An
article in the May issue of the Atlantic Magazine by Simon Johnson provides both a meticulous description of the public-private financial oligarchy that runs the United States and at the same time a completely wrong-headed analysis of what is wrong with the American economy and how to fix it. Johnson, former chief economist of the International Monetary Fund (IMF), views the United States through IMF lenses (the IMF Consensus) and unwittingly illustrates why the IMF brings economic misery and social upheaval wherever it sets foot around the world. The IMF treats a political-economy cancer (created by the very policy it advocates) with policy toxins, which far from arresting the cancer make it more virulent and fast metastasizing.
Johnson’s greatest contribution in writing this article is to demonstrate conclusively that the free market did not cause the economic and financial mess we are in. He lucidly describes how Wall Street and Washington form an axis of oligarchy—a form of fascism—that circumvents and distorts market forces to feather their own nests and enhance their own power at the expense of the American people. The problem with Johnson’s article, however, is that he misinterprets the oligarchy and its behavior as the cause of the problem when in fact the oligarchy and its harmful consequences are the effects of much more
profound problems plaguing American democracy and the economy. Ironically, the IMF Consensus rests on the very principles and institutions that produce the behavior Johnson decries. Johnson merely calls for a more faithful and stringent application of the very policies that caused the problems in the first place.
The essence of the IMF Consensus, and the cancer at the core of western economies today is fractional reserve banking that is able to issue new fiat money out of thin air constrained only by bureaucratic regulations, overseen by central banks that themselves issue new fiat money at will and are empowered by their governments to fine tune the economy through monetary policy manipulations, all “held together” by an international monetary system of floating fiat currencies that the IMF strives to manage. The IMF Consensus invariably produces a cycle of destruction by substituting a funny-money bureaucracy-based economy for a sound-money, market-based economy. The deception and confusion arises—making the private sector and free markets appear to be the source of the problem—because the oligarchy running the economy “outsources” much of the operational tasks to private entities, which operate in quasi-free markets. Thus, when things go wrong, it is the behavior of market actors that is mistakenly blamed for creating the problems when in fact that behavior is simply the consequence of the underlying bureaucratic incentives and constraints individuals confront when pursuing their own self-interests.
As always, political/bureaucratic intervention into economies creates problems that the same bureaucratic and political institutions are then called upon to fix, which in turn only creates more severe problems for the bureaucrats and politicians to grapple with. When analysts such as Johnson attempt to explain what is happening and how to fix it by taking into account only the visible consequences of private actors’ behavior, rather than understanding that behavior as the consequences of deeper political and bureaucratic forces powering the system, they invariably recommend increases in the power and reach of the very political-bureaucratic institutions that created the problems in the first place.
The IMF Consensus always prescribes the same twin toxins to fix the problems the IMF Consensus created in the first place: Devalue the currency and then impose austerity measures in the name of deficit and debt reduction, i.e., draconian spending reductions and tax increases, and give regulators more power to prevent the cycle from repeating itself. Hence, Johnson says:
“The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC 'intervention' is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector.”
Good advice as to dealing with the current banking crisis however there is one big caveat: Cleaning up the current bank mess without addressing the central, underlying problem only sets the stage for the next calamity. Johnson’s second IMF recommendation illustrates this fact:
“This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.”
The only problem is, the oligarchy cannot be broken without fixing the broken system that gives rise to it but that is not what Johnson has in mind. What he prescribes is breaking the current oligarchy and replacing it with a new oligarchy with a new super central bank—the Fed on steroids—at its heart. But the IMF has much more in mind than simply enhancing the power of the Fed. As the recent G-20 meetings revealed, the real agenda is to create an international central bank with a new global fiat currency to replace the fiat dollar as the world’s reserve currency. In other words, what is occurring is the metastasizing of the IMF into a world central bank, which would bring the US oligarchy to heel by making it subservient to a new international oligarchy with the IMF at its heart. Call it the New IMF Order.
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