The Creature from Jekyll Island: A Second Look at the Federal Reserve – G. Edward Griffin
Debt: The First 5,000 Years – David Graeber
Let’s have some fun and say some things that are likely to anger almost everyone, with the intent of illustrating an important investing lesson:
Ideology blinds investors.
When I was a boy, I read thousands (and I mean thousands) of comic books. Every super-villain, usually at the point of defeat, would breathlessly sneer at the superhero and say, “We’re not so different, you and I! We’re two sides of the same coin!”
I think the same is true of some folks who see themselves as pretty ideologically far apart—Tea Partiers and Occupiers. When it comes to some economic/financial issues, they’re close to each other in many ways. Impossible? Consider this statement, and tell me which side is most likely to say it:
“The US is over-indebted and out of control! Indeed, money itself has degenerated into perverse conduit for government’s use. Money today is a form of enslavement! Worse, the biggest banks have all colluded, along with the Federal Reserve, as a cartel to rule the US in a grand conspiracy! We should ditch fiat money, force fiscal restraint and start all over again to serve the people of this country!”
Spend a bit of time with either group, and amazingly, you likely hear something like all or part of that—very similar rhetoric. This, more or less, is the basic stance of both Occupy and the Tea Party. And such disposition is on stark display in the Tea Party’s foundational tome, The Creature from Jekyll Island, and Occupy’s missive, Debt: The First 5,000 Years.
Let’s be clear: This isn’t to say these two groups are the same. Far from it. But it should give pause to both sides (and anyone thinking about these issues) that a similar kind of hyperbole sometimes spouts from both sides.
Let’s start with Jekyll Island. This is the book Ron Paul never had time to write. Indeed, his name graces the back cover in praise of it. (See my review of Paul’s more pithy read, End the Fed, here.)
What Jekyll Island does best is explain the intertwined nature of government and banking, with the Fed at the epicenter. That government’s imposition on the otherwise market-based financial system creates moral hazard and encourages reckless lending taxpayers ultimately pay for via taxes or inflation (monetizing debt) are perfectly valid points of view—and ones MarketMinder has some sympathy for. Additionally, Jekyll Island explains how fractional banking works (often quite lucidly) to the layperson.
But beyond that, the book delves into breathless conspiracy theory. Jekyll Island posits today’s financial edifice—globally—is the result of a vast (and I mean almost limitless) conspiracy stemming from the socialist Fabian Society (identified most often with the likes of John Maynard Keynes) over 100 years ago. And this is, simply, a bridge too far.
Conspiracy theories can be reasonable for coups and maybe also the results of American Idol, but 100 year-plus, large-scale and global historical movements have larger forces at work. The biggest financial firms turn over every couple decades—some consume each other, some die spectacularly. New players emerge! It was the world, evolving toward ever more efficient mechanisms of allocating capital, that decided on fractional banking under a fiat regime—not a long-dead Keynes.
The far stronger long-term case is that financial innovations have unlocked more globalization and wealth for the whole world, notwithstanding the externalities and moral-hazard problems of fiat and fractional systems which, yes, aren’t perfect. I don’t think anyone disputes the mere existence of the Fed, and thus its sometimes preferential treatment of the big banks (i.e. its “primary dealers”), creates some question of cartel behavior and collusion. The more bailout insurance that is set up, effectively, the more incentive there is for a private bank to take on big risk and perpetuate the cycle of moral hazard (bailouts) and banking boom/busts.
VERY IMPORTANT: Whether you agree or not, it’s vital to realize these are not books about how equity markets behave. As the Fed and other central banks around the globe developed, and as all sorts of significant capital markets evolutions took place (and continue to), there have been big bull and bear markets. Simply, like or loath this book, it tells you nothing about where equity markets might head. Don’t let your ideology, whatever it may be, blind you to this investing reality.
In sum, there are better and more even-handed avenues to understand the Fed and its history. I’d recommend Alan Meltzer’s mammoth, two-volume study of the Federal Reserve.
Next week, in Part II of this review, we’ll tackle Debt: the First 5,000 Years.
Bonus Book Review! Taste What You’re Missing
And, if you’re looking for some non-investment related reading as Spring springs, try Barb Stuckey’s Taste What You’re Missing. By turns entertaining and informative, this is one of the best books around detailing the art and science of your palate. Everyone has to eat—you may as well know how to do it right.
A favorite part of the book is the “experiments” you can easily do from your own home to highlight and develop your sense of taste. If you’re as palate-blind as I, this book wasn’t just a great primer, it also saved me from sounding like a culinary dunce to my friends.