Washington and Wall Street—the Twin Towers of Deception
By the start of the new currency war in 2010, central banking was based not on principles of sound money but on the ability of central bankers to use communication to mislead citizens about their true intentions. Monetarism was based on unstable relationships between velocity and money that made it ineffective as a policy tool. Keynesianism was applied recklessly based on a mythical multiplier that was presumed to create income but actually destroyed it. Financial economics was a skyscraper erected on the quicksand of efficient markets and normal risk distributions that bore no relation to real behavior in capital markets. The entire system of fiscal policy, monetary policy, banking and risk management was intellectually corrupt and dishonest, and the flaws persist to this day.
Recently new and better economic paradigms have emerged. However, Washington and Wall Street both have a vested interest in the flawed models from the past. For Washington, Keynesianism is an excuse to expand spending and monetarism is an excuse to concentrate power at the Fed. For Wall Street, the theories of financial economics provide cover for high leverage and deceptive sales practices for off–balance sheet derivatives. On Wall Street, profits come first and good science second. If some theory, however flawed or out of date, can be trotted out with the right academic pedigree to provide a rationale for risk taking, then that is fine. If politicians and regulators are even further behind the learning curve than Wall Street, then that is fine too. As long as the profits continue on Wall Street, the hard questions will not be asked, let alone answered.
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