber-rich have benefited so spectacularly from this volatility that there now exists the greatest gap in recorded history between rich and poor. If the answer is that Capitalism has finally triumphed, then I wish for him (or someone) to come right out and say that. I might feel a tiny bit better, but quite naturally one would follow thereafter and promptly announce the failure of democracy. 

Short of this, how long does Mr. El-Erian expect an intelligent and ever frustrated population to suffer the indignity of a bald-faced lie? We are all aware that the volatility in the markets has an end, namely that the rich got richer.  Are cyclical weaknesses that benefit the rich and result in greater wealth concentration the new normal? Do they constitute a new economic reality that we should accept as loyal subjects of the FED? Indeed for some, the bland corporate serfdom that is a direct result of these cycles must feel as arbitrary and distant as the rule of a monarch did during Imperial times. 

Wealth concentration and cyclical economic weakness do seem oddly related, do they not? Are we to believe that the massive wealth creation for the select few that accompanied this volatility in the last ten to fifteen years is coincidence? I would ask the reader to consider the possiblilty that those who control the Central Banks have always rigged the system. Perhaps arbitrarily, and over a very long period of time, but rigged it is, none-the-less. 

Some Facts about The FED

Having straightforward facts at one's disposal tends to damage the credibility of conspiracy theorists and apologists alike. I assiduously avoid these two appellations, and I have gone to the trouble of finding what I could from the SEC and FED themselves.

So, what does the FED charter tell us?

The FED claims they ARE a government institution, partly independent and privatized. Here is how they describe the organization of banks.  

“The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation’s central banking system, are organized similarly to private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks do not operate for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock cannot be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”

Conventional wisdom tells us that this should not be problematic-that this is democratic even. However, as I have mentioned before, there is more here. While the FED has never been exactly forthright and downplayed who the majority shareholders are (vis a vis private member bank ownership), it does not deny it. I know that it is not you and I. You and I cannot trade FED stock. The FED it is a club, and we are not in it, nor do I suspect we will be invited anytime soon. And since it is a private club, should we doubt that things are going on that we cannot see?

What lay beneath the surface?

In our submarine survey of the FED, let's first dispense with the nonsense that the Rothschild family owns all the Central Banks. This is inaccurate and fatuous. They do not own all of them alone; this much is true. Member banks privately own the Federal Reserve Bank. This data comes from mandatory company 10K filings to the SEC itself, not some crack-pot, wing-nut website, but the actual SEC filings which are avaialble on-line. Bank of America, JP Morgan Chase, Citigroup and Wells Fargo (who also own majority positions in Exxon Mobil, Royal Dutch/Shell, BP and Chevron Texaco); in tandem with Deutsche Bank, BNP, Barclays and other European old money behemoths, own the banks. In turn, thirteen families own majority stakes in the companies and control them via those majority shareholder positions, as is their right. This very mere fact of ownership, of whom controls the global economy is of great importance to the average citizen though s/he may not think this to be the case. 

In other words, from where we are sitting presently, we cannot see what is actually going on. 

After paying these shareholders, the Federal Reserve returns what remains to the US Government. It is worth noting that the regional Federal Reserve banks turned over a record $98.7 billion in profits to the U.S. Treasury in 2014, essentially recycling the earnings the central bank gets from the $4 trillion in securities it accumulated through three rounds of quantitative easing.

We can conclude that private banking interests in the FED are both exclusive and incredibly lucrative. Does Mr. El-Erian have any interest in assuaging the investing public's interests here? Of course he does.

Interestingly enough--auditing the FED may be the only measure that the has voted on recently that has a fascinating twist to it. The Democractic Senate rejected Sen. Rand Paul’s (R-Ky.) controversial proposal to audit the Federal Reserve, turning aside a bill that has drawn the ire of the business community and the White House. The Senate voted 53-44. In the process, Paul won some bipartisan support for the legislation, with none other than Sen. Bernie Sanders (I-Vt.), voting in favor. He was joined by Democratic Sen. Tammy Baldwin (Wis.). Only two Republicans did not vote against the bill. Arch-conservative Sen. Ted Cruz (R-Texas) missed the vote and Senator Bob Corker of Tennessee.

Sanders writes:

“Requiring the Government Accountability Office to conduct a full and independent audit of the Fed each and every year, would be an important step towards making the Federal Reserve a more democratic institution that is responsive to the needs of ordinary Americans rather than the billionaires on Wall Street.”

Et Tu, Europa?

The global situation becomes even more complicated when we realize that all of the European Central Banks are publicly owned. Before the second World War, all European Central Banks were owned privately. In earlier days, both in Europe and the US, free banking and Sovereign local money created a diverse commercial environment, harder to control for the elite. However, the massive upheaval caused by the Great Depression and the powerful monetary reform movements that emerged rattled the cages of the actual power brokers. The shock raised awareness about private ownership of the financial systems of the West and nationalizing the Central Banks was a handy way of diverting this attention.

The ECB are corporations with 100% Government ownership. They do operate as ‘independent’ entities. Before the ECB, they set interest rates and managed the volume without Government interference. Nowadays this is done by the ECB, which in turn is owned outright by the National Central Banks. There does indeed exist a cartel-like control over the money supplies of the World and Central Banks created as ‘lenders of the last resort’. Central Banks keep busted banks afloat and maintain sufficient confidence in the system. We've seen this unfold already twice in the past 20 years.

Again, what would be Mr. El-Erian's motivation for defending them? Investor confidence in their national governments is in short supply as of late, (if you have not noticed). 

It is no secret that from the tip-top of the financial totem pole, the elite's control over the Central Banks allows them to ‘regulate’ other banks. They do this in the same way much legislation here in the US is hung up--they make regulations incredibly complex and expensive, and it becomes impossible for the vast majority of market players to comply. It is the same relationship that the Pharmaceutical companies have with the FDA: new drugs are so incredibly expensive to test that it is impossible for low-cost natural cures to go through the process, as they will never provide the return necessary to cover the cost. This sort of cronyism is exactly what keeps prices artificially high, and FED stock allotted to the select few. This is ever-more interesting when one considers this last bit of wisdom from El-Erian:

"Central banks felt a moral and ethical obligation to do whatever they could to buy time for the pri­vate sector to heal and for the political system to get its act together and assume its economic governance responsibilities".

Mr. El-Erian would have us believe the Central Bank is politely bidding its time while governments, to whom they are not entirely beholden, get their knickers in order. Ladies and Gentlemen, I assure you that to those in charge, public vs. Private ownership is a matter of semantics. What is important to Bankers and people like Mr. El-Erian is that they have stable and cheap (interest-free) money. If a private interest-free body can provide it, great. If Government can do it, that is fine too. A mixture of both is a negotiation that serves those with vested interests.

Central Banks have vested public and private aspects, but the bottom line is that Central Banks do the bidding of the elite who own the banking cartels. The elite everyone is crowing about has allowed the banks to create the boom/bust cycle because they have a keen interest in keeping competition out of the market, propping up busted banks to maintain a semblance of ‘stability’ and preserving the banks’ ability to take in trillions per year in interest. It is one hell of a racket; you have to admit.

If we follow El-Erian's apologist reasoning, then he is correct, this club has no business in telling us "the right destination". Though weak, non-commital and ultimately an escape route for him, there is truth in his apologist stance. We can ignore the wolf on the hill as long as we like. We can munch on the grass at our feet, but eventually, there will be no more grass and no more sheep, only fat wolves. 

We do have a choice, after all.

As Thomas Jefferson warned:

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the public, to whom it properly belongs.”

– Jefferson in the debate over the Re-charter of the Bank Bill (1809)

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