Do we need one king to rule over us all?

In Business Week, Jeffrey Garten makes an incredibly weak case for a global central bank. Either Garten has spent far too much time watching Barefoot Contessa at his insular ivory tower in New Haven, or he’s been preparing for Ina’s meals with securities trader Irv Rosenfeld. Let’s breakdown Garten’s baseless opinion:

1. A global central bank is “a necessity in today’s complex, interconnected world economy.” If we have transacted trillions of dollars of economic activity across the globe for centuries, how could a global central bank (GCB) be a “necessity”? Garten says a GCB is a necessity because “each successive crisis [over the past 30 years], has been worse than the last.” First, the data set was cherry picked. When making the case for a global governing body, let’s look back further than when Madonna became a star.

If we merely look back to the inception of the US Federal Reserve, there was at least a couple events which trump Garten’s evidence: The Great Depression (1929) and The OPEC Oil Crisis (1973). In this context, one could reasonably argue that sovereign nations have evolved to prevent “crises” from evolving into devastation. For all the talk about The Great Depression 2, I don’t see any comparable unemployment rates or bread lines. Hell, Applebee’s is full on Friday nights.

2. “Private financial institutions compete too fiercely for markets and profits to regulate themselves.” As Alan Greenspan learned in a moment of bewildered revelation, Gartmen’s assertion has been absolutely proven correct during the recent financial crisis. However, appointing another elite oligarchy to control the levers of the global economy is hardly the best or only option. For example, if the US Federal Reserve has caused several bubbles and decreased the value of the US Dollar over 95% since inception (1913), please explain why we need an additional group of private interests making decisions for our citizenry? Clearly, we simply need competent regulators. We don’t need more incompetent regulators regulating already incompetent regulators.

3. “Governmental oversight remains national, while financial institutions are more globally intertwined.” Again, this is true. However, Garten starts his article by stating, “They [the G-20] can congratulate themselves for averting a 1930′s style meltdown.” If the current model of cooperating sovereignties prevented a genuine Great Depression, Garten begs the question why in the world we would need a GCB?? Garten continues, “But nothing the G-20 has done, or is likely to do, will prevent or substantially moderate the next global crisis.” Nothing? The most powerful 20 countries in the world can do “nothing” to prevent the next global crisis? Why? Are they incompetent? Can they not look at the basic causes of the previous crisis and recode our laws to prevent the damaging behavior?

We must first show we can figure out an effective set of rules in our national financial systems before we should claim a GCB can do better. Otherwise, we are saying poor oversight (e.g., no-doc loans, Mortgage Backed Securities with AAA-Ratings) and loose money under the Greenspan Fed led to the second worst financial crisis in 100 years, but we need a similar institution an additional level removed to now make decisions on behalf of the entire world economy. Or, it is like saying, “My business model is failing in the US, but let’s expand globally!” This logic does not pass the laugh test.

Speaking of logic, if we follow Garten’s support for US Treasury Secretary Tim Geithner’s logic “we need a common global solution to these markets, not separate regional solutions,” such logic would bring all human behavior under the jurisdiction of a world government (merely replace the term “these markets” with your subject of choice — e.g., crime, communication, etc.). Like local real estate markets, all regional economies produce and consume different goods/services and reflect different values. To assert we need a common global solution to local cultural and resource-driven transactions is to choose homogeneous authoritarianism over local democracy and culture.

Although the economy is global, it is comprised of individual nations or, as Thomas Jefferson called them, “factions.” According to our Founding Fathers, these competing factions are what prevent tyranny. Moreover, individual nations are comprised of individual citizens who produce and consume. Therefore, national governments have an incentive to work with other nations to create best practices and customs to increase trade, wealth, standards of living, and ultimately the politicians’ cake: taxes.

But Gartner says, “the reaction of governments working together, even in good faith, is too slow, diffuse, and compromised by national political pressures to result in anything but actions that are too little, too late.” First, national politics and cultures matter. Second, again Gartner uses another absolute statement to falsely assert that without a GCB all individual nations will always act too late. Too late for what? Perfection? Why can’t individual nations continue to diplomatically negotiate in their best interests and over time, through trial and error, work out best practices amidst a real-time global experiment? While lying on the soft spring grass in the Yale quad, Gartner must be dreaming he and a team of enlightened despots can govern over 6 billion people according to yet another model which is an imprecise derivative of reality.

4. A GCB would be better than the current system. Gartner says we need a GCB to “bring together the different regulatory approaches of the US, EU, and China.” If certain common sense rules create stable economies (e.g., capital requirements, limiting leverage, requiring proof of one’s ability to repay loans, etc.), regulators of all G-20 countries will adopt these rules. A GCB is not needed.

Gartner also says we need a GCB to monitor “any major financial institution whose failure could bring down the system” and “setting standards for debt-to-equity ratios for the biggest institutions.” If national central banks are supposed to do this at home, it logically follows that such a task is already assigned. The issue is whether the current central banks are doing their job. We can file grievances with Congress to fix this problem. A GCB would be redundant.

My Conclusion: For better or worse, the citizens of the world do not need a handful of unelected power brokering politicians wielding power over our sovereign nations. At least the US central bank is subject to Congressional oversight. Thus, we can demand our elected reps govern the Federal Reserve (e.g., The Federal Reserve Transparency Act, H.R. 1207). If every country in the world were subjects of a GCB, how much power will US citizens have when calling a local legislator? I’ll give you a hint: less power than a 100-year old man in a Red Light District without Viagra.

Instead of proposing silly theoretical jibber-jabber, let’s work on creating minimum capital reserve and leverage limitation requirements which will prevent crises. Let’s establish laws that people can borrow only what they can afford to pay back (with interest). Let’s legitimize these borrowers by requiring proof of income and expenses. Let’s create a Congressional Committee to scrutinize exotic and new financial products produced by financiers (to insure they are not complete legal scams). Let’s worry about whether our central bank has fulfilled its four government delegated duties (it has not — see “Has the Federal Reserve Failed?“) before we kiss the ring of Jeffrey Garten’s uberbank oligarchs …

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