monetary policy

Defending Cato from Paul Krugman’s Inaccurate Assertions

Written by Daniel J. Mitchell, a senior fellow at the Cato Institute. Posted with permission from Cato @ Liberty.

Writing for the New York Times, Paul Krugman has a new column promoting more government spending and additional government regulation. That’s a dog-bites-man revelation and hardly noteworthy, of course, but in this case he takes a swipe at the Cato Institute.

The financial crisis of 2008 and its painful aftermath…were a huge slap in the face for free-market fundamentalists. …analysts at right-wing think tanks like…the Cato Institute…insisted that deregulated financial markets were doing just fine, and dismissed warnings about a housing bubble as liberal whining. Then the nonexistent bubble burst, and the financial system proved dangerously fragile; only huge government bailouts prevented a total collapse.

Upon reading this, my first reaction was a perverse form of admiration. After all, Krugman explicitly advocated for a housing bubble back in 2002, so it takes a lot of chutzpah to attack other people for the consequences of that bubble.

But let’s set that aside and examine the accusation that folks at Cato had a Pollyanna view of monetary and regulatory policy. In other words, did Cato think that “deregulated markets were doing just fine”?

We Are All Modern Monetary Theorists Now

As a consequence of loose monetary policy with a fiat currency, the United States is rapidly descending into an economic reality of Modern Monetary Theory, or MMT.  While MMT (also known as Chartalism) is typically associated with its Keynesian predecessor and the policies of the Left, new developments reveal that both parties are responsible for the slip into a brave new economic world.

Essentially, there are four preconditions in Modern Monetary Theory:

1) Money enters the economy through government spending, as the total amount of money is constrained not by gold but by the total output of the national economy;
2) Government spending is speculative as it prints as much money as it needs to control production and, as a byproduct, employment, and spending beyond productive capacity leads to inflation;
3) Taxes do not pay for expenditures but are instead a way to throttle private sector demand; and
4) The government is the issuer of the currency, sovereign governments that issue their own currency are never insolvent, so debts essentially don’t matter.

Romney Advisor: Consider Keeping Ben Bernanke

Ben Bernanke

One of Mitt Romney’s top advisors said recently that Federal Reserve Chairman Ben Bernanke needs to “get every consideration” for another term when his current term expires in 2014. When I saw that headline, I had to go read (and re-read) it for myself. Did he really say that?

Yes. Yes, he did.

I take a little comfort in the fact that Romney has previously said that Bernanke wouldn’t likely be returning as the Chairman of the Federal Reserve if he’s elected president. But Glenn Hubbard (no, not this guy) is a top advisor to Romney, and in that YouTube video I just linked to, one of the possible nominees for Bernanke’s job was Hubbard.

While I’m not very concerned about Romney keeping Bernanke around (he’s been a failure under Bush and Obama…it’s time for him to go), the thought that his replacement could be somebody who thinks Bernanke should be considered for another term scares me.

It’s worth mentioning that Hubbard and Bernanke are friends and have been for a long time, so there’s a chance that he’s just trying to be nice and not call his friend a complete miserable failure in the news. But there’s also the chance that he’d continue in Bernanke’s dollar-destroying ways.

A candid moment from a member of the FOMC

Federal Reserve Chairman Ben Bernanke just announced Operation Twist, a new combat operation that will supposedly fix our market woes. Supposedly. (Hey, pass the vodka, will you? I need a drink before I listen to this guy.)

I am not a financial markets expert, and I have not heard that much on the actual details of Operation Twist, but, courtesy of CNN, here’s a brief explanation:

NEW YORK (CNNMoney) — The Federal Reserve announced “Operation Twist” Wednesday, a widely expected stimulus move reviving a policy from the 1960s.

The policy involves selling $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds, starting in October and ending in June 2012.

 

While the move does not mean the Fed will pump additional money into the economy, it is designed to lower yields on long-term bonds, while keeping short-term rates little changed.

The intent is to thereby push down interest rates on everything from mortgages to business loans, giving consumers and companies an additional incentive to borrow and spend money.

So basically, they’re selling bonds and buying bonds. Nothing exactly Earth shattering here. And definitely not anything that will get us out of this rut.

Interestingly, some members of the FOMC agree with my assessment, and one of them had a speech about it. Mr. Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, had this to say about recent monetary policy, using a Nordic weather station as a metaphor:

Assessing Monetary Collapse: Exposing Agenda 21 and Understanding Freedom

What if the Federal Reserve dollar falls – hard? How is the globalist blueprint known as Sustainable Development Agenda 21 designed to make humans into livestock? Why liberty must be understood by this generation of Americans lest it be lost for a very long time.

More Americans, an accelerating percentage of ordinary citizens, have come to understand the nature of “fiat” monetary system – that is money created out of thin air. The contemporary fiat system came to the United States in 1913 with the congressional creation of the privately owned United States Federal Reserve. The Federal Reserve legislation violated Article 1 Section 8 of the Constitution by the issuance of legal tender and brought once again the influence/control of the globalist banking cartel to the U.S.

Today’s global monetary system was originally authorized by the British Parliament. Its purpose was to form the central bank of England as the Bank of England, which is the equivalent to our Federal Reserve, to control a nation’s money.

“Issuing money” means controlling fiat (phony) money creation through the operation of a printing press or computer entry. This results in the regular increase in the money supply which ultimately expresses itself as price inflation.

Newly issued money is infused into the money supply via the creation of debt. Much of this debt is held by the federal government. More money equals more debt. ‘The harder I work’, says the average American, ‘the deeper in debt the nation becomes.’

Growing debt cedes the ultimate exercise of control to the creditor, particularly as the system breaks down under its own largesse. A “new” system is being designed by the same forces who designed today’s fiat system and who now have America close to the brink of dollar destruction. It is the replacement system that we must be wary of if we are to exercise a wise defense and restoration of freedom.

But Ben, a Bubble has No National Boundaries

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.)

Austrian Scholar’s Conference 2009

Every year the Ludwig von Mises Institute in Auburn, AL hosts a conference for scholars of the Austrian tradition to come together and share essays and ideas.  This year’s conference was loaded with big names and reputable authors among the Libertarian and generally liberty-minded.

Peter Schiff: Why the Meltdown Should Have Surprised No One

See Video

Naturally a recurrent theme of this lecture was monetary policy, specifically having to do with the dollar’s spiral toward hyper-inflation in the midst of the current economic collapse.  Schiff stressed that sooner than later the rest of the world, more importantly those still buying our debt would wise up to our inability to repay those fiscal obligations.  He told a short story about a wily old man in a certain neighborhood who had hoodwinked the neighborhood kids into vying for the job of painting his fence.  He related the metaphor by surmising, “We’ve got the world painting our fences, as if they don’t have their own fences to paint.”  Essentially, he said the way it is now, we get all the stuff and they only get the jobs.  He then fittingly asked, “What good are jobs without stuff?”  In short, we are barreling straight toward a currency crisis.

Dr. Paul on Bloomberg Explaining Why the Fed Needs to Go

See Video

Dr. Paul explains why the Federal Reserve needs to go and why the free market and saving money (vs. printing money) is part of the solution to the current crisis.

Rand Paul to place hold on Fed chair nominee

Janet Yellen

Sen. Rand Paul (R-KY) has informed Majority Leader Harry Reid (D-NV) of his intention to place a hold on Federal Reserve chair nominee, Dr. Janet Yellen, until the chamber votes on S. 209, the Federal Reserve Transparency Act.

“I am writing to convey my objection to floor consideration of the nomination of Dr. Janet Yellen to Chair the Board of Governors of the Federal Reserve without also considering legislation to bring much-needed transparency to the Fed,” wrote Paul in a letter to Reid, delivering on a threat he made last week.

 
 


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