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How our banking system destroys the free market

The foundation of an economy is money. And if the creation, value and availability of that money are controlled by few elites instead of a free market then it doesn’t matter how complex and a giant system we build.

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It will be shocking to many Americans that our free market system is deeply and fundamentally flawed. Many people understand that we have crony capitalism that creates loopholes to benefit those at the top. The financial crisis of 2008 and the following bailouts also exposed the rotten financial system and the rigged Wall Street. But there’s something else that’s even more significant and innate in the corruption of our economy: the Federal Reserve Bank. This is an arcane issue that puts most people to sleep, so let’s make it easy and fun by story-telling. It’s about a small town called Murika.

Prosperous Murika

Once upon a time, there was a big town called Murika. It was a simple town based on simple principles of economics. Every able person contributed to Murika through their labor, whether it was at home, farm, industry or the office. Murika used a simple philosophy: money was created only through labor or natural resources. If you worked on a farm and harvested 100 apples, you got some money. If you harvested 200 apples, you got twice the money. Gold and silver also acted as currencies.

Murika had a bank where people deposited their money. The bank gave them a nice return on those deposits, and it was able to do it because it also loaned the same money to other people at a slightly higher interest rate. The bank could not create any money, it simply managed Murika’s money. It was not easy to get a loan, but this also ensured that most Murikans lived debt-free. The government was also debt-free and always balanced its budget. Murika was prosperous and growing, but the growth was slow and steady.

Janet the Fairy Godmother

And then one fateful day, Murika changed forever! That’s when a woman named Janet came to Murika and told the people she had an amazing solution to bring unimaginable prosperity. She talked in really complex jargons that nobody understood, which only convinced them that she was really smart. They agreed to turn over their banks and money to Janet.

Janet’s miracle was a money-printing machine! She told Murikans that nobody will stop them from their dreams. You want to buy a house or a car? Janet will give you the money you want! Want to start a restaurant or even a factory? Come to Janet. Forget the old, cranky bankers. This is the new and improved Murika!

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People were simply ecstatic! Well, of course, every dollar she printed was a debt and Murikans had to pay it back, but this is what a free enterprise was all about. For a while, everything was great. Business and the economy were booming, and people couldn’t believe anything could go wrong.

Then, some of the newspapers started noticing that Janet’s families and friends seemed to have more access to money than others. For example, Janet’s cousin had just opened up a newspaper – Murika Times – in a flashy, new building and was paying journalists way more than the fair rate; Janet’s golf buddy simply bought two of the most successful restaurants for an undisclosed sum (rumors were that it was an offer that nobody could refuse).

Soon, Murika Times (MT) became the #1 newspaper. All the big factories were spending their advertisement money on MT because, let’s face it, they didn’t want to offend Janet. Also, MT would write really nice, fluff pieces on all the advertisers. It was a win-win deal. Independent media was slowly dying in Murika and they kept trying to warn Murikans, but to no avail.

One of the unintended consequences of Janet’s miracle was that prices of things kept going up, as more and more money flooded the town. Back in the old days, this never happened – prices used to be very stable, even for decades. But people were assured that their wealth was growing faster than the rise in cost of living.

From a Fairy to a Witch

Then one day, Janet had a very bad news for Murika. She said that a lot of Murikans were falling behind in their debt payments and she has stopped the printing machine for a few months. Of course, this meant that many businesses were in trouble as new projects depended on monthly debt to continue. Janet also raised the interest rate on many of the old loans. Soon there was a tragic recession in Murika. Factories, shops and restaurants were shut down and homes were mired in foreclosures. Unemployment and poverty soared to levels that Murikans had never seen before.

That’s when Janet announced that she had assembled a team of patriots aptly named “Save Murika.” These patriots were willing to risk their money to rebuild Murika. People were so desperate that they accepted this deal. Soon, Save Murika bought all the foreclosed homes and the shuttered factories. To face the tough economic challenges, all the workers accepted cuts in salaries and wages. People were allowed to go back to their homes, but as renters.

Some Murikans wondered aloud where Save Murika had gotten its money from. The source was none other than Janet’s printing machine, but Janet refused to get audited.  

After Save Murika had completed their acquisition spree, Janet started printing money for the regular folks, but the interest rates were much higher. She said that she had to do it in order to avoid the past mistakes.

Murika after the recession was like a ghost town – people were working harder and longer for less pay, homeowners had become renters, most Murikans were stuck with high-interest loans, and Save Murika owned most of the profitable factories and businesses.

Murika now felt like a land of serfdom.

Murika to America

Although a simple story, it has all the truth we need to understand what exactly happened in America over the last 100 years since the Federal Reserve Bank was founded. It’s a private organization, in spite of its name. It has shareholders and, as Alan Greenspan admitted, no other agency of the government can overrule the Fed! From the Great Depression to Dot Com bubble to real estate bubble to stock market bubble, it’s the same, elementary principle at work – easy money and low-interest rates. The bursting of all these bubbles is also child’s play. Just like Murika, every business sector in America is now dominated by mega-corporations and oligopoly. This is why the top 0.1% of America now has almost as much wealth as the “bottom” 90%.

In addition to the Fed, there are numerous ways in which Wall Street manipulates the prices of everything from oil to coffee to interest rates by using the opaque financial tool called Derivatives. That topic deserves a separate article.

The concept of “money as debt” also creates an inherently unstable Ponzi system. To pay off $100 of debt, you need $105. But where is that extra $5 going to come from? More debt!

The foundation of an economy is money. And if the creation, value and availability of that money are controlled by few elites instead of a free market (that is based on supply, demand and honesty), then it doesn’t matter how complex and a giant system we build. The entire system will remain fake, unfair and unstable.

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