Central banking, the enabler of inequality

Rex van Schalkwyk is a former judge of the Supreme Court of South Africa, chair of the FMF’s Board, and chair of the FMF’s Rule of Law Board of Advisers. He is the author of three books. The first is a novel. The second, One Miracle is not Enough (1998), deals with the failures then already evident in the South African democracy. The third, Panic for Democracy (2009), deals with the equivalent failures evident for many years in the democracy of the United States.  

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This article was first published on Businesslive.co.za 
on 20 February 2022

Central banking, the enabler of inequality

The permanent institution of a central bank came to the United States in 1913. Three unsuccessful attempts had been made before then. This institution was, and is, a banking cartel, which goes by the deceptive moniker, Federal Reserve. Conceived in conspiracy on Jekyll Island – the hunting retreat of J P Morgan, it is in practice today the financial centre which directs the monetary affairs of the world.
Although the Federal Reserve is a private institution, with shareholders, Congress has defined its authority and structure; it is the equivalent of a British Chartered Company of the 18th and 19th centuries.
The principal business of a central bank is to set short term interest rates, upon which all other rates are dependent. There is no financial institution which does not hold its breath when the Federal Reserve undertakes to make its portentious pronouncements.
Is the setting of interest rates by a central authority compatible with the free market, of which the United States is said to be the foremost exponent? Interest rates are the price of money; for society, both as consumer and supplier, there is no more significant numerator. All else depends upon it, as John Maynard Keynes (the mathematician turned economist) discovered. The question is: can this incomprehensibly complicated calculation be accomplished with any success? The answer: in the Soviet Union it was discovered, at enormous cost, that it was impossible to centrally determine the price of wheat or potatoes. What chance then the price of money?
The question is posed upon the assumption that the central bank will make an honest, or at least, an impartial assessment of its responsibilities. However, this is not how it works in practice.
In 1927, shortly before the Great Depression, Benjamin Strong, the governor of the New York branch of the Federal Reserve gave his infamous undertaking that he was about to “deliver a coup de whiskey” to the stock exchange. The result was that the stock exchange became so intoxicated that it lost its sense of direction.
Much more recently, in 2008, with the banking crisis, and at a cost of $700 billion, the US government bailed out the banks that had made recklessly incautious, but profitable housing loans. The scheme only fell apart when the over-extended housing market collapsed. The conduct of the delinquent banks fell within the remit of the Federal Reserve. The regulation of banks and stability of the financial system are two of its core functions. The bailout was done at taxpayers’ expense prompting commentators to observe that profits were privatised while risk had been socialised.
Interest rates have been kept artificially low for decades now, with the overt objective of supporting the stock exchange. The result has been spectacular returns for those whose investments are made there.
These examples, and there are others, demonstrate that the Federal Reserve has a bias towards Wall Street, and against the frugal, whose investments consist of savings accounts. When this anomaly was pointed out to a financial adviser, his response was that the savers should withdraw their savings and invest these in the stock exchange. His was, of course, not a practical suggestion, but worse, it missed the import of the question. The response was not only obtuse, but also callous for the implication was that if the savers were the losers, on account of the paltry interest they were receiving by decree of the central bank, they should follow the example of the winners.
The winners are, of course, the plutocrats and their fellow travellers who know how the system works. Money is borrowed, in huge sums, and at an interest rate barely above zero, to buy shares, an estate in the Hamptons, and a penthouse in Manhattan. Because these items are in limited supply the prices rise, sometimes exponentially. But the chief executive of a Fortune 500 company has another advantage. He can get the board, all of whom have similar interests, to agree to a re-purchase, with borrowed money, of the company’s shares. In a rising market this can have a profound effect upon the value of the shares, many millions of which are owned by the chief executive and fellow board members.
Few observers will have missed the irony of the 400 executive jets parked at the Glasgow airport whose function was to ferry their occupants to and from the climate change conference held in that city.
This opulent wealth comes from the ultra-low interest rate environment, created by the Federal Reserve. But there is a cost, borne by the many millions of frugal savers (salaried employees) who receive a fraction of the interest on savings that the free market would dictate. The result is that in the United States the middle class is being eviscerated. While 61% of the average adult American population lived in a middle-income household in 1971, this figure had declined to 51% in 2019. With the advent of the Corona 19 virus and the huge transfer of wealth that the ill-considered response has entailed, a further deterioration has undoubtedly occurred.
Although it may appear that this is a problem unique to the United States, this is not so. Some European countries, notably Denmark and Sweden, have introduced negative interest rates; meaning that at the end of the period of the investment, the investor gets back less than was invested. Why, one asks, would this be done? The answer is that it is the last gasp of the Keynesian experiment; an experiment that, in 80 years, has gone from bad to pernicious. People must, according to the script, be encouraged to spend, and so savings must be discouraged. To this extent has the state and its agencies come to meddle in the private affairs of its citizens, and in the process, to benefit only a very small minority.
BlackRock and other similar organisations are in the process of buying up the available private housing, at prices sometimes exceeding the asking price by 20%. This can only be with the intention that those who are now owners will become tenants in the future. Bill Gates is now the largest private owner of agricultural land in the United States. A 21st century feudalism is at hand.
This article is based upon a talk given at the Libertarian Spring Seminar at Wilderness, in 2018.

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