Writing at The New Ledger, Francis Cianfrocca lucidly explains the precarious financial condition of the Republic. In the course of this he also provides some very useful economic history about how we got where we are. The answer to how we got here is deeply entangled with the geopolitics that emerged after the devastation of the World Wars and the Depression.
One way of looking at it is that we got here because after those historic calamities, concentrated in Europe, no one was left with the credibility to anchor world finance -- no one except America. "The bottom line is that the United States exports dollars, which function as a store of value in the global trading system much as gold did in the past."
Let it be noted that this settlement -- generally referred to as Bretton Woods, after the resort in New Hampshire where the victors in the Second World War met to begin the work of bringing to the ravaged world to a workable system of finance -- faciliated an expansion of wealth almost unparalleled in history. Under the operation of this settlement, both Germany and Japan were restored to a level of prosperity which would have been unthinkable to most observers at point of their ruin and subjugation after the war. Under the operation of a modified version of this settlement, China, India, and other nations in Asia have similarly witnessed an explosion of productive economic activity which has lifted countless millions out of grinding privation. And under the operation of the settlement, Americans became the richest people ever to walk the earth. The accomplishments of Bretton Woods should not be overlooked.
The problem here, as I see it, is that the position of the United States as the fons et origo of the world's reserve currency, the primary "store of value in the global trading system," presented extraordinary moral and even spiritual vulnerabilities. In a word, it exposed us to Usury on a staggering scale.
Mr. Cianfrocca, I hasten to add, does not use this loaded word; but to my way of thinking that is what he is describing:
Since we no longer need to manufacture consumer goods (which we can import for the cost of money creation, essentially for free), we’ve turned to other bases for our industrial economy. With the rise of neoclassical economics and financial engineering, America’s most valuable business in the last two decades has been not the exportation of money, but rather the manufacture of money. The fact that Wall Street’s rocket scientists figured out how to make money out of money itself, without creating real goods and services, made it inevitable that we would have a cataclysmic crash.
The temptation to curse the bankers and financiers is very strong. Unquestionably their recklessness has enervated our proud Republic in appalling ways. Nor should the Federal Reserve escape blame. The Wall Street Journal Editorial Page has been waging forensic and rhetorical war on the Fed, and Chairman Ben Bernanke in particular, for some time now, and scoring plenty of solid points. Recently released transcripts from the Fed's Open Market Committee show that even as far back as five years ago this war came into the compass of that Committee's own internal debates. The crux of the criticism is that the Federal Reserve's loose monetary policy during the brief recession that followed the dot.com crash and September 11th, unleashed upon the world financial system a flood of new money that raced off after new bubbles, above all the housing bubble and what is called shadow banking. The Fed facilitated the manufacture of money, and thus it faciliated a colossal system of usury.
Yet the thing that strikes me as I study all this is a terrible sense of inevitability. Where in this chain of crises and decisions are the obvious points where normal statesmanship could have averted the disaster? When Paul Volcker, Fed Chairman in the early 1980s, showed the guts to actually provoke a deep recession in order to check the ruinous enigma known as stagflation, he had behind him the greatest statesman of our age, Ronald Reagan. What prescience and iron will would have been required to strangle shadow banking in the crib of its late-80s infancy? What sort of strength and shrewdness, not to mention humility, must Greenspan have possessed were he to have staved off the various bubbles his tenure faciliated, when virtually all the world was praising his wisdom? Can you imagine the hue and cry, had the Fed answered the shock of September 11, hard on the heels of which the stock market fell like rock, by raising interest rates?
Perhaps smarter, more knowledgeable men than me will eventually identify for us the Pickett's Charge, so to speak, of this tragedy of Usury -- the moment when a few decisions taken by a few crucial men truly formed the pivot round which the world turned. Perhaps some future historian of genius will one day explain for our posterity where a decisive stroke of statesmanship would have averted this disaster. But I cannot see it.
What I can see is a new crisis or pivot in the near future. Likely it will be a confrontation, misunderstood and poorly reported. With the economy finally starting to revive a bit, the politicians in Washington will want more money for their pet schemes, but Ben Bernanke or his successor at the Federal Reserve will perceive that more manufactured money could produce the final discredit of the dollar and the bankruptcy of the Republic. He will perceive that he must stand against the politicians, and against the tides of popular socialism now rolling over us, and refuse them and their constituencies the money they want. Let us hope that we have more than normal statesmanship when this confrontation comes.
Mr. Cianfrocca ends on an unexpectantly hopeful note, but what he hints at is obscure. Perhaps it lies in his sense of the power of necessity to discipline excess. In any case, it is doubtful that we can hide from necessity's discipline much longer.