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
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

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