Tuesday, March 24, 2009

The Fox Bids to Be the Sole Guardian of the Henhouse

On Monday, March 9th, Federal Reserve Board Chairman Ben Bernanke spoke at the Council on Foreign Relations in Washington, D.C. and delivered a self-serving and barely veiled bid to become the sole, supreme, super regulatory and supervisory agency of all financial institutions in the United States. One really must read the speech in its entirety to get the full flavor of Mr. Bernanke’s hubris.

Taking absolutely no responsibility for the current financial crisis, he proposes that the Fed itself become a dictator of everything financial in the country. In typical Fed-speak, he invented new words--"procyclicality" and "macroprudential". This is a favorite tactic of all who desire to cover fairly common concepts with the aura of something grand. And since he invented the words, the words can mean whatever he wants them to mean. So said the Queen of Hearts in Alice in Wonderland. For the reader’s instruction, I gathered that "procyclicality" means to take some action that aggravates a current condition, and that "macroprudential" means to look at the big picture. But that just doesn’t sound very impressive, does it?

Interestingly, at the beginning of his speech—in which Mr. Bernanke makes a very brief attempt to explain the cause of the current crisis--he inadvertently (I must assume!) introduced an Austrian economic concept! Here is his exact quote:

"The increase in excess saving in the emerging world resulted in turn from factors such as rapid economic growth in high-saving East Asian economies…"

Did you catch the Austrian concept? He says that increased savings is compatible with rapid economic growth! This is exactly right, although it is the opposite of what Mr. Bernanke and the rest of the current D.C. elite say should be the solution to restore growth to the U.S. Here in the good old U.S.A., Mr. Bernanke, President Obama, and everyone else is singing the praises of spend, spend, spend, not save, save, save. Furthermore, the banks must help us spend by continuing to lend, lend, lend. None of us should save. No, sir, we should spend. Spending will bring us out of this recession, not savings, say the D.C. elite. But that is not what Mr. Bernanke claims happened over the last ten to fifteen years in the East Asian countries. The "high-saving East Asian economies" experienced "rapid economic growth". This is consistent with Austrian Business Cycle Theory, which states that increased savings provides the capital for building longer term productive capacity, which in turn expands the country’s production possibility frontier. In other words, if we save more we can build more plant and equipment, which will give us more stuff in the future. Even a caveman or a chairman of the Federal Reserve Board should be able to understand this concept. Mr. Bernanke lets this insight slip into his speeches, because I am certain that he knows that it is true. Yet he sings with the D.C. chorus that we must spend our way out of depression anyway. Such is to be expected of a government employee.

But the most chilling aspect of Mr. Bernanke’s speech was his very veiled reference to taking over the "too big to fail" banks. His reference in the quote below to "both models" refers to the Fannie Mae and Freddie Mac takeover and to an FDIC procedure for liquidating failing institutions. Here’s what he says:

"Both models allow a government agency to take control of a failing institution's operations and management, act as conservator or receiver for the institution, and establish a "bridge" institution to facilitate an orderly sale or liquidation of the firm."

Notice the key phrase "take control of…operations and management". This is very different from the current method of closing down the failed institution and selling its business piece by piece to its competitors for whatever prices the market determines. Giving any government agency the power to run the "operations and management" of a failed institution is a radical change from liquidating an institution; for one thing, there is no time frame for how long the government will run it or for what purpose (my guess is for political purposes!).

Earlier in his speech Mr. Bernanke reaffirmed his belief that some firms are too big to fail because they would cause "systemic" problems. But he never explains what a "systemic" problem is, how it would arise, and what makes big firms so crucial. We poor common people must believe that life just would not be the same without Goldman Sachs or Citibank, but there is no theoretical or practical reason that these institutions cannot be liquidated just like your insolvent neighborhood community bank.

Nowhere does Mr. Bernanke voice the concern that the bigger a bank is the LESS reason there is to propping it up with taxpayer money. Capital losing institutions make us poorer, so propping up the big ones just drives us to the poor house quicker. The argument should be the other way around—too big to save.

In addition, nowhere does Mr. Bernanke express even the slightest doubt that he (or some other earthly god, if another could possibly exist) possesses the knowledge to carry out plans from his understanding of the "macroprudential" situation. Here Mr. Bernanke falls prey to what Frederic Hayek calls the "Pretense of Knowledge"--that it is possible for anyone or any group to understand the totality of the economy. How does Mr. Bernanke know your plans for the future, for example? How does he know your purchasing preferences? Falling prey to the "Pretense of Knowledge" central planners engage in what Hayek calls "The Fatal Conceit" that man has total control to shape the world around him. The bloodthirsty economic planners in the Soviet Union and the smiling workaholics in Japan’s Ministry for Trade and Industry (MITI) could neither understand the market nor shape it to their wishes. The shame of it all is that no one needs to mimic the market, even if that were possible. The market itself consists of more decisions and preferences than could ever be understood by the fastest, most powerful computer. Only parts of the market coordinate with other parts to arrive at a conclusion that no one could predict yet that rewards all who participated. Why try to mimic and control this wonder of cooperative achievement?

The very thought of Mr. Bernanke sitting at his desk with computer screens flashing and couriers bringing in the latest polls and economic statistic to be followed by shouted orders from this pretentious egomaniac is almost comical were it not so frightening. For this is what Mr. Bernanke desires--to be the Great and Powerful Oz behind the screen, with lights flashing and smoke billowing, while the frightened citizenry cower before his pretended brilliance and his not-so-pretended police power to coerce and compel. It is the Road to Serfdom, as Hayek explained in his brilliant book written during the euphoric hours of World War II in which the central planning of the Allied victory was viewed as a model for a peacetime economy. Hayek—and many others, most notably Robert Higgs—have explained that the centrally planned war economy consumed capital and impoverished even the victors. It is not a model for anything, possibly not even a war economy itself. Yet that is the model that Mr. Bernanke sees for America, with himself at the forefront of an army of Fed statisticians. Preposterous! Balderdash! Let this be our battle cry—Give Us Liberty! End the Fed!

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