United Liberty

Treasury secretary Timothy Geithner has been using what I would call “scare tactics” to improve Ben Bernanke’s renomination as the head of the Federal Reserve.

From Politico:

Asked about possible market reaction to a defeat, Geithner said: “I think the markets would view that as a very troubling thing to the economy as a whole. But, as I said, I don’t think they should be uncertain. I think they should be confident because we are very confident he will be reconfirmed.”

He appears confident, as he should be, that Bernanke will get the votes needed for confirmation. But what is troubling about this is that there is a very subtle threat that the markets will react negatively if he is not confirmed.

What the American public should be concerned about is the fact that a central bank has monopoly power over money in the United States. Besides that, they are private and unaccountable to the American public. Yet we still see people arguing that they should not even be audited! Unfortunately for Geithner and the Fed-backers, they can’t threaten that the market will react negatively to what is uncovered in the Fed audit. That would just prove the audit should have occurred; the market needs correction from the intervention of the Federal Reserve.

I recently read an article written by former Fed economist Richard Alford over at Naked Capitalism. He focused his criticism on the zero interest rate policy (ZIRP) currently deployed by the Fed under the watch of Chairman Ben Bernanke. There has been increasing noise surrounding ZIRP and more mainstream suggestions that interest rates were too low for too long between 2001 and 2006.

Alford’s article gets into quite a bit of detail, but it is worth a read if you enjoy geeky economics stuff. Mainstream macroeconomists believe that the economy can be explained and managed with mathematical formulas. In fact, the formulas are really quite simple and do not capture the dynamics of the millions of “irrational” actors therein. One favorite is the Taylor rule which suggests a target for the Fed funds rate - the key interest rate set by the central bank. Alford points to a Taylor op-ed which states that rates were too low from 2002-2005.

Bernanke has suggested that rates necessarily had to be low (and must stay low) to fend off the threat of deflation. When analyzing Bernanke’s definition of deflation, however, Alford suggests deflation was never a threat. Thus, interest rates were lower than they “should have been” for no good reason.

Once again, Bernanke is the object of my funny bone. The day is coming soon when his mettle will be tested.

Ben Bernanke is showing himself to be more of a Big-Government politician than a scientist. In his latest speech, he has tried to defend the actions of his predecessors by claiming that their easy-money monetary policy only holds five percent of the responsibility for the high real estate prices that ignited the boom-and-bust bubble that almost broke the back of the global economy.

According to his analysis, 30 percent of the responsibility goes to what he has been calling the “global savings glut.” The other 65 percent, he says, belongs to the inferior standards of the US mortgage market. Therefore, his argument seems to be saying that if we cure the standards we cure the problem.

He attempts to prove his point by demonstrating through charts that other countries had even looser monetary policy than the US, and yet they did not show a worse real estate boom; therefore, he concludes, loose monetary policy does not cause bubbles.

This sounds convincing, coming as it does from the highest-placed economic academician in the land. But his logic is flawed.

There are two problems with his argument. First, you cannot isolate these particular variables as he has done. To do so is the equivalent of saying Michael Phelps eats a lot, and he is not obese, therefore a high-calorie diet does not cause obesity. (Michael Phelps is the Olympic medalist swimmer who purportedly eats around 8,000-10,000 calories a day. A scientist could probably prove that he also spends almost 8,000-10,000 calories a day in his sports activities.)

NOTE: Due to the higher than normal traffic using Skype at the time of this recording, there may be some omissions of a word or two of the discussion peppered throughout the podcast.  We apologize for that inferior quality.

Jason and Brett were joined by Brad Warbiany, administrator and writer at The Liberty Papers, as well as a home-brewed beer guru.

Together, they discuss:

Note: Brad Warbiany from The Liberty Papers was originally penciled in as a guest for the podcast, but some technical difficulties required a re-recording of the show.  He was missed on the final product, but we plan to have him on again in the very near future.

Jason and Brett were joined by Stephen Gordon, principal with Forward Focus Media for the re-record, as well as the original.

Together, they discuss:

These tense times need comic relief.

When President Obama arrives in London this week he will meet with the leader of Germany, a nation where his election has brought newfound goodwill towards America; but will the goodwill be enough to force the hands of Germany to conform to Washington’s desires for additional stimulus and bailouts? If the latest media reports, which point towards an Administration attempting to dial down expectations, are any indication, then the answer is most likely a soft no.

The NYT is reporting that little ground is expected to be made in regards to additional German stimulus, with Chancellor Angela Merkel expected to cite fiscal discipline as a reason for German non-cooperation with President Obama’s Administration on the issue-

Since the middle of the 20th Century, when the Federal Reserve started compiling this measurement of non-borrowed bank deposit reserves there has been little short term deviation from its normal levels. Long Story short - Bank reserves, other than those achieved through loans (usually FED funds market, or discount window) have evaporated.

H/T Fincial Ninja.