Bankocracy: A Corrupt System that Rewards Stupidity

…we have today a system where leaders are not only not punished for their failures, but are actually rewarded…

By Marc Faber: For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. If they waged wars or had to defend their territories from invading hostile forces, they frequently lost their lives, territories, armies, power and crowns. I don’t deny that some leaders were irresponsible, but in general, they were fully aware that they were responsible for their acts and, therefore, they acted responsibly.
The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well:

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.”

When political leaders or economic policymakers are seen to fail, the worst that will happen to them is that they won’t be re-elected or reappointed. They then become a lobbyist or an adviser or consultant, and give speeches, earning in the process a high income on top of their pension.
Similarly, many corporate executives and fund managers who have no personal stake in the business that employs them will receive generous pensions even if they fail to do their job properly and are dismissed. (This doesn’t apply to hedge fund managers, most of whose wealth is invested in their funds.) In other words, probably for the first time in history, we have today a system where leaders are not only not punished for their failures, but are actually rewarded…
Recently, Warren Buffett said that the Fed was the world’s largest hedge fund. He is wrong. The world’s largest hedge funds are owned by people who are risk takers with their own money, since they are usually the largest investors in their funds. The academics at the Fed are playing with other people’s money.
However, if we consider that the Fed, led by its chairman, is the most powerful organization in the world — because by printing money, it can finance the government (fiscal deficits) and wars, manipulate the cost of money (interest rates), directly intervene in the economy by bailing out failing institutions (banks) or countries (Greece, etc.), intervene in the foreign exchange market and even influence elections — then the question arises whether it makes sense that so much power should be given to Fed members, who are “group thinking” academics and most of whom have never worked in the private sector. In my opinion, the enormous power of the “academic” Fed is a frightening thought. My friend Fred Sheehan recently quoted from Johann Peter Eckermann’s conversation with Goethe, Feb. 1, 1827. We talked about the professors who, after they had found a better theory, still ignored it. From Eckermann and Goethe:

“‘This is not to be wondered at,’ said Goethe; ‘such people continue in error because they are indebted to it for their existence. They would have to learn everything over again, and that would be very inconvenient.’
“‘But,’ said I, ‘how can their experiments prove the truth when the basis for their evaluation is false?’
“‘They do not prove the truth,’ said Goethe, ‘nor is such the intention; the only point with these professors is to prove their own opinion. On this account, they conceal all experiments that would reveal the truth and show their doctrine untenable. Then the scholars — what do they care for truth? They, like the rest, are perfectly satisfied if they can prate away empirically; that is the whole matter.’”

Fortunately, there is an institution that exercises control over the academics at the Fed; it is called the market economy. As I have just explained, the Fed is an immensely powerful organization, but over time, the market economy is a more powerful force that can outsmart the academics because it is adaptive and dynamic. Just consider the following. Since the implementation of QE1 at the end of 2008, money supply has exploded, but the “real” economy has hardly responded.
I know that the neo-Keynesians will argue that the Fed didn’t expand its asset purchases sufficiently. But then, as I’ve mentioned before, Mr. Bernanke opined at a press conference held on Sept. 13, 2012:

“We do think that these policies [QE3] can bring interest rates down — not just Treasury rates, but a whole range of rates, including mortgage rates and rates for corporate bonds and other types of important interest rates.”

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Art by WB7