After Reviewing the Federal Reserve’s Lousy Track Record, Thomas Sowell Asks Why such a Deeply Flawed Institution Should Be Allowed to Accumulate more Power

When speaking about the difference between the private sector and the government, I sometimes emphasize that mistakes and errors are inevitable, and that the propensity to screw up may be just as prevalent in the private sector as it is in the public sector.

I actually think the government is more likely to screw up, for reasons outlined here, here, and here, but let’s bend over backwards to be fair and assume similar levels of mistakes.

The key difference between capitalism and government, though, is the feedback mechanism.

Private firms that make errors are quickly penalized. They lose customers, which means they lose profits. Or perhaps they even fail and go out of business (remember, capitalism without bankruptcy is like religion without hell).

This tends to concentrate the mind. Executives work harder, shareholders and bondholders focus more on promoting good corporate governance. All of which benefits the rest of us in our roles as workers and consumers.

But mistakes in the public sector rarely lead to negative feedback. Indeed, agencies and departments that make mistakes sometimes get rewarded with even bigger budgets. This means the rest of us are doubly victimized because we are taxpayers and we have to rely on certain government services.

Citing the Federal Reserve as an example, Thomas Sowell explains how this process works. He starts with a look at the Fed’s recent failures and asks some basic questions about why we should reward the central bank with more power.

The recent release of the Federal Reserve Board’s transcripts of its deliberations back in 2007 shows that their economic prophecies were way off. How much faith should we put in their prophecies today — or the policies based on those prophecies?

Here’s another example.

Ben Bernanke said in 2007, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” It turned out that financial disasters in the housing market were not “contained,” but spread out to affect the whole American economy and economies overseas.

And here’s the icing on the cake.

Bernanke said: “It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth.” What is an even more interesting question is why we should put such faith and such power in the hands of a man and an institution that have been so wrong before.

Sowell acknowledges that we all make errors, but then makes the key point about the risks of giving more and more power to a central bank that has such a dismal track record.

We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System — or the seemingly boundless confidence that Fed Chairman Ben Bernanke still shows as he intervenes in the economy on a massive scale.

Sowell then highlights some of the reasons why we should worry about concentrating more power into the hands of a few central bankers.

Being wrong is nothing new for the Federal Reserve System. Since this year is the one hundredth anniversary of the Fed’s founding, it may be worth looking back at its history. …In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded. The biggest deflation in the history of the country came after the Fed was founded, and that deflation contributed to the Great Depression of the 1930s.

If you want a more detailed examination of the Fed’s performance, this George Selgin video is withering indictment.

In other words, instead of giving the Fed more power, we should be looking at ways of clipping its wings.

I realize my fantasy of competitive currencies isn’t going to be realized anytime soon, and I’ve already explained why we should be very leery of trusting the government to operate a gold standard.

So I’m not sure whether I have any firm recommendations – other than perhaps hoping to convince policy makers that easy money is the not the right way of boosting an economy that is listless because of bad fiscal and regulatory policy.

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Rare Video Found from Ben Bernanke’s Childhood!

In the past, I’ve shared Federal Reserve humor, including this special Fed toilet paper, Ben Bernanke’s hacked Facebook page, the Bernanke-who-stole-Christmas image, a t-shirt celebrating the Fed Chairman, and the famous “Ben Bernank” video.

But this film from Bernanke’s childhood years may be the best of all of them. It is a good symbol of how he learned to conduct monetary policy.

Though, to be fair, it is theoretically possible that the Fed Chairman’s monetary easing is simply the well-timed provision of liquidity and he will soak up all the extra money at precisely the right moment.

But I’m skeptical, as you can see here, here, and here.

The real problem, though, is that we’ve given government a monopoly over money. This video is a good introduction to how governments replaced market-based money with central banking.

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QE3: A Risky Ploy to Solve the Problems of Bad Fiscal Policy with Bad Monetary Policy

I posted this t-shirt about Bernanke’s easy-money approach a couple of days ago, but I should have waited ’til today since it would be a perfect accompaniment to any analysis of the Fed Chairman’s unveiling of QE3.

But given the potential economic consequences, I suppose this isn’t a time for jokes. Let’s look at some of what the Wall Street Journal wrote this morning.

This is the Fed’s third round of quantitative easing (QE3) since the 2008 panic, and the difference this time is that Ben is unbounded. The Fed said it will keep interest rates at near-zero “at least through mid-2015,” which is six months longer than its previous vow. The bigger news is that the Fed announced another round of asset purchases—only this time as far as the eye can see. The Fed will start buying $40 billion of additional mortgage assets a month, with a goal of further reducing long-term interest rates. But if “the labor market does not improve substantially,” as the central bankers put it, the Fed will plunge ahead and buy more assets. And if that doesn’t work, it will buy still more. And if. . .

The “And if…” is the key passage. For all intents and purposes, Bernanke has said that the Fed is going to relentlessly focus on the variable it can’t control (employment) at the risk of causing bad news for the variable it can control (inflation).

A trip to the store in Bernankeville

Since that hasn’t worked in the past, it presumably won’t work in the future. The WSJ notes that recent Fed easings have made the economy worse.

Will it work? Mr. Bernanke recently offered a scholarly defense of his extraordinary policy actions since 2008, and there’s no doubt that QE1 was necessary in the heat of the panic. We supported it at the time. The returns on QE2 in 2010-2011 and the Fed’s other actions look far sketchier, even counterproductive. QE2 succeeded in lifting stocks for a time, but it also lifted other asset prices, notably commodities and oil. The Fed’s QE2 goal was to conjure what economists call “wealth effects,” or a greater propensity to spend and invest as consumers and businesses see the value of their stock holdings rise. But the simultaneous increase in commodity prices lifted food and energy prices, which raised costs for businesses and made consumers feel poorer. These “income effects” countered Mr. Bernanke’s wealth effects, and the proof is that growth in the real economy decelerated in 2011. It decelerated again this year amid Operation Twist. When does the Fed take some responsibility for policies that fail in their self-professed goal of spurring growth, rather than blaming everyone else while claiming to be the only policy hero?

For those of us who worry about the pernicious impact of inflation, it’s possible that the Fed will soak up all this excess liquidity at the right time. But don’t hold your breath. The WSJ continues.

The deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion. Mr. Bernanke says not to worry, he has the tools and the will to pull the trigger before inflation builds. That’s what central bankers always say. But good luck picking the right moment, which may be before prices are seen to be rising but also before the expansion has begun to lift middle-class incomes. That’s one more Bernanke Cliff the economy will eventually face—maybe after Ben has left the Eccles Building.

Last but not least, the WSJ is not terribly happy about the Fed seeking to influence the election.

Given the proximity to the Presidential election, the Fed move can’t be divorced from its political implications. Mr. Bernanke forswore any partisan motives on Thursday, and we’ll give him the benefit of the personal doubt. But by goosing stock prices, and thus lifting the short-term economic mood, the Fed has surely provided President Obama an in-kind re-election contribution.

If we go to the other side of the Atlantic, Allister Heath of City A.M. has some very wise thoughts about QE3.

In the long run, real sustainable growth comes from entrepreneurs inventing better ways of conducting business, from investment in productivity enhancing capex financed from savings, and from more people finding viable jobs. Eventually, the short-term becomes the long-term – and that is where we are today. Cheap money is just a temporary fix – and like all drugs, the economy needs more and more of it merely to stay still now it is hooked. …manipulating the housing and construction markets is a dangerous game that the Fed should not be playing; it would be better to allow the market to clear freely. In a brilliant new paper for the Federal Reserve Bank of Dallas, William R White, one of the few economists to have predicted the financial crisis, warns of the disastrous unintended consequences of ultra easy money. He explains why there are limits to what central banks can do, that monetary “stimulus” is less effective in bolstering aggregate demand than previously, that it triggers negative feedback mechanisms that weaken both the supply and demand-sides of the economy, threatens the health of financial institutions and the functioning of financial markets, damages the independence of central banks, and encourages imprudent behaviour on the part of governments.

In other words, Allister is worried about the Fed acting as some sort of central planning body, attempting to steer the economy.

Sadly, the Fed has a long track record of doing precisely that, as documented in this lecture by Professor George Selgin. It’s 40 minutes, so not for the faint of heart, but if you watch the video, you’ll have a hard time giving the Fed the benefit of the doubt.

And let’s also remember that bad monetary policy is not the only thing to worry about when considering the Fed’s behavior. It also has started to interfere with the functioning of credit markets, thus distorting the allocation of capital.

Here’s the bottom line. I think, at best, the Fed is pushing on a string. Why will it help to create more liquidity when banks already have more than $1 trillion of excess reserves?

The real problem in our economy is the overall burden of government. The tax system is punitive. Wasteful and excessive government spending is diverting resources from productive use. The regulatory burden continues to expand.

These are the policies that need to be fixed. Sadly, they are less likely to be addressed if politicians think they can paper over the problems by figuratively printing more money.

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Ben Bernanke: “Who Is This Man, and Why Is He Ruining My Money?”

Like most of you, I imagine, I get lots of email advertisements. It’s very rare that I ever click on something, and I’ve never purchased anything. But sometimes I have to acknowledge a clever pitch or product.

And since I’ve previously publicized special Federal Reserve toilet paper, Ben Bernanke’s hacked Facebook page, and the famous “Ben Bernank” video, you will understand why I think this t-shirt is quite amusing.

Though I’m not sure that’s a great likeness of Bernanke on the t-shirt. Heck, my Bernanke-who-stole-Christmas image may be more accurate.

But I guess that’s not overly important since the real reason for the t-shirt is to express concern about inflationary monetary policy. And that’s something that should worry all of us (it’s already worrying drug dealers).

To be momentarily serious, I don’t follow monetary policy closely enough to make definitive statements, but here’s a good summary of why I’m also worried. I further address monetary policy in this post, and express displeasure with Bernanke’s behavior in this post.

Last but not least, this video is a good introduction to central banking.

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Ten Reasons to Dislike the Federal Reserve

Nothing compares to the depth and substance of Professor George Selgin’s scholarly take-down of the Federal Reserve, but this video by a local libertarian has a very authentic feel.

Julie lists 10 reasons to dislike the Fed.

1.    The Fed has too much power.
2.    The Fed has devalued the currency.
3.    The Fed hurts the poor and middle class.
4.    The Fed is unaccountable.
5.    The Fed destabilizes the economy.
6.    The Fed is too secretive.
7.    The Fed benefits special interests.
8.    The Fed is unconstitutional.
9.    The Fed facilitates bailouts.
10.    The Fed encourages deficit spending.

If I want to nit-pick, I’m not sure that I agree with number 8 since the Constitution gives the federal government the power to coin money. I guess it depends how one interprets that particular power.

Also, I suspect politicians would waste just as much money even if the Fed didn’t exist, so number 10 may be a bit superfluous.

The main argument against the Fed is number 5. Looking at the economic chaos of the 1930s and 1970s, as well as the recent economic crisis, it is no exaggeration to say that the Federal Reserve deserves the lion’s share of the blame.

For those that like monetary policy, here’s my video that looks at the origin of central banking.

And I can’t resist including a link to the famous “Ben Bernank” QE2 video that was a viral smash.

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The Federal Reserve, the “Twist,” Inflation, QE3, and Pushing on a String

Welcome Instapundit readers: If you want a longer-term perspective on the Fed’s misdeeds, this George Selgin analysis is highly recommended.

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In a move that some are calling QE3, the Federal Reserve announced yesterday that it will engage in a policy called “the twist” – selling short-term bonds and buying long-term bonds in hopes of artificially reducing long-term interest rates. If successful, this policy (we are told) will incentivize more borrowing and stimulate growth.

I’ve freely admitted before that it is difficult to identify the right monetary policy, but it certainly seems like this policy is – at best – an ineffective gesture. This is why the Fed’s various efforts to goose the economy with easy money have been described as “pushing on a string.”

Here are two related questions that need to be answered.

1. Is the economy’s performance being undermined by high long-term rates?

Considering that interest rates are at very low levels already, it seems rather odd to claim that the economy will suddenly rebound if they get pushed down a bit further. Japan has had very low interest rates (both short-run and long-run) for a couple of decades, yet the economy has remained stagnant.

Perhaps the problem is bad policy in other areas. After all, who wants to borrow money, expand business, create jobs, and boost output if Washington is pursuing a toxic combination of excessive spending and regulation, augmented by the threat of higher taxes.

2. Is the economy hampered by lack of credit?

Low interest rates, some argue, may not help the economy if banks don’t have any money to lend. Yet I’ve already pointed out that banks have more than $1 trillion of excess reserves deposited at the Fed.

Perhaps the problem is that banks don’t want to lend money because they don’t see profitable opportunities. After all, it’s better to sit on money than to lend it to people who won’t pay it back because of an economy weakened by too much government.

The Wall Street Journal makes all the relevant points in its editorial.

The Fed announced that through June 2012 it will buy $400 billion in Treasury bonds at the long end of the market—with six- to 30-year maturities—and sell an equal amount of securities of three years’ duration or less. The point, said the FOMC statement, is to put further “downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.” It’s hard to see how this will make much difference to economic growth. Long rates are already at historic lows, and even a move of 10 or 20 basis points isn’t likely to affect many investment decisions at the margin. The Fed isn’t acting in a vacuum, and any move in bond prices could well be swamped by other economic news. Europe’s woes are accelerating, and every CEO in America these days is worried more about what the National Labor Relations Board is doing to Boeing than he is about the 30-year bond rate. The Fed will also reinvest the principal payments it receives on its asset holdings into mortgage-backed securities, rather than in U.S. Treasurys. The goal here is to further reduce mortgage costs and thus help the housing market. But home borrowing costs are also at historic lows, and the housing market suffers far more from the foreclosure overhang and uncertainty encouraged by government policy than it does from the price of money. The Fed’s announcement thus had the feel of an attempt to show it is doing something to help the economy, even if it can’t do much. …the economy’s problems aren’t rooted in the supply and price of money. They result from the damage done to business confidence and investment by fiscal and regulatory policy, and that’s where the solutions must come. Investors on Wall Street and politicians in Washington want to believe that the Fed can make up for years of policy mistakes. The sooner they realize it can’t, the sooner they’ll have no choice but to correct the mistakes.

Let’s also take this issue to the next level. Some people are explicitly arguing in favor of more “quantitative easing” because they want some inflation. They argue that “moderate” inflation will help the economy by indirectly wiping out some existing debt.

This is a very dangerous gambit. Letting the inflation genie out of the bottle could trigger 1970s-style stagflation. Paul Volcker fires a warning shot against this risky approach in a New York Times column. Here are the key passages.

…we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes. The siren song is both alluring and predictable. …After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? …all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth. …What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate. …At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.

Last but not least, here is my video on the origin of central banking, which starts with an explanation of how currency evolved in the private sector, then describes how governments then seized that role by creating monopoly central banks, and closes with a list of options to promote good monetary policy.

And I can’t resist including a link to the famous “Ben Bernank” QE2 video that was a viral smash.

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Another Fed-Bashing Video

I generally try to avoid commenting on monetary policy. Not because I don’t have opinions, but for the simple reason that I don’t follow the issue closely enough to feel fully confident about what I say.

This doesn’t mean I’m happy with Fed Chairman Bernanke. But I’m most likely to be upset that he is making misguided statements about fiscal policy (endorsing the faux stimulus, endorsing bailouts, endorsing tax increases, and siding with Obama on the debt-limit fight).

On monetary policy, as I’ve previously explained, it’s possible that “easy money” is the right approach. I’m skeptical, but I admitted on CNBC that the TIPS data does suggest that future inflation is not a problem.

So with all these caveats out of the way, I don’t embrace everything in this video, which is very critical of the Fed, but it’s amusing and worth sharing.

If you find it even remotely interesting and/or amusing, then you definitely should watch the famous Ben-Bernank-quantitative-easing video.

And if you want to actually understand more about the Federal Reserve and monetary policy, then you should watch this video on the history of the Fed featuring Professor George Selgin.

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Ben Bernanke: Political Hack for Big Government

Ben Bernanke is definitely trying hard to overtake Arthur Burns and G. William Miller (those wonderful guys who helped give us the 1970s) as the worst Fed Chairman of the modern era. But unlike Burns and Miller, who “earned” their poor reputations with bad monetary policy, Bernanke is trying to cement his place in history by being a stooge for the big-government policies of the Washington establishment (he also is getting lots of criticism for QE2 and other monetary policy actions, but let’s give Bernanke the benefit of the doubt and assume all those decisions will somehow work out for the best).

Bernanke frequently pontificates about the supposed horrors of deficits and debt (I write “supposed” because the real problem is spending, with red ink being a symptom of a government that is far too large). Yet he endorsed Obama’s failed stimulus. He’s also asserted that reducing the burden of government spending would hurt the economy. And he was an avid supporter of the TARP bailout.

Now he’s trying to discourage GOPers from seeking budgetary savings as part of a proposed increase in the debt limit. Here’s a blurb from the AP report.

Federal Reserve Chairman Ben Bernanke on Tuesday urged Republicans to support raising the nation’s borrowing limit. He said threatening to block the increase to gain deeper federal spending cuts could backfire and worsen the economy. Even a short delay in making payments on the nation’s debt would cause severe disruptions in financial markets, damage the dollar and raise serious doubts about the nation’s creditworthiness, Bernanke said.

By the way, I’ve previously debunked Bernanke’s demagoguery about disrupted financial markets. The federal government this year will collect 10 times as much revenue as needed to service the national debt.

Let’s close with a thought experiment. What do you think Bernanke would say if Senate Republicans got suckered into a tax increase and that tax hike was attached to a debt limit, but House GOPers were refusing to go along? It’s just a guess, of course, but I’m quite confident that Bernanke would completely reverse his position about the debt limit and suddenly say something like “it is critical to include such a measure to demonstrate seriousness about fixing the fiscal mess in DC.”

What it would actually demonstrate, though, is that Bernanke is a tool for big government.

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Could Technical Default Today Save America from Greek-Style Fiscal Disaster in the Future?

There’s a lot of buzz about a Wall Street Journal interview with Stanley Druckenmiller, in which he argues that a temporary delay in making payments on U.S. government debt (which technically would be a default) would be a small price to pay if it resulted in the long-term spending reforms that are needed to save America from becoming another Greece.

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs. “I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction. …Mr. Druckenmiller’s view on the debt limit bumps up against virtually the entire Wall Street-Washington financial establishment. A recent note on behalf of giant banks on the Treasury Borrowing Advisory Committee warned of a “severe and long-lasting impact” if the debt limit is not raised immediately. …This week more than 60 trade associations, representing virtually all of American big business, forecast “a massive spike in borrowing costs.” On Thursday Federal Reserve Chairman Ben Bernanke raised the specter of a market crisis similar to the one that followed the 2008 bankruptcy of Lehman Brothers. As usual, the most aggressive predictor of doom in the absence of increased government spending has been Treasury Secretary Timothy Geithner. In a May 2 letter to House Speaker John Boehner, Mr. Geithner warned of “a catastrophic economic impact” and said, “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Mr. Druckenmiller is not overly impressed by this hyperbole. The article continues with this key passage.

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says. Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.” …”Russia had a real default and two or three years later they had all-time low interest rates,” says Mr. Druckenmiller. In the future, he says, “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order.”

This is a very compelling argument, but it overlooks one major problem – the complete inability of Republicans to succeed in forcing fiscal reform using this approach.

Here’s a sure-fire prediction, assuming GOPers in the House actually are willing to engage in an eyeball-to-eyeball confrontation with Obama on the debt limit.

o There will be lots of political drama.

o We will get to a point where the federal government exhausts its borrowing authority.

o At that point, either Geithner or Bernanke (or probably both) will make some completely dishonest statements designed to rattle financial markets.

o The establishment media will echo those statements.

o The stock market and/or bond market will have a negative reaction.

o Republican resolve will evaporate like a drop of water in the Mojave Desert.

o The debt limit will be increased without any meaningful fiscal reform.

For all intents and purposes, this is what happened with the TARP vote in 2008. There were basically two choices of how to deal with the financial crisis. The establishment wanted a blank-check bailout, while sensible people wanted the “FDIC-resolution” approach (similar to what was used during the savings & loan bailouts about 20 years ago, which bails out retail customers but wipes out shareholders, bondholders and senior management). Republicans initially held firm and defeated the first TARP vote, but then they folded when the Washington-Wall Street establishment scared markets.

I hope I’m wrong in my analysis, but I don’t see how Republicans could win a debt limit fight. At least not if they demand something like the Ryan budget. The best possible outcome would be budget process reform such as Senator Corker’s CAP Act, which would impose caps on future spending, enforced by automatic spending cuts known as sequestration. Because it postpones the fiscal discipline until after the vote, that legislation has a chance of attracting enough bipartisan support to overcome opposition from Obama and other statists.

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Why Are Geithner and Bernanke Trying to Panic Financial Markets with Debt Limit Demagoguery?

By taking advantage of  “must-pass” pieces of legislation, Republicans have three chances this year to restrain the burden of government.  They didn’t do very well with the ‘CR fight” over appropriated spending for the rest of FY2011, which was their first opportunity. I was hoping for an extra-base hit off the fence, but the GOP was afraid of a government shutdown and negotiated from a position of weakness. As such, the best interpretation is that they eked out an infield single.

The next chance to impose fiscal discipline will be the debt limit. Currently, the federal government “only” has the authority to borrow $14.3 trillion (including bookkeeping entries such as the IOUs in the Social Security Trust Fund). This is a very big number, but America’s gross federal debt will hit that limit soon, perhaps May or June.

Republicans say they will not raise the debt limit unless such legislation is accompanied by meaningful fiscal reforms. The political strategists in the Obama White House understandably want to blunt any GOP effort, so they are claiming that any delay in passing a “clean debt limit” will have catastrophic consequences. Specifically, they are using Treasury Secretary Tim Geithner and Federal Reserve Bank Chairman Ben Bernanke to create fear and uncertainty in financial markets.

Just a few days ago, for instance, the Treasury Secretary was fanning the flames of a financial meltdown, as noted by Bloomberg:

“Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover,” Geithner said. “For these reasons, default by the United States is unthinkable.”

The Fed Chairman also tried to pour gasoline on the fire. Here’s a passage from an article in the New York Times earlier this year:

Mr. Bernanke said the debt ceiling should not be used as a negotiating tactic, warning that even the possibility of the United States not being able to pay its creditors could create panic in the debt markets.

There are two problems with these statements from Geithner and Bernanke. First, it is a bit troubling that the Treasury Secretary and Fed Chairman are major players in a political battle. The Treasury Secretary, like the Attorney General, traditionally is supposed to be one of the more serious and non-political people in a  President’s cabinet. And the Fed Chairman is supposed to be completely independent, yet Bernanke is becoming a mouthpiece for Obama’s fiscal policy.

But let’s set aside this first concern and focus on the second problem, which is whether Geithner and Bernanke are being honest. Simply stated, does a failure to raise the debt limit mean default? According to a wide range of expert opinion, the answer is no.

Donald Marron, head of the Urban-Brookings Tax Policy Center and former Director of the Congressional Budget Office, explained what actually would happen in an article for CNN Money.

Our monthly bills average about $300 billion, while revenues are about $180 billion. If we hit the debt limit, the federal government would be able to pay only 60 cents of every dollar it should be paying. But even that does not mean that we will default on the public debt. Geithner would then choose which creditors to pay promptly and which to defer. …Geithner would undoubtedly keep making payments on the public debt, rolling over the outstanding principal and paying interest. Interest payments are relatively small, averaging about $20 billion per month, and paying them on time is essential to America’s enviable position in world capital markets.

And here is the analysis of Stan Collender, one of Washington’s elder statesman on budget issues (and definitely not a small-government conservative).

There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isn’t increased that, before any more unnecessary bloodcurdling language is used that increases everyone’s anxiety, it’s worth taking a few steps back from the edge. …if a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months.

The Economist magazine also is nonplussed by the demagoguery coming from Washington.

Tim Geithner, the treasury secretary, sent Congress a letter on January 6th describing in gory detail the “catastrophic economic consequences” such an event would entail. …Even with no increase in the ceiling, the Treasury can easily service its existing debt; it is free to roll over maturing issues, and tax revenue covers monthly interest payments by a large multiple. But in that case it would have to postpone paying something else: tax refunds, Medicare or Medicaid payments, civil-service salaries, or Social Security (pensions) cheques.

There are countless other experts I could cite, but you get the point. The United States does not default if the debt limit remains at $14.3 trillion. The only exception to that statement is that default is possible if the Treasury Secretary makes a deliberate (and highly political) decision to not pay bondholders. And while Geithner obviously is willing to play politics, even he would be unlikely to take this step since it is generally believed that the Treasury Secretary may be personally liable if there is a default.

The purpose of this post is not to argue that the debt limit should never be raised. That would require an instant 40 percent reduction in the size of government. And while that may be music to my ears (and some people are making that argument), I have zero faith that politicians would let that happen. Instead, my goal is to help fiscal conservatives understand that Geithner and Bernanke are being dishonest and that they should not be afraid to hold firm in their demands for real reform in exchange for a debt limit increase.

Last but not least, with all this talk about the debt limit, it’s worth reminding everyone that deficits and debt are merely symptoms of too much government spending. As this video explains, spending is the disease and debt is merely one of the symptoms.

By the way, the final chance this year to impose spending restraint will be around October 1, when the 2011 fiscal year expires and the 2012 fiscal year begins. But I won’t be holding my breath for anything worthwhile if Republicans screw up on the debt limit just like they failed to achieve much on the CR fight.

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End the Fed: More than Just a Bumper Sticker Slogan?

To put it mildly, the Federal Reserve has a dismal track record. It bears significant responsibility for almost every major economic upheaval of the past 100 years, including the Great Depression, the 1970s stagflation, and the recent financial crisis. Perhaps the most damning statistic is that the dollar has lost 95 percent of its value since the central bank was created.

Notwithstanding its poor performance, the Federal Reserve seems to get more power over time. But rather than rewarding the central bank for debasing the currency and causing instability, perhaps it’s time to contemplate alternatives. This new video from the Center for Freedom and Prosperity dives into that issue, exposing the Fed’s poor track record, explaining how central banking evolved, and mentioning possible alternatives.

This video is the first installment of a multi-part series on monetary policy. Subsequent videos will examine possible alternatives to monopoly central banks, including a gold standard, free banking, and monetary rules to limit the Fed’s discretion.

One of the challenges in this field is that opponents of the Fed often are portrayed as cranks. Defenders of the status quo may not have a good defense of the Fed, but they are rather effect in marginalizing critics. Congressman Ron Paul and others are either summarily dismissed or completely ignored.

The implicit assumption in monetary circles is that there is no alternative to central banking and fiat money. Anybody who criticizes the current system therefore is a know-nothing who wants to create some sort of libertarian dystopia featuring banking panics and economic chaos.

To be fair, it certainly might be possible to create a monetary regime that is worse than the Fed. That is why the next videos in this series will offer a careful look at the costs and benefits of possible alternatives.

As they say, stay tuned.

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Some Wholesome Fed-Bashing on CNBC

A lot of guests for this appearance, but I think I got a fair share of airtime. More important, I explained why it is not a good thing for Ben Bernanke and the Federal Reserve to let the inflation genie out of the bottle.

Monetary policy is one area where I always try to display some humility. While I know the right goal is zero inflation, I realize that achieving that goal requires central bankers to know both the supply of money (not as easy as it used to be) and the demand for money (always a challenge).

This is why I’m skeptical of QE2, but also willing to admit that it might be the right approach (though it grates on me that it is often portrayed as a form of stimulus, which definitely is wrong).

I’ll soon release a video that begins to tackle monetary policy. I don’t want to give away too much right now, but suffice to say that a monopoly central bank run by government is a recipe for mischief.

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Guess Who Profits from Inflation?

As I’ve noted on previous occasions, I’m not a fan of Ben Bernanke and his actions at the Federal Reserve, though it is possible that QE2 may be the right policy (albeit for different reasons than publicly stated by the Fed Chairman).

I’ve had several people say to me, however, that it doesn’t make sense for the government to engage in an inflationary monetary policy because that will worsen the fiscal situation. Why inflate, after all, if it results in higher cost-of-living adjustments for Social Security recipients and higher pay for government bureaucrats?

My first response is to say that long-run fiscal policy almost surely is not a big (or even little) factor in monetary policy decisions. Central Banks tend to behave poorly for short-run reasons such as financing deficits (a problem in the developing world) or manipulating interest rates in hopes of goosing growth (a problem is all nations).

It goes without saying, of course, that a series of bad short-run policy decisions translates into bad long-run policy, which is why the dollar has lost 95 percent of its value since the Federal Reserve was created.

My second response is to tell folks that we should hope that long-run fiscal policy is not a factor in monetary policy. Because they are right that inflation leads to higher expenditures, but the government reaps a big windfall from higher tax revenue.

But don’t believe me. You can find this information in Table 3.1 on page 23 of the Economic and Budget Analysis section of Obama’s budget.

Addendum: Welcome, Instapundit readers. Since this is a depressing topic, you can see some Federal Reserve humor here, here, and here.

And if you want to really understand what wrong with the Fed, this is the video to watch.

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Bernanke’s Soft-Core Keynesianism Is Even Worse than the Nonsensical Analysis of Hard-Core Keynesians

Earlier this week, the Washington Post predictably gave some publicity to the Keynesian analysis of Mark Zandi, even though his track record is worse than a sports analyst who every year predicts a Super Bowl for the Detroit Lions. The story also cited similar predictions by the politically connected folks at Goldman Sachs.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year. His report comes on the heels of a similar analysis last week by the investment bank Goldman Sachs, which predicted that the Republican spending cuts would cause even greater damage to the economy, slowing growth by as much as 2 percentage points in the second and third quarters of this year.

Republicans understandably wanted to discredit this analysis. But rather than expose Zandi’s laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like asking Alex Rodriguez to comment on Derek Jeter’s prediction that the Yankees will win the World Series.

Not surprisingly, as reported by McClatchy, Bernanke endorsed the notion that spending cuts (actually, just tiny reductions in planned increases) would be “contractionary.”

Bernanke was asked repeatedly about GOP proposals to trim anywhere from $60 billion to $100 billion in government spending during the current fiscal year, which ends Sept. 30. These cuts would do little to bring down long-term budget deficits but would slow the economic recovery, he cautioned. “That would be ‘contractionary’ to some extent,” Bernanke said, projecting that “several tenths” of a percentage point would be shaved off of growth, and it would mean fewer jobs. …While Democrats got what they wanted out of Bernanke with that answer, he frowned on some of their projections that the spending cuts that are being debated could reduce growth by a full 2 percentage points.

Since he is not a fool, Bernanke was careful not to embrace the absurd predictions made by Zandi and Goldman Sachs. But that’s merely a difference of degree. Bernanke’s embrace of Keynesian economics is disgraceful because he should know better. And his endorsement of deficit reduction (at least in the long run) is stained by crocodile tears since Bernanke supported bailouts and endorsed Obama’s failed stimulus.

But while Bernanke is not a fool, I can’t say the same thing about Republicans. Bernanke has made clear that he either believes in the perpetual-motion machine of Keynesianism, or he’s willing to endorse Keynesian policies to curry favor with the White House. Republicans should be exposing these flaws, not treating Bernanke likes he’s some sort of Oracle.

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Five Things We Should Worry about in 2011

The mid-term elections were a rejection of President Obama’s big-government agenda, but those results don’t necessarily mean better policy. We should not forget, after all, that Democrats rammed through Obamacare even after losing the special election to replace Ted Kennedy in Massachusetts (much to my dismay, my prediction from last January was correct).

Similarly, GOP control of the House of Representatives does not automatically mean less government and more freedom. Heck, it doesn’t even guarantee that things won’t continue to move in the wrong direction. Here are five possible bad policies for 2011, most of which the Obama White House can implement by using executive power.

1. A back-door bailout of the states from the Federal Reserve – The new GOP Congress presumably wouldn’t be foolish enough to bail out profligate states such as California and Illinois, but that does not mean the battle is won. Ben Bernanke already has demonstrated that he is willing to curry favor with the White House by debasing the value of the dollar, so what’s to stop him from engineering a back-door bailout by having the Federal Reserve buy state bonds? The European Central Bank already is using this tactic to bail out Europe’s welfare states, so a precedent already exists for this type of misguided policy. To make matters worse, there’s nothing Congress can do – barring legislation that Obama presumably would veto – to stop the Fed from this awful policy.

2. A front-door bailout of Europe by the United States – Welfare states in Europe are teetering on the edge of insolvency. Decades of big government have crippled economic growth and generated mountains of debt. Ireland and Greece already have been bailed out, and Portugal and Spain are probably next on the list, to be followed by countries such as Italy and Belgium. So why should American taxpayers worry about European bailouts? The unfortunate answer is that American taxpayers will pick up a big chunk of the tab if the International Monetary Fund is involved. Indeed, this horse already has escaped the barn. The United States provides the largest amount of  subsidies to the International Monetary Fund, and the IMF took part in the bailouts of Greece and Ireland. The Senate did vote against having American taxpayers take part in the bailout of Greece, but that turned out to be a symbolic exercise. Sadly, that’s probably what we can expect if and when there are bailouts of the bigger European welfare states.

3. Republicans getting duped by Obama and supporting a VAT – The Wall Street Journal is reporting that the Obama Administration is contemplating a reduction in the corporate income tax. This sounds like a great idea, particularly since America’s punitive corporate tax rate is undermining competitiveness and hindering job creation. But what happens if Obama demands that Congress approve a value-added tax to “pay for” the lower corporate tax rate? This would be a terrible deal, sort of like a football team trading a great young quarterback for a 35-year old lineman. The VAT would give statists a money machine that they need to turn the United States into a French-style welfare state. This type of national sales tax would only be acceptable if the personal and corporate income taxes were abolished – and the Constitution was amended to make sure the federal government never again could tax what we earn and produce. But that’s not the deal Obama would offer. My fingers are crossed that Obama doesn’t offer to swap a lower corporate income tax for a VAT, particularly since we already know that some Republicans are susceptible to the VAT.

4. Regulatory imposition of global warming policy – This actually is an issue we needed to start worrying about before this year. The Obama Administration already is in the process of trying to use regulatory edicts to impose Kyoto-style restrictions on energy use, and 2011 may be a pivotal year for this issue. This issue is troubling because of the potential impact on economic growth, but it also represents an assault on the rule of law since the White House and the Environmental Protection Agency are engaging in regulatory overreach because they did not have enough support to get so-called climate change legislation through Congress. The new GOP majority presumably will try to use the “power of the purse” to limit the EPA’s power grab, and the outcome of that fight could have dramatic implications for job creation and competitiveness.

5. U.N. control of the Internet – The Federal Communications Commission just engaged in an unprecedented power grab as part of its “Net Neutrality” initiative, so we already have bad news for both Internet consumers and America’s telecommunications industry. But it may get worse. The bureaucrats at the United Nations, conspiring with autocratic governments, have created an Internet Governance Forum in hopes of grabbing power over the online world. This has caused considerable angst, leading Vint Cerf, one of inventors of the Internet (sorry, Al Gore) to warn: “We don’t believe governments should be allowed to grant themselves a monopoly on Internet governance. The current bottoms-up, open approach works — protecting users from vested interests and enabling rapid innovation. Let’s fight to keep it that way.” International bureaucracies are very skilled at incrementally increasing their authority, so this won’t be a one-year fight. Stopping this power grab will require persistent oversight and a willingness to reject compromises that inevitably give bureaucracies more power and simply set the stage for further demands.

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Merry Christmas from Ben Bernanke

The Chairman of the Federal Reserve is such a swell guy, but you already would know that if you saw his Facebook page. Well, thanks to his “QE2 plan,” he’s giving the rest of us a very thoughtful Christmas present.

To be fair, I suppose it should be noted that Bernanke’s policy isn’t necessarily a bad idea – but only if you think that there will be future deflation and “quantitative easing” is the way of preventing that from happening. I’m quite skeptical, as explained here, but freely admit that I’m not a monetary policy expert (thanks for catching my mistake, Charlie). But Christmas isn’t the right time for serious discussion, so let’s just enjoy a laugh and keep our fingers crossed that we’re not heading into Jimmy Carter Inflation-land.

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Someone Tell Bernanke You Don’t Cure Bad Fiscal Policy with Bad Monetary Policy

Fed Chairman Ben Bernanke is at it again, giving an interview that combines all of the worst features of Keynesian economics. I have an excerpt below from a New York Times report, which features an amazing amount of mistakes in a very short amount of space. Here are three that demand correction.

1. The economy needs less government intervention, not more “government help.” Bernanke doesn’t understand that job creation and entrepreneurship are hurting because politicians are doing too much, yet he wants more interference from Washington.

2. The economy needs less government spending, not Keynesian nonsense about big deficits to boost consumer spending. Bernanke seems to think so-called stimulus schemes for more wasteful spending help the economy, even though those policies failed for Hoover, Roosevelt, Bush, and Obama.

3. The economy needs a strong and stable dollar, not inflationary quantitative easing. Bernanke wants us to believe that low interest rates are the key to growth, but apparently oblivious to the fact that interest rates are very low now (and have been very low in Japan during that country’s 20-year stagnation. Memo to Ben: People don’t invest when they expect to lose money, regardless of interest rates.

Here’s the excerpt about Helicopter Ben’s thinking:

Federal Reserve Chairman Ben Bernanke is stepping up his defense of the Fed’s $600 billion Treasury bond-purchase plan, saying the economy is still struggling to become “self-sustaining” without government help. In a taped interview with CBS’ “60 Minutes” that aired Sunday night, Bernanke also argued that Congress shouldn’t cut spending or boost taxes given how fragile the economy remains. The Fed chairman said he thinks another recession is unlikely. But he warned that the economy could suffer a slowdown if persistently high unemployment dampens consumer spending. The interview is part of a broad counteroffensive Bernanke has been waging against critics of the bond purchase plan the Fed announced Nov. 3. The purchases are intended to lower long-term interest rates, lift stock prices and encourage more spending to boost the economy.

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The Hidden Explanation for Bernanke’s QE2 Policy?

Maybe I’m crazy, or maybe I’m just getting into the Christmas spirit, but I saw this photo of Fed Chairman Ben Bernanke on the Drudge Report and my mind instantly connected his image with this character from “The Grinch Who Stole Christmas.”

This might explain Bernanke’s QE2 policy. I can see a film being released in time for next year’s holiday season: “The Grinch Who Debased the Dollar.”

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Bashing the Federal Reserve

I’m utterly envious at how this video has gone viral, but I have to admit that it is quite clever. I don’t think my flat tax videos, for instance, have quite the same flair. In any event, one imagines “the Ben Bernank” is probably not happy about  this production.

If you really want to understand the Federal Reserve’s shortcomings, however, you should read this new Cato Institute working paper. Here’s the abstract.

As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation‘s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed‘s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed‘s establishment. (2) While the Fed‘s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

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Will the Federal Reserve’s Easy-Money Policy Turn the United States into a Global Laughingstock?

One of my first blog posts (and the first one to get any attention) highlighted the amusing/embarrassing irony of having Chinese students laugh at Treasury Secretary Geithner when he claimed the United States had a strong-dollar policy.

I suspect that even Tim “Turbotax” Geithner would be smart enough to avoid such a claim today, not after the Fed’s announcement (with the full support of the White House and Treasury) that it would flood the economy with $600 billion of hot money.

As I noted in an earlier post, monetary policy is not nearly as cut and dried as other issues, so I’m reluctant to make sweeping and definitive statements. That being said, I’m fairly sure that the Fed is on the wrong path. Here’s what my colleague Alan Reynolds wrote in the Wall Street Journal about Bernanke’s policy.

Mr. Bernanke…believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing. This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn’t intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?

The rest of the world seems to share these concerns. The Germans are not big fans of America’s binge of borrowing and easy money. Here’s what Finance Minister Wolfgang Schäuble had to say in a recent interview.

The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. …I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don’t recognize the economic argument behind this measure. …The Fed’s decisions bring more uncertainty to the global economy. …It’s inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.

The comment about borrowed money has a bit of hypocrisy since German government debt is not much lower than it is in the United States, but the Finance Minister surely is correct about monetary policy. And speaking of China, we now have the odd situation of a Chinese rating agency downgrading U.S. government debt.

The United States has lost its double-A credit rating with Dagong Global Credit Rating Co., Ltd., the first domestic rating agency in China, due to its new round of quantitative easing policy. Dagong Global on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the US by one level to A+ from previous AA with “negative” outlook.

This development shold be taken with a giant grain of salt, as explained by a Wall Street Journal blogger. Nonetheless, the fact that the China-based agency thought this was a smart tactic must say something about how the rest of the world is beginning to perceive America.

Simply stated, Obama is following Jimmy Carter-style economic policy, so nobody shoud be surprised if the result is 1970s-style stagflation.

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Should the Fed Print More Money?

Chairman Ben Bernanke has announced that the Federal Reserve will buy about $600 billion of government bonds as part of what is being called QE2 (because this is the second big stage of “quantitative easing”).

This actually isn’t printing money, but it has the same effect in that it creates more liquidity by putting more money into the financial system. The theory is that all this extra money will drive down interest rates, and that lower interest rates will encourage people to take on more debt to finance additional spending.

There are several reasons why this is a bad idea and one potential argument why it is a good idea.

* It is a bad idea because rising prices are the inevitable result when there is more money chasing the same amount of goods.

* It is a bad idea because it assumes that the economy is weak because of high low interest rates. That is nonsense. Interest rates already are very low. Trying to drive them lower in hopes of stimulating borrowing is like pushing on a string.

* It is a bad idea because you don’t solve bad fiscal and regulatory policy with bad monetary policy. The economy is weak in considerable part because of too much spending, new health care interventions, and the threat of higher taxes. You don’t solve those problems by printing money, just like you don’t make rotting fish taste good with ketchup.

* It is a bad idea because the easy-money policy of artificially low interest rates helped create the housing bubble and financial crisis, and “hair of the dog” is not the right approach.

* It is a bad idea because no nation becomes economically strong with a weak currency.

* It is a bad idea because it may lead to “competitive devaluation,” as other nations copy the Fed’s misguided policy in hopes of keeping their exports affordable.

So what about arguments in favor of the Fed’s policy? There’s only one possible reason to support Bernanke’s policy, and at least one monetarist friend has offered this as justification for what is happening. I hope he’s right.

* The only legitimate argument for quantitative easing is if more money needs to be put in the system to counteract deflation. In other words, if the Fed focuses on its one appropriate responsibility – price stability, and if there is a legitimate concern of falling prices in the future, then an “easy-money” policy today could offset that future deflation.

By the way, some people say that the stock market’s recent performance is a sign that Bernanke’s policy is good for the economy. This is wrong because it confuses portfolio shifting with long-term economic performance. When the Fed creates liquidity, that drives down interest rates. What does that mean for investors? Well, it means that putting money into bonds will yield a lower return, so the only other major option is stocks. That is why Fed policy often leads (seemingly inexplicably) to short-term results that are at odds with the long-term consequences.

Here are some excerpts from a Bloomberg report.

Federal Reserve Chairman Ben S. Bernanke said the central bank must focus on the U.S. rather than overseas economies when trying to spur the recovery by purchasing an additional $600 billion in Treasuries. …Bernanke came under fire yesterday from officials in Germany, China, and Brazil, who said his plan to pump cash into the banking system may jar other economies and fail to fuel U.S. growth. Critics including Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, have said Fed policy is encouraging investors to take on too much risk and threatens to undermine the dollar. …“We are showing insufficient stimulus,” Bernanke said yesterday in his remarks, mostly in response to questions. Asset purchases have “the goal of reducing interest rates, providing more stimulus to the economy and, we hope, creating a faster recovery and an inflation rate consistent with long-run stability,” Bernanke said to students.

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Can a Weak Dollar Lead to a Strong Economy?

Two CNBC stories are linked on the Drudge Report this morning, and they both highlight the growing risk of the Fed’s easy-money policy. The first story discusses whether the dollar will continue to depreciate. Since the “optimist” argument is based on global instability, this is hardly encouraging regardless of what you think will happen to the dollar.

The dollar’s slump could get far worse if the dollar index takes out last year’s low, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC Monday. …”The dollar is being trashed, we’ve actually had effectively devaluation of about 14 percent in the last two months,” Griffiths said. His view is contrary to that of HSBC foreign exchange strategist David Bloom, who told CNBC that a continuation of the currencies war after the G20 might put pressure on risky assets, causing a flight to safety into the dollar.

The Germans certainly are not happy about U.S. monetary policy. The other story reveals that Bernanke’s easy-money policy met with criticism from other nations at the recent G-20 meeting in South Korea.

German Economy Minister Rainer Bruederle on Saturday took issue with what he called a U.S. policy of increasing liquidity, saying it indirectly manipulated exchange rates. The U.S. Federal Reserve is widely expected to embark on a fresh round of asset purchases to prop up the economy. “There was criticism of the American policy of monetary easing, or creating more liquidity,” Bruederle said after a meeting in South Korea of finance officials from the Group of 20 economic powers. “I tried to make clear in my contribution to the discussion that I regard that as the wrong way to go,” he said.

But maybe this image captures the real meaning of what’s happening to the dollar. On a more serious note, the United States is not in danger of becoming another Zimbabwe or Argentina, but there are real reasons to be concerned that political manipulation of monetary policy will bring us back to 1970s-style inflation. At that point, the question becomes whether we get a leader like Reagan who is willing to make the tough choices needed to restore a sound currency.



The Wall Street Journal obviously isn’t happy about the Fed’s policy. Writing about what happened in South Korea, they opine this morning that:

…the clear implication is that the U.S. will continue to print dollars until China and other surplus nations with currencies pegged to the dollar cry uncle and revalue. As for Europe and those countries whose currencies float against the dollar, they’ll have to decide whether to join the Fed’s easing binge or accept rising currencies too. This is a recipe for more currency turmoil, not less. And it is likely to drive more capital, not less, to Asia and elsewhere other than the U.S.

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Check Out Ben Bernanke’s Facebook Page

Actually, I suppose we should clearly state that someone is having some fun by mocking Helicopter Ben, but that person did a good job. Kudos to Tertium Quids for finding this gem.

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Bernanke’s Hollow Deficit Warning

Even though I’ve been in Washington almost 25 years, I am endlessly amazed at the chutzpah of people who support higher spending and bigger government while piously lecturing the rest of us about the need to control deficits. Fed Chairman Ben Bernanke is a good (though “bad” might be a better term) example of this hypocrisy. He was an avid supporter of bailouts and so-called stimulus, yet the Washington Post reports that he is now hectoring us to be fiscally responsible:

Federal Reserve Chairman Ben S. Bernanke warned Wednesday that Americans may have to accept higher taxes or changes in cherished entitlements such as Medicare and Social Security if the nation is to avoid staggering budget deficits that threaten to choke off economic growth. “These choices are difficult, and it always seems easier to put them off — until the day they cannot be put off anymore,” Bernanke said in a speech. “But unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.”

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The Case Against Bernanke

The Washington establishment is rallying behind Ben Bernanke, so that probably means the Fed Chairman will get confirmed for another term. But this is precisely why he is the wrong man for the job. As the Wall Street Journal opines, Bernanke is guilty of two sins. His track record on monetary policy is weak, indicating an insufficent commitment to protecting the value of the dollar. And his willingness to resist political pressure is even weaker, suggesting that America could be headed back to 1970s-style inflation:

The White House said yesterday it has damped down a political revolt against Ben Bernanke and now has the votes to secure the Federal Reserve Chairman’s second four-year term. Whether or not Mr. Bernanke is confirmed, the lesson we draw is that overly political central bankers will eventually be undone by politics. …When we opposed Mr. Bernanke’s reconfirmation on December 3, the facile consensus was that the Fed chief was a master of the universe who had saved the world from depression. But after Scott Brown’s victory in Massachusetts last week, Senate Democrats are suddenly looking for a financial political sacrifice. …The Democrats’ loudest complaint, moreover, is that Mr. Bernanke and the Fed haven’t been easy enough in printing money. …The Fed has already kept interest rates at near zero for more than a year, and it is buying $1.25 trillion in mortgage-backed securities to refloat the housing bubble, among other interventions into fiscal policy and credit allocation. Is the Fed going to buy another $1.25 trillion, or promise to keep rates at zero for another 14 months? Mr. Reid’s declaration of a confirmation quid pro quo will not reassure global investors who already fear that the Fed lacks the political will to withdraw its historic post-crisis liquidity binge soon enough to avoid new asset bubbles. …Mr. Bernanke is already far too susceptible to political pressure. As a Fed governor, he was Alan Greenspan’s intellectual co-pilot last decade when their easy money policies created the housing mania. When Congress later put political pressure on the Fed to direct credit toward housing, and even to student loans, Mr. Bernanke (who was then chairman) also quickly obliged. More ominously for the next four years, Mr. Bernanke continues to deny any Fed monetary culpability for creating the mania. Shortly after the New Year, even with his nomination pending, Mr. Bernanke issued an apologia that was striking for its willingness to play to the Congressional theory of the meltdown by blaming bankers and lax regulators. …Yes, much of Wall Street wants to see Mr. Bernanke confirmed. The Street is currently making a bundle off Fed policy, as it borrows at near-zero rates and lends long, and the banks don’t want that to end. The banks also loved negative real interest rates in the middle of the last decade, and we know how that turned out.

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Even Drug Dealers Don’t Want to Use the Dollar

I’m not sure whether this is a good thing or bad thing, but it surely says something that international drug dealers and money launderers prefer the euro over the dollar. The good news, so to speak, is that this is not a referendum on Bernanke’s easy-money policy. Instead, it seems the drug lords prefer larger denominations, and the U.S. no longer circulates bills larger than $100. The Guardian reports:

International drug cartels have abandoned the US dollar for high denomination euros to launder millions in illegal profits, Europol has revealed. The gangs no longer use $100 bills because €500 notes – the largest denomination of euro – take up less room when transporting large amounts of cash across the world. …Rob Wainwright, director of Europol, said last week police forces across continental Europe were tracking the movements of smuggled and laundered euros and had traced much of it back to large drug gangs. …The scale of the smuggling operation was revealed in figures from the Colombian National Directorate. Only $300,000 worth of euros were declared as entering Colombia between January and June 2007, but over $551m in euros left the country. Once in Europe, the notes can be exchanged for dollars.

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Federal Reserve Chairman Wants Central Bank to Be Rewarded for a Crummy Job

We’ve all heard the joke about the guy who gets convicted of murdering his parents and then asks a judge for mercy because he’s an orphan. That same kind of chutzpah was displayed in a recent column by Fed Chairman Ben Bernanke is the Washington Post. In an attempt to preserve some of the Fed’s regulator powers (which are not necessary for, and may be harmful to, the central bank’s ostensible mission of price stability) and dodge accountability and oversight, Bernanke warns that, “These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.” These two sentences would be laughable if it wasn’t for the fact that Fed policy mistakes have caused so much misery. At the risk of stating the obvious, the Fed’s easy-money policy was the main reason for the financial crisis. Bernanke’s argument is akin to an arsonist expecting praise for calling the fire department after setting a house on fire. But Bob Higgs, the highly-regarded economic historian, had the best analysis:

And about this “economic and financial stability in the United States” that a Fed audit would threaten: Is Bernanke thinking about the stability we enjoyed between the world wars, when the Fed managed to bring about the onset on what proved to be the greatest depression in world history (an accomplishment for which he has previously accepted responsibility on behalf of the Fed)? Or perhaps he is thinking instead about the stability we enjoyed since 2001, when the Fed pushed the Fed funds rate quickly from 6.5 percent to 1 percent, held it at a negative real rate for several years, then pushed it up quickly to 5.25 percent in 2006-2007, then shoved it down quickly to almost zero in the past year? Zounds. It would certainly be tragic if the American people had to give up such remarkable stability. Or perhaps he is thinking about the fact that before the Fed was created, the dollar had retained its purchasing power more or less constant for more than a century, except for transitory war-related ups and downs, but since the Fed’s creation, the dollar has lost more than 95 percent of its purchasing power. Who calls this degree of debasement stability?

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Weekly Economics Lesson: The “Sugar High” of Easy Money

Steve Pearlstein of the Washington Post has a common-sense column warning about the dangers of the Fed’s easy-money policy. It is possible, to be sure, that the Fed will withdraw (or “soak up”) all this liquidity as the economy recovers, but all the signs suggest that the central bank is kowtowing to the politicians and debasing the currency in order to help politicians create illusory growth. This is a recipe for a return to the 1970s. The bad policy started under Bush (and Greenspan) and is continuing under Obama (and Bernanke):

The Federal Reserve is still going through its “lessons-learned” exercise from the recent financial crisis, but there’s one lesson it clearly has not yet absorbed — the one about ignoring and enabling credit bubbles. That’s the only conclusion that can be drawn from the Fed’s decision last week to not only keep its benchmark interest rates at zero but also let everyone know that it intends to leave them there for a good long time. …Not surprisingly, all of this sparked a week-long party in financial markets that had already experienced powerful rallies over the past six months. Even with Thursday’s modest pullback on Wall Street, U.S. stocks are up 60 percent since March, and share prices in emerging markets have nearly doubled. Commodity prices are soaring once again, led by gold, which is now selling for more than $1,100 an ounce, and crude oil, which is up a whopping 126 percent since February. A rally in the junk-bond and third-world debt markets has driven interest rates back to where they were before the crisis. In urban China, India and Brazil, property prices have doubled in the past year. “The markets are on a sugar high,” Mohamed El-Erian, chief executive of Pimco, the giant money manager, told Newsweek’s Rana Foroohar last week. Judging from how sharply and quickly these prices have risen, it’s a pretty good guess that most of the buying has not been done by long-term investors who are suddenly upbeat about the prospects of global economic growth. The better bet is all this is the handiwork of short-term speculation by banks, hedge funds, private-equity funds and other financial center wise-guys moving as a herd, financing their purchases directly or indirectly with some of that yummy zero-percent money provided courtesy of the Fed. …There’s no way to know how long all this can continue before one of these bubbles finally bursts, the dollar spikes upward and investors all rush to unwind their trades at the same time. But it is a good guess that it will last as long as the Fed and other central banks indicate there is no end in sight for the current cheap-money regime. The longer they wait, the bigger the bubbles, and the bigger the mess to clean up. All of which is why the recent statements by policymakers were so disappointing — and so dangerous.

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If the Choice is Bernanke or Geithner, Can I Pick “None of the Above”?

In this CNBC debate, I argue that more regulatory power for government is a bad idea. I need to learn to interrupt, though, since Christian is very effective using that tactic to get more air time.

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