Throughout history, governments have always used crises to justify blatant
power grabs. Often the crisis subsides, but the expanded government powers
remain. In America this week, the tendency came into sharp focus. Congress
signaled that it is preparing to perpetuate the George W Bush administration's
domestic wiretapping program, and has even abandoned the pretense that
warrantless surveillance be confined to terrorism.
Similarly, even though our financial crisis has yet to reach full flower,
Treasury secretary Henry Paulson announced plans to give the Federal Reserve
new and explicit powers to oversee and regulate the financial services
industry. However, a sober look at his plan reveals that it is tantamount to
giving the fox complete autonomy to guard the henhouse.
What few economic leaders have acknowledged is that the
Federal Reserve itself is responsible for the real estate and credit bubbles,
which are the source of our current troubles. By keeping interest rates too low
for too long, the Fed ignited speculative fever and engendered a disregard for
risk management that pushed asset prices above rational levels.
Should we blame the private sector for taking advantage of all the cheap
credit, or the Federal Reserve for supplying it? If a kindergarten teacher
passes out handfuls of Pixie Sticks, and then leaves her classroom unattended
for several hours, should we blame the five year olds for the hysteria that
ensues?
The reality is that we should be restricting, rather than expanding, the powers
given to the Federal Reserve. Since former chairman Alan Greenspan, his
successor Ben Bernanke and company have already inflicted so much damage with
the weapons already in their arsenal, why provide them with heavier artillery?
Only in Washington do those who screw up get rewarded for doing so.
Since the Fed has demonstrated complete incompetence at setting interest rates,
why not return that function to the market? Instead of allowing the Fed to
inflict unbridled havoc on our economy, why not re-impose some discipline?
Instead of looking for new ways to regulate Wall Street, why not find an old
way to regulate the Fed? Actually there is a simple answer to all of these
questions; it's called the gold standard.
In his speech outlining these proposals, Paulson stated that during the past 50
years the performance of the US economy has been second to none. I do not know
what planet Paulson has been living on these past 50 years, but it is certainly
not Earth. If Paulson were referring to the prior 50-year period, from
1908-1958, his statement would have been correct. But from 1958 to 2008, the US
economy has blown a lead even greater than the one the Lakers enjoyed over the
Celtics in game four of the just concluded NBA Finals. In fact, it may well
qualify as the biggest economic choke in history.
In 1958, the US enjoyed a standard of living so unmatched that the rest of the
world still lived in the Stone Age by comparison. Our per capita income was so
far ahead of our nearest rival that it seemed impossible that any other nation
would ever catch up. Today not only is per capita income in the US barely in
the top 10, but we are being rapidly overtaken by countries that up until a few
years ago were barely discernable in our rear-view mirrors. When it comes to
economic performance during the past 150 years, the US is the Big Brown of
economies. 1858-1908 was the Kentucky Derby, 1908-1958 was the Preakness, and
1958-2008 was the Belmont Stakes.
Not only did the US surrender a substantial lead, but in many respects our
current standard of living is lower than the one our grandparents enjoyed. Sure
we have a few more gadgets, larger televisions and more prevalent air
conditioning, but the quality of life has actually declined.
In the 1950s, the average man earned enough money to fully support a wife and
four kids, all the while saving for retirement and paying off his mortgage.
Today the average man can barely support himself. It takes two bread winners in
most families to make ends meet, and that is assuming only two children. Even
with both parents working, the typical mortgage on the family home will never
be paid off and retirement is now a pipe dream. Flush with high pay, low debt,
and a strong currency, the Ugly American in the 1950s could vacation in Europe
like a king. Now we can now barely afford the gas for a day trip to a Six Flags
theme park.
If Paulson can be so completely clueless regarding the Fed's role in the
current debacle and in America's economic stumbles over the past two
generations, why would anyone place any faith in his proposed remedies?
In fact, an unaccountable and unelected Federal Reserve, which nonetheless has
lately proven to be as politically craven as any two-bit politician, does not
hold the keys to our economic revival. However, with its increased willingness
to rescue the big financial firms from their own excesses, perhaps Paulson sees
an expanded Fed as the best way to ensure the continued prosperity of his
former pals on Wall Street.
Peter Schiff is president and chief global strategist of Euro Pacific
Capital. He is the author of Crash Proof: How to Profit from the Coming
Economic Collapse (Wiley & Sons, 2007) and his second book is scheduled for
publication in early 2009. Euro Pacific Capital commentary and market news is
available at http://www.europac.net. It has a free on-line investment
newsletter.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
