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Archive for the ‘Easy money’ Category

Back in 2010, I shared a video that predicted a catastrophic end to the welfare state.

I said it was an example of “Libertarian Porn” because:

…it is designed for the dark enjoyment of people who think the government is destroying the nation. If you don’t like bloated government and statist intervention and you think that the policies being imposed by Washington are going to lead to hyperinflation and societal collapse, then you will get a certain level of grim satisfaction by watching the video.

While I also stated in that post that I thought the video was far too dour and pessimistic, I don’t automatically reject the hypothesis that the welfare state will lead to societal chaos.

UK RiotsIndeed, I’ve specifically warned that America might experience European-type disarray because of big government and I even wrote about which nations that might be good escape options if the welfare state causes our country to unravel.

Moreover, I’ve speculated about the possible loss of democracy in Europe and specifically said that people should have the right to be well armed just in case society goes you-know-where in a handbasket.

So I’m definitely not a Pollyanna.

I’ve given this background because here’s another video for those of you who revel in the glass being nine-tenths empty. It’s about the United Kingdom, but these numbers from the BIS, OECD, and IMF show that the long-term spending problem is equally severe in the United States.

Be warned, though, that it’s depressing as well as long. And I gather it’s also designed to sell a magazine, so you can ignore that (particularly if you’re not British).

Now that I’ve shared the video, I’ll add a couple of my own observations.

First and foremost, no country is past the point of no return, at least based on the numbers. It doesn’t matter whether we’re talking about the United Kingdom, the United States, Greece, or France. Politicians always have the option of reforming entitlements and restraining the burden of government spending. So long as they follow Mitchell’s Golden Rule over an extended period of time, they can dig out of the mess.

That’s why I’m a big fan of Switzerland’s spending cap, That policy, technically known as the debt brake, imposes a rolling cap on budgetary growth and has been very effective. Colorado also has a spending cap that has been somewhat effective in restraining the cost of the public sector.

My second observation, however, is that some nations may be past the psychological point of return. This is not easy to measure, but it basically means that there’s good reason to be pessimistic when the majority of citizens in a country think it’s morally acceptable to have their snouts in the public trough and to live off the labor of others. When you have too many people riding in the wagon (or riding in the party ship), then it’s difficult to envision how good policy is implemented.

Indeed, the video includes some discussion of how a growing number of people in the United Kingdom now live off the state. And if you add together the votes of people like NatailijaTraceyAnjem, Gina, and Danny, perhaps the United Kingdom has reached a grim tipping point. Especially since welfare spending has dramatically increased in recent years!

A third and final point about the video. I think it focuses too much on deficits and debt. Red ink is a serious issue, to be sure, but it’s very important to understand that too much borrowing is merely a symptom of too much spending.

P.S. On a totally separate matter, everyone should read the USA Today column by Glenn Reynolds. He explains how government is perverting our criminal justice system.

Here are some of the most important passages, but you should read the whole thing.

Here’s how things all-too-often work today: Law enforcement decides that a person is suspicious (or, possibly, just a political enemy). Upon investigation into every aspect of his/her life, they find possible violations of the law, often involving obscure, technical statutes that no one really knows. They then file a “kitchen-sink” indictment involving dozens, or even hundreds of charges, which the grand jury rubber stamps. The accused then must choose between a plea bargain, or the risk of a trial in which a jury might convict on one or two felony counts simply on a “where there’s smoke there must be fire” theory even if the evidence seems less than compelling.

This is why, Glenn explains, there are very few trials. Almost everything gets settled as part of plea bargains.

But that’s not a good thing, particularly when there are no checks and balances to restrain bad behavior by the state.

…although there’s lots of due process at trial — right to cross-examine, right to counsel, rules of evidence, and, of course, the jury itself, which the Framers of our Constitution thought the most important protection in criminal cases — there’s basically no due process at the stage when prosecutors decide to bring charges. Prosecutors who are out to “get” people have a free hand; prosecutors who want to give favored groups or individuals a pass have a free hand, too.When juries decide not to convict because doing so would be unjust, it’s called “jury nullification,” and although everyone admits that it’s a power juries have, many disapprove of it. But when prosecutors decide not to bring charges, it’s called “prosecutorial discretion,” and it’s subject to far less criticism, if it’s even noticed.

Here’s the bottom line.

…with today’s broad and vague criminal statutes at both the state and federal level, everyone is guilty of some sort of crime, a point that Harvey Silverglate underscores with the title of his recent book, Three Felonies A Day: How The Feds Target The Innocent, that being the number of felonies that the average American, usually unknowingly, commits. …The combination of vague and pervasive criminal laws — the federal government literally doesn’t know how many federal criminal laws there are — and prosecutorial discretion, plus easy overcharging and coercive plea-bargaining, means that where criminal law is concerned we don’t really have a judicial system as most people imagine it. Instead, we have a criminal justice bureaucracy that assesses guilt and imposes penalties with only modest supervision from the judiciary, and with very little actual accountability.

Glenn offers some possible answers.

…prosecutors should have “skin in the game” — if someone’s charged with 100 crimes but convicted of only one, the state should have to pay 99% of his legal fees. This would discourage overcharging. (So would judicial oversight, but we’ve seen little enough of that.) Second, plea-bargain offers should be disclosed at trial, so that judges and juries can understand just how serious the state really thinks the offense is. …And finally, I think that prosecutors should be stripped of their absolute immunity to suit — an immunity created by judicial activism, not by statute — and should be subject to civil damages for misconduct such as withholding evidence. If our criminal justice system is to be a true justice system, then due process must attach at all stages. Right now, prosecutors run riot. That needs to change.

Amen to all that. And you can read more on this topic by clicking here.

The Obama years have taught us that dishonest people can twist and abuse the law for ideological purposes.

Obamacare rule of law cartoonWhether we’re talking about the corruption of the IRS, the deliberate disregard of the law for Obamacare, or the NSA spying scandal, the White House has shown that it’s naive to assume that folks in government have ethical standards.

And that’s also true for the law enforcement bureaucracy, as Glenn explained. Simply stated, people in government abuse power. And jury nullification, while a helpful check on misbehavior, only works when there is a trial.

Indeed, I’m now much more skeptical about the death penalty for many of the reasons Glenn discusses in his column. To be blunt, I don’t trust that politically ambitious prosecutors will behave honorably.

That’s why, regardless of the issue, you rarely will go wrong if you’re advocating fewer laws and less government power.

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Like John Stossel and Thomas Sowell, I’m not a big fan of the Federal Reserve.

It’s not just that I’m a libertarian who fantasizes about the denationalization of money.

I also think the Fed hasn’t done a good job, even by its own metrics. There’s very little doubt, for instance, that easy-money policies last decade played a major role in creating the housing bubble and causing the financial crisis.

Yes, Fannie Mae and Freddie Mac played a big role, but it was the Fed that provided the excess liquidity that the GSEs used to subsidize the subprime lending orgy.

But I’m not writing today about possible alternatives to the Fed or big-picture issues dealing with monetary policy.

Instead, I want to highlight three rather positive signs about the Janet Yellen, the new Chair of the Fed’s Board of Governors.

1. Unlike a normal political animal and typical bureaucratic empire builder, she didn’t assert powers that she doesn’t have. She was asked at a congressional hearing about bitcoin and she forthrightly stated that the Federal Reserve has no legislative authority to mess with the online currency.

The Federal Reserve has no authority to supervise or regulate Bitcoin, chair Janet Yellen told Congress on Thursday. …On Wednesday, Manchin wrote to the Fed, Treasury and other regulators warning that the currency was “disruptive to our economy” and calling for its regulation. “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate Bitcoin in anyway,” said Yellen.

This is very refreshing. A government official who is willing to be bound by the rule of law.

President Obama, by contrast, is now infamous for his radical and unilateral rewrites of his failed healthcare law.

Eighteen of them for those keeping count at home.

But it’s not just Obamacare.

Because of my interest in tax competition, fiscal sovereignty, and financial privacy, I’m upset that his Treasury Department pushed through a regulation that overturns – rather than enforces – laws about protecting American banks from tax inquiries by foreign governments.

But let’s not wander into other issues. Today’s post is about positive signs from Janet Yellen.

2. And here’s another one.

Political Cartoons by Gary VarvelThe Fed Chair poured cold water on the left’s fantasy view that higher minimum wage mandates don’t kill jobs.

The new Federal Reserve chairman, Janet Yellen, seemed to offer some support for the CBO’s recent conclusion that increasing the minimum wage to $10.10 an hour, as President Obama and Senate Democrats propose, would cost a significant number of jobs. The CBO projected that the proposal would mean 500,000 fewer jobs by the end of 2016, a conclusion the White House took issue with. Yellen said the CBO “is as qualified as anyone to evaluate the literature” about the employment effects of the minimum wage (some of which argues there would be little to no jobs losses, and some of which suggests there would be significant job losses), and that she “wouldn’t want to argue with their assessment.”

In the cautious-speak world of Fed officials, this is a very strong statement.

Congratulations to Yellen for putting intellectual honesty above partisan loyalty.

3. Most important of all, Yellen also affirmed that she plans on continuing the “taper,” which is the buzzword for winding down the Fed’s easy-money policy.

…she reiterated that it would take a “significant change” to the economy’s prospects for the Fed to put plans to wind down its bond-buying program on hold. …After more than five years of ultra easy monetary policy in the wake of the 2007-2009 recession, the Fed is taking the first small steps towards a more normal footing. It trimmed its bond buying by $10 billion in each of the past two months, and it expects to raise interest rates some time next year as long as the economy continues to improve. Yellen reiterated her concerns about possible asset price bubbles, and suggested the Fed would move to a more qualitative description of when it plans to finally raise rates. …Yellen acknowledged that such low borrowing costs “can give rise to behavior that poses threats to financial stability.”

And she even acknowledged that easy money can cause bubbles.

A refreshing change from some previous Fed Governors.

Now let’s give a caveat. None of this suggests Yellen is a closet libertarian.

She is perceived as being on the left of the spectrum, and it’s worth noting that many hardcore statists in the Democratic Party urged her selection over Larry Summers because he was (incorrectly) seen as somehow being too moderate.

Moreover, I suspect she will say many things in the coming years that will add to my collection of gray hair.

All that being said, I’m glad Obama picked her over Summers. By all accounts, Yellen is honest and will focus her attention on monetary policy.

Summers, by contrast, is a far more political animal and would have used the position of Fed Chair to aggressively push for more statism in areas outside of monetary policy.

P.S. Private financial institutions also played a role in the housing bubble and financial crisis, which is why those entities should have been allowed to go bankrupt instead of benefiting from the corrupt TARP bailout.

P.P.S. Since this post mentions bitcoin and since I sometimes get asked about the online currency, I’ll take this opportunity to say that I hope that it is ultimately successful so that we have alternatives to government monetary monopolies. That being said, I wouldn’t put my (rather inadequate) life savings in bitcoin.

P.P.P.S. If you want an amusing video mocking the Fed, here’s the famous “Ben Bernank” video. And if you want a serious takedown of the Fed, here’s George Selgin’s scholarly but accessible analysis.

P.P.P.P.S. On a completely unrelated topic, if you’re a fan of “House of Cards,” I invite you to pay close attention at about the 30:00 mark of Episode 5, Season 2. If you don’t blink, you may notice an unexpected cameo appearance. Maybe this person has a future acting career if he ever succeeds in restoring limited government and needs to find something new to occupy his time. After all, if President Obama has a future on the silver screen, why not others?

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At the beginning of the year, I was asked whether Europe’s fiscal crisis was over. Showing deep thought and characteristic maturity, my response was “HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?”

But I then shared specific reasons for pessimism, including the fact that many European nations had the wrong response to the fiscal crisis. With a few exceptions (such as the Baltic nations), European governments used the crisis to impose big tax hikes, including higher income tax rates and harsher VAT rates.

Combined with the fact that Europe’s demographic outlook is rather grim, you can understand why I’m not brimming with hope for the continent. And I’ve shared specific dismal data for nations such as Portugal, France, Greece, Italy, Poland, Spain, Ireland, and the United Kingdom.

But one thing I’ve largely overlooked is the degree to which the European Central Bank may be creating an unsustainable bubble in Europe’s financial markets. I warned about using bad monetary policy to subsidize bad fiscal policy, but only once in 2011 and once in 2012.

Check out this entertaining – but worrisome – video from David McWilliams and you’ll understand why this issue demands more attention.

I’ve openly argued that the euro is not the reason that many European nations got in trouble, but it appears that Europe’s political elite may be using the euro to make a bad situation even worse.

And to add insult to injury, the narrator is probably right that we’ll get the wrong outcome when this house of cards comes tumbling down. Instead of decentralization and smaller government, we’ll get an expanded layer of government at the European level.

Or, as I call it, Germany’s dark vision for Europe.

That’s Mitchell’s Law on steroids.

P.S. Here’s a video on the five lessons America should learn from the European crisis.

P.P.S. On a lighter note, the mess in Europe has generated some amusing videos (here, here, and here), as well as a very funny set of maps.

P.P.P.S. If all this sounds familiar, that may be because the Federal Reserve in the United States could be making the same mistakes as the European Central Bank. I don’t pretend to know when and how the Fed’s easy-money policy will turn out, but I’m not overly optimistic about the final outcome. As Thomas Sowell has sagely observed, “We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System… 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.”

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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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This is an easy question for me to answer. To be honest, I have no idea.

If I knew such things, I could time the market and I’d be rich beyond my wildest dreams and relaxing on the beach in the Cayman Islands instead of sitting in my kitchen in chilly Virginia.

Heck, I don’t even know whether the Fed’s policy is wrong or just worrisome. It’s possible, after all, that the central bank has provided appropriate liquidity and it will soak it up at the right time.

I don’t think that’s the case. I fear Bernanke is in over his head and that the Fed is engaging in the monetary version of Keynesian economics.

And if that’s true, something bad will happen at some point. If there’s too much liquidity out there, it presumably will show up at some point as either rising prices or an asset bubble.

Then again, we know banks are keeping more than $1 trillion of excess reserves parked at the Fed and maybe it will stay that way forever. In which case the private sector is inadvertently protecting us from bad monetary policy. Thomas Sowell has suggested that something like this is happening.

I can say for sure is that we wouldn’t have to worry if we were in a libertarian fantasy world and the private sector was responsible for money.

You may think that sounds crazy, but that’s the way it used to be, as explained in this short video.

John Stossel has made the same point about competing market-based currencies.

And if you want to see how well money has maintained its value since the Federal Reserve took over, this link has an excellent video.

P.S. I often get asked about the gold standard. It’s good in theory, but the real issue is whether governments can be trusted to operate it prudently and honestly.

P.P.S. Since Christmas is just two days away, we can all wonder whether we will get this present from Ben Bernanke. And if you still have some last-minute shopping to do, here’s a Bernanke t-shirt for your liberal friends.

P.P.P.S. For some laughs, check out Ben Bernanke’s Facebook page.

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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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I’ve expressed concern about QE3 and other decisions by the Federal Reserve about monetary policy, but I have also admitted that it’s difficult to know the right monetary policy because it requires having a good idea about both the demand for money and the supply of money.

But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.

And we also are asked to suspend reality and assume that the folks at the Fed will be good central planners and never be influenced by their political masters. Yeah, good luck with that.

With so many difficult – or perhaps impossible – demands placed upon them, no wonder the Fed has a lousy track record (as documented in this powerful George Selgin video).

So let’s ask a fundamental question. Is the Fed necessary? Are we stuck with a central-planning monopoly because there’s no alternative? Professor Larry White says no in this new video from Learn Liberty.

This is one of the best videos I’ve ever seen, so I strongly encourage everyone to share this post widely.

Professor White effectively demonstrates how private markets can replace the five different roles of the Fed. But his arguments are not just based on theory. He shows that the private sector used to handle those roles in the past.

And I especially like his point about how a decentralized market system would operate. Indeed, I would have stressed even more how such a system overcomes the knowledge problem that exists with a monopoly central planner.

Here’s my video on the Fed. I focus more on how central banks developed, but you’ll see some common themes in the two videos.

P.S. Here’s a video with 10 reasons to dislike the Fed.

P.P.S. If you want some Fed humor, we have a Who-is-Ben-Bernanke t-shirt, this Fed song parody, some special Federal Reserve toilet paperBen Bernanke’s hacked Facebook page, and the famous “Ben Bernank” video.

P.P.P.S. Professor White’s video shows how we can improve monetary policy, but let’s also be aware that there are proposals that would lead to even worse monetary policy.

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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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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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I’ve been worried for quite some time that the European Central Bank was losing its independence, thus undermining the long-run prospects of the euro.

Well, yesterday’s announcement that the ECB would buy the dodgy debt of nations such as Spain didn’t make me feel any better.

Central banks should not be bullied into creating too much money simply because politicians are too corrupt, venal, and short-sighted to control spending.

Here is some of what Allister Heath of City A.M. wrote earlier today. He begins with a wise warning about moral hazard.

There is nothing markets love more than a good dose of monetary activism, especially when they detect a hidden bailout, so it is no wonder that traders and investors reacted so positively to Mario Draghi’s bond buying plan. …Yet generally speaking these days, the more the markets like a central bank intervention, the more I worry. This is because all too often investors are trying to get central banks – and ultimately, the taxpayer – to monetise debt to protect themselves, or because they believe that there are monetary solutions to real, structural problems. I disagree on both counts: excessive debt needs to be written off, with the cost born by the creditors, not redistributed to the taxpayers of more prudent countries or inflated away. It is right that investors should be able to make a fortune if they make a correct bet – but it is equally right that they should lose their shirt when their investment goes sour. This habit of quietly enjoying the former but loudly refusing the latter is one of the main reasons why the City’s reputation is at such a low ebb.

He then explains that the ECB shouldn’t try to mask reality.

…there is a perfectly good reason why the yields of peripheral Eurozone nations have shot up over the past year. It is because the markets have finally started to price risk properly. Higher yields on Spanish or Greek debt reflect the reality of deeply troubled, structurally uncompetitive nations… The market is sending a clear and precise signal, and warning the world that there is a major problem that needs resolution; buying vast amounts of bonds to try and distort or even entirely eliminate that signal and pretend that nothing is wrong with Europe’s weaker economies would be an absurd act of delusion.

I’m not as optimistic as Allister is in this next section, largely because the supposed conditionality will lead to the kind of fiscal gimmicks and moving goal posts that we see in Greece.

…while there are many problems with Draghi’s plans, he is actually being relatively sensible. He will not help Portugal, Ireland and Greece until they are able to access bond markets; even more importantly, Spain and Italy will need to ask for European bailout fund support, and accept the ensuing conditionality, before ECB bond-buying starts. It will theoretically be unlimited in scale but Draghi only wants to “do whatever it takes” as long as politicians toe the line. Given that they won’t, and that many countries will soon be borrowing even more, the crisis will soon flare up again. The simple reality is that the Eurozone in its current form is doomed. Draghi’s plan will buy some time, and his next one even more, as will the one after that. But eventually the size of the fiscal and competitiveness crisis, combined with voter anger in both Northern and Southern countries, will overwhelm all of his attempts at papering over the cracks. It’s just a matter of time.

But I obviously agree with his conclusion. Unless European politicians decide to reduce the burden of government spending, the continent is in deep trouble.

Last but not least, the problem in Europe is not the euro. It is the welfare state. I’m not a huge fan of the single currency, but it is way down on my list of reasons that nations such as Spain, Italy, and Greece are in trouble.

P.S. America will be in the same boat at some point in the future if we don’t reform entitlements.

P.P.S. Allister is the author of this great article explaining why tax competition and tax havens are so important and valuable in the global economy.

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Writing in today’s Washington Post, former Obama economist Larry Summers put forth the strange hypothesis that more red ink would improve the federal government’s long-run fiscal position.

This sounds like an excuse for more Keynesian spending as part of another so-called stimulus plan, but Summers claims to have a much more modest goal of prudent financial management.

And if we assume there’s no hidden agenda, what he’s proposing isn’t unreasonable.

But before floating his idea, Summers starts with some skepticism about more easy-money policy from the Fed.

Many in the United States and Europe are arguing for further quantitative easing to bring down longer-term interest rates. …However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative rate. There is also the question of whether extremely low, safe, real interest rates promote bubbles of various kinds.

This is intuitively appealing. I try to stay away from monetary policy issues, but whenever I get sucked into a discussion with an advocate of easy money/quantitative easing, I always ask for a common-sense explanation of how dumping more liquidity into the economy is going to help.

Maybe it’s possible to push interest rates even lower, but it certainly doesn’t seem like there’s any evidence showing that the economy is being held back because today’s interest rates are too high.

Moreover, what’s the point of “pushing on a string” with easy money if it just means more reserves sitting at the Fed?

After suggesting that monetary policy isn’t the answer, Summers then proposes to utilize government borrowing. But he’s proposing more debt for management purposes, not Keynesian stimulus.

Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position, even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates. They should accelerate any necessary maintenance projects — issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate. …Similarly, government decisions to issue debt, and then buy space that is currently being leased, will improve the government’s financial position as long as the interest rate on debt is less than the ratio of rents to building values — a condition almost certain to be met in a world with government borrowing rates below 2 percent. These examples are the place to begin because they involve what is in effect an arbitrage, whereby the government uses its credit to deliver essentially the same bundle of services at a lower cost. …countries regarded as havens that can borrow long term at a very low cost should be rushing to take advantage of the opportunity.

Much of this seems reasonable, sort of like a homeowner taking advantage of low interest rates to refinance a mortgage.

But before embracing this idea, we have to move from the dream world of theory to the real world of politics. And to his credit, Summers offers the critical caveat that his idea only makes sense if politicians use their borrowing authority for the right reasons.

There is, of course, still the question of whether more borrowing will increase anxiety about a government’s creditworthiness. It should not, as long as the proceeds of borrowing are used either to reduce future spending or raise future incomes.

At the risk of being the wet-blanket curmudgeon who ruins the party by removing the punch bowl, I have zero faith that politicians would make sound decisions about financial management.

I wrote last month that eurobonds would be “the fiscal version of co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”

Well, giving politicians more borrowing authority in hopes they’ll do a bit of prudent refinancing is akin to giving a bunch of money to your drug-addict brother-in-law in hopes that he’ll refinance his credit card debt rather than wind up in a crack house.

Considering that we just saw big bipartisan votes to expand the Export-Import Bank’s corporate welfare and we’re now witnessing both parties working on a bloated farm bill, good luck with that.

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Ron Paul has made “End the Fed” a popular slogan, but some people worry that this is a radical untested idea. In part, this is because it is human nature to fear the unknown.

But there are plenty of examples of policy reforms that used to be considered radical but are now commonplace.

This list could go on, but the pattern is always the same. People assume something has to be done by government because “that’s the way it’s always been.” Then reform begins to happen and the myth is busted.

But is money somehow different? Not according to some experts.

Here’s some of what John Stossel wrote in a recent column.

Why must our government make currency competition illegal? …Competition is generally good. Why not competition in currencies? Most people I interviewed scoffed at the idea. They said private currency should be illegal. But impressive thinkers disagree. In 1975, a year after he won the Nobel Prize in economics, F.A. Hayek published “Choice in Currency,”which has inspired a generation of “free banking” economists. Hayek taught us that competition not only respects individual liberty, it produces essential knowledge we cannot obtain any other way. Any central bank is limited in its access to such knowledge, and subject to political pressure, no matter how independent it’s supposed to be. “This monopoly of government, like the postal monopoly, has its origin not in any benefit it secures for the people but solely in the desire to enhance the coercive powers of government,” Hayek wrote. “I doubt whether it has ever done any good except to the rulers and their favorites. All history contradicts the belief that governments have given us a safer money than we would have had without their claiming an exclusive right to issue it.” Former Federal Reserve economist David Barker discussed this idea recently with me. “There are a lot of ways that private money might be better,” Barker said. “It might have embedded chips that would make it easier to count.” The chips would also prevent counterfeiting. There used to be private currencies. A businessman who sold iron and tin made coins that advertised his business. The Georgia Railroad Co. also produced its own currency. This became illegal in 1864 — Abraham Lincoln was a fan of central banking.

Stossel’s historical references are particularly important. As I explain in this video, many nations – including the United States – used to have competing currencies.

And if you want a thorough analysis of the Fed’s performance, I urge you to watch this George Selgin speech. Then ask yourself whether we would have been in better shape with private currencies.

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Whenever I narrate videos lasting longer than nine minutes, such as my three videos on tax havens or my video on international corporate taxation, I often get backhanded compliments along the lines of “that was good, but it would be even better if you said it in five minutes.”

So it is with considerable envy that I offer up this video about Europe’s fiscal/financial/monetary mess. Even though it lasts longer than nine minutes, I suspect it will keep everyone’s attention.

I’m not fully endorsing the contents of the video. Mr. McWilliams, for instance, probably has a confused IMF-type definition of austerity. But I definitely agree with him that policy is driven by the interests of the elite.

In any event, the production values of the video are first rate. Perhaps not in the same league as Part I and Part II of the Hayek v Keynes video set, but still remarkably well done.

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I’ve linked before to Professor George Selgin’s masterful video on the Federal Reserve’s horrible track record, and I’ve done my own video on the origin of central banking.

These types of posts often generate questions about what reforms we should support, and a lot of people ask about the gold standard. I’m not a monetary economist, so I’m not in a position to give competent answers. Fortunately, Prof. Selgin has decided to provide a very useful analysis of the issue.

Writing for a British paper, he explains that a genuine gold standard worked very well before World War I, but it probably wouldn’t work today because governments are so untrustworthy.

Of all the reasons usually given for condemning the gold standard, perhaps the most common is the claim that it was to blame for the Great Depression. What responsible politician, gold’s critics ask rhetorically, wants to relive the 1930s? But the criticism misses its mark. Fans of the gold standard are no more anxious to repeat the 1930s than their critics are. Their nostalgia is instead for the interval of exceptional international monetary stability that prevailed from the mid-1870s until World War I. That was the era of the classical gold standard – a standard policed by the citizens of participating countries, all of whom were able to convert their nations’ paper money into gold. This classical gold standard can have played no part in the Great Depression for the simple reason that it vanished during World War I, when most participating central banks suspended gold payments. (The US, which entered the war late, settled for a temporary embargo on gold exports.) Having cut their gold anchors, the belligerent nations’ central banks proceeded to run away, so that by the war’s end money stocks and price levels had risen substantially, if not dramatically, throughout the old gold standard zone. …the gold standard that failed so catastrophically in the 1930s wasn’t the gold standard that some Republicans admire: it was the cut-rate gold standard that Great Britain managed to cobble together in the 20s – a gold standard designed not to follow the rules of the classical gold standard but to allow Great Britain to break the old rules and get away with it. …the collapse of the gold-exchange standard forever undermined the public’s confidence in governments’ monetary promises; and absent such confidence there can be no question of a credible, government-sponsored gold standard, classical or otherwise. Sometimes with monetary systems, as with life, you can’t go home again.

I’m also glad that he explains that the gold standard was not responsible for the Great Depression. If you want to know more about that issue, including the damaging impact of statist policies by Hoover and FDR, this video is an excellent introduction.

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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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Europe is in the midst of a fiscal crisis caused by too much government spending, yet many of the continent’s politicians want the European Central Bank to purchase the dodgy debt of reckless welfare states such as Spain, Italy, Greece, and Portugal in order to prop up these big government policies.

So it’s especially noteworthy that economists at the European Central Bank have just produced a study showing that government spending is unambiguously harmful to economic performance. Here is a brief description of the key findings.

…we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth. …Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

There are two very interesting takeaways from this new research. First, the evidence shows that the problem is government spending, and that problem exists regardless of whether the budget is financed by taxes or borrowing. Unfortunately, too many supposedly conservative policy makers fail to grasp this key distinction and mistakenly focus on the symptom (deficits) rather than the underlying disease (big government).

The second key takeaway is that Europe’s corrupt political elite is engaging in a classic case of Mitchell’s Law, which is when one bad government policy is used to justify another bad government policy. In this case, they undermined prosperity by recklessly increasing the burden of government spending, and they’re now using the resulting fiscal crisis as an excuse to promote inflationary monetary policy by the European Central Bank.

The ECB study, by contrast, shows that the only good answer is to reduce the burden of the public sector. Moreover, the research also has a discussion of the growth-maximizing size of government.

… economic progress is limited when government is zero percent of the economy (absence of rule of law, property rights, etc.), but also when it is closer to 100 percent (the law of diminishing returns operates in addition to, e.g., increased taxation required to finance the government’s growing burden – which has adverse effects on human economic behaviour, namely on consumption decisions).

This may sound familiar, because it’s a description of the Rahn Curve, which is sort of the spending version of the Laffer Curve. This video explains.

The key lesson in the video is that government is far too big in the United States and other industrialized nations, which is precisely what the scholars found in the European Central Bank study.

Another interesting finding in the study is that the quality and structure of government matters.

Growth in government size has negative effects on economic growth, but the negative effects are three times as great in non-democratic systems as in democratic systems. …the negative effect of government size on GDP per capita is stronger at lower levels of institutional quality, and ii) the positive effect of institutional quality on GDP per capita is stronger at smaller levels of government size.

The simple way of thinking about these results is that government spending doesn’t do as much damage in a nation such as Sweden as it does in a failed state such as Mexico.

Last but not least, the ECB study analyzes various budget process reforms. There’s a bit of jargon in this excerpt, but it basically shows that spending limits (presumably policies similar to Senator Corker’s CAP Act or Congressman Brady’s MAP Act) are far better than balanced budget rules.

…we use three indices constructed by the European Commission (overall rule index, expenditure rule index, and budget balance and debt rule index). …The former incorporates each index individually whereas the latter includes interacted terms between fiscal rules and government size proxies. Particularly under the total government expenditure and government spending specifications…we find statistically significant positive coefficients on the overall rule index and the expenditure rule index, meaning that having these fiscal numerical rules improves GDP growth for these set of EU countries.

This research is important because it shows that rules focusing on deficits and debt (such as requirements to balance the budget) are not as effective because politicians can use them as an excuse to raise taxes.

At the risk of citing myself again, the number one message from this new ECB research is that lawmakers – at the very least – need to follow Mitchell’s Golden Rule and make sure government spending grows slower than the private sector. Fortunately, that can happen, as shown in this video.

But my Golden Rule is just a minimum requirement. If politicians really want to do the right thing, they should copy the Baltic nations and implement genuine spending cuts rather than just reductions in the rate of growth in the burden of government.

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There’s a rather simple solution to Europe’s fiscal crisis, but politicians will never do the right thing unless every other option is exhausted.

That’s why American taxpayers should not be involved in any sort of European bailout, either directly or indirectly.

This cartoon captures my sentiment.

At the risk of being picky, however, I would replace “Fed” with “USA/IMF” or something like that.

As I explained a few days ago, the Federal Reserve’s recent announcement that it will provide dollar liquidity to Europe is not necessarily objectionable. After all, the Europeans have to pay us back if they borrow dollars, with interest, at current exchange rates.

Yes, I worry European politicians may interpret the Fed’s actions as a signal that they can defer long-overdue reforms, and I also worry that it might be a precursor for easy-money policies in the future.

But the real threat to American taxpayers is that the International Monetary Fund may provide more bailouts to Europe.

I keep explaining that the only solution is for Europe’s welfare states to copy the Baltic nations and actually cut spending, but that will never happen if European politicians think that they can get an IMF handout (and thus shift some of their bad fiscal policy onto the backs of American taxpayers).

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In hopes of stopping investor panic about Europe’s fiscal crisis, the world’s major central banks just announced that they will do whatever is needed to ensure financial markets don’t freeze up.

This could be an appropriate and relatively benign use of the lender-of-last-resort powers, or it could signal another round of reckless easy money and quantitative easing.

I’m skeptical of the Fed and other central banks, but I don’t want to play back-seat driver on monetary policy. Instead, I want to focus on the underlying issue, which is whether there is any alternative to immediate – and real – spending cuts.

Maybe there is some way to muddle through, but I think the answer is no. Easy money from central banks is not a solution. Bailouts from the IMF or some other entity are not the solution.

In this interview with Neil Cavuto, I explain that more bailouts won’t work and that Europe’s welfare states should copy the Baltic nations and shrink the burden of government spending.

One point I made deserves to be emphasized. We wouldn’t be in the current mess if the political elite at the IMF and in Europe and the United States had followed my sage advice and rejected the original bailout for Greece.

The Wall Street Journal agrees. Here’s a passage from today’s editorial page.

Europe’s original sin in this crisis was not letting Greece default, remaining in the euro but shrinking its debt load as it reformed its economy. The example would have sent a useful message of discipline to countries and creditors alike. The fear at the time was that a default would spread the contagion of higher bond rates, but those rates have soared despite the bailouts of Greece and Portugal.

Sadly, I expect more bad policies. Politicians are addicted to big government, so they’ll always take the primrose path of bailouts and easy money as an alternative to fiscal restraint. Especially when the United States is a source of laughably bad advice from the clowns in the Obama Administration.

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As demonstrated by the new video from the Center for Freedom and Prosperity, there are five key lessons to learn from the fiscal crisis in Europe.

Unfortunately, Europe’s despicable political class has not learned from their mistakes. They are not taking the simple and obvious steps that are needed to address the problems of spendthrift governments.

Instead, they want to compound bad fiscal policy with bad monetary policy by having the European Central Bank purchase even more bonds issued by the continent’s most decrepit welfare states.

I warned last year that this was a big mistake and I’m glad to see that the issue is now getting more attention. Here’s some of what the Wall Street Journal said in an editorial this morning.

Only weeks into his new job as president of the European Central Bank, the Italian is being portrayed along with German Chancellor Angela Merkel as the main—the only—obstacle to saving the euro zone. If only the ECB would print a few trillion euros to buy the debt of spendthrift European countries, all will be well. Hang in there, Mr. Draghi, and you too, Chancellor. Don’t let the French, the British and the Yanks, the euro-pundits and the other blabbering bullies for bailouts get you down. Someone needs to defend the principle of central bank independence and price stability. The ECB has been by far the most effective part of the euro system since its founding. It shouldn’t squander that legacy now by taking on the debts of spendthrift governments that are the real cause of this crisis. It’s true that the ECB has already become a little bit pregnant in buying sovereign bonds, first taking on Greek, Irish and Portuguese debt, and this summer Spanish and Italian bonds. A week ago Friday, the ECB held €187 billion worth of country bonds. …So far, the ECB’s bond purchases have been limited enough that the central bank has been able to “sterilize” them, meaning they are offset by withdrawing money elsewhere in the banking system and haven’t added to the overall supply of money. But a multitrillion euro program would make sterilization impossible and would become a money-printing exercise. …If the Germans and ECB do write a blank check, then the balance of power within the euro zone will shift markedly, and perhaps irreversibly, in favor of the spenders. Even if this prevented short-term panic, it would merely postpone the day of reckoning and leave Europe worse off in the medium and long term. Without a system that can enforce spending restraint, borrowing discipline and economic reform, all the ECB bond-buying in the world won’t save the euro, and the independence of the ECB itself will become another casualty of the crisis.

The mess in Europe is like a slow-motion train wreck. It’s easy to see it won’t work, but that doesn’t stop the politicians from doing the wrong thing.

Indeed, I predicted most of the bad policies. But it doesn’t require much insight to know that statism won’t work, as I acknowledged in my I-told-you-so post.

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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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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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Allen Meltzer, an economist at Carnegie Mellon University, writes today in the Wall Street Journal about the Fed’s worrisome announcement that it will continue the easy-money policy of artificially low interest rates.

Professor Meltzer’s key point (at least to me) is that the economy is weak because of too much government intervention and too much federal spending, and you don’t solve those problems with a loose-money policy – especially since banks already are sitting on $1.6 trillion of excess reserves (why lend money when the economy is weak and you may not get repaid?).

Meltzer then outlines some of the reforms that would boost growth, all of which are desirable, albeit a bit tame for my tastes.

…the United States does not have the kind of problems that printing more money will cure. Banks currently hold more than $1.6 trillion of idle reserves at the Fed. Banks can use those idle reserves to create enormous amounts of money. Interest rates on federal funds remain near zero. Longer-term interest rates on Treasurys are at record lows. What reason can there be for adding more excess reserves? The main effect would be a further devaluation of the dollar against competing currencies and gold, followed by a rise in the price of oil and other imports. …Money growth (M2) reached 10% for the past six months, presaging more inflation ahead. …What we need most is confidence in our future. That calls for:

• Reducing corporate tax rates permanently to encourage investment (paid for by closing loopholes).

• Agreeing on long-term reductions in entitlement spending.

• A five-year moratorium on new regulations affecting energy, environment, health and finance.

• An explicit inflation target between zero and 2% to force the Fed to pay more attention to the medium term and to increase public confidence that we will not experience runaway inflation.

The president is wrong to pose the issue as more taxes for millionaires to pay for more redistribution now. That path leads to future crises because higher taxes support the low productivity growth of the welfare state, delay the transition to export-led growth, and do not reduce future budget liabilities enough.

Meltzer’s final point about the futility of class-warfare taxes is very important. He doesn’t use the term, but he’s making a Laffer Curve argument. Simply stated, if punitive tax rates cause investors, entrepreneurs, and small business owners to earn/declare less taxable income, then the government won’t collect as much money as predicted by the Joint Committee on Taxation’s simplistic models.

Of course, Obama said in 2008 than he wanted high tax rates for reasons of “fairness,” even if such policies didn’t lead to more tax revenue. That destructive mentality probably helps explain why not only banks, but also companies, are sitting on cash and afraid to make significant investments.

But if you really want to understand how Obama’s policies are causing “regime uncertainty,” this cartoon is spot on.

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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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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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The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.

And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).

I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.

1. Bailouts Don’t Work – When Ireland’s government rescued depositors by bailing out the nation’s three big banks, they made a big mistake by also bailing out creditors such as bondholders. This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses. And because it required the government to incur a lot of additional debt, it also had the effect of destabilizing the nation’s finances, which then resulted in a second mistake – the bailout of Ireland by the European Union and IMF (a classic case of Mitchell’s Law, which occurs when one bad government policy leads to another bad government policy).

American policy makers already have implemented one of the two mistakes mentioned above. The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated companies, executives, and investors. But something good may happen if we learn from the second mistake. Greedy politicians from states such as California and Illinois would welcome a bailout from Uncle Sam, but this would be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration already provided an indirect short-run bailout as part of the so-called stimulus legislation, and this encouraged states to dig themselves deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the state level, and the mess in Europe is a powerful argument that this counterproductive approach should be stopped as soon as possible.

By the way, it’s worth noting that politicians and international bureaucracies behave as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute explains that there have been more than 200 sovereign defaults in the past 200 years and we somehow avoided Armageddon.

2. Excessive Government Spending Is a Path to Fiscal Ruin – The bailout of the banks obviously played a big role in causing Ireland’s fiscal collapse, but the government probably could have weathered that storm if politicians in Dublin hadn’t engaged in a 20-year spending spree.

The red line in the chart shows the explosive growth of government spending. Irish politicians got away with this behavior for a long time. Indeed, government spending as a share of GDP (the blue line) actually fell during the 1990s because the private sector was growing even faster than the public sector. This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

Eventually, however, the house of cards collapsed. Revenues dried up and the banks failed, but because the politicians had spent so much during the good times, there was no reserve during the bad times.

American politicians are repeating these mistakes. Spending has skyrocketed during the Bush-Obama year. We also had our version of a financial system bailout, though fortunately not as large as Ireland’s when measured as a share of economic output, so our crisis is likely to occur when the baby boom generation has retired and the time comes to make good on the empty promises to fund Social Security, Medicare, and Medicaid.

3. Low Corporate Tax Rates Are Good, but They Don’t Guarantee Economic Success if other Policies Are Bad – Ireland used to be a success story. They went from being the “Sick Man of Europe” in the early 1980s to being the “Celtic Tiger” earlier this century in large part because policy makers dramatically reformed fiscal policy. Government spending was capped in the late 1980 and tax rates were reduced during the 1990s. The reform of the corporate income tax was especially dramatic. Irish lawmakers reduced the tax rate from 50 percent all the way down to 12.5 percent.

This policy was enormously successful in attracting new investment, and Ireland’s government actually wound up collecting more corporate tax revenue at the lower rate. This was remarkable since it is only in very rare cases that the Laffer Curve means a tax cut generates more revenue for government (in the vast majority of cases, the Laffer Curve simply means that changes in taxable income will have revenue effects that offset only a portion of the revenue effects caused by the change in tax rates).

Unfortunately, good corporate tax policy does not guarantee good economic performance if the government is making a lot of mistakes in other areas. This is an apt description of what happened to Ireland. The silver lining to this sad story is that Irish politicians have resisted pressure from France and Germany and are keeping the corporate tax rate at 12.5 percent. The lesson for American policy makers, of course, is that low corporate tax rates are a very good idea, but don’t assume they protect the economy from other policy mistakes.

4. Artificially Low Interest Rates Encourage Bubbles – No discussion of Ireland’s economic problems would be complete without looking at the decision to join the common European currency. Adopting the euro had some advantages, such as not having to worry about changing money when traveling to many other European nations. But being part of Europe’s monetary union also meant that Ireland did not have flexible interest rates.

Normally, an economic boom drives up interest rates because the plethora of profitable opportunities leads investors demand more credit. But Ireland’s interest rates, for all intents and purposes, were governed by what was happening elsewhere in Europe, where growth was generally anemic. The resulting artificially low interest rates in Ireland helped cause a bubble, much as artificially low interest rates in America last decade led to a bubble.

But if America already had a bubble, what lesson can we learn from Ireland? The simple answer is that we should learn to avoid making the same mistake over and over again. Easy money is a recipe for inflation and/or bubbles. Simply stated, excess money has to go someplace and the long-run results are never pleasant. Yet Ben Bernanke and the Federal Reserve have launched QE2, a policy explicitly designed to lower interest rates in hopes of artificially juicing the economy.

5. Housing Subsidies Reduce Prosperity – Last but not least, Ireland’s bubble was worsened in part because politicians created an extensive system of preferences that tilted the playing field in the direction of real estate. The combination of these subsidies and the artificially low interest rates caused widespread malinvestment and Ireland is paying the price today.

Since we just endured a financial crisis caused in large part by a corrupt system of housing subsidies for Fannie Mae and Freddie Mac, American policy makers should have learned this lesson already. But as Thomas Sowell sagely observes, politicians are still fixated on somehow re-inflating the housing bubble. The lesson they should have learned is that markets should determine value, not politics.

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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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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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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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Thanks to the folks at the Mises Institute, Professor George Selgin of the University of Georgia (!) has a superb presentation on the failings of the Federal Reserve. George was one of my professors at George Mason University back in the 1980s and is one of the world’s experts on competing currencies. This video is 1,000-times more substantive than the famous “QE2″ video I posted last month. Fed bashing is fun, but watch this if you want to understand economics and history.

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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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