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Posts Tagged ‘Federal Reserve’

Robert Wenzel gave an address to the New York Fed earlier this week. It is worth reading in its entirety (here). You can read some positive reviews by Vox Day (Vox Populi) and Tyler Durden (Zero Hedge, see some of the comments).

On economic 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. …

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.

On Bernanke’s reign at the Fed:

There have been more changes in monetary policy direction during the Bernanke era then at any other time in the modern era of the Fed. Not under Arthur Burns, not under G. William Miller, not under Paul Volcker, not under Alan Greenspan  have there been so many dramatically shifting Fed monetary policy moves. Under Chairman Bernanke there have been significant changes in direction of the money supply growth FIVE different times. Thus, for me, I am not at all surprised at the current stop and go economy. The current erratic monetary policy makes it exceedingly difficult for businessmen to make any long term plans.

On Bernanke’s appeal to Operation Twist, Wenzel notes that it seems quite peculiar, given that a 2004 Fed paper coauthored by the current chairman concluded:

 “Operation Twist is widely viewed today as having been a failure, largely due to classic work by  Modigliani and Sutch”

and

“Operation Twist does not seem to provide strong evidence in either direction as to the possible effects of changes in the composition of the central bank’s balance sheet.”

After additional comments on the Fed (none of them positive), Wenzel ends on a delightful note:

The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or,  if you stop printing, another massive economic crash will occur. There is no other way out.

Again, thank you for inviting me. You have prepared food, so I will not be rude, I will stay and eat. 

Let’s have one good meal here. 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 address contains a nice primer on Austrian economics, a lively critique of current policy, and a lot of head scratching. One can only imagine how it was received at the New York Fed. 

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For many libertarians, the single most important policy reform today would be abolishing the Federal Reserve and replacing it with competing currencies issued by unregulated, private banks. Ron Paul has repeatedly introduced bills to abolish the Fed and has made the issue a key theme of his presidential campaigns. Many libertarians get involved in efforts to use silver as a medium of exchange, such as the Liberty Dollar and Shire Silver.

Why do so many libertarians think that abolishing the Fed should take such a high priority? Some economists have explored the history and theory of “free banking,” such as Larry White and George Selgin. But I suspect many libertarians derive their monetary ideas not from reading White or Selgin, but from Ron Paul or lurid, conspiratorial books like The Creature from Jekyll Island. One commonly encounters views such as, “The Fed is creating hyperinflation that will destroy the value of the dollar,” and, “The Fed prints money to fund the government’s war machine.”

It’s important to note that these views are not correct. The main way that the Fed creates money is by (more…)

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I just recently came across this profile of Milton Friedman by Paul Krugman in the February 15, 2007 New York Review of Books. Krugman pays homage to Friedman’s research as a macroeconomist, including his and Schwartz’s Monetary History of the United States, best known for its explanation of the Great Depression as a monetary phenomenon. However, Krugman castigates Friedman for “intellectual dishonesty” in his popularizations.

On the Great Depression, the core of Krugman’s accusation is that Friedman claimed to have found that the Federal Reserve “caused” the Great Depression when the money supply collapsed by a third during 1931-33 due to bank failures. But, says Krugman, the fault in the Fed was not reducing the monetary base (they increased it), but instead failure to act. So it’s dishonest to claim that the Fed caused the Depression, when Friedman’s research actually demonstrates the case for more government intervention, not less.

I take the point, but it’s an unfair stretch to characterize Friedman’s interpretation as intellectually dishonest. After all, when public choice economists criticize government regulation on the grounds that such agencies are often “captured” by the interests they’re supposed to be regulating, no one would say it’s intellectually dishonest to oppose certain government regulations on those grounds. Similarly, one can legitimately oppose monetary discretion on the grounds that central banks will sometimes make catastrophic mistakes on the side of acting too hesitantly or timidly.

Second, as I recall Friedman and Schwartz’s original argument, they also argued that an alternative to rescuing the banks would be either deposit insurance or allowing solvent but illiquid banks to suspend payments to depositors, as had been the case prior to 1913. It was the combination of no deposit insurance, no bailouts, and the prohibition on suspension of payments that caused the catastrophe. Had that last government regulation not been in place, the U.S. Depression might not have turned out to be the worst slump in the industrialized world in the 1930s.

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