Joint Post: David Evans and Jo Nova
Robert Wenzel says to Federal Reserve: “Leave the Building to the Four-Legged Rats”
Finally a speech with attitude tells it like it is, at the US Federal Reserve. The speech was given by blogger Robert Wenzel in late April to the New York Federal Reserve Bank, because they invited him to speak. It deserves a read — a man who knows the details tallies up the score, and politely lays out the contradictions of the Federal Reserve at point blank range.
But it is much more than that. For the US Federal Reserve to invite Wenzel to explain Austrian economics to them is like “the team” in Australia inviting me along for lunch at the Department of Climate Change to explain why the CO2 theory ain’t too hot. If that happened (as if), what would I say? This is the nature of the choice that Wenzel faced. A slam-dunk, in the nicest possible way.
The convergence of common sense: Austrians are the skeptics of economics
Wenzel is an Austrian economist, which is like being a climate skeptic in climate change. In the 1930s, Keynesian economics took over from classical economics among the central banks and governments, then academia, and by 1970s, in the words of Richard Nixon, “We are all Keynesians now”. Well not quite. Austrian economics came into existence around 1930, in response to the monetary upheaval. It is similar to classical economics but with a better understanding of the business cycle and monetary theory. It makes sense, fits the facts, and the man in the street can point out mistakes made by the elite. Since the Internet started, it has enjoyed a revival. A huge revival.
Keynesian economics was essentially an elaborate excuse to lower interest rates in the 1930s, basically because the banks were about to go bust. The main assets of banks at the time were bonds, which are worth more if interest rates are lower. And governments love lower interest rates, because that creates more money (who wants to be disciplined eh?). Loose Money means Loose Legislators. It appears to boost short term demand, and that makes influential businessmen and other recipients of the new money very happy. Governments can avoid hard calls on welfare. (Everyone seems to get a free lunch — everyone except the hardest workers and diligent savers.) Another part of the problem of the 1930s was that there wasn’t enough money around — some towns literally had no money to circulate — so schemes to hand out money by burying it in bottles and having people dig it up had a certain logic — indeed, they weren’t any different from giving tax refunds to people who didn’t pay tax, except that people who dug for bottles of cash got fitter. But schemes to simulate demand were perversely backwards: corn prices would rise if we stop farmers from farming, wages would rise if we legislated it (but jobs would be lost). A proliferation of government boards made the economy bureaucratic, but ultimately prevented the US from recovering as quickly from the 1929 shock like the rest of the western world.
But what is good for banks and government isn’t necessarily good for the economy. Keynesian economics were considered crackpot by the standards of the day and by classical economists. Ever noticed how Keynesian economics never quite seems to make sense, explanations are often complicated and unfinished, and Keynesian commentators like Paul Krugman of the NYT or Ross Gittins of the SMH are always contradicting themselves two years later? Keynesian economics was a radical and “counter intuitive” economic response, that made little sense to experts at the time, but governments and banks loved it.
So how did it become the orthodoxy? Same as the CO2 theory of climate. Government adopted it, force fed its practitioners money via plum jobs and consultancies, while quietly ignoring and starving its opponents. The central banks adopted it, and they fund much of the research work at universities. By the 1950’s you could only get a PhD in economics if you were a Keynesian, because outside money to the economics department came from organizations that preferred Keynesian for political reasons, and it pretty much still that way. Anyone with a PhD in economics is a Keynesian, with rare exceptions. Nearly all the interesting consulting jobs in economics come from central and commercial banks, and they strongly support Keynesian economics. Like being a climate skeptic in climate science, being an Austrian economist is very career limiting.
Keynesian economics and the CO2 theory of global warming are Big Game hunting arenas for people seeking power, control and buckets of cash. In both areas, Big Government is one of the hunters. Same mechanisms, same practitioners, same beneficiaries. And both came unstuck starting around 1999 because the nonsense was progressively unmasked on the Internet. Which is why Austrian economics and climate skepticism are on a hot-ticket convergence at the moment as two audiences of reality-lovin’ net-heads cross paths.
I think Keynsianism is the tempting path to tyranny, but Keynes himself was no fool. There is a very strong account that when he we was near death he essentially told a visitor that his theory was just a response to the particular political conditions of the 1930s, and shouldn’t be taken too seriously in other contexts. Modern Keynesians vehemently deny this, of course.
The period 1982 to 2007 saw a huge build up in debt as money creation took off, with low interest rates and relaxed banking rules, just like the last time — 1920 to 1929, after the creation of the Fed and after WWI was out of the way. That bubble ended in a serious deflationary contraction 1929 – 1931. Bernanke, a student of the period, has vowed not to let the same happen again. Which is why the Federal Reserve, and other central banks, can be relied upon to print as required this time around, not to let our money/debt bubble deflate. Instead they will inflate away the debt, like a prolonged version of the 1970s. The investing world is only starting to work this out. Like Wenzel (and Murdoch) have been saying, there is a great deal of inflation dead ahead. Are your investments ready for that? See, these arcane arguments can really matter!
Please allow me to begin with methodology, I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.
In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed..
There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.
And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. …
In present day America, the government focus has changed a bit. In the new focus, the government attempts much more to prop up the unemployed by extended payments for not working. Is it really a surprise that unemployment is so high when you pay people not to work.? The 2010 Nobel Prize was awarded to economists for their studies which showed that, and I quote from the Nobel press release announcing the award:
One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.
I scratch my head that somehow most of you on some academic level believe in the theory of supply and demand and how market setting prices result, but yet you deny them in your macro thinking about the economy.
I also must scratch my head at the view that the Federal Reserve should maintain a stable price level. What is wrong with having falling prices across the economy, like we now have in the computer sector, the flat screen television sector and the cell phone sector? Why, I ask, do you want stable prices? And, oh by the way, how’s that stable price thing going for you here at the Fed?
Since the start of the Fed, prices have increased at the consumer level by 2,241% . that’s not me misspeaking,…
So you then might tell me that stable prices are only a secondary goal of the Federal Reserve and that your real goal is to prevent serious declines in the economy but, since the start of the Fed, there have been 18 recessions including the Great Depression and the most recent Great Recession. These downturns have resulted in stock market crashes, tens of millions of unemployed and untold business bankruptcies.
I scratch my head and wonder how you think the Fed is any type of success when all this has occurred.
I am especially confused, since Austrian business cycle theory (ABCT), developed by Mises, Hayek and Rothbard, has warned about all these things. According to ABCT, it is central bank money printing that causes the business cycle and, again you here at the Fed have certainly done that by increasing the money supply.
…since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%.
Bob goes on to quote his prescient detailed warnings to the Fed before the GFC, and compare them to other speeches made at the same time:
“..although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” Ben Bernanke, June 8, 2008.
…I believe the Great Recession that followed is still fresh enough in our minds so it is not necessary to recount in detail as to whose forecast, mine or the chairman’s, was more accurate
And the finale:
… Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.
The whole speech is at Economic Policy Journal. Nice.
H/t Houston2000 thanks.