Archive for July, 2009

Re McAlvany’s and Jekyll Island

July 30, 2009

Listening to this week’s McAlvany’s podcast which you can find here.

I always find their shows contrarian which is great however this week they made no effort to find fault in Edward Griffin’s analysis. Now a lot of what he says make sense, but they brush over the subtleties of the claims.

I’m willing to believe that the Federal Reserve was forged in the way claimed. I’m willing to believe that it acts as a cartel in that it limits the extent to which members can do business.

However from here I have questions.

Regular cartels is that the action of cartels always hurt the consumer for the period in which they last. They don’t perform any benefit to the consumer. When the Fed is allowed to be a lender of last resort, it does offer a benefit to consumers. When Lehman brothers was allowed to collapse, credit markets seized up. This is demonstrable. The Government/Fed won’t allow this to happen again. It is true that they are experimenting as they go because no-one is certain of the rules.

Once a cartel is written into law it is no longer a cartel. Cartel’s don’t work in practise over long periods as members that have a competitive advantage to break from the rules will do so when the incentives are right. That is not possible here, so even if it was a means of enforcing the rules of a cartel at one point, it no longer is. It is law. Because of these points it is unfair to call the Fed a ‘regular’ cartel.

Other claims that were made were that the whole inflation scenario works in the banks and governments favour. “That’s where the money goes”. Inflation undermines the value of all assets in the designated currency, whether they are being held by banks, government or the private sector at large. Can Mr Edward Griffin please provide data to show that bank’s shareholders have outperformed other sectors over the period since the Fed’s creation? The barriers of entry to becoming a bank are not so great that other companies could not become banks if they saw a market opportunity in doing so.

The biggest claim of Mr Edward Griffin’s which stinks of propaganda is that he gave an example that the banks would easily pass up on the small person’s loan, but wouldn’t when it came to cities, big corporations or foreign countries. Now although it may be true that there are banking departments geared for different kinds of loans, the US housing bubble is a clear indication that they would extend easy credit to the small man as well.

Come on McAlvany! You need to drill your guests when they make claims that sound bogus, even if they have a lot of good points as well. Otherwise your show doesn’t sound credible.