My Letter to the New York Times re: Useless "Crisis-Prevention Manual"

From: Patrick Barron (patrickbarron@msn.com)
Sent: Thu 6/17/10 1:43 PM
To: NY Times (letters@nytimes.com)

Re: Fifteen Economists Issue Crisis-Prevention Manual

Dear Sirs:
It is no surprise to Austrian school economists that Fed Chairman Ben Bernanke thinks very highly of "The Squam Lake Report", a list of recommendations by fifteen eminent economists for preventing future banking crises. The report ignores the foundation of the crisis and justifies more regulatory power that Mr. Bernanke hopes to wield. The report's tired laundry list of "fixes" will do nothing to prevent future crises, because they attack the symptoms rather than the disease. This banking crisis, like all previous ones in the last hundred years, was caused by bank credit expansion not funded by real savings. The Fed drove down the interest rate by adding reserves to the banking system. Fractional reserve banking allowed the banks to pyramid new loans onto these new reserves. Each dollar of new lending created a matching dollar of new money. This laid the foundation for the banking crisis, because at no point did the public increase real savings. It was all smoke and mirrors.

Fractional reserve banking is damaging enough when the reserves are sound, such as gold or silver, but the practice becomes most lethal when the reserves themselves are manufactured out of thin air. This is the case with all banking systems today--the banking system is allowed to expand the money supply out of thin air based upon reserves that themselves have been created out of thin air via the Fed's open market operations in which it monetizes government debt. This isn't as difficult to understand as it may sound. The Fed prints money out of thin air to buy government bonds. This money increases the money supply AND becomes reserves of the banks. Then the banks are allowed to expand the money supply, via their lending operations, by many multiples of this increase in reserves.

If the report's recommendations are adopted, the Fed will continue to shower the world with funny money while attempting to ensure that it doesn't create another banking crisis. This is impossible. The money must go somewhere, and, since it is not representative of real savings, it will cause another crisis. Attempting to prevent a crisis through regulation of banking activity will cause what Wilhelm Ropke called "repressed inflation" and what we call "stagflation", falling production and higher prices.

The only way to stop expansion of the money supply, which is the real cause of banking crises and the boom/bust business cycle, is to stop expansion of bank reserves and end fractional reserve banking.


Patrick Barron

My Letter to the NY Times re: Free Trade

To: The New York Times
From: Patrick Barron
Date: June 15, 2010

Re: Senators Losing Patience With U.S. Policy on China

Dear Sirs:
Last week several members of the Senate Finance Committee dressed down Secretary of the Treasury Timothy Geithner over whether China is or is not moving fast enough for our satisfaction in eliminating its policies to protect its domestic industries. The sheer uselessness of this exercise is matched only by the implied danger that the U.S. will start a world wide trade war. China hurts only itself by intervening in its own markets, and, anyway, it is none of our business. No one in Washington seems capable of understanding why, if one wishes to benefit one’s own nation as a whole, unilateral free trade is the only rational policy to pursue. Unilateral free trade--in which the U.S. would freely import whatever goods Americans wished to buy, regardless of whether or not the country of origin allowed American goods onto its shores—means that Americans live better, more prosperous lives. If China or any other country refuses to buy from us or restricts our imports into their country in some way, then we have imported goods that we enjoy and have exported to China dirty pieces of green paper. Now, who wins from this policy?

When China intervenes in its currency markets to give more yuan per dollar than the natural, open market, it imports inflation onto its own shores while holding down inflation in the U.S. It is not true that by keeping American goods out of China, we are “harmed”. True, we have lost a sale, but that is not the same as harm. I refer you to Dr. Patrick Burke’s well-reasoned exploration of the subject in his book No Harm: Ethical Principles for a Free Market. According to Dr. Burke, no harm is incurred when one is left in a prior condition, and losing a sale leaves one in the prior condition.

Yet it seems inevitable that the US is about to commit itself to another Smoot-Hawley moment. Already we are following the playbook of Hoover and the early Fed by increasing federal spending and pumping up bank reserves respectively. So why not go for the trifecta and start an international trade war to go along with massive debt and the threat of hyperinflation? Our best policy is limited government (which means limited spending and limited regulation), sound money, and free trade. None of this needs to be managed by anyone, for a free market manages itself.

My Letter to the NY Times re: Shallow Economic Reporting

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: Shallow Economic Reporting by the NY Times
Date: Wed, 9 Jun 2010 10:32:34 -0400

Re: US. Presses the Airlines to Satisfy the Traveler

and

Re: As China's Wages Rise, Export Prices Could Follow

Dear Sirs:
For some time now I have been frustrated at the shallowness of your economic and business reporting. Two recent articles illustrate my point.

The very title of your June 2nd report of new airline regulations--U.S. Presses the Airlines to Satisfy the Traveler--displays your perspective that some businesses do not care about their customers and that the public must rely upon the noble bureaucrat to remedy the situation. What nonsense! Although Secretary of Transportation Ray LaHood is an honest man, what does he really know about the airline industry? Mr. LaHood is a career bureaucrat/politician. He hasn't held a real job in decades, if ever. He was chief of staff for Republican Congressman Bob Michael for many years and succeeded to the safe Republican seat when Mr. Michael was ousted from his minority leadership position by Newt Gingrich. Now he is Secretary of Transportation, with vast powers to make or break entire industries. But where is his transportation background that would make him anything more than just a nuisance to the people who are trying to deliver transportation services every day? I really doubt that Mr. LaHood has ever had any contact with airline operations other than sipping his drink in first class. In a competitive airline business, or any other business for that matter, those who serve the public at the best price and with the best service will be rewarded with the consumers' patronage. Nothing else is required.

Your June 8th report on rising wages in China--As China's Wages Rise, Export Prices Could Follow--is not really a report at all. It is pure speculation and not very good speculation at that. There is a very sound economic reason that rising wages in China probably will NOT cause export prices to rise. Rising labor productivity is very likely the reason that Chinese business owners can afford pay increases, not their benevolence, as your report suggests. In fact rising labor productivity is the ONLY way that labor can be paid more. Undoubtedly Chinese businesses are investing in more capital equipment, and it is rising capital investment per worker that underlies all worker wage gains. To pay workers more out of a sense of benevolence would lead to a lack of competitiveness and would bankrupt any firm in a very short time. Undoubtedly the beneficial effects of globalization, which is just another word for increasing the specialization of labor, is driving low wage jobs out of China and into other developing countries, just as happened with Japan after World War II. At one time the label "Made in Japan" held connotations of inexpensive, poor quality trifles. Not any more. Did Japan attain its economic eminence by paying its workers more out of the goodness of its capitalists' hearts? Of course not. Japan pays higher wages because its workers produce more and better goods that can be sold at a profit even at low prices.

More capital per worker, flexible labor rules, and sound business management are the keys to higher wages--always have been and always will be.


Patrick Barron

My Letter to the Wall Street Journal

From: Patrick Barron (patrickbarron@msn.com)
Sent: Sun 6/06/10 10:04 AM
To: Wall Street Journal (wsj.ltrs@wsj.com)

Re: G-20 Is Nearing Accord

Dear Sirs:
Having the world's irresponsible and bankrupt governments demand that bankers clean up their acts is like having Willie Sutton, the famous American bank robber, advising his victims! The crisis was caused by loose central bank monetary policy and not by lower capital and liquidity positions of banks. As usual the governments of the world are blaming the victim in order to divert attention from their own imminent financial collapse. And, as usual, their answer is to tax banks into creating another socialist slush fund that will punish sound banks and create massive moral hazard. The real answer to our problems is limited government, laissez faire capitalism, and sound money. But you will never hear these radical proposals emanating from a G-20 meeting, because the purpose of the G-20 itself is to coordinate centralization of economic power at the governments themselves and ensure that there exists no safe haven for capital anywhere in the world.

Patrick Barron

My Letter to the NY Times re: Stifling Free Trade

From: Patrick Barron
To: NY Times
Sent: Wednesday, March 24, 2010 10:02 AM
Subject: A Brilliant Call for Autarky and War


Re: Stifling the Economy, One Argument at a Time, by Robert E. Lighthizer, March 22, 2010

http://www.nytimes.com/2010/03/22/opinion/22lighthizer.html?scp=1&sq=Robert%20E.%20Lighthizer&st=cse

Dear Sirs:
The irony of the title to Mr. Lighthizer's article--Stifling the Economy, One Argument at a Time--is that it applies to HIS arguments and not to those who advocate free trade. Like the front page, above-the-fold report by Mr. Bradsher on March 15, Mr. Lighthizer believes that China is harming others by holding its currency cheap. No, it is harming its own citizens by importing inflation; it is subsidizing its trading partners' lifestyles. It is laughable that Mr. Lighthizer writes that "many economists" believe that China contributed to our housing bubble. Would those be Curly, Moe, and Larry? And what is Mr. Lighthizer's brilliant answer to his upside down view of the world?--Make the rest of the world raise taxes to America's level and make the rest of the world adopt our punishing labor and environmental regulations. Since the rest of the world is unlikely to follow America as we jump off this bridge, Mr. Lighthizer would have us adopt trade barriers, ala Messrs Smoot and Hawley. Americans' view of free trade indeed has been poisoned, as Mr. Lighthizer says, but not by China's trade gap. It has been poisoned by the likes of Mr. Lighthizer himself, whose policies will lead to the same conclusion as did those of Herbert Hoover and FDR--autarky and war.

Patrick Barron
Adjunct Instructor in Austrian Economics
University of Iowa

Fed Chief Wants to Eliminate Bank Reserves

The link below is a transcript of Federal Reserve Chairman Ben Bernanke's Feb 10, 2010 testimony to Congress. The last line of the final note at the end of the letter has the pertinent statement that the Fed may eliminate reserves completely.

http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm

Here is my analysis:

With over a trillion dollars in excess reserves right now, the banking system is not limited by reserves. Since its founding in 1913 the Fed has steadily destroyed the public's understanding of real money. Therefore, eliminating reserves fits into the scheme of things as just another move away from any semblance of sound money.

Without reserve requirements, the banking system would have no limits to its manufacture of money; therefore, I see this as a step toward government allocation of credit--the government's ultimate goal. Because the banks would be in a position to expand credit without limit, the government could claim that only it has the foresight and the power to prevent another crisis. This is the banking system as it was practiced during the communist reign in Eastern Europe. I taught many East European bankers at the University of Wisconsin in the late '90's. They related that the role of bankers during the communist era was simply to implement orders from the government; that is, allocate so much credit to the steel industry, so much to agriculture, etc.

If sound money is eliminated and the banks are not required to hold any reserves, there hardly is any other way to conduct banking.

My Letter to the Wall Street Journal re: Regulating CDS's

Wednesday, 10Mar10

Dear Sirs:
I see that the government has succeeded in its efforts to focus attention away from itself as the real cause of the financial crisis and onto "evil speculators". The Fed's feckless attempts to create wealth out of paper money was doomed from the start. A false boom ignited by fiat money credit expansion cannot be distinguished from a real economic expansion financed by savings and capital accumulation. Now the government is trying to make everyone believe that a free, capitalist economic system is inherently unstable and an easy victim of unscrupulous villains, when the truth is exactly the opposite.

Patrick Barron
Adjunct Instructor in Austrian Economics
University of Iowa, Iowa City, Iowa

My Letter to National Review Magazine

Thursday, October 08, 2009

Re: “Pop Economics” by Kevin D. Williamson

Dear Sirs:

In “Pop Economics” (Oct 19, 2009 Edition) Kevin D. Williamson exposes as a lie the government’s self-serving rationale for further financial regulation—that greedy, overpaid, and irresponsible executives caused it all. Although he does not attempt to provide a complete and systematic explanation for the mess in which we find ourselves, Mr. Williamson and his colleague Stephen Spruiell like the moral hazard argument advanced by Jeffrey Friedman of the University of Texas that “Basel rules encouraged banks to load up” on assets that carried more risk than initially perceived.

Regulations account for some of the problem, to be sure, but the real, underlying cause was bank credit expansion not supported by real savings. Earlier in his essay Mr. Williamson made the perceptive observation that the bankers “all made similar bad decisions at the same time.” In his classic mid 1960’s book "America’s Great Depression", Murray N. Rothbard called what seemed to be inexplicably poor decision-making by America’s elite bankers as a “Cluster of Errors”. Mr. Williamson asks the same question as Rothbard and comes to the same conclusion—“they thought they were making good investments on behalf of their shareholders…” But what led them down the garden path? What can explain the suspension of Say’s Law--that markets tend toward equilibrium? These errors should have been self-correcting; poor investors lose their own and their clients money and are trusted no more.

Mr. Rothbard’s explanation, backed by meticulous statistical analysis grounded in Austrian School economic theory, is that inherent, fatal flaws in the not-two-decade old central banking system (the Fed), unleashed the boom/bust business cycle. Unfortunately, nothing has changed since 1929. The Fed still causes the speculative boom. And, although the malinvestment eventually reveals itself, government still tries to short circuit the bust and reflate the bubble. Hoover-FDR have been reincarnated in Bush-Obama.

The solution is obvious—take monetary control out of the hands of government and place it back into the hands of the market. In other words, end the Fed and return to whatever private money is accepted by market participants. Without a doubt, the market would return to the gold standard.

Patrick Barron
West Chester, PA

Corn for Ethanol

I sent the following letter to the Wall Street Journal today in response to a lobbyist's defense of the increased use of corn for ethanol production

Dear Sirs:
In his role as president of the American Corn Growers Association we should expect nothing less from Mr. Bob Dickey than that he make as good a case as possible for increasing the demand for his product. ("Ethanol Has Boosted Corn Output"--Letters--18Sep09) Nevertheless, each of his rationales defending the increased use of corn for ethanol production fails sound economic analysis. The fact that U.S. corn production has increased is to be expected when demand for any good increases. But what other agricultural good was sacrificed in order to increase production from the artificially boosted demand for corn? Mr. Dickey says that the price of corn is down and, therefore, its use as a fuel has not priced other uses out of the market. But the price would have fallen even further without the government's mandate for ethanol production. Finally, no one doubts that the government's mandates for ethanol production is good for farmers, but is it good for everyone else? Of course not. The point of any government intervention is to prevent the free market from guiding production and consumption decisions based upon man's true preferences. If ethanol were such a wonderful product, it would need no government mandates to force us to use it.

Patrick Barron

Two Recent Letters to the Wall Street Journal

Monday, September 14, 2009

Re: China Strikes Back on Trade

Dear Sirs:
Regarding the brewing trade dispute between the U.S. and China over new U.S. tariffs on Chinese tires, you make this statement:

"The effect on the U.S. is less clear because China has not imposed sanctions."

But we do know the effect on the U.S., and it is clear as day--U.S. consumers will pay more for tires. That is the whole point--reduce our standard of living by denying us the products of overseas trade in order to benefit a few U.S. tire manufacturers and their union members. The Obama administration is dividing the country into those whose businesses and occupations will be protected by the coercive power of the state and those who are not members of this politically connected group and must pay.

Patrick Barron


Tuesday, September 15, 2009

Senseless and Murderous Drug War

Mary O'Grady explains the damage done to our southern neighbor by our senseless war on drugs. She details the murders of law enforcement officers and honest politicians in Mexico and the fear of its citizens. She could have mentioned the many needless deaths in the U.S., too. No, not necessarily from turf wars and that sort of thing, although there are plenty of these. There are many needless deaths from so-called drug overdoses, which really means that the user inadvertently took too large a dose or a corrupted dose of his drug of choice. How does this happen? Well, in a lawless business there is no way for customers to enforce standards through the normal court process. If a legitimate drug manufacturer tainted his product with poison, he would be taken to court, fined, and possibly sent to jail. But the victim of a tainted illegal drug just dies. I heard recently of the death of the son of French actor and director Gerard Depardeu. The reports claimed that M. Depardeu's son died of a drug overdose. Since his son was a rising force in the film industry himself, I doubt that he wanted to kill himself. More likely the drug was tainted or more potent than he believed it to be. Another needless death cause by our senseless and murderous war on drugs.

Patrick Barron

No Power to the People!

My recent letter to National Review magazine, commenting on Mark Steyn's brilliant essay.

Re: Ethiopia Comes to You, by Mark Steyn

Dear Sirs:
Mark Steyn's recent skewering of the anti-population lobby could be applied in equal measure to the anti-energy lobby. Both are born of the environmental movement, whose blatant inhumanity places Mother Earth on a higher ethical scale than people. Talk about your pagan gods!

The legislators in my gone-crazy home state of Pennsylvania recently passed a bill requiring electric utilities to produce increasing LESS power, in graduated steps over the next five years, than the unhampered economy would demand. The environmentalists--such as my state representative, Chris Ross--claim that conservation efforts will make up the difference. But here lies a great logical fallacy. One does not produce electricity by conserving it. In fact electricity CANNOT be conserved; it can only be produced. The raw materials of nature, such as oil, waterfalls, uranium, etc. are not energy. They are merely oil, waterfalls, uranium, etc. One may say that energy lies trapped within them, awaiting the ingenuity of man to release it. But NOT releasing the energy accomplishes nothing of economic benefit.

Not harnessing the materials of nature--to avoid the energy police, and don't think they won't come!--forces man to move down his consumer preference scale. The lights must be turned off somewhere; a factory must close somewhere. Devices that use less energy in order to accomplish the same economic benefit divert resources that would have gone to satisfy something man valued more. The owners of businesses and homes have always invested in energy saving devices, without the heavy hand of governmental mandates, when it became clear that the savings would outstripped the cost. But governmental mandates to speed up this process merely lower everyone's standard of living. Unemployment and poverty follow.

PECO, my local utility, wants me to allow them to shut off my power when demand exceeds the government-mandated maximum supply. Of course, these peaks occur during very hot weather, when everyone runs his air conditioner. Who is most likely to sign up for such a program? The elderly, because they are trying to stretch their fixed income over increasingly expensive necessities. Will Representative Ross or any of the environmental lobby take responsibility for the deaths that will result? Not on your life!

As Mark Steyn might say--No Power to the People!

Why Financial Regulation Will Not Work

Please read my letter to the Philadelphia Inquirer. I recommend that you also read a relatively short essay by Wilhelm Ropke in which he explains the consequences of what he calls "repressed inflation". "Repressed inflation" destroys production by attempting to forbid risk and/or to direct investment by political means in conjunction with excessive credit expansion...exactly what all the governments and central bankers of the world are attempting to do now.

Ropke wrote his essay in 1947. Read it here: http://mises.org/story/3492

----- Original Message -----
From: Patrick Barron
To: Editor Philadelphia Inquirer
Sent: Tuesday, July 07, 2009 8:28 AM
Subject: Why Financial Regulation Will Not Work


Re: "Financial overseers in place", by Robert Lam, acting chairman of PA Securities Commission, 7July09

http://www.philly.com/inquirer/opinion/20090707_Financial_overseers_in_place.html

Dear Sirs:
Mr. Lam's confidence in the ability of regulators to spot excessive financial risk should have been shaken during his three decades on the Pennsylvania Securities Commission. During his tenure, we have suffered innumerable financial booms and busts. If vigorous oversight by regulators will prevent such occurrences in the future, why did past regulatory oversight fail? The answer, of course, from Mr. Lam is that financial markets need even more regulation. The real answer is that financial booms and busts are caused by excess fiat money generated by the Federal Reserve System. Once this excess money--generated by the printing press and not by real savings--enters the banking system, nothing can prevent it from doing its inevitable harm of initiating unsustainable business investment. These investments do not appear to be unsustainable at the time, because the Fed suppresses the interest rate. Only years later, when it becomes evident that there exists a deficiency in the factors of production necessary to carry these projects through to profitable conclusion, does it become apparent to everyone that our scarce capital has been misallocated. At that point it is fruitless to attempt to sustain the boom by printing even more money, as our Federal Reserve System is doing right now. All the Fed is accomplishing is the destruction of even more scarce capital. Free financial markets operating under a sound money environment tend toward equilibrium, as explained by Jean-Baptiste Say over two centuries ago. The free market prevents and punishes bad investment more quickly and with less damage than an army of regulators empowered with all the modern tools of financial analysis.


Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382

The Consequenses of Restrcting Power Generation

Please read my letter below written to the Philadelphia Inquirer. I attempted to convince my state senator to vote against Act 129, but "the great man"--Dominic Peliggi--refused to see me. Instead his sycophantic chief of staff spent an hour with me trying to talk around the issue. Finally he told me the truth, that no politician can vote against any piece of legislation, no matter how bad it may be for us citizens, if it wraps itself in environmentalism. By the way, Senator Peliggi's chief of staff is a revolving door lobbyist, working a few years for our largest utility--PECO--and a few years for some politician. I am certain that PECO is in cahoots with the legislature. PECO will be allowed to raise rates to compensate for its reduced revenue from selling less power. All utilities in America are regulated by public utility commissions, which make them nothing more than arms of the government--just another way to fleece us and control us. If we citizens do not reduce our power consumption in line with Act 129, what are the likely consequences? The only alternatives are penalty rates and periodic shutoffs of power. Already PECO is proposing a program whereby we citizens would "allow" it to shut off our power during peak demand. Just think about it. What free market business purposefully rations its goods to consumers? State regulation of utilities turns the producer/consumer relationship on its head. Instead of the producer trying to meet the needs of consumers, we consumers must adapt our lifestyles to the wishes of the producers...in this case a politically controlled utility monopoly. Just another nail in the coffin of our freedoms.

Patrick Barron

To: Editor Philadelphia Inquirer
Sent: Friday, July 03, 2009 8:24 AM
Subject: The Consequences of Restricting Power Generation

Re: "Peco rolls out a bold proposal", 2July09

http://www.philly.com/inquirer/business/20090702_Peco_proposal_seeks_to_slash_power_consumption.html

Dear Sirs:
Act 129, which mandates that Pennsylvania utilities REDUCE! power generation in ever greater percentages in the next four years is but one more example of the attack by radical environmentalists upon modernity. Government has no moral authority to deny the citizens of Pennsylvania all of the power that we desire and are willing to purchase. The consequences of this foolish and dangerous law are not hard to predict--lower profitability for Pennsylvania businesses, fewer new businesses choosing to locate in Pennsylvania, the flight of some existing businesses from the commonwealth, lower wages for Pennsylvania workers, fewer job opportunities for Pennsylvania workers, the flight of "the best and brightest" from the commonwealth, higher costs and lower standard of living for Pennsylvania residents, lower property values for those seeking to sell their homes and move to more economically hospitable states...I could go on and on. This law should be repealed forthwith.

Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382
Phone: 610-793-3605
www.patrickbarron.blogspot.com/

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!

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.
http://www.cfr.org/content/publications/attachments/031009_CFR.pdf
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 his be our battle cry—Give Us Liberty! End the Fed!