Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

They Want Us to Love the Fed

Politics / Central Banks May 06, 2011 - 04:42 PM GMT

By: William_Anderson

Politics

Best Financial Markets Analysis ArticleI recently took time from criticizing the actions of the Federal Reserve System (and associating with my "End the Fed" friends) to attend a conference in New York City that was hosted by none other than the Federal Reserve Bank of New York. As much as anything, I was curious as to what goes on at a Fed conference, and it also gave me the chance to visit friends in the area and to appear on Judge Andrew Napolitano's show, Freedom Watch.


The conference, "The Federal Reserve in the 21st Century," is an annual affair in which New York Fed economists and others explain "the mission and the dual mandate" that Congress has given to the central bank, and also to explain — or try to explain — the Fed's role in the current economic downturn. To be honest, it was an interesting two days of lectures and discussion, and the food was very good.

For all of the issues of security — and on the first day, we had to stand outside in a security line in the rain — it was hardly like being at an airport. The Federal Reserve police were friendly and helpful (unlike their TSA counterparts), and the staff members I met — from the conference organizers to the people who organized and prepared the wonderful meals — were sincerely warm and went out of their way to help. In other words, on a personal level, I was impressed, and I appreciated the professionalism and courtesy with which we conferees were treated.

My problem was not and is not with the conference or the people involved; my problem is that they never will "get it," nor will they understand why the economy is where it is and what the Fed's role is in putting it there. From what I could tell about many of the other college professors attending the conference, they had no idea, either. Like the attempts at the nearby "Ground Zero" zone to build a "Freedom Tower" that is 1,776 feet high, it seemed to me that people were wanting to believe the impossible, no matter what the real cost might be.

Before dealing with some specific things that we covered in the sessions, I want to explain the most important piece of knowledge I came away with: The Fed economists and their supporters really believe — truly believe — that they are the rescuers of our economy, and that the actions of Ben Bernanke, from the Fed loans to businesses to the Wall Street bailout and generally showering the world with dollars, actually kept the downturn from getting much worse. As they see it, the problem was that the economies of the world were facing liquidity crises, and the Fed provided "liquidity" to nearly every entity that asked for it.

The notion that Federal Reserve actions and policies might have helped to fuel the disastrous twin bubbles (stock-market and housing) that touched off the boom-and-bust cycles clearly did not exist in that building on Liberty Street in New York's Financial District. Instead, the message was that the Fed serves the economy the same way firefighters serve a community: putting out fires caused by someone else.

Conferees heard often about the Fed's "dual mandate" from Congress to (1) provide "price stability" and (2) help ensure "full employment" in the US economy. Not surprisingly, we citizens get neither, although the leaders of the Fed assure us that they have the answers we need to hear and the ability to pull yet one more rabbit out of the hat.

Although there were a large number of presentations, I will deal with two of them, the first being a talk on the housing boom and bust, and the second on why "monetary policy" really can increase "aggregate demand" at a time when the economy supposedly languishes in what Paul Krugman insists is a "liquidity trap." The former had a lot of good information, but lacked the critical element of causality. The second was, well, pretty bad, but really provided a window into the mentality that drives Fed policies.

One of the things that really hit me as I sat through the "housing boom" session was the utter lack of examination of the deeper cause of the whole mess. While the speaker mentioned things like the lack of standards for borrowers who were taking on huge amounts of debt (on which many would default), the larger issue that he pictured was something akin to a natural disaster, like a tornado or a meteor hitting the earth.

No, I don't mean that he likened the damage done by the boom-bust cycle to a natural disaster. I am referring to his view of why it happened: why standards were dropped, and why the government saw fit to push people into home ownership. According to him, it just happened, as though it were a natural event.

But there is nothing "natural" about shelling out a $500,000 mortgage to a family making less than $50,000 a year. The whole thing was absurd, and anyone stepping back and taking a hard look would realize it. So how did it happen? It was very clear that the speaker was not interested in that question.

And why should he be interested? The Fed played a major role in the fiasco, and if there were any consistent message over the two days of the seminar, it was that while the Fed was not infallible, its error was only that it was fooled just like the rest of us. Fed economists and decision makers, of course, have only the interests of "the people" in mind.

The second session dealt with the Fed's ability to increase "aggregate demand" during this downturn. According to Keynesians like Paul Krugman, the economy is currently in a "liquidity trap," in which the "tools" of "monetary policy" — keeping interest rates artificially low and the Fed stocking up bank reserves to enable more lending — are ineffective. As Krugman likes to say, interest rates are near the "zero bound," so even if the Fed lowers interest rates, it won't stimulate more borrowing.

Thus, the Keynesians claim that the only way to break this downward cycle is for government to borrow and spend until the economy gains "traction" (as Krugman calls it), and the government then can go back to doing whatever governments are supposed to do. However, said the Fed economist, never fear, for there are plenty of ways for Fed policies to "stimulate" more "aggregate demand."

One questioner, a professor from Dartmouth College, disagreed. "When will someone here admit the obvious, that we are in a liquidity trap?" he asked, to some applause. I cannot recall the economist's response, but as far as I was concerned, it was akin to the blind man leading the other blind man into the ditch.

The problem is that the entire Fed program was based upon the belief that the central bank really creates wealth. If it were not for the Fed, they argued, the economy would be stuck in mud and unable to free itself. Yes, unemployment is high, and food prices and gasoline prices are skyrocketing, but hey, "core inflation" is low; so unless you have to buy food or fuel, you won't notice inflation at all.

In case readers are wondering, no, I did not ask any questions or make public comments. It would have done no good, as trying to explain anything from an Austrian point of view only would have enraged the economists there; and it was a long way down to the ground from the window of the 12th floor of the NY Fed building.

In the end, I could conclude only one thing: those at the Fed truly are clueless about the real harm they have caused. Had Ben Bernanke followed the advice of Murray Rothbard instead of the advice of Milton Friedman on government policies during a severe downturn, he would have refused to try to "reflate" the economy after the collapse of the housing bubble.

Had Bernanke understood Rothbard, he would have known that a government cannot print an economy into prosperity. He also would have understood that inflation is not a solution — it is the problem.

We have to live with Bernanke's decisions, and the lessons will be painful, even if most people don't understand what they are supposed to be learning. And the people least likely to learn any good lessons at all are those who are employed by the Federal Reserve.

William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him mail. See William L. Anderson's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
06 May 11, 21:35
Why Isn't Bernanke In The Poor House?

A very nice article. I congratulate the author. I would phrase some of the things he said a little differently.

Firstly and very simply, the fundamental problem is total national debt, and you don't solve a debt problem by borrowing more money. And things have been progressively getting worse and not better since the housing crisis hit.

Secondly, no mention is made of the nature and extent of the economic damage that the FED has done to the US economy. For example, the upper one percent of the population receives approximately 25% of income and controls over 25% of the wealth, there simply are no jobs, and the social damage done is extensive, progressive, and very difficult to repair.

Thirdly, how is it possible that the Fed could have done so much damage to the US and world economy and get away with it? It's because the dollar is semi-officially the international currency. When the middle east countries and/or China refuse to accept dollars in exchange for their products, it will really hit the fan.

In passing, the Fed boys may be really nice guys, but they spend all their time screwing up the economy and lying about it.

Thirdly


Post Comment

Only logged in users are allowed to post comments. Register/ Log in