by Steve Forbes
In Europe, the story was much the same. Greek prime minister George Papandreou condemned speculators for driving down the value of his country’s bonds. In Great Britain, protesters attacked the home of Fred Goodwin, the former head of the bailed-out Royal Bank of Scotland, who had been widely vilified as a symbol of banker incompetence and greed. Protesters sounded Occupy Wall Street themes in a written message that declared: “We are angry that rich people, like [Goodwin], are paying themselves a huge amount of money and living in luxury, while ordinary people are made unemployed, destitute, and homeless. . . . Bank bosses should be jailed. This is just the beginning.”
There are some who have suggested that such rage is more than a response to the redistribution of wealth brought about by the distortion of money. The late Nobel Prize–winning Bulgarian writer Elias Canetti, who wrote about the emotions of crowds, offers a provocative, if unsettling, explanation of the psychology of the extreme scapegoating that occurred in the wake of Germany’s monetary collapse. As a representation of toil and human action, it can be argued that money is not simply a medium of exchange, but rather an expression of self. When Germany’s money collapsed, that society, he believes, reacted to the trauma of this “depreciation” by responding in kind:
The natural tendency afterwards is to find something which is worth even less than oneself, which one can despise as one was despised oneself. It is not enough to take over an old contempt and to maintain it at the same level. What is wanted is a dynamic process of humiliation. Something must be treated in such a way that it becomes worth less and less, as the unit of money did during the inflation.
Occupy Wall Street: Players in a Classic Drama
In 2011, when Occupy Wall Street protesters started a two-month encampment in Zuccotti Park in New York’s financial district, they were playing out the scenario of unrest that follows a debasement of money. Sounding age-old themes of inequality and injustice, their demonstrations quickly spread across the United States and then into a few European cities as well. A Detroit protester voiced the typical lament: “The financial architecture . . . is bad for more people than it is good for. This system is rigged for a very few.”
Demonstrators staged a “Billionaires Walking Tour” to vent their rage outside the homes of JPMorgan Chase chairman and CEO Jamie Dimon, News Corporation CEO Rupert Murdoch, industrialist David Koch, and financier John Paulson—all of whom were assailed as symbols of the 1%.
The media blamed this breakdown of social trust on Wall Street greed. They should have blamed the Fed.
Along with boosting the monetary base to breathtaking levels, QE was delivering big gains to the financial sector. We have noted that the Fed’s purchases of long-term Treasuries and mortgage-backed securities channeled credit to government and large corporations at the expense of loans to new and small businesses. Matthew Taibbi complained in Rolling Stone:
Ordinary people have to borrow their money at market rates. Lloyd Blankfein and Jamie Dimon get billions of dollars for free from the Federal Reserve. They borrow at zero and lend the same money back to the government at two or three percent, a valuable public service otherwise known as “standing in the middle and taking a gigantic cut when the government decides to lend money to itself.”
The problem, however, wasn’t cheating by Wall Street but Fed policies that were attempting to revive the economy by doing the very thing that had brought on the crisis—pumping still more liquidity into mortgages. Meanwhile, people with moderate and lower incomes were continuing to struggle in a sluggish economy that QE had failed to revive.
For once, Paul Krugman wasn’t wrong when he complained in 2013 that the nation was seeing a “rich man’s recovery.” “The rich,” he writes, “have come roaring back”:
95% of the gains from economic recovery since 2009 have gone to the famous 1%. In fact, more than 60% of the gains went to the top 0.1%, people with annual incomes of more than $1.9 million. Basically, while the great majority of Americans are still living in a depressed economy, the rich have recovered just about all their losses and are powering ahead.
He observes, “I guess I’d note that a large proportion of those super-high incomes come from the financial industry, which is, as you may remember, the industry that taxpayers had to bail out after its looming collapse threatened to take down the whole economy.”
With Less Trust Comes More Government
In nations with chronic monetary instability, distrust of commerce is a way of life. A perfect example is Greece, whose policy makers were chronic currency debasers before embracing the euro. Joining the euro zone pushed the Greek government to stop inflation—though not spending. This legacy of monetary dysfunction has corrupted the country’s political and economic life, in addition to undermining basic civility.
When entrepreneur Demetri Politopoulos returned to his native Greece from the United States to start a brewery, his products were vandalized, his tires were slashed, and he received taunts and threats. Given the deeply ingrained cultural hostility to commerce, one can readily see how unemployment in Greece is nearly 28%.
In Argentina, the poster child for the perils of inflation, empresario, the word for businessman, has come to mean criminal.
This toxic destruction of trust almost always brings with it increasingly capricious and draconian regulations. People turn to government when they feel they can’t trust each other.
Argentina has virtually paralyzed its economy with countless arbitrary and politically driven regulations—including, at one point, a ban on imported books.
In Europe and the United States, there is a growing push for “macroprudential” strategies in monetary and financial regulation. This approach would give central banks and financial regulators sweeping new powers aimed at assessing entire markets and preventing bubbles before they happen. European central banks are already beginning to adopt such a preemptive—and dangerous—approach. Noted economist John Cochrane in the Wall Street Journal worries about the future of the United States entrepreneurial economy in the shadow of an increasingly powerful and capricious macroprudential Fed:
How will homebuilders react if the Fed decides their investments are bubbly and restricts their credit? How will bankers who followed all the rules feel when the Fed decrees their actions a “systemic” threat? How will financial entrepreneurs in the shadow banking system, peer-to-peer lending innovators, etc., feel when the Fed quashes their efforts to compete with banks?
Given that finance was already the most regulated sector of the U.S. economy (that is, the numerous regulations and bureaucracies of Sarbanes Oxley, Dodd-Frank, not to mention countless preexisting securities laws and other constraints), today’s calls for still more control look less like real efforts at reform and more like the kind of politicized strictures common in places like Argentina and Greece. They’re part of the aftermath of political scapegoating and payback that ensues when the corruption of money destroys trust.
Indeed, Washington’s punitive mood was clear in 2013 when JPMorgan Chase was forced by the Obama Justice Department to accept a $13 billion settlement—the largest fine ever paid by a company to the government and the equivalent of half the firm’s annual profit. The “offer you can’t refuse” allowed the world’s largest bank to avert a lawsuit over its sale of mortgage securities to investors—the same investment vehicles that continue to be sold by Washington’s creations, Fannie and Freddie, and that the Fed has bought as a result of quantitative easing.
The historic fine is in addition to the $18 billion JP Morgan has already spent defending itself against investigations by at least seven federal agencies since the financial crisis. Holding 50 meetings per month with regulators, the bank’s senior executives have become virtual hostages to Washington. The Wall Street Journal reported in 2013 that the firm was nearly doubling its risk and compliance team to 15,000 people from 8,000 the year before, spending another $5 billion on compliance.
Critics gloated that the company got what it
deserved. In truth, job-seeking Americans were the losers. Instead of JPMorgan Chase’s billions being used as capital to back the next Apple or Google, the money went into the pockets of bureaucrats, funding broken websites and flailing bureaucracies.
Demoralization and Malaise
The intensified government controls on finance and capital that are typical reactions to the destruction of money neither restore trust in a currency nor revive an economy. Instead, they cause it to sink even deeper into stagnation and pessimism. During the 1970s’ stagflation in the United States, Jimmy Carter encapsulated this despair in his famous “malaise” speech:
The symptoms of this crisis of the American spirit are all around us. For the first time in the history of our country a majority of our people believe that the next five years will be worse than the past five years. Two-thirds of our people do not even vote. The productivity of American workers is actually dropping, and the willingness of Americans to save for the future has fallen below that of all other people in the Western world.
Inflationary despair is evident today in India, a longtime monetary abuser that was hit with rampant inflation after the economy slowed and the United States announced its intention to taper and raise interest rates. As a result, investors abandoned Indian bonds in favor of U.S. debt, setting off a slide in the value of the rupee, which reached a record low in 2013. The Indian government raised the benchmark interest rate to nearly 8% and imposed controls on overseas investment, going so far as to ban the import of duty-free flat screens by airline passengers.
Once known as the new tiger of Asia, India has seen its growth slip from around almost 9% in the early 2000s to below 4% in the fall of 2013. The country’s vast subsistence population has been hit hard by rising food prices. India’s growing middle class, a success story for the last two decades, is for the first time expressing pessimism about the future. Alam Srinivas, author of the book The Indian Consumer, told the Washington Post that the inflation “was a huge shock for the middle class. There was a sense that nothing could go wrong.” One student said that she had postponed her plans for the future and was now “focused on simply surviving.”
President Obama sounded the same grim themes in his 2013 speech on income inequality, the pessimism of which is characteristic of monetary malaise:
It’s not surprising that the American people’s frustrations with Washington are at an all-time high. . . . Their frustration is rooted in their own daily battles—to make ends meet, to pay for college, buy a home, save for retirement. It’s rooted in the nagging sense that no matter how hard they work, the deck is stacked against them. And it’s rooted in the fear that their kids won’t be better off than they were.
Unlike his predecessor Jimmy Carter, who acknowledged the role of inflation in the nation’s woes, President Obama, like so many others in Washington, has failed to see a link between the problems of the 99% and wealth-destroying monetary policies. When the president complained that “the basic bargain at the heart of our economy has frayed,” he could have been talking about what happens when the Fed weakens the dollar.
Debasing Public Morality
In 2013, Theodore Dalrymple described in City Journal how the debasement of currency “corrodes the character of people”:
It not only undermines the traditional bourgeois virtues but makes them ridiculous and even reverses them. Prudence becomes imprudence, thrift becomes improvidence, sobriety becomes mean-spiritedness, modesty becomes lack of ambition, self-control becomes betrayal of the inner self, patience becomes lack of foresight, steadiness becomes inflexibility: all that was wisdom becomes foolishness. And circumstances force almost everyone to join in the dance.
Monetary blogger Paul Hein put it succinctly: “If there are no standards for money, other standards will fade away as well.” The distortion of market trust mechanisms that are the unintended consequence of fiat money sooner or later are likely to produce deliberate transgressions of trust on the part of governments, institutions, and individuals.
Not only social unrest but corruption is a symptom of the reckless debasement of money. Big inflators like Syria, Argentina, and Zimbabwe typically score high in perceptions of corruption on Transparency International’s annual Corruption Perceptions Index.
With the worldwide destruction of money, it is no surprise that corruption is on the increase. Transparency International’s 2013 annual Global Corruption Barometer, which reports on corruption in 107 countries, found that 53% of people surveyed believe that corruption has increased or increased a lot over the last two years.
Examples seem to be everywhere:
• Turkey, which has been trying with some success to get inflation under control, was rocked by unrest in 2013 because of a government graft scandal. It eventually forced Prime Minister Recep Tayyip Erdogan to replace 10 ministers in his cabinet.
• In tiny Belarus, where inflation reached nearly 60% in 2012, bribes are necessary for admission to prestigious state universities that confer degrees in fields such as law and medicine.
• Russia’s English language RT Network reported that inflation in 2011 meant the average cost of a bribe in that country “more than tripled.”
In 2012 Barclays Bank and 15 other global financial institutions admitted to artificially lowering the London Interbank Offered Rate (LIBOR), the short-term interbank interest rate used when banks lend to each other. The banks were accused of manipulating rates initially so that their traders could profit when trading derivatives. Later, they pushed the rates downward to make their balance sheets appear stronger during the financial crisis. In the United States, the United Kingdom, and the European Union, banks had to pay fines totaling more than $6 billion.
If the system had had stable money, LIBOR’s ethical breach would probably never have happened. Fluctuating currencies create the volatility that necessitates derivatives. Economist David Malpass noted: “The instability of exchange rates and the interest rates backing them create the need for complex derivatives and floating-rate financial instruments.” In other words, the environment that encouraged banks to manipulate their interbank rates would not have existed. Barclays’ self-protective manipulation of LIBOR would also probably never have taken place, because the financial crisis would not have occurred.
Sound money would have likely prevented other acts of desperation, such as the looting of private bank accounts that took place during the Cyprus financial crisis in 2012 and 2013. To help pay for a bank bailout, the Cypriot government, at the behest of Germany, the International Monetary Fund, and the European Union, imposed one-time taxes on the accounts of the country’s bank depositors. It confiscated nearly half of the uninsured accounts over 100,000 euros of customers at the Bank of Cyprus. Voicing the stunned disbelief felt by many at this unprecedented confiscation of personal property and violation of trust, investor Jim Rogers declared to CNBC “What more do you need to know?”:
Think of all the poor souls who just thought they had a simple bank account. Now they find out that they are making a “contribution” to the stability of Cyprus. The gall of these politicians.
Gaming the System
It’s not just governments and banks that stiff citizens and walk away from their loans. The destruction of money corrupts social trust and morality among ordinary citizens as well. In 2011, in the wake of the financial crisis, the New York Times ran an astonishing story, “They Walked Away and They’re Glad They Did,” a sympathetic look at people who had decided to abandon their mortgages in the wake of the financial crisis.
One pharmaceutical employee told the paper that three years after he bought his Los Angeles home, it was now worth nearly $250,000 less than what he paid for it: “We looked at how much my home was under water, how much I’d lost thus far and how much I would continue to lose until I started to break even. . . . And that could be 20 years away. It was a no-brainer.” This man had enlisted the help of YouWalkAway.com, a service that specializes in “Intelligent Strategic Default
.” According to the Times, the process of walking away from a $300,000 loan was fairly routine:
The company charges clients an enrollment fee of $199 to $395, and monthly membership fees ranging from $29.95 to $99.95, depending on which assistance plan a homeowner chooses. Then it essentially coaches clients through the process of walking away from their mortgages, helps them figure out which threatening letters to pay attention to and which to ignore and provides access to lawyers versed in each state’s property laws.
YouWalkAway.com’s CEO Jon Maddux appeared to dismiss any moral concerns about helping people turn their backs on their loans: “I think as more and more people know someone that’s done it, they know that, O.K., these people have moved on, they kind of pushed the reset button, and they’re starting over.”
The Times quoted a Harvard University housing expert who backed them up: “If your home is a financial asset, and it’s financially rational to walk away, that’s what you do.”
It’s Not Just Mortgages
Students cannot walk away from their loans as easily as homeowners whose houses are under water. Their lender, Uncle Sam, can garnish their wages. An increasing number, however, are choosing to do so; default rates are at their highest levels since 1995, according to the Department of Education.
Just as liquidity pumped into housing created moral hazard in the mortgage market, the Fed’s monetary expansion over the last four decades has indirectly undermined morality in the market for college loans. Between 1996 and 2006, real federal aid—including grants, loans, and tax credits—has skyrocketed, increasing by 77%, from $48.7 billion to almost $86.3 billion. Aid (mostly federal) per full-time student increased 43%. The cost of college has risen commensurately: the per-pupil cost of tuition, fees, room, and board has increased 29% at private four-year schools; 41% at public four-year institutions.