Get rid of Stanley Fischer and end the Bank of Israel

Economic Policy Journal led me to an article in the Times of Israel talking about how African central bankers are on their way to Israel to figure out why our economy isn’t as screwed up as everyone else’s. The answer is, we don’t borrow as much as everyone else. Instead, we just tax Israeli citizens to the point that they think something’s wrong if their mortgage payments go down for some reason.

Many of the average Israelis who I talk to from time to time when economic crisis becomes the subject line believe that we are safe because we have this genius at the helm whose name is Stanley Fisher who is all-knowing and omnipotent and can save us from any crisis. It’s human nature to attribute all the good to one tangible point that you can see. This is the essence of the emotion that leads to idolatry.

There is nothing amazing about Stanley Fisher, except for the fact that he refuses to use his power of printing money AS MUCH as other central bankers. He’s relatively better than most central bankers precisely because he does very little. So what I can tell these Africans who are checking out Israel’s central bank is:

  1. Don’t have a central bank.
  2. If you insist on having one, then just let it collect dust and don’t use it.

Let’s do an analogy here: After the Continental Army won the Revolutionary War, American colonists were begging for George Washington to be their new king. We think that’s crazy, but they knew no better. Get rid of King George, install a new King George. The idea of separation of powers was foreign to them. Even Alexander Hamilton, the guy on the $10 bill, wanted a king, and criticized the Constitution for lacking a provision for a monarch. Hamilton, by the way, was also a proponent of a Central Bank of the United States. Coincidence?

Washington, thank God, refused to be King, and instead we got the Constitution and separation of powers.

Fast forward to today and we want one guy to be in charge of everybody’s money. We think that if we don’t have this one guy in charge, everything will be anarchy. Just like the colonists thought that if you had separation of powers, you’d have anarchy. So we want to crown King Fisher as head of our central bank. We cannot conceive of not having a central bank, just like the Colonists could not conceive of not having a King.

How would money work without a central bank? Very simple. Competition. Different firms would rise coining different monies, and the one that is most trustworthy with the best purchasing power would be the one used in the end. It would probably end up being backed by some metal, if not be that metal itself. No one would use a fiat paper currency if they had the choice not to use it.

So…get rid of legal tender laws, take taxes off gold and silver, and let people use them as money like mankind has been doing for thousands of years. You don’t even have to “get rid” of the central bank of Israel per se. You just have to take away its monopoly control over the money supply and let competitors put Fischer out of business.

Fischer, by the way, was Ben Bernanke’s thesis adviser at MIT. Now the student controls the value of the dollar. The teacher controls the value of the shekel.

I say forget them both. I own gold and silver, something Ben and Stan can’t print away into oblivion.

When the new Federal Reserve money starts churning…

I’ve been pondering different scenarios as to how the whole house of cards will fall. I read an article recently that seems to be the simplest explanation yet. Here it is in a few paragraphs.

The Fed buys bonds so the government can borrow at low rates. This enables it to have multi trillion dollar deficits annually with no immediate consequences. In order to buy the bonds, the fed conjures up money out of nothing. The money ends up on the balance sheet of some big bank. That big bank doesn’t touch the money, because the economy is fragile and they want to keep the cash reserves for rainy days. So interest rates get low and inflation is delayed, since the money isn’t moving.

Then, the economy starts picking up a bit. GDP goes up. People start borrowing money and spending money. The big banks start to unlock some of those cash reserves. Problem is, there’s such a staggering amount of them that it overwhelms the system and prices start flying out of control. So the Fed has to suck some of that cash back in its black hole by selling bonds, taking the money and burying it.

The Fed is like the Big Bang of fiat money. The monetary universe expands and contracts and the fed is at the center of the universe.

So anyway, as the Fed tries to control the hyper inflation it itself created, interest rates go up. People finally stop buying bonds. Banks, who were relying on the Fed feeding them with money, are no longer fed. Their leverage – the amount of money they lend out over the amount they actually hold – is now about 33 to one and gets called in by people looking for their cash. Banks fall like dominoes, and the Fed either has to agree to hyperinflation, or a depression. It will pick one or the other. Those that own real assets will be fine.