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Mish Shedlock: Case Against the Fed



May 07, 2009 – Comments (10)

In a recent article on, Mish Shedlock makes his case against the Federal Reserve. At the same time he asks, "are we ever going to go give the free market a chance?"  Many of you wish we would.  Some are still hiding under the beds afraid of big bad robber barons (and completely ignorant to American history.)



1R. To those who claim credit extended by fractional reserve lending is not fraudulent because it's backed by assets, I ask: "What assets?" The answer of course is ....

Fannie Mae and Freddie Mac debt that would be worthless were it not for taxpayer bailouts.

Asset-backed commercial paper that has ceased to trade. 

Toggle bonds and other such nonsense where debt is paid back with more debt.

Loans to hedge funds for speculation in credit default swaps and commodities. 

Commercial real estate boondoggles including scores of condo towers now sitting empty.

A whole array of other silly loans that should never have been made.

Close analysis shows the "backed by assets" claim only holds true as long as asset prices are rising. When asset prices are falling as they are now, the true state of the non-existent backing is plain to see.

Credit extended via FRL is backed by nothing more than thin air and promises. Those promises are currently worth pennies on the dollar, and the entire global banking system is insolvent as a result.

2R. Some claim that fractional reserve lending cannot be fraud because it is legal. However, just because something is legal does not make it right. For example: Slavery was once legal. It certainly never was right. Government decree cannot make slavery right, but it can and did make it legal. By the same token, government decree alone cannot change the fact that fractional reserve lending is fraudulent. Proof of fraudulence will be offered in the rebuttal to point number 4.

3R. Some claim that FRL cannot be eliminated because that would require regulation and such regulation would in and of itself be against free market principles. The fact of the matter is that a free market would quickly shut down any bank lending out more money than it had in the vault. No one would possibly trust such a bank. It is only government decree (regulation) that allows banks to get away with such obvious fraud.

Furthermore, people are confused by what "libertarian" means. Libertarian does not mean anarchy. There are laws against murder, theft, fraud, and slavery that no libertarian I know would argue against.

Indeed, for any society to function, there must be certain laws (regulations) in place. Here are the basic tenants of valid laws.

Protection of property rights

Protection of civil rights

Freedom of religion

Equal protection under the law regardless of race, creed, color, sex, nationality, wealth, etc.

4R. Proponents of FRL claim no one is harmed by it. In practice, everyone is harmed by it. Here is how it starts. Those with first access to money accumulate assets and those with later access to money bid up those assets. Consider housing. GSE creation of credit out of thin air is a perfect example of what happens. By the time credit was available to those of lower economic status, the bubble was already formed and ripe for a collapse. Even the non-participants were harmed. How so? Via rising property taxes and rising prices of goods and services without the benefit of rising wages.

Ironically, even those with first access to money (the banks and wealthy) ultimately did not fare well because they were greedy. When the bubble popped (as all debt bubbles eventually do) the only winners were the few who made timely bets on the demise of the bubble.

FRL is the enabler for credit bubbles. Given enough time, credit bubbles are guaranteed to implode in deflationary fashion. History is replete with examples. The South Seas bubble, the John Law Mississippi bubble, and tulip mania are prime examples.

5R. People have no such right to agree to commit fraud. Here are more things people have no right to do: Shout fire in a movie theatre, conspire to steal someone's money, agree to start a toxic waste dump in a location where it would poison every water source in the neighborhood. There is an infinite number of things two people cannot agree to do. The right of people to do things ends when it affects the property rights of everyone else. And as noted in 4R, everyone is affected by fraudulent agreements that allow more credit to be extended than there is money in the bank.

Read the full article...

The evidence is mounting.  Thankfully, plenty of free market thinkers out there understand the ROOT CAUSE of our problems is not the whims of evil entrepreneurs, but the distortion of the market caused by government interference.  The center of that distortion is the Federal Reserve, practicing so-called "price stability" attempting to set interest rates (the price of money) by increasing or decreasing the money supply (almost always increasing - see the value of the dollar since 1913).  The ideal of price stability in money is about as silly as trying to maintain price stability in toasters.

David in Qatar

10 Comments – Post Your Own

#1) On May 07, 2009 at 5:47 AM, DaretothREdux (51.35) wrote:

The right of people to do things ends when it affects the property rights of everyone else.

Bingo. It's so simple yet beautiful.

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#2) On May 07, 2009 at 6:24 AM, whereaminow (< 20) wrote:

Allow me to point out that Mish does not understand the definition of anarchy.

Classical anarchy is the absence of coercion and force in private affairs.

Modern anarchists believe in the use of force and violence.  They are not anarchists. They are murderers.  The State has perverted the definition of anarchy just as it has the definition of liberalism, conservatism, inflation, and deflation.

Mish falls into their trap: agnosticism of meaning.

David in Qatar

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#3) On May 07, 2009 at 8:52 AM, devoish (65.70) wrote:

The answer to Mish's question is no. There never has been, nor will there ever be, what you imagine a "free market" to be. just like Socialism, Communism and Fascism, Libertarianism is best imagined in a vacuum.

Democracy acknowledges and has a means to correct the "greed" and "corruption" of men.

Clearly your marketing campaign is shifting in order to sell to the environmentalist.


The right of people to do things ends when it affects the property rights of everyone else.

"So beautiful, yet so simple"

Yes it is, unlike the real world. Here is a timeline of Bisphenol A's development, and use. the discovery of links to health problems and the battle between those who profit from it and those who don't.

Please discuss how eliminating "fractional reserve lending" is connected to this environmental issue and how "small" governments vs wealthy corporations can be strong enough to resist being corrupted by money paid from the corporations to the Government regulators. Please include where the money comes from for the Government regulator to perform its own testing in order to decide the truth between the two sides and what pecentage of GDP you think is needed for testing of this list of chemicals currently on the market.

I hope your plan does not depend on the altruism of men who believe they should endeavour to collect as many dollars as possible.


The USA has been devaluing its dollars since Woodrow Wilson. Countries all around the world have been selling us product since then, for dollars they know have been losing 4% (inflation)of their value annually, and have set and steadily raised their prices accordingly for this time decay.

Suddenly renegotiating and eliminating the time decay of those dollars would increase their value considerably. If, through no other reason than State action, those dollars are revalued, should the United States demand to be compensated for renegotiating the value of that time decay by demanding that all holders of dollars surrender 50% of their holdings?

Alternatively, would you prefer the United States to simply issue a second, gold backed currency to its citizens, and allow the Free Markets to determine the value of the time decay of the Treasury notes?

Or is it your feeling that the United States should simply give away the farm and allow United States debtholders such as Qatar to realise a windfall at the stroke of a pen?

Just wondering what the terms of this renegotiation are.


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#4) On May 07, 2009 at 11:05 AM, whereaminow (< 20) wrote:


You're really making this too easy for me.  This is a layup. The FDA has been in existence in some form since 1902!!!!!!  That's 106 years in which it is not done a thing to protect you from BPA.  The FDA has 255 offices, 13 laboratories, a $2.1 BILLION yearly budget, and yet it can't protect you from BPA.  Should oversight entities like the FDA exist?  Absolutely.  Consumers want them.  That is called demand.  Should the FDA have a legal monopoly on the control of food and drugs in America? Well, only if you want to waste $2.1B per year while leaving us unprotected to chemicals like BPA.

If you want to protect the consumer, give them what they want. Abolish the legal monopoly status of the BPA, allow consumers to choose products based on their complaince with market driven consumer protection agencies. (Audio File interview with Robert Murphy discussing this topic.)

As for the topic at hand, governments have been devaluing their currency since the beginning of governments.  For more on this read this free book (pdf) The Ethics of Money Production.

That includes the US government since its inception, which did it during times of war and during the introduction of the Continental dollar.

As for this fairy tale nonsense that socialism and free markets don't exist.  That's a ridiculous simplification.

There are 500,000,000 dead people who, if alive, would testify that Socialism is not a fairy tale.  It's real and it's deadly.

A free market, on the other hand, exists ANYWHERE people work together cooperatively without outside coercion.  The only thing separating most markets from freedom is government interference and legal tender money laws. 

So how does a country account for the time decay of dollars?  You've stumbled upon the Economic Calculation Problem of the Socialist Commonwealth. How does someone account for the time decay, when the level of devaluation is driven not by market forces, but by the whims of bureaucrats?  Looks to me like you have found the economic calculation problem inherent in government pricing.

You've taken your first step towards Austrian School Economics.  I hope you'll take the next step and read Mises' Economic Calculation Problem.

David in Qatar


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#5) On May 07, 2009 at 11:09 AM, whereaminow (< 20) wrote:

Abolish the legal monopoly status of the BPA

That should obviously read "FDA". My bad.

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#6) On May 07, 2009 at 11:41 AM, whereaminow (< 20) wrote:

When you start reading free market scholars, the first thing you are struck by is how accurately they can predict government responses and how well they understand the effects of government intervention in the market. 

For example, have a read of what Ludwig Von Mises said about a policy of purposeful inflation in 1926.  

From Socialism, An Economic and Sociological Analysis, p. 448-9

Inflation is the last word in destructionism. The Bolshevists, with their inimitable gift for rationalizing their resentments and interpreting defeats as victories, have represented their financial policy as an effort to abolish Capitalism by destroying the institution of money. But although inflation does indeed destroy Capitalism, it does not do away with private property. It effects great changes of fortune and income, it destroys the whole finely organized mechanism of production based on division of labour, it can cause a relapse into an economy without trade if the use of metal money or at least of barter trade is not maintained. But it cannot create anything, not even a socialist order of society.

By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses. This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.

But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners' fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.

The destructionist policy of interventionism and Socialism has plunged the world into great misery. Politicians are helpless in the face of the crisis they have conjured up. They cannot recommend any way out except more inflation or, as they call it now, reflation. Economic life is to be "cranked up again" by new bank credits (that is, by additional "circulation" credit) as the moderates demand, or by the issue of fresh government paper money, which is the more radical programme.

But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up.

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#7) On May 07, 2009 at 12:17 PM, devoish (65.70) wrote:

I was going to ignore the BPA/FDA thing because it was clearly just a boo-boo.

However the list of chemicals I linked to is regulated by the EPA which has been around since 1970 not the 1800's. The mandate to regulate chemicals did not come right away and many have been exempted at the insistence of the chemical industry and the lack of budget for the EPA. The list of chemicals and responsibilities on its watch has grown much faster that the EPA's budget due to the low tax siren song of the small government folks.

I began listening to your market driven consumer protection agencies link and it is embarrassing to believe that it would work in the real world. I will have to reply later though, as I am not sure how longh the audio is. 

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#8) On May 07, 2009 at 1:05 PM, whereaminow (< 20) wrote:

Yes, you're right, it's the EPA. I get the 1.8 million civil servants employed in America mixed up sometimes.

The EPA has only 38 years of existence, 17,000 employees, 10 regional offices, 27 laboratories, and a $7.1 BILLION budget!!!!!  (PDF of EPA's FY 2009 budget)

Clearly it's a problem of not enough tax money!

Same rules apply here as they do to the FDA.  Civil servants can't protect you from those evil Capitalists. If there is a demand for services like the EPA, then allow the market to compete for those services.  The EPA would be out of business in a year or two.

I guess all these agencies just suffer from a lack of tax dollars too:

List of Federal Agencies

Those damn small government advocates are really keeping us under wraps!

David in Qatar

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#9) On May 07, 2009 at 1:48 PM, nzsvz9 (< 20) wrote:


 As I read the article, I noticed a few items which I think are near-bulleyes:

"Equal protection under the law regardless of race, creed, color, sex, nationality, wealth, etc. " This should probably just have been stated as "Equal protection under the law." The modern liberal reading the original would pick apart the statement to imbue those "groups" with special rights as being called out specifically. You are either treated equal under the law as a human being, or you are not human -- like the 500 millions you mention in your replies. I would claim that these clarifications belong separate from the expression of the actual right.

"The right of people to do things ends when it affects the property rights of everyone else." is an overstatement which may better be written as "The right of people to do things ends when it affects the property rights of anyone else." It needs only be one person wronged for it to be wrong. Bulldozing one person's home for a road is just as wrong as bulldozing a hundred persons home for an army base or bulldozing a city for forced relocation ... as governments, local, state, and federal are wont to do. As well, if one person robs you it is as horrible a violation of your property rights as if the entire government does it. All victims or just one victim, it is still illegal. Theft is theft.

As for FRL: it is theft.

Also beautiful, also simple. Just like "we are all created equal".

Known by my spell checker as svnz9n (oops, nzsvz9)

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#10) On May 07, 2009 at 9:36 PM, devoish (65.70) wrote:

I have to admit I am sorry I am trying to take this free market theory seriously.

You have reimagined the reality that is the finance industry and declared that good.

I hope you are not misjudging that personal interest will prevent corruption as Alan greenspan did.

But you are.

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