A Bankers' Economy

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William Cohan claims that "Banking has always been an elaborate confidence game. . . ." And the history of central banking provides ample evidence that his claim is true. Six decades ago, the U.S. Treasury wanted to shut down the Bank for International Settlements (BIS), saying it helped finance the Nazis during World War II. It handled gold looted by the Nazis and transferred Czechoslovakian gold to Germany after the Nazi invasion in 1939 during which Czech officials were held at gunpoint as they placed the order. U.S. Treasury Secretary Henry Morgenthau tried to shut down the bank at the 1944 Bretton Woods conference. Today, Jean-Claude Trichet and Ben S. Bernanke are transforming the organization into one of the world's most powerful networking clubs.

Central banking developed into a far-reaching plan which has been described by Georgetown Professor Carroll Quigley like this: "to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank . . . sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the levels of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

Several short-lived attempts to impose the central banking scheme on the United States were defeated by the patriotic efforts of Presidents Madison, Jefferson, Jackson, Van Buren and Lincoln. But with the passage of the Federal Reserve Act of 1913, America yielded.

Few Americans know that the FED is a privately-held institution owned, operated, and managed by the nation's banks. Its major concern, as is true of all private institutions, is the welfare of its owners. FED publications rarely inform readers of the FED's ownership. To do so would expose its "elaborate confidence game." This confidence game is inherent in remarks made by Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas in an interview published in the Dallas Morning News.

Mr. Fisher's biography is revealing. He attended the United States Naval Academy in Annapolis, but apparently didn't graduate, before transferring to Harvard University where he earned a bachelor's degree in economics. He then engaged in Latin American studies at Oxford University, again apparently without acquiring a degree, and then earned an M.B.A. at Stanford University. He joined Brown Brothers, Harriman and Company, a private banking firm, where he was assistant to former Undersecretary of the Treasury Robert V Roosa. He then served as Special Assistant to Secretary W. Michael Blumenthal at the United States Department of the Treasury before returning to Brown Brothers and established and managed the bank's Dallas-based Texas operations. In 1987, Fisher created Fisher Capital Management, and a separate funds-management firm, Fisher Ewing Partners, managing both firms until 1997. In 1993, he was a candidate for the U.S. Senate but took fifth place. The following year, he was a candidate for the same U.S. Senate seat but again lost. From 1997 to 2001, he served as Deputy U.S. Trade Representative, serving under U.S. Trade Representative Charlene Barshefsky, where he was responsible for the implementation of NAFTA, and negotiating a variety of trade agreements, including the bilateral accords admitting both the People's Republic of China and Taiwan to the World Trade Organization. From 2001 to 2005, he served as Vice Chairman of Kissinger McLarty Associates, a strategic advisory firm headed by former U.S. Secretary of State Henry Kissinger and former White House Chief of Staff Mack McLarty. He left the firm in April, 2005, when he was appointed President of the Federal Reserve Bank of Dallas.

Although his political connections are obviously very extensive, he could not get elected and now has the non-responsible power to cast his vote on issues of crucial importance concerning the American economy. Since the FED never has to take responsibility for its actions, being a member of the FED's Board of Directors is a cushy, high-paid job in which he can be an advocate for his favorite special interests—banking, global finance, and "free trade." As such, he fits in perfectly with Professor Quigley's description cited above.

In his interview, Mr. Fisher reveals his lack of critical reasoning ability, inhumanistic biases, and spotty education. He say, for instance, that "Capitalism wasn't designed to be stable, and we forget that too often. . . . That's just the price we pay for a system that works better than anyone else's."

Well, I don't know who he thinks "designed" Capitalism, but if is was Adam Smith, I'd like Mr. Fisher to cite any passage in the Wealth of Nations that states or even implies that view. Given that Mr. Fisher's education in economics was acquired as an undergraduate, I doubt that the Wealth of Nations was even on his reading list. And yes, American Capitalism is "a system that works better than anyone else's" but better at what? It is not better at providing health-care, it is not better at providing security to the elderly, it is not better at providing a modern, efficient infrastructure, it is not better at providing internet service even though the internet was invented in America. It is not better at providing an efficient transportation system; it is not better at eliminating poverty nor even of providing a culture of law-abiding citizens. It is not better at providing a just legal system or an effective educational system. So just what is it better at? Two things: a plethora of products and services most of which do not work as advertised and many of which don't work at all, and a means for a small group of people to amass huge amounts of money, especially bankers.

Mr. Fisher's comments about the Texas economy are curious at best. He says, "We're the one shining star in the United States." And "the benefit of being in Texas is we will have positive employment growth, somewhere between 1 1/2 and 2 percent. We didn't have an over-priced housing stock. We benefit from significant immigration, not just from across the border, but from foreign countries [sic] (perhaps a typesetter's error) like California and Florida."

But Mr. Fisher has his head in the sand. The Texas economy has never been prosperous. In fact, the advantages Mr. Fisher cites are the result of its lack of prosperity. The reason "we didn't have an over-priced housing stock" is that Texans didn't have the money to support a run-up in housing prices. And if Mr. Fisher passed his statistics courses, he surely knows that employment numbers are absolutely meaningless by themselves. The very week Mr. Fisher's interview was published, the Dallas Morning News published two stories about employment that were contradictory. One cited employment growth, the other unemployment growth. The only sane conclusion that can be draws from those pieces is that the numbers used are bogus. Of course, it is well-known that all economic numbers are bogus. The CPI is a cruel joke; so many versions of it exist that it can be cited to support almost any viewpoint. The GNP includes what a Harvard economist has called "phantom" numbers, and the employment numbers have never made any logical sense, since they render a large group of employable aged people neither employed nor unemployed. That employment growth is a meaningless number when cited by itself, consider this simple example. Suppose 12 jobs were gained and 10 lost. That gives an employment growth of two jobs. But now suppose two of the ten jobs lost paid $80,000, three paid $60,000, four paid $50,000, and one paid $40,000. The income lost comes to $580,000. Now consider the twelve jobs gained. Suppose eight paid $40,000 and two paid $50,000. The income gained comes to $420,000. So income would have declined by $160,000. That does not look like an improvement to me; people pay for things with income, not jobs.

But because Mr. Fisher is a one-consequence thinker, he misses the connection between what he praises about the Texas economy and what he laments about it. The Texas political climate fosters anti-labor and low-wage policies. But the state gets its revenue from a consumption tax, which means that since wages are low, consumption is minimal. This results in under-funded state services, one of which is public education. So when he writes that, "It worries me terribly that there's only one Texas educational institution in the top 25 in America, and that's Rice in Houston. . . . The economy is brain-driven in America. And the way brains develop is through education." Rice University, of course, is a privately funded university; its activities do not depend upon state funding. Secondly, it is not required to enroll a fixed percentage of graduates from the state's public schools. The other best known Texas universities are public institutions, and Mr. Fisher fails to see that a great university cannot be built on the backs of poorly prepared students. Undergraduate and graduate studies cannot be disassociated. It is difficult to lure the most talented graduate students to a university whose student body is poorly prepared, because graduate students shoulder the burden of undergraduate teaching so that their professors can devote their time to research and graduate-level teaching. Highly prestigious professors can't be lured to institutions lacking highly talented graduate students, so what Mr. Fisher laments about Texas is the result of those so-called business friendly policies put in place by the legislature that I suspect Mr. Fisher supports. There problem with single consequence thinkers is that they cannot connect causal chains; they don't understand the distinction between proximate and ultimate causes. The low quality of Texas universities may be a proximate cause of poor economic activity, but the ultimate cause is the practice of fostering ineffective, business-friendly employment policies.

Mr. Fisher also laments the nation's commitment to Medicare. Would he then advocate that we merely allow people to suffer and die prematurely? If the nation merely kills-off the sick among us, Medicare would cost nothing at all. But Mr. Fisher's worry about the nation's long-term Medicare liability is misplaced anyhow. He says, "We have committed ourselves to do something for which there is a lack of $85.6 trillion in funds, which we'll have to find somewhere. To me, that is the greatest threat facing America and our overall stability." But this cited number is based on some projection, and every projection is derived from a set of assumptions. Anyone with even a modicum of mathematical knowledge can show how the number can be changed by changing some or all of them. Mr. Fisher's chicken-little fears are the result of pure speculation. There are numerous ways of making the costs of Medicare manageable; every other developed nation has done it. The only reason it can't be done in America is the hide-bound thinking of people like Mr. Fisher.

But in the end, the problem is really banker-think, which Mr. Fisher describes very nicely but inaccurately: "When the return on money gets low, people take higher risk. We had a period . . . where interest rates were low worldwide. And the yield curve, which is the difference between long-term lending rates and short-term lending rates, was almost nil. So what did humans do? They did what they always do. . . . They went out further and took higher risk. Now they're paying for that." The trouble with this description is that is uses slippery language. "When the return on money gets low, people take higher risk." Well, no. Financiers (bankers) take higher risk. Most people are not in the business of money-lending. Then again, "So what did humans do?" Well, no, not humans, bankers. Then again, "Now they're paying for that." Well, a few bankers may be paying for it, but, unfortunately, so are the rest of us who never intended to take on any risk.

Banker-think is very insidious. Bankers take the risk and then dump the consequences of the public, and Mr. Fisher says, "I don't see anything abnormal about it." Only a person who also engages in banker-think could make that statement.

And then Mr. Fisher fixes the blame: "We go through periods of excess, we overbuild, we correct, we reroute. . . . But you don't correct for the "excess excess" that we have experienced very quickly. We got carried away. I blame the regulators, including the Federal Reserve, for letting things get too far. Given that it went so far, given the natural pattern of the way creditors work, they sort of feel something is wrong, but they let it happen anyway. . . ." Mr. Fisher again confounds proximate and ultimate causes. If one asks why regulators and the FED let things get too far, the answer is banker-think. If one asks why creditors felt something was wrong, but let it happen anyway, the answer is banker-think. If the bankers didn't engage in banker-think, the excess would have been avoided, and the regulators would have had no need to regulate. But because both the bankers and the regulators (more bankers) were of one mind, banker-think drove the bankers to more and more excess, and because the regulators were of one mind with the bankers, the regulators did nothing.

So there you have it, a bankers' constitution for the world which reads, "We the bankers of the world, in order to form a more perfect association, to secure wealth to ourselves and our posterity, caring nothing for the nation nor the welfare, suffering, or even deaths of ordinary people, do ordain and establish the BIS and a world-wide bankers' economy." Confidence game? Confidence game indeed!