Alan Greenspan, 1926-2026: 'The Undertaker' passes away

Alan Greenspan, dubbed by Ayn Rand as "The Undertaker."  
Ultimately, he took the job that John Galt refused: economic dictator

"Alan Greenspan died [earlier this week], and the man who spent two decades inflating bubbles will be eulogised as a maestro. Fitting, because he understood exactly what he was doing. 

"In 1966 a younger Greenspan wrote an essay called 'Gold and Economic Freedom.' [In it, he states that the gold standard is essential for economic freedom.] He laid out the case with precision. The gold standard protected savers from confiscation by inflation. Welfare statists hated gold because it stood in the way of their deficits. He wrote that the abandonment of gold made deficit spending a "scheme for the hidden confiscation of wealth." He was right. He knew it. Then he took the job running the printing press.

"From August 1987 to January 2006 Greenspan sat atop the Federal Reserve and did the opposite of everything that essay defended. After the 1987 crash he flooded the banks with liquidity and taught a generation of traders that the central bank would catch them every time they fell. They named the reflex after him: the 'Greenspan put.' He cut the federal funds rate to 1 percent by June 2003 and held it there, and you watched housing prices detach from any sane relationship to income. Mortgage credit gushed. He went on television in February 2004 and suggested Americans consider adjustable-rate mortgages, roughly eighteen months before he started hiking rates into those very borrowers. The man who warned in 1966 about the hidden confiscation of wealth engineered the largest credit distortion in postwar history. 

"Then came the apology that wasn't one. In October 2008, sitting before Congress as the wreckage smoked, Greenspan confessed he had found 'a flaw' in his model of how the world worked. He was 'shocked' that lenders [licensed to print money] had not policed themselves. You don't get to spend twenty years pricing risk at zero and then act surprised when men respond to the incentives you built. Any committee of economists cannot set the price of money better than a market can. 

"Greenspan knew the answer at 40 and spent the next half century pretending he'd forgotten it. The savers he warned about in 1966 paid for that performance. ..."

"Every Fed chair since Greenspan has discovered this truth the hard way. Bernanke cranked rates to zero after 2008, then Yellen kept them pinned there, then Powell printed $4 trillion more during COVID. Each crisis demanded bigger interventions than the last."

~ Handre

 

"Greenspan was the Dr. Robert Stadler of our age: the brilliant man who knew the right principles and betrayed them, certain his own genius could control the evil he agreed to serve. 

"He was a member of Rand's inner circle. His essay "Gold and Economic Freedom" appeared in Capitalism: The Unknown Ideal. He argued, correctly, that the gold standard protected savers from confiscation, that statists hated gold because it blocked their deficits, and that abandoning it turned deficit spending into a scheme for the hidden confiscation of wealth. 

"He even understood that Social Security was a Ponzi fraud that would help bankrupt the nation. He knew all of it. Then he took command of the Federal Reserve and did the opposite of everything he had written. 

"The 'Greenspan put,' rates held at one percent, the housing bubble, the very confiscation he had warned of, engineered by his own hand. 

"Here is the irony. Greenspan knew 'Atlas Shrugged' intimately. He watched Rand create Stadler, the genius who lent his mind to the looters' Institute believing he could outwit them, and who lived to see his knowledge weaponised as Project X. Greenspan studied that warning at the source, from the author herself. He understood the character completely. Then he walked the identical road and became the man the novel was written to expose. 

"When the wreckage came in 2008, he told Congress he had found 'a flaw' in his model. There was no flaw in the model. The flaw was in the choice to abandon what he knew. Some men meet the virus and are consumed by it. Greenspan had the answer at forty and spent the next fifty years pretending he had forgotten."

~ The Rational Animal

"Q: Alan Greenspan passed away [this week]. Alan Greenspan was a close associate of Ayn Rand for a while, and the Chairman of the Federal Reserve … these things did not overlap, as people familiar with Ayn Rand’s ideas wouldn’t be surprised to hear. So, Keith, I’m sure you’ve read [Greenspan’s essay] ‘Gold & Economic Freedom’ many times; so let’s get your thoughts on Greenspan’s passing…

"A: For anyone who’s read that essay, which was published in 1966 as part of [Ayn Rand’s] book 'Capitalism: The Unknown Ideal,' and therefore endorsed by Ayn Rand, he had to evade everything he knew in 1966 in order to take the job at the Fed. And ultimately, he took the job that John Galt refused, which was economic dictator.

"Now … everybody is confused about capitalism … but … there is no greater area of confusion than the concepts around money. Both the critics of capitalism and of gold, and the FANS of capitalism and gold will tell you that he was 'a Maestro' — and if you ask “a master of what?’ you’ll be told he was a master of central planning of our economy, and of managing our little lives for us. …

"They’ll say ... ‘he managed a sound money regime’— and the problem with the concept of sound money they use is an anti-concept, that is, [it’s a notion] that destroys and obliterates a legitimate concept in order to smuggle something else in. And what they mean by ’sound money’ is an irredeemable fiat currency jammed down our throats by the government forcing us to use it as if it WERE money, but ‘sound’ because it’s somehow managed to avoid consumer prices going up [by no too much].

"So I’d like people to think about a simple fact, that in every industry seeking greater efficiency, that is, they want to produce more with less — with less cost, with fewer inputs, with less labour, land, physical commodities etc. — and of course that’s happening relentlessly across the entire economy in every sector (unless regulation prevents it…).

"So suppose the average across the entire [economy] is a 2 percent gain in efficiency every year, all else being equal, you’d expect consumer prices therefore to be falling comparatively across industries, as costs are falling. SO your expect consumer prices tl be falling roughly 2 percent per year.

"So imagine it it were possible as the manager of the currency to debase the currency at a matching rate. Now, this is pure fantasy [hoho!]; this is only interesting as a thought experiment … but suppose it were possible to debase the currency at a matching rate so that every company from Intel to US Steel to Rolls Royce making aircraft engines is cutting costs at 2 percent, [while] you are debasing the currency at a matching 2 percent, and the nett result is CPI = zero. Would anybody call that SOUND?

"I wrote an article called ‘Sound Money is Not What You Think It Is,’ and I had a picture that I took from Norman Rockwell [above, with customer and butcher both cheating] … and I asked if that would be considered a sound measurement of the weight of the chicken, and therefore a sound price to pay … And at best, that’s what Greenspan did."

~ Keith Weiner from Monetary Metals, interviewed on the 'Daily Objective'

"Of course you can 'speak ill of the dead' ...  After all, wrote Shakespeare, 'The evil that men do lives after them; / The good is oft interred with their bones.'

"Alan Greenspan, former chairman of the Federal Reserve System, just died at age 100. The general public wants to blame the United States president for the health of the U.S. economy, but the Fed chairman has much more influence over economic conditions. 

"Greenspan spent some time early in his career as an Ayn Rand acolyte, and in fact three chapters of Rand's book Capitalism: The Unknown Ideal, were written by the future Fed chairman.... Greenspan's opponents on the left therefore interpreted his whole career through a Randian lens, which serves to remind us how stubbornly they refuse to understand the world. 

"Had Greenspan wanted to run the Federal Reserve in such a way as to approximate a gold standard as much as possible, he could certainly have done so. Instead, he used it as an instrument for central planning, with disastrous results.

"Initially, Greenspan could do no wrong. He became known as 'The Maestro' ....  Meanwhile, Greenspan's contempt for the public was legendary: he confessed to Lesley Stahl of CBS that before congressional committees he would speak gibberish -- a tactic he called 'syntax destruction.' The next day the headlines would report two different things about what he had said, and for Greenspan that meant he had succeeded. Greenspan's policy moves (like arranging for a bailout of Long Term Capital Management in 1998) gave rise to the belief in a 'Greenspan put,' according to which investors could be assured that the Fed chairman was prepared to use the tools at his disposal to backstop the market if it should ever fall below a certain level. 

"And of course his monetary stimulus after the dot-com bust in 2000-2001, which looked to some observers at the time as a brilliant move, only delayed the reckoning, and transformed that bust into a real estate bubble (and eventual bust). When the lights of the economy should have turned red, Greenspan made them all green. That was the only recession on record in which housing starts rose rather than fell. 

"The Federal Reserve, like the government itself, has no real goods at its disposal, so while its various tricks can redistribute resources and simulate prosperity, it cannot generate real wealth. It simply arranges the economy into an unsustainable configuration that has to come apart. 

"Because of Greenspan's earlier association with Ayn Rand, and because the general public knows so little about the Fed, when the 2008 crash occurred, people generally went along with blaming 'capitalism' -- even though the Federal Reserve is a non-market institution created by act of Congress and enjoying a government-granted monopoly, and even though Greenspan's manipulations overrode what the market was trying to say. 

"Greenspan's legacy is 2008, and the undeserved reputational damage that the market economy suffered as a result."

~ Tom Woods

The central bankers on the Nobel Prize committee gave their award this year to the central bankers who, as Mark Thornton outlines in this guest post, "rescued" the world from a disaster of their own making.

Ben Bernanke's Nobel Prize: The Committee Rewards an Arsonist for Claiming to Fight the Fire He Started

Guest post by Mark Thornton

Former Federal Reserve Chairman and 'saviour of the world' Ben Bernanke was awarded the Nobel Prize in Economics this week, along with Douglas Diamond and Philip Dybvig. The three have written extensively on the need to bail out banks in times when the economy is in corrective mode, generally after a long period of monetary injections. Bernanke was Chairman of the Federal Reserve when he pushed for the latest round of bank bailouts in 2007-2009.

Bernanke’s research concentrated on the Great Depression, and argued that the banks needed to be bailed out in the 1930s in response to the collapse of the stock market and the severe correction in the US economy. Diamond and Dybvig have also written on the implications of bank failures on the US economy. All three have latched onto the idea that banks take in deposits which are redeemable short term, but they make loans that are longer term and are thus susceptible to bank runs.

Their work is highly suspect from the view of economic theory and is derived from the point of view of history and the social sciences. They neglect the overall situation they are trying to explain, the role of institutions, and the basics of government intervention. For example, Bernanke’s work does not explain why the “situation” occurred in the first place, what the government did from the outset, or how it could be prevented in the future, except for ever-increasing government and Fed intervention.

Their research amounts to little more than an excuse to bail out the banks. Therefore, if you are a member of the privileged financial elites, the Housing Bubble and the ensuing Financial Crisis was an unmixed blessing. You made big money all throughout the housing and stock market bubbles and then your banks received several bailouts and special privileges during the bust, including borrowing at zero interest rates on loans, capital infusions, Quantitative Easing 1 & 2, and interest payments on “excess reserves.”

Of course, most importantly, you had your man in charge of the Federal Reserve, the man who literally “wrote the book” and dissertation on how the Fed must bailout the banks in times of economic trouble. No matter how badly everyone else fared, you could depend on Bernanke to bailout the banks, whatever the costs to others.

The Great Depression is a pivotal event in American history, and it is also crucial in terms of economic theory and policy. Bernanke’s writings are pivotal in terms of redirecting government bailout policy from monetary policy to bank bailouts.

Milton Friedman’s monumental work (on which Bernanke's bailouts were based) argued that the depression became "great" because the Fed allowed the money supply to collapse in the early 1930s. Instead, Joseph Salerno has /shown/ that the Fed was aggressive in trying to keep the money supply growing, but they failed. Bernanke’s own work shows that banks failed in large numbers in the early 1930s -- due to the negative expectations of banks (and the demise of many of them) they were simply not an effective conduit of the Fed’s desire to pump up the money supply. Banks thereby became “systemically important.”

Each major school of economic thought has its own story of the Great Depression, with Friedman and Bernanke representing the Monetarists, and Bernanke providing the “shock” that provided the “pluck” to Friedman’s Fed-piloted model, as explained by Professor Garrison.

The Keynesians of course have Keynes’s (1936) General Theory. He felt that the depression was caused by a failure of aggregate demand: people were unwilling to spend and invest causing the economy to contract via a psychological pathway, without any fundamental cause, thus necessitating government intervention to prop up the economy. This is the same naive “explanation” you would hear from your grocer, barber, or gas station clerk. Peter Temin filled out this historical narrative in his 1976 book Did Monetary Forces Cause the Great Depression? where he suggests that the cause was a decrease in the demand for money.

The debate between Monetarists and Keynesians devolved into bickering over aggregate supply and demand, model specifications, empirical results, and, at base, cause and effect.

The Austrian school has its own macroeconomic approach, and this can be seen vividly in the case of Great Depression. Ludwig von Mises wrote about the coming of the depression before it happened, and he pointed out what was causing it. In his day, Irving Fisher was the leading economist in the US; Mises showed that it was Fisher’s notion of a stable dollar, managed by the Fed, that was the cause of the coming depression. I explain this episode as evidence of the superiority of the Austrian Business Cycle Theory. Lionel Robbins wrote a contemporaneous account of the Great Depression based on the Austrian Business Cycle Theory.

Murray Rothbard’s America’s Great Depression provides a comprehensive view of the economics, politics, and policy implications of the event from the Austrian view. 

First, Rothbard shows that the Fed’s policies in the 1920s, based on Fisher’s views, were the fundamental economic cause of the crash. It was the Fed that was inflating the money supply during the 1920s, and it was the Fed that had recently taken on the newly created function of "lender of last resort" -- thereby encouraging bankers to take on more risk, and making our fractional reserve banking system more unstable in the first place.

Second, it was the political action by Hoover, Roosevelt and others -- regulations; tariffs; attempting to keep prices and wages high; propping up malinvested resources through the Reconstruction Finance Corporation; moral suasion to raise prices -- that caused the resulting depression to be "great." 

Third, the policy action in the 1930s to keep spending high and to restructure the American economy with New Deal policies lengthened the time of recovery, largely due to the regime uncertainty created by all the political activism. (And just by the way: Robert Higgs demonstrated conclusively that WWII did not get us out of the Great Depression.)

While Bernanke et al are dependable in terms of recommending and endorsing bailout policies and promoting the activities of the central bank -- the Nobel Prize being awarded by and for central bankers -- were happy to  the Austrian school seeks a better, fuller understanding and questions the fundamental effectiveness of such bailouts. The cause of the Great Depression was the Federal Reserve Banks’s inflationary monetary policy of the 1920s. Rather than preventing or even reducing the impact of the depression, it was the New Deal policies of Hoover and Roosevelt expanding the role of government in the 1930s that made it great!

To address the fundamental problem that Bernanke, Diamond and Dybvig have fixated on, and which any non-central banker can explain, requires not an extensive quilt of government regulation, controls, and bailouts, but merely a sound-money regime of money, and banking without a central bank.

AUTHOR

Mark Thornton is the Peterson-Luddy Chair in Austrian Economics and a Senior Fellow at the Mises Institute. He is the book review editor of the Quarterly Journal of Austrian Economics, and has authored seven books and is a frequent guest on national radio shows.

His post first appeared at the Mises Wire.

An Economics Nobel for and by Central Bankers

"The committee that awards the Nobel Prize in economics announced Monday it has chosen three U.S. economists for the 2022 prize [including] former Federal Reserve Chairman Ben S. Bernanke, ...The award is for 'research on banks and financial crises.'... 

    "The Nobel Prize in economics is funded not by the Nobel Foundation but by Sweden’s central bank. I don’t usually think that matters, but in this case I wonder if it does. The 2022 award seems to be an affirmation by central bankers of the value of central banking."

~ David R. Henderson, from his op-ed [paywalled] 'An Economics Nobel for and by Central Bankers'

 MISHTALK:

QotD: The gold standard v the PhD standard

"Under the classical gold standard, prices and wages were expected to adjust to economic disequilibria. Under the PhD standard, it’s interest rates and exchange rates and asset prices that are expected to do the adjusting......."Well, if Eisenhower-era America scratched its head over the classical gold standard, what will futurity make of the PhD standard [that now runs the monetary world]? Likely, it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence—after the crash ... that wiped out the youngster’s inheritance and provoked a central bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal Reserve’s methods....."I expect you’ll wind up saying something like this: 'My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates. We put the cart of asset prices before the horse of enterprise. We entertained the fantasy that high asset prices made for prosperity, rather than the other way around. We actually worked to foster inflation, which we called ‘price stability’ ... We seem to have miscalculated.”~ Jim Grant, the world's most famous interest rate observer, speaking in Nov. 2014 on 'An Agenda for Monetary Action'

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Four Reasons the Bernanke-Yellen Asset-Price Inflation May Be Nearing Its End

The American central bank – the Fed – has exported asset-price inflation to the world. But in  recent times there are signs this asset bubble is beginning to burst. In this guest post, Joseph Salerno offers four reasons the Federal Reserve’s asset-price inflation may be nearing its end.

There are strong indications that the remarkable run up of asset prices in the last few years is beginning to run out of steam and may be on the verge of collapse. (We will leave aside the question of whether the asset inflation is symptomatic of a garden-variety inflationary boom or is a more virulent bubble phenomenon in which prices are rising today simply because buyers anticipate that they will rise tomorrow.)

The Evidence

1. The dizzying climb of London real estate prices since the financial crisis, noted in a recent post by Dave Howden, may be fizzling out. Survey data from real-estate agents indicate London housing prices in September fell 0.1 percent from August, their first decline since November 2012. Meanwhile, an index of U.K. housing prices declined for the first time in 17 months. In explaining the "pronounced slowdown" in the London real estate market, the research director of Hometrack Ltd. commented, “Buyer uncertainty is growing in the face of a possible interest-rate rise, a general election on the horizon and recent warnings of a house-price bubble,” which is playing out "against a backdrop of tougher mortgage affordability checks and limits on high loan-to-income lending."

2. Just released data from the Dow Jones S&P/Case Schiller Composite Home Price Indices through July 2014 shows a marked deceleration of U.S. housing prices. 17 of the 20 cities included in the 20-City Composite Index experienced lower price increases in July than in the previous month. Both the 10- and 20-City Index recorded a 6.7 percent year-over-year rate of increase, down sharply from the post-crisis peak of almost 14 percent less than a year ago.

3. More ominously…

Living in a Chinese bubble

No, you can’t see bubbles when you’re in them, said Bubble Master Alan Greenspan.

No, there’s no way to tell if you’re a in bubble, said his apprentice Ben Bernanke.

No, no one can see a bubble at the time, says Ben’s successor Janet Yellen, echoed by every central banker in the world busy inflating their bubbles.

Which means there’s nothing at all to see in China.

[Hat tip Hugh Pavletich]

It’s Janet

So, as expected, Obama has finally formally appointed Janet Yellen to chair of the US Federal Reserve, taking over from PrintMaster-in-Chief  Bernanke, who took over from BubbleMaker-in-Chief Greenspan.

That’s Janet Yellen, the woman who sincerely believes that Japan’s biggest problem was they didn’t print enough money. Of whom, when she was appointed as Vice PrintMaster, Gerard Jackson observed,

Janet Yellen is an inflationist first and foremost. She has made it abundantly clear that all of her policy suggestions will be geared to promoting an inflationary policy. Like all Keynesians she seems congenitally incapable of grasping the dangerous microeconomic consequences of inflation for investment, jobs and the standard of living. She is in fact a very dangerous woman.

Do you think this will end well?

End of QE? I Don’t Buy It

Guest post by Detlev Schlicter

A new meme is spreading in financial markets: The U.S. Federal Reserve is about to turn off the monetary spigot. American Printmaster General Ben Bernanke announced that he might start reducing the monthly debt monetisation program called “quantitative easing” (QE) as early as autumn 2013, and maybe stop it entirely by the middle of next year.

He reassured markets that “The Fed” will keep the key policy rate (the Fed funds rate) at near zero all the way into 2015. Still, the end of QE is seen as the beginning of the end of super-easy policy and potentially the first step toward normalisation—as if anybody still has any idea of what “normal” was.

Fearing that the flow of nourishing mother’s milk from The Fed could dry up, a resolutely un-weaned Wall Street threw a hissy fit.

So far, so good. There is only one problem: It won’t happen.

Now, I am the first to declare that the Fed SHOULD abolish QE. Not in autumn of this year or summer of next, but right now. Pronto. Why? Because a policy of QE and zero interest rates is complete madness. It distorts markets, sabotages the liquidation of imbalances, prohibits the correct pricing of risk, and encourages renewed debt accumulation. It numbs the market’s healing powers by enabling more “pretend and extend” in the financial industry. And it adds new imbalances to the old ones that it also helps to maintain.

This policy may have prevented, for now, debt deflation. But maybe debt deflation is what’s needed.

[Ed. note: Debt deflation is the idea that the market contracts and corrects itself as the overall level of debt decreases.]

QE on the other hand is nothing but heavy-handed market intervention. It is destructive. It doesn’t solve the underlying problems. It creates new ones.

Larry Summers’ Getaway Car

However, none of these objections even registers at The Fed. The Fed has a completely different perspective: This policy was a roaring success, and as it has worked so well, it can now be faded out. Soon there will be no need for it.

Larry Summers’ dreadful phrase captures that thinking probably best: The economy will soon achieve “escape velocity.”

Most analogies are somewhat poor, but this one is particularly inept. Ironically, though, the reference to mechanics captures beautifully the logic of Keynesians and other interventionists: The economy to them is like a physical object moving through space and is occasionally in need of a little push to get moving again at an appropriate speed. Policy provides the push.

Bernanke doesn’t use these terms, but his thinking is similar. He explained QE to the American public in 2010 by announcing that his job was to to encourage lending, borrowing, spending, shopping, and other healthy economic activities by occasionally manipulating interest rates and asset prices. Once his machinations had stimulated enough of those activities, the economy would again enter a virtuous cycle (his words) of self-sustained growth. Escape velocity restored.

However appealing it may sound to many laypersons, I think this is nonsense. The economy is not an object that needs a push, a machine that needs to be jump-started, nor a lazy mule that needs a gentle slap on its behind to get going again. An economy is a complex process of coordination. An elaborate tool that allows an extensive and diverse group of actors with different and frequently conflicting goals and interests to cooperate with one another peacefully toward the best possible realisation of their own material aims.

A crisis is a failure of that coordination process. It is a cluster of errors. The only explanation for the occurrence of such a cluster of errors is a systematic distortion of the market’s coordinating properties. This occurs when monetary expansion distorts interest rates and other relative prices and leads to imbalances that unhinge the economy.

The economy went into recession because of massive financial deformations. Easy money led to excessive indebtedness, a housing bubble, and dangerous levels of leverage. The problems were these distortions, not the lack of “momentum.”  S0 the real question now isn’t whether the GDP statistics exhibit the right “velocity.” Rather it’s whether the underlying dislocations, which cannot be easily ascertained from the macro data, have now dissolved.

No Escape

The Fed believes it’s healed an economy that was sick from easy money by prescribing and delivering even more easy money. They believe the patient is feeling better and can soon be released from intensive care.

In my view, the patient is still sick and now suffers from a dangerous addiction to boot. The “feeling better” is just a lingering drug high from Dr. Bernanke’s generous medication. Withdrawal symptoms may surface soon. And when they do, Dr. Bernanke will simply open the medicine cupboard again. Don’t forget only a few weeks ago, the man appeared on TV and tried to talk up the Russell 3000 stock index.

I do not doubt that, if measured by overall GDP, the U.S. economy is presently doing better. I would be foolish to take on the Fed regarding this point. The Fed has a staff of 200-plus economists, most of them, I assume, from America’s finest universities. This doesn’t mean they are good economists, but they are, at any rate, probably good statisticians. If they say there are signs of life in the economy [as measured by the GDP], that’s good enough for me.

Where I disagree is on the narrative. The dislocations and deformations are largely still there. How can they not be, given the enormous policy effort to suppress the very market forces that would have exposed and liquidated these deformations in a free market?

The dislocations are still visible, among other indicators, in high degrees of indebtedness. And they matter. That is why I am distrustful of the Fed’s projections.

Their theories compel them to believe in virtuous cycles and “escape velocity,” and to disregard imbalances and distortions. Any sustained removal of super-easy money will allow these deformations to resurface and immediately cloud the short-term cyclical outlook.

According to my worldview, this should be allowed to happen because it is part of the essential healing process. But it runs counter to The Fed’s worldview and The Fed’s view of its mission.

The one institution that lacks “escape velocity” is the U.S. Federal Reserve. It will remain hostage to the financial monsters it created and the dangerous misconception of its own grandeur.

Sincerely,
Detlev Schlichter

Detlev Schlichter is the author of Paper Money Collapse—an Austrian School economist who has spent nearly twenty years working in international finance, including for Merrill Lynch, J.P. Morgan, and Wester Asset Management. Article originally posted here at his website, and reposted at Laissez Faire Books.

Bubble Trouble: Is There an End to Endless Quantitative Easing?

Guest post by Detlev Schlicter

The publication earlier this week of the Federal Reserve’s Federal Open Market Committee minutes of Jan. 29-30 seemed to have a similar effect on equity markets as a call from room service to a Las Vegas hotel suite, informing the partying high rollers that the hotel might be running out of Cristal Champagne. Around the world, stocks sold off, and so did gold.

Here are two sentences that caused such consternation:

However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases [the Fed's open-ended, $85 billion-a-month debt monetization program called 'quantitative easing']. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability.

Loosely translated:

Guys, let’s face it: All this money printing is not without costs and risks. Three problems present themselves:

1) The bigger our balance sheet gets (currently $3 trillion and counting), the more difficult it will be to ever load off some of these assets in the future. When we start liquidating, markets will panic. We might end up having absolutely no manoeuvring space whatsoever.

2) All this money printing will one day feed into higher headline inflation that no statistical gimmickry will manage to hide. Then some folks may expect us to tighten policy, which we won’t be able to do because of 1.

3) We are persistently manipulating quite a few major asset markets here. Against this backdrop, market participants are not able to price risk properly. We are encouraging financial risk-taking and the type of behaviour that has led to the financial crisis in the first place.

All these points are, of course, valid and excellent reasons for stopping “quantitative easing” right away. You may not be surprised that I would advocate the immediate end to “quantitative easing” and any other central bank measures to artificially “stimulate” the economy.

In fact, the whole idea must appear entirely preposterous to any student of capitalism. First, a bunch of bureaucrats in Washington scan an incredible amount of data, plus some anecdotal “evidence,” every month (with the help of 200 or so economists) and then they “set” interest rates. Next, they astutely manipulate bank refunding rates and cleverly guide various market prices so that the overall economy comes out creating more new jobs. All the while, the officially sanctioned devaluing of money (meaning your dollar is worth less today than it was just a year ago) unfolds at the regularly scheduled “harmless pace” of 2%.

There should be no monetary policy in a free market, just as there should be no policy of setting food prices or wage rates, or of centrally adjusting the number of hours in a day.

But the question here is not what I would like to happen, but what is most likely to happen. There is no doubt that we should see an end to “quantitative easing,” but will we see it anytime soon? Has the Fed finally — after creating $1.9 trillion in new “reserves” since Lehman went bust — seen the light? Did they finally get some sense?

Maybe, but I still doubt it. Of course, we cannot know, but my present guess is that they won’t stop quantitative easing anytime soon; they may pause or slow things down for a while, but a meaningful change in monetary policy looks unlikely to me.

The boxed-in central banker
I think that the financial markets and media overestimate the degrees of freedom that central bank officials enjoy. I consider central bankers to be captives of three overwhelming forces:

1. Their own belief system, which still holds that they are the last line of defense between dark and inexplicable economic forces and the helpless public, and that therefore, whenever the data or the markets go down, it is their duty to ride to the rescue. Thus, when the withdrawal of the Cristal dampens the party mood, the Fed will soon feel obliged, by its own inner logic and without any motivation from outside influences, to open another bottle. Just wait until the present debate about an end to QE leads to weaker markets and until, in the absence of the diversion from rallying equity markets, the almost consistently uninspiring “fundamental data” become the focus of attention again, and we will witness another shift in Fed language, again back to “stimulus.”

We had these little twists and turns a couple of times without any major change in trend. Anybody remember the talk of “exit strategies” in the spring of 2011?

Of course, like most state officials, central bank bureaucrats are largely preoccupied with the problems of their own making. It is precisely the Fed’s frequent rescue operations that have created the excessive leverage that causes instability and repeated crises in the first place. However, there are no signs anywhere that, intellectually, the Fed is willing and able to break out of this policy loop.

2. After years of Greenspan puts, Bernanke bailouts, and zero interest rates, the size of the dislocations may be as large as ever. The Wall Street Journal reported that total borrowing by financial institutions is down by about $3 trillion from its all-time high in 2008. That’s the widely heralded “deleveraging.” But does that mean that the current level of about $13.8 trillion is a new equilibrium? The Fed’s balance sheet expanded by almost $2 trillion over the same period, and super-easy monetary policy has provided a powerful disincentive for banks to shrink meaningfully. What is truly sustainable or not will only be discernible once the Fed stops its manipulations altogether and lets the market price things freely. My guess is that we would still have to go through a period of deleveraging and probably of headline deflation. This would be a necessary correction for a still unbalanced economy addicted to cheap credit, but nobody is willing to take this medicine.

3. Politics. Falling stocks, shrinking 401(k) plans, and shaky banks don’t make for a happy electorate. Additionally, the state is increasingly dependent on low borrowing costs and central bank purchases of its debt. The chances of the U.S. government repairing its own balance sheet are slim to none. So dependence on ultralow funding rates and the Fed as lender of last resort (and every resort) will likely continue.

Look at Japan
When it comes to any of the major trends in global central banking of the past 25 years, Japan has consistently been leading the pack. In the mid-’90s, Japan had set the fed funds rate to 1%, which at the time was deemed exceedingly low compared with other countries, like the U.S. The global community still looked upon these rates with disbelief and growing annoyance at the small payoff in terms of real growth.

Japan was the first to have zero policy rates and the first to conduct “quantitative easing.” Albeit, Japan’s version of QE was on an altogether smaller scale than some of the Western central banks have, to date, managed since 2008. Now the country seems to point the way toward the next phase in the evolution of modern central banking: the open and unapologetic politicization of the central bank and the demotion of the head central banker to PR man.

Any pretence of the “independence” of central bankers has been unceremoniously dumped in Japan. Ministers take part in central bank meetings and give joint statements with central bank governors afterward. New Prime Minister Shinzo Abe has made it very clear what he wants the central bank to do (print more money faster, devalue the yen, create inflation), and to that end, he is looking for a new central bank governor. Of course, only accredited “doves” need apply. A few days ago, Mr. Abe also spelled out what skill set he is really looking for: good marketing skills. Salesmanship:

Since we all have our national interests, sometimes there will be criticism about the monetary policy we are pursuing.
The person needs to be able to counter such criticism using logic.

The course of monetary policy is pretty much fixed. Now it is all about marketing.

In the meantime, the debasement of paper money continues.

Sincerely,
Detlev Schlichter

Detlev Schlichter is a writer and Austrian School economist who has spent nearly twenty years working in international finance, including for Merrill Lynch, J.P. Morgan, and Wester Asset Management. 
    His book Paper Money Collapse conclusively illustrates why paper money systems—those based on an elastic and constantly expanding supply of money as opposed to a system of commodity money of essentially fixed supply—are inherently unstable and why they must lead to economic disintegration.
    Paper Money Collapse shows that the present crisis is the unavoidable result of elastic money; and that the continuous money production to stimulate the economy could lead to a complete collapse of the monetary system.

This post first reappeared at Laissez Faire Today 

QUOTE OF THE DAY: Peter Schiff on Ben Bernanke [update]

‎Despite the devastation of the Fed’s previous burst bubbles ... Bernanke still believes in the virtue of pumping. His current policy is to inflate another stock market bubble to cure the recession that resulted from the bursting of the housing bubble, which was itself inflated to counter the effects of the bursting tech stock bubble.
Does the story of the old lady who swallowed the fly come to mind? She eventually tried swallowing a horse, and we know how that ended.
It’s hard to decide who is more culpable for the strategy: Bernanke for selling it or the country for buying it.
        -Peter Schiff, “There Was a Fed Chairman Who Swallowed a Fly”

UPDATE: “Ben Bernanke Has Never Gotten Anything Right” Peter Schiff tells a room including a panel of Federal Reserve officials. (They respond.)

It’s true. For example:

But weren’t Ben and his boss Alan right that there a nasty “savings glut” that caused the nice chaps all the problems ?

No, Ben, there wasn’t.

Ben Bernanke: Adrift without a clue [updated]

As a bookend to the non-answering of Queenbo’s question to economists (story here yesterday), we’ve now got the diametrical opposite to Peter Schiff’s now famous ‘Peter Schiff Was Right’ video: Ben Bernanke’s ‘I Don’t Have a Fucking Clue’ video.  Here it is:

While Schiff was predicting the deep recession that would follow the bursting of the housing bubble, Bernanke didn’t even know there was a bubble going on – or realise that his own organisation was largely responsible for it.

Now just to make sure you don’t miss a word, Lilburne has both transcript and analysis – and a point worth taking.  In this video, “Bernanke is shown to have been just as embarrassingly wrong as Schiff was uncannily right”; but that’s not because Bernanke is a moron – he’s a very bright guy – but because of “their differences in economic understanding.”

Schiff’s economic understanding is Austrian.  Bernanke’s is mainstream.  There’s the story.

UPDATE: Robert Blumen gives an example of a blatant mainstream error committed by Bernanke right out in the open here – the same error, I’ll wager, that many NZ home-owners make: i.e., the idea that a strong economy necessarily supports rising house prices.

As Blumen points out, we certainly shouldn’t expect that to be the case with a strong economy and food prices, would we, so why expect it with house prices?  And in any case, shouldn’t a strong economy support generally falling prices?

[Blumen’s] point is not that it is impossible for rising incomes and rising home prices to co-exist, only that it requires a very special set of conditions and that, in general, we should expect the opposite. Bernanke's blithe statement of the obvious at best requires further explanation and is at worst illogical. It is more likely, as Reisman says, that the cause is an expansion of credit.

Biggest bill ever

Last week I posted a piece on The Biggest Bill in the History of the World – that is, the $22 trillion bill American taxpayers and their children and grandchildren face for bailouts, stimulunacy and nationalisations.

It’s huge. It was huge even last year before the Barack Bailouts and Giant Stimulunacy added another $18 trillion to the bill, but even at the $4.6 trillion it was last November it’s bigger then any other government programme in history.

Not just bigger than any other government programme ever, but bigger than all America’s big-government programmes ever.

Bigger than the bill to purchase Louisiana from the French.

Bigger than the Apollo programme that was celebrated again last week – in fact, bigger than NASA’s entire, all-time budget.

Bigger than Roosevelt’s New Deal and the post-war Marshall Plan that rebuilt post-war Europe.

Bigger than the the cost of the Iraq War, the Korean War, and the Vietnam War put together.

In fact, the bill is bigger than all of them put together – and that’s just the bill to the end of last year.  See here (just click through for the full graphic):

And what’s been bought for all that you ask?  You tell me. But someone has to pay for it all – and it sure as hell isn’t going to be Goldman Sachs. 

And every dollar pissed away is a dollar businessmen can’t invest in productive activity – but it’s been hard work getting any sort of hard information from Henry Paulson, Helicopter Ben Bernanke or Little Timothy Geithner on which specific forms of unproductivity they’ve pissed it away on.

Look at the Stimulus, they say, celebrating the Golden Shower pissing out from the printing presses.  Never mind the quality, just enjoy the Stimulus!  If Roosevelt’s New Deal failed for insufficient stimulus, which is what the mainstream bozos say, then just sit back – they insist – and enjoy the ride this time!

How much stimulus is enough? Keynesian stimulus-monger and Nobel Prize winner Paul Krugman reckoned a while back that the "spending hole" in the U.S. economy is $2.9 trillion dollars. We’re already well past that with nothing to show for it except a huge bill and the failure to recover.

How could there be a genuine recovery when every dollar pissed away is a dollar businessmen can’t invest in productive activity? That’s even less real productive spending than the $2.9 trillion hole Krugman says needs to be filled up.  As Ludwig von Mises wrote,

a government can spend or invest only what it takes away from its citizens … its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.

This leads to the question [says ‘Lilburne’ ] of whether government spending and investment does more good than private spending and investment.

    Sound economics answers this question with a resounding "no" . . . because ultimately, Keynesian fiscal stimulus is not even about the goods and services produced by the additional spending (infrastructure, welfare, etc). You see, the fiscal stimulus might as well be literally filling holes, since according to Keynes's ridiculous understanding of how an economy works, it doesn't matter what the government spends money on; even digging up holes just to refill them would qualify as beneficial stimulus. You might think that this must not be literally true. "Keynes may have been wrong on some things," you may protest, "but no economist as prominent as him would believe something so foolish!" Read the man's words for yourself:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

    The above passage is not some off-hand note written to a colleague in a fit of academic speculation. It is part of Keynes's chief contribution to economics, upon which his reputation rests: The General Theory of Employment, Interest, and Money. I don't care how prominent, credentialed, or "accomplished" an economist is. If he says that burying cash in the ground can be a boon to society, then he should be immediately dismissed from public and academic discourse.
    That thinking hasn’t just not been dismissed – it’s the very “thinking” that made the government and its minions piss away $22 trillion on things you aren’t allowed to know about.

Happy about that, are you? Because our own government is still promising its own “decade of deficits."

UPDATE 1: More good stuff on our local problems from David Beatson of all people, who says, “in case you’ve missed the main message: the tradable sector of our economy – the real driver of sustainable growth in New Zealand – has been in recession for the past five years. No wonder we’re in trouble.”

   The sector that produces the goods and services we export to the rest of the world and that competes with imports for your purchasing power at home actually shrunk around 10% over the last five years. If we want it to grow, something else has to make way – like central and local government spending. . .
   The recession is going to change everything else in New Zealand. Why shouldn’t it change the shape and nature of our public sector too?

Trouble is, it’s not, is it.  Job losses in real businesses are going through the roof.  Job losses in the bureaucracy by comparison?  Bugger all.

UPDATE 2: And here ‘s another piece, on the debt problems of the dairy industry (who in a story that’s now all too familiar) have partially substituted the “economically perverse” illusion of debt-fuelled capital gain (i.e., the illusory “wealth” of a bubble) for real productivity growth. Read Analyst warns of dairy debt tsunami (and also, if you’re keen, a piece I wrote a few weeks back on the foolishness of “farming for asset gains”: ‘The credit/debt delusion: The faster you go, the bigger the mess.’)

Fed’s Ben Bernanke’s is feeling the auditor’s breath on his collar [updated]

In testimony to Congress and in the Wall Street Journal, Federal Reserve Chairman Ben Bernanke continues to resist Ron Paul’s bill to audit the Fed.  Indeed, in his Wall Street Journal op-ed Bernanke whinges that Paul’s Audit the Fed will give politicians control of monetary policy, that “congressional audits would expose the Fed to dangerous political pressure,” to which Ron Paul calls horseshit. "It's not like it's not politicized now," he says:

And Bernanke continues to insist, both in his Wall Street Journal piece and in his testimony to Congress, that he has an “exit strategy” to ensure that, come recovery time, the US economy doesn’t explode with double digit price inflation as a direct reflection of the double digit monetary inflation.  He will, he says, simply turn off the tap when the first signs of “green shoots”appear.”  That’s his “strategy.”  Peter Schiff calls horseshit on that one:

UPDATE:   About ten years ago, a reporter from the Detroit News did an interview with ‘Austrian economist’ Richard Ebeling about the Federal Reserve and Greenspan's monetary policy.

This reporter  has just reprinted this interview on his blog, pointing out Ebeling’s "prevision" in seeing where Fed monetary policy was leading: serious interest rate distortions, imbalances between savings and investment, and an inevitable economic correction.

Good reading to get a handle on what happened, why ‘The Fed’ was responsible, and why it didn’t need rocket science to see what the Fed’s meddling would eventually lead to – not rocket science, just the sound economics that mainstream economists don’t have.

The biggest bill in the history of the world [update 2]

Neil Barofsky, special inspector general for the TARP program, says the total cost of the TARP programme – the Toxic Assets Relief Programme that I would characterise as “producing the toxic assets of tomorrow” – says that the total bill for the TARP programme is, wait for it, $23.7 trillion.  “TARP has evolved into a program of unprecedented scope, scale and complexity,” Barofsky said.  HE sure got that right.

Barofsky’s estimates [reports Bloomberg] include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

Just to say that again, that’s 23,700,000,000,000 dollars – one billion dollars multiplied 23,700 times – spent on junk.   Not Zimbabwe dollars, US dollars.  More money than was spent on two world wars put together – two wars that bankrupted two continents.  More money than presently exists in the world -- spent on more “toxic assets” than the world has ever before seen, in a “recovery programme” more destructive than any of its progenitors could have fathomed.

And, to add irony to ignominy, the airheads on CNBC are for some reason getting angry at the guy pointing out the size of the bill [hat tip Fred Gibson].

UPDATE 1: Bernard Hickey spots US Congressman Alan Grayson grilling Helicopter Ben overnight on a NZ item in the multi-trillion dollar bill:

Here is some grand theatre in a CSpan video on Youtube from Ben Bernanke’s Congressional hearing overnight where Congressman Alan Grayson grills Bernanke over currency swaps with various central banks, including “New Zealand, who got US$9 billion or US$3,000 per person” (2mins 31). It’s a fascinating watch and all part of the growing momentum to audit the Fed.

“This will go viral,” says Bernard of the video of the confrontation.  Here’s the first re-infection:

UPDATE 2: And the busy Bernard Hickey also links to this short video to help you get your head around the concept of one trillion dollars – which is less than 1/27th of the total bill for the TARP programme.

Central bankers: Out there without a clue [updated]

This video of Federal Reserve chairman Ben  Bernanke puts into perspective the recent predictions of of economic recovery made by our own central banker, Alan Bollard.  Frankly my dears, for all the reverence they’re given, these guys don’t have a clue. 

Bob Murphy calls it “The Best Five-Minute-And-Seven-Second Argument Against Giving [Central Bankers] More Power.”  Enjoy.

UPDATE:  To be fair, it’s not just central bankers whose crystal balls need work.  There’s a Prime Minister not a million miles from here who’s similarly bereft.

In an alternative universe we could have seen economic recovery in February [updated]

Joseph Keckeissen offers an alternative universe in which the bailouts didn’t happen and TARP was thrown back; in which the money supply wasn’t bloated up with “quantitative easing,”and the budget wasn’t inflated with stimulunacy inanities. No more rescues. No more trillions -- “those who have received any bit of largesse promptly return their ill-gotten loot to the Treasury,” and the bankruptcy courts were authorized to get on with their jobs without fear or favour.

This is an alternative universe in which we would have seen recovery in February.

    There would be no more impatient dilly-dallying on the part of investors, waiting for the government to decide who are going to be the recipients of the new trillions in handouts, and causing daily upsurges and downfalls in the unsettled Dow.
    Assets would have fallen to their normal worth, the present discounted value of their future returns. No need to wrestle with mark-to-market account. . .
    Mr. Geithner wouldn't be stressed to invent new ways to cajole folks to contribute to the buyout of overvalued securitized junk. Nor would there be the least excuse for more G20s to be needled into bastardizing their overbloated monetary systems. Mr. Bernanke would have stopped acting the role of Santa Claus, distributing the government-invented moonshine to the denuded former greats of Wall Street.
    The corpses of the erstwhile automobile empires would have breathed their last, their good assets now transferred to the hands of newer more responsible entrepreneurs. The prior executives would be moving over to Cheapside and brushing off their overalls, perhaps in line to join a new remodeled UAW, in search for some job where they couldn't mess things up any more.
    The bankruptcy courts would be finishing up their exequies for the deceased former titans of the packaged debentures. The tombstones of the new economic cemetery would display the once great names of Fannie and Freddie, of Citi, of AIG, of Merrill Lynch, along with the hapless Lehman Brothers, interred several months before. And so many more financial cadavers would have been laid to rest, their memory duly to be forgotten, as perpetrators of a fake capitalism now buried and forgotten. . .
    Washington would finally be silenced, even if the Fed were not yet duly junked in the process, and the Treasury's overbearance would be bridled as the rest of the uneconomic trash was being flushed out of the system.
    The Case Shiller indices would have completed their downfall to a level that future homeowners could devote the traditional 30 percent of their money incomes towards purchasing their long-wanted love nests. New families would be rushing in to fill the vacant home sites.
    True capitalism would be alive again; employment would be rising up to normal. The waiting lines would no longer be for unemployment checks, but rather to be first to enroll in the new jobs daily being created. The new savings of the American people, shocked by the catastrophe, would now offset the strangling of the market rate of interest on the part of the monetary gymnasts, and would reflect the new flow of healthy capital ready to be invested in solid new ventures. The Dow would be healthily aglow with daily increments. All the bubbles would have burst away.
    Happy days would be here again! We'd once again be rolling in prosperity!
    But why hasn't this happened?
    Why is the world still in acute misery, even expecting the worst yet to come?

Because in this universe, none of this happened.  Washington wasn’t silenced.  Ben Bernanke wasn’t strangled.  Instead of following the lessons of the Great Depression of 1920-21 (you know, the one that no one remembers because of the so-swift recovery), political functionaries instead made sure we got to enjoy a rerun of the Great Depression that everyone does remember.  Faced with the choice of short, sharp pain or a long-drawn-out blood-letting, “the authorities” ensured we have to endure the latter.

The Visible Dead Hand has returned to strangle our future, at the expense of the “invisible hand” which could have transformed it.

It makes one almost wish for an alternative universe in which the roles were reversed.

UPDATE:  Sadly, in this universe, the pain continues:

U.S. Foreclosure Filings Hit Record 1.5 Million in First Half.