Browsed by
Tag: crisis

The Fed Plans for the Next Crisis – Article by Ron Paul

The Fed Plans for the Next Crisis – Article by Ron Paul

Comments 0 Comment
The New Renaissance HatRon Paul
******************************

In her recent address at the Jackson Hole monetary policy conference, Federal Reserve Chair Janet Yellen suggested that the Federal Reserve would raise interest rates by the end of the year. Markets reacted favorably to Yellen’s suggested rate increase. This is surprising, as, except for one small increase last year, the Federal Reserve has not followed through on the numerous suggestions of rate increases that Yellen and other Fed officials have made over the past several years.

Much more significant than Yellen’s latest suggestion of a rate increase was her call for the Fed to think outside the box in developing responses to the next financial crisis. One of the outside-the-box ideas suggested by Yellen is increasing the Fed’s ability to intervene in markets by purchasing assets of private companies. Yellen also mentioned that the Fed could modify its inflation target.

Increasing the Federal Reserve’s ability to purchase private assets will negatively impact economic growth and consumers’ well-being. This is because the Fed will use this power to keep failing companies alive, thus preventing the companies’ assets from being used to produce a good or service more highly valued by consumers.

Investors may seek out companies whose assets have been purchased by the Federal Reserve, since it is likely that Congress and federal regulators would treat these companies as “too big to fail.” Federal Reserve ownership of private companies could also strengthen the movement to force businesses to base their decisions on political, rather than economic, considerations.

Yellen’s suggestion of modifying the Fed’s inflation target means that the Fed would increase the inflation tax just when Americans are trying to cope with a major recession or even a depression. The inflation tax is the most insidious of all taxes because it is both hidden and regressive.

The failure of the Federal Reserve’s eight-year spree of money creation via quantitative easing and historically low interest rates to reflate the bubble economy suggests that the fiat currency system may soon be coming to an end. Yellen’s outside-the-box proposals will only hasten that collapse.

The collapse of the fiat system will not only cause a major economic crisis, but also the collapse of the welfare-warfare state. Yet, Congress not only refuses to consider meaningful spending cuts, it will not even pass legislation to audit the Fed.

Passing Audit the Fed would allow the American people to know the full truth about the Federal Reserve’s conduct of monetary policy, including the complete details of the Fed’s plans to respond to the next economic crash. An audit will also likely uncover some very interesting details regarding the Federal Reserve’s dealings with foreign central banks.

The large number of Americans embracing authoritarianism — whether of the left or right-wing variety — is a sign of mass discontent with the current system. There is a great danger that, as the economic situation worsens, there will be an increase in violence and growing restrictions on liberty. However, public discontent also presents a great opportunity for those who understand free-market economics to show our fellow citizens that our problems are not caused by immigrants, imports, or the one percent, but by the Federal Reserve.

Politicians will never restore sound money or limited government unless forced to do so by either an economic crisis or a shift in public option. It is up to us who know the truth to make sure the welfare-warfare state and the system of fiat money ends because the people have demanded it, not because a crisis left Congress with no other choice.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Do We Need the Fed? – Article by Ron Paul

Do We Need the Fed? – Article by Ron Paul

Comments 0 Comment
The New Renaissance HatRon Paul
******************************

Stocks rose Wednesday following the Federal Reserve’s announcement of the first interest rate increase since 2006. However, stocks fell just two days later. One reason the positive reaction to the Fed’s announcement did not last long is that the Fed seems to lack confidence in the economy and is unsure what policies it should adopt in the future.

At her Wednesday press conference, Federal Reserve Chair Janet Yellen acknowledged continuing “cyclical weakness” in the job market. She also suggested that future rate increases are likely to be as small, or even smaller, than Wednesday’s. However, she also expressed concerns over increasing inflation, which suggests the Fed may be open to bigger rate increases.

Many investors and those who rely on interest from savings for a substantial part of their income cheered the increase. However, others expressed concern that even this small rate increase will weaken the already fragile job market.

These critics echo the claims of many economists and economic historians who blame past economic crises, including the Great Depression, on ill-timed money tightening by the Fed. While the Federal Reserve is responsible for our boom-bust economy, recessions and depressions are not caused by tight monetary policy. Instead, the real cause of economic crisis is the loose money policies that precede the Fed’s tightening.

When the Fed floods the market with artificially created money, it lowers the interest rates, which are the price of money. As the price of money, interest rates send signals to businesses and investors regarding the wisdom of making certain types of investments. When the rates are artificially lowered by the Fed instead of naturally lowered by the market, businesses and investors receive distorted signals. The result is over-investment in certain sectors of the economy, such as housing.

This creates the temporary illusion of prosperity. However, since the boom is rooted in the Fed’s manipulation of the interest rates, eventually the bubble will burst and the economy will slide into recession. While the Federal Reserve may tighten the money supply before an economic downturn, the tightening is simply a futile attempt to control the inflation resulting from the Fed’s earlier increases in the money supply.

After the bubble inevitably bursts, the Federal Reserve will inevitably try to revive the economy via new money creation, which starts the whole boom-bust cycle all over again. The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.

Some economists and policy makers claim that the way to stop the Federal Reserve from causing economic chaos is not to end the Fed but to force the Fed to adopt a “rules-based” monetary policy. Adopting rules-based monetary policy may seem like an improvement, but, because it still allows a secretive central bank to manipulate the money supply, it will still result in Fed-created booms and busts.

The only way to restore economic stability and avoid a major economic crisis is to end the Fed, or at least allow Americans to use alternative currencies. Fortunately, more Americans than ever are studying Austrian economics and working to change our monetary system.

Thanks to the efforts of this growing anti-Fed movement, Audit the Fed had twice passed the House of Representatives, and the Senate is scheduled to vote on it on January 12. Auditing the Fed, so the American people can finally learn the full truth about the Fed’s operations, is an important first step in restoring a sound monetary policy. Hopefully, the Senate will take that step and pass Audit the Fed in January.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

The Imperative of Technological Progress: Why Stagnation Will Necessarily Lead to Disaster and How Techno-Optimism Can Overcome It – Article by G. Stolyarov II

The Imperative of Technological Progress: Why Stagnation Will Necessarily Lead to Disaster and How Techno-Optimism Can Overcome It – Article by G. Stolyarov II

Comments 2 comments
The New Renaissance HatG. Stolyarov II
August 14, 2015
******************************

“He who moves not forward, goes backward.”
~ Johann Wolfgang von Goethe

It is both practically desirable and morally imperative for individuals and institutions in the so-called “developed” world to strive for a major acceleration of technological progress within the proximate future. Such technological progress can produce radical abundance and unparalleled improvements in both length and quality of life – whose possibilities Peter Diamandis and Steven Kotler outlined in their 2012 book Abundance: The Future is Better Than You Think. Moreover, major technological progress is the only way to overcome a devastating step backward in human civilization, which will occur if the protectionist tendencies and pressures of existing elites are allowed to freeze the status quo in place.

If the approximate technological and economic status quo persists, massive societal disintegration looms on the horizon. A Greece-style crisis of national-government expenditures may occur as some have predicted, but would only be a symptom of a greater problem. The fundamental driver of crisis since at least September 11, 2001, and more acutely since the Great Recession and the national-government bailouts of legacy financial and manufacturing institutions, is an increasing disconnect between the powerful and everybody else. The powerful – i.e., the politically connected, including the special interests of the “private sector” – seek to protect their positions through political barriers, at the expense of individual rights, upward social mobility, and economic/technological progress. Individuals from a relatively tiny politically connected elite caused the 2008 financial crisis, lobbied for and received unprecedented bailouts and lifelines for the firms whose misbehavior exacerbated the crisis, and then have attempted to rig the political “rules of the game” to prevent themselves from being unseated from positions of wealth and influence by the dynamics of market competition. The system created by these elites has been characterized by various observers as crony capitalism, corporatism, corporate fascism, neo-mercantilism, and a neo-Medieval guild system.

The deleterious influence of the politically connected today is reflected in the still-massive rates of unemployment and underemployment for the millennial generation, while many established industries fail to make openings for young people to ascend and fail to accommodate the emerging technologies with which young people thrive. While the millennial generation had nothing to do with the Great Recession, it has suffered its greatest fallout. Many millennials now encounter tremendous diminution in economic opportunity and living standards (think of young people in New York City paying several thousand dollars a month to share a tiny, century-old apartment among three people – or the emerging trend of shipping containers being converted into the only type of affordable housing for young people in San Francisco). The “Occupy” movement was a reflection of the resulting discontentment – a reflexive and indiscriminate backlash by young people who knew that their circumstances were unjustly bad, but did not understand the root causes or the culprits.

The only way for a crisis to be averted is for the current elites to stop blocking people from the millennial generation from opportunities to achieve upward mobility. The elite must also stop bailing out obsolete and poorly managed legacy institutions, and cease erecting protectionist barriers to the existence of innovative businesses that young people can and have tried to start. If the millennial generation continues to be shut out of the kinds of opportunities available to the preceding generation, however, I can envision two crisis scenarios. Each of these characterizations is not a prediction (but rather a nightmare which I hope can be avoided), is somewhat broad and, of course, is tentative. However, these scenarios are rough outlines of how the West could falter in the absence of significant technological progress.

Crisis Scenario 1: “Occupy” Times Ten: Millions of unemployed thirty-somethings (millennials in five to ten years) riot in the streets, indiscriminately destroying storefronts and setting cars alight. Economic activity and sophisticated production are ground to a halt because of the turmoil. The continuity of knowledge transfer and intergenerational symbiosis involved in human civilization are completely interrupted. Clashes with police create martyrs who are then invoked by opportunistic thugs as an excuse to loot and burn. Without the opportunity for peaceful economic cooperation, society degenerates into armed gangs, some left-wing (e.g., “Black Bloc” violent anarchists), others right-wing (e.g., survivalist militia groups). Thoughtful and intellectual people, who want the violence to end and see an imperfect peace as better than a war of all against all, are universally despised by the new tribes and cannot find a safe environment in which to work and innovate. The infrastructure of everyday life is critically damaged, and nobody maintains or repairs it. Roads, bridges, pipes, and electrical grids are either destroyed or become unusable after years of decay. The West becomes Ukraine writ large, eventually regressing into premodernity.

Crisis Scenario 2: The Reaction: Current political and crony-capitalist elites crack down with extreme force, either in response to actual riots or, more likely, to the threat thereof. Civil liberties are obliterated and an economic underclass enforced through deliberate restrictions on entry into any remunerative occupations – much like the 17th-century mercantilists advocated for maximum wages and prohibitions on perceived luxuries for the working classes. Those who do get jobs are required to work 60 or more hours per week and so have no time for anything else in life. All established industries are maintained in their current form through legal protections and bailouts, and there is an official policy that the structure of the economy must not be allowed to change for any reason. (Think of Directive 10-289 from Ayn Rand’s Atlas Shrugged.) Licensing requirements for professions become ubiquitous and burdensome, laden with Catch-22 provisions so that few or no new entrants can make it into the system. Only an elite cadre of Baby Boomers enjoys wealth and uses the force of legal entry barriers to prevent anyone else from having the opportunity to earn their own. They have ground technological progress to a halt, seeking to keep established business models in place and thwart all competition. The national government develops a massive spying capability and enforces social order through the ability to detect behaviors that might even be algorithmically correlated with dissent. All ordinary citizens are routinely humiliated in public under the pretense of thwarting crime or terrorism. TSA body searches have expanded beyond airports to highway checkpoints, shopping centers, and random stops by police on city streets. People’s homes are routinely raided by SWAT teams at the mildest pretext. This is done to make people meek and subservient to the established order. To keep young people from rioting (and get rid of the “excess” unemployed youths), the elites concoct jingoistic justifications to inflame endless foreign wars, and young people are conscripted and sent to die abroad. If any of these wars aggravate the regimes of either Russia or China, this scenario has the added risk of putting the world back on the verge of nuclear conflict. The fast-senescing crony-capitalist elites have cut off future biomedical progress and so will die eventually, but only the children of the elite will inherit any wealth. A neo-feudal oligarchy is established and becomes gradually ossified throughout the generations, while the industrial and technological base built over the past 200 years, as a legacy of the Enlightenment and individual rights, will deteriorate, eventually bringing the West back into premodernity.

I see an ossification of the status quo as leading to one or both of the above crisis scenarios. A return of premodernity is the logical conclusion of the dynamics of a fundamentally unaltered status quo. If humankind does not move technologically forward, it will go backward in a spiral of destruction and repression.

The only way for either crisis scenario to be averted is for technological progress to occur at no slower than the rates experienced during the twentieth century. Overt political revolution, even if it begins peacefully, is dangerous. To understand why this is so, one needs look no further than the recent Arab Spring uprisings – initially motivated by liberally minded dissidents and ordinary people who could no longer tolerate corrupt dictatorships, but ultimately hijacked by Islamist militants, military juntas, or both. A case even closer to the contemporary Western world is the recent Maidan revolution in Ukraine, which, while initially motivated by peaceful and well-intentioned pro-European activists, replaced a corrupt regime that occasionally persecuted dissidents with a fiercely militant, nationalistic regime that tolerates no dissent, engages in coercive historical revisionism, prohibits criticism of Nazi and neo-Nazi thugs, conscripts some of its citizens to die in civil war, and indiscriminately shells others of its citizens in the East. Revolutions always have the potential of replacing a lethargically bad regime with an aggressively destructive one.

This is why it is better for any societal transformation to be driven primarily by technological and economic development, rather than by political turmoil. The least turbulent transformations should be somewhat gradual and at least grudgingly accepted by the existing elites, who need to be willing to alter their own composition and accept bright minds from any background – not just their own progeny. A sufficient rate of technological advancement – especially due to the growth in 3D printing, robotics, nanotechnology, biotechnology, genetic engineering, vertical farming, and renewable energy – can ensure near-universal abundance within a generation, untethered from permission-granting institutions to which most people today owe a living. Such prosperity would enable most people to experience what are today upper-middle-class living standards, therefore having no motivation to riot. Technological progress can also preserve individual liberty by continually creating new spheres where politicians and lobbyists are incapable of control and individuals can outmaneuver most political restrictions.

Technological progress, particularly radical extension of the human lifespan through periodic rejuvenation that can restore the body to a more youthful condition, is also the only hope for remedying unsustainable expenditures of national governments, which are presently primarily intended to support people’s income and healthcare needs in old age. Rejuvenation biotechnology of the sort championed by Dr. Aubrey de Grey’s SENS Research Foundation could be developed with sufficient investment into the research, and could become disseminated by biotechnology entrepreneurs, ensuring that older people do not become decrepit or incapable of productive work as they age. The only way to sustainably extend average lifespans past about 85 years would be to turn back the clock of biological aging. It is not possible for most people (who do not have some degree of genetic luck) to live much longer beyond that without also becoming more youthful.

Many people who receive rejuvenation treatments will not want to retire – at least not from all work – if they still feel the vitality of youth. They will seek out activities to support human well-being and high living standards, even if they have saved enough money to consider it unnecessary to take a regular 8-to-5 job. With the vitality of youth combined with the experience of age, these people will be able to make sophisticated, persistent contributions to human civilization and will tend to plan for the longer term, as compared to most people today. If automation takes care of basic human needs, then human labor will be freed for more creative and fulfilling tasks.

Effective rejuvenation will not arrive right away, but immigration can keep the demographic disparity between the young and the old from being a severe problem in the meantime. This is another reason to reject protectionist policies and instead pursue approaches that allow more people to contribute to and benefit from the material prosperity of the “developed” world. Birth rates tend to fall anywhere there are major rises in standards of living after an industrial revolution, as children stop becoming productive helpers in an agricultural economy and instead become expensive to raise and educate so that they can participate in a knowledge-based economy. However, birth rates are still higher in many less-developed parts of the world, and people from those areas will readily seek opportunities for economic advancement in more developed countries, if given the option.

Fortunately, there are glimmers of hope that the path of gradual embrace of ever-accelerating progress will be the one taken in the early-21st-century Western world. The best outcome would be for an existing elite to facilitate mechanisms for its own evolution by offering people of merit but from humble backgrounds a place in real decision-making.

Some of that evolution can occur through market competition – new, upstart businesses displacing incumbents and gradually amassing significant resources themselves. The best instantiation of this in the United States today is the Silicon Valley entrepreneurial culture – which, incidentally, tends to finance the majority of longevity research. The most massive infusion of funds into longevity-related research has been from an offshoot of Google – Calico – founded in 2013 and currently partnering with a large pharmaceutical company, AbbVie. Calico has been somewhat secretive as to the details of its research, but there are other large businesses that are beginning to invest in similar endeavors – e.g., Craig Venter’s Human Longevity, Inc. Moreover, the famous libertarian venture capitalist Peter Thiel has given millions of dollars to Dr. Aubrey de Grey’s SENS Research Foundation – a smaller-scale organization but perhaps the most ambitious in its goals to bring about a reversal of human senescence through advances in rejuvenation treatments within the next quarter-century.

These developments are evidence that the United States today is characterized not by one elite, but by several – and the old “Paper Belt” elite is clearly in conflict with the new Silicon Valley elite. Politicians tend, surprisingly, not to be the most decisive players in this conflict, since they typically depend on harnessing pre-existing cultural currents in order to get elected and stay in office. Thus, they will tend to side with whatever issues and special interests they consider to be gaining ground at a given time. For this reason, many thinkers have characterized politics as a lagging indicator, responding to rather than triggering the defining events of an era. The politicians ride the currents to power, but something else creates those currents.

Differences in the breadth of vision among elites also matter. For instance, breakthroughs in human longevity could actually be a great boon for medical providers and the first pharmaceutical companies that offer effective products/treatments. Even the most ambitious proponents of life extension do not think it possible to develop a magic immortality pill. Rather, the treatments involved (which will be quite expensive at first) would require periodic regeneration of the cells and tissues within a person’s body – essentially resetting the biological clock every decade or so, while further innovation uncovers ways to reverse the damage more cheaply, safely, and effectively. This is a field ripe with opportunities for enterprising doctors, researchers, and engineers (while, at the same time, certainly endangering many extant business models). Some government officials, if they are sufficiently perceptive, could also be persuaded to support these changes – if only because they could prevent a catastrophic collapse of Social Security and Medicare. Approximately 30% of Medicare expenditures occur during the last year of patients’ lives, when the body is often fighting back multiple ailments in a losing battle. If this situation were simply prevented in the first place, and if most people became biologically young again and fully capable of working for a living or financing their own retirements, the expenses of both Social Security and Medicare could plummet until these programs became wholly unnecessary in the eyes of most voters.

The key to achieving a freer, more prosperous, and longer-lived future is to educate both elites and the general public to accurately weigh the opportunities and risks of emerging technologies. Too many individuals today, both elites and ordinary people, view technological progress with suspicion, conjuring in their minds every possible dystopian scenario and every possible malfunction, inconvenience, lost opportunity, moral reservation, or esthetic dislike they can muster against breakthroughs in life extension, artificial intelligence, robotics, autonomous vehicles, genetic engineering, nanotechnology, and many other areas of advancement that could vastly benefit us all. This techno-skeptical mindset is the biggest obstacle for proponents of progress and a better future to overcome. Fortunately, we do not need to be elites to play important roles in overcoming it. By simply arguing the techno-optimist case and educating people from all walks of life about the tremendous beneficial potential of emerging technologies, we can each do our part to ensure that the 21st century will become known as an era of humankind’s great liberation from its age-old limitations, and not a lurch back into the bog of premodern barbarism.

If we have a modicum of technological progress, the West might be able to muddle through the next several decades. If we have an acceleration of technological progress, the West will leave its current problems in the dust. The outcome will be a question of whether people (both elites and ordinary citizens) are, on balance, held hostage to the fear of the new or, rather, willing to try out technological alternatives to the status quo in the hopes of achieving improvement in their lives.

This essay may be freely reproduced using the Creative Commons Attribution Share-Alike International 4.0 License, which requires that credit be given to the author, G. Stolyarov II. Find out about Mr. Stolyarov here.
Bernanke’s Legacy: A Weak and Mediocre Economy – Article by John P. Cochran

Bernanke’s Legacy: A Weak and Mediocre Economy – Article by John P. Cochran

Comments 0 Comment
The New Renaissance Hat
John P. Cochran
February 8, 2014

******************************

As Chairman Bernanke’s reign at the Fed comes to an end, the Wall Street Journal provides its assessment of “The Bernanke Legacy.” Overall the Journal does a reasonable job on both Greenspan and Bernanke, especially compared to the “effusive praise from the usual suspects; supporters of monetary central planning. The Journal argues when accessing Bernanke’s performance it is appropriate to review Bernanke’s performance “before, during, and after the financial panic.”

While most assessments of Bernanke’s performance as a central banker focus on the “during” and “after” financial-crisis phases with much of the praise based on the “during” phase, the Journal joins the Austrians and John Taylor in unfavorable assessment of the more critical “before” period. It was this period when the Fed generated its second boom-bust cycle in the Greenspan-Bernanke era. In the Journal’s assessment, Bernanke, Greenspan, and the Fed deserve an “F.” While this pre-crisis period mostly fell under the leadership of Alan Greenspan, the Journal highlights that Bernanke was the “leading intellectual force” behind the pre-crisis policies. As a result of these too-loose, too-long policies, just as the leadership of the Fed passed from Greenspan to Bernanke, the credit boom the Fed “did so much to create turned to mania, which turned to panic, which became a deep recession.” The Journal’s description of Bernanke’s role should be highlighted in any serious analysis of the Bernanke era:

His [Bernanke’s] role goes back to 2002 when as a Fed Governor he gave a famous speech warning about deflation that didn’t exist [and if it did exist should not have been feared].[1] He and Mr. Greenspan nonetheless followed the advice of Paul Krugman to promote a housing bubble to offset the dot-com crash.

As Fed transcripts show, Mr. Bernanke was the board’s intellectual leader in its decision to cut the fed-funds rate to 1% in June 2003 and keep it there for a year. This was despite a rapidly accelerating economy (3.8% growth in 2004) and soaring commodity and real-estate prices. The Fed’s multiyear policy of negative real interest rates produced a credit mania that led to the housing bubble and bust.

For some of the best analysis of the Fed’s pre-crisis culpability one should turn to Roger Garrison’s excellent analysis. In a 2009 Cato Journal paper, Garrison (2009, p. 187) characterizes Fed policy during the “Great Moderation” as a “learning by doing policy” which, based on events post-2003, would be better classified as “so far so good” or “whistling in the dark.” The actual result of this “learning by doing policy” is described by Garrison in “Natural Rates of Interest and Sustainable Growth”:

In the earlier episode [dot.com boom-bust], the Federal Reserve moved to counter the upward pressure of interest rates, causing actual interest rates not to deviate greatly from the historical norm. In the later episode [housing bubble/boom-bust], the Federal Reserve moved to reinforce the downward pressure on interest rates, causing the actual interest rates to be exceedingly low relative to the historical norm. Although the judgment, made retrospectively by economists of virtually all stripes, that the Fed funds target rate was “too low for too long” between mid-2003 and mid-2004, it was almost surely too low for too long relative to the natural rate in both episodes. (p. 433)

Given this and other strong evidence of the Fed’s role in creating the credit-driven boom, the Journal faults “Mr. Bernanke’s refusal to acknowledge that the Fed made any mistake in the mania years.”

On the response to the crisis, the Journal refrains from the accolades of many who credit the Fed led by the leading scholar of the Great Depression from acting strongly to prevent another such calamity. According to the Fed worshipers, things might not be good, but without the unprecedented actions and bailouts things would have been catastrophic. The Journal’s more measured assessment:

Once the crisis hit, Mr. Bernanke and the Fed deserve the benefit of the doubt. From the safe distance of hindsight, it’s easy to forget how rapid and widespread the financial panic was. The Fed had to offset the collapse in the velocity of money with an increase in its supply, and it did so with force and dispatch. One can disagree with the Fed’s special guarantee programs, but we weren’t sitting in the financial polar vortex at the time. It’s hard to see how others would have done much better.

But discerning readers of Vern McKinley’s Financing Failure: A Century of Bailouts might disagree. Fed actions, even when not verging on the illegal, were counter-productive, unnecessary, and contributed to action-freezing policy uncertainty which contributed to the collapse of the velocity of money. McKinley describes much of what was done as “seat-of-the-pants decision-making” (pp. 305-306):

“Seat of the pants” is not a flattering description of the methods of the regulators, but its use is justified to describe the panic-driven actions during the 2000s crisis. It is only natural that under the deadline of time pressure judgment will be flawed, mistakes will be made and taxpayer exposure will be magnified, and that has clearly been the case. With the possible exception of the Lehman Brothers decision … all of the major bailout decisions during the 2000s crisis were made under duress of panic over a very short period of time with very limited information at hand and with input of a limited number of objective parties involved in the decision making. Not surprisingly, these seat-of-the-pants responses did not instill confidence, and there was no clear evidence collected that the expected negative fallout would truly have occurred.

While a defense of some Fed action could be found in Hayek’s 1970s discussion of “best” policy under bad institutions (a central bank) where he argued that during a crisis a central bank should act to prevent a secondary deflation, the Fed actions went clearly beyond such a recommendation. Better would have been an immediate policy to end the credit expansion in its tracks. The Fed’s special guarantee programs and movement toward a mondustrial policy should be a great worry to anyone concerned about long-term prosperity and liberty. Whether any human running a central bank could have done better is an open question, but other monetary arrangements could clearly have led to better outcomes.

The Journal’s analysis of post-crisis policy, while not as harsh as it should be,[2] is critical. Despite an unprecedented expansion of the Fed’s balance sheet, the “recovery is historically weak.” At some point “a Fed chairman has to take some responsibility for the mediocre growth — and lack of real income growth — on his watch.” Bernanke’s policy is also rightly criticized because “The other great cost of these post-crisis policies is the intrusion of the Fed into politics and fiscal policy.”

Because the ultimate outcome of this monetary cycle hinges on how, when, or if the Fed can unwind its unwieldy balance sheet, without further damage to the economy; most likely continuing stagnation or a return to stagflation, or less likely, but possible hyper-inflation or even a deflationary depression, the Bernanke legacy will ultimately depend on a Bernanke-Yellen legacy. Given, as the Journal points out, “Politicians — and even some conservative pundits — have adopted the Bernanke standard that the Fed’s duty is to reduce unemployment and manage the business cycle,” the prospect that this legacy will be viewed favorably is less and less likely. Perhaps if the editors joined Paul Krugman in reading and fully digesting Joe Salerno’s “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” they would correctly fail Bernanke and Fed policy before, during, and after the crisis.

But what should be the main lesson of a Greenspan-Bernanke legacy? Clearly, if there was no pre-crisis credit boom, there would have been no large financial crisis and thus no need for Bernanke or other human to have done better during and after. While Austrian analysis has often been criticized, incorrectly,[3] for not having policy recommendations on what to do during the crisis and recovery, it should be noted that if Austrian recommendations for eliminating central banks and allowing banking freedom had been followed, no such devastating crisis would have occurred and no heroic policy response would have been necessary in the resulting free and prosperous commonwealth.

Notes

[1] See Joseph T. Salerno, “An Austrian Taxonomy of Deflation — With Applications to the U.S.” Quarterly Journal of Austrian Economics 6, no. 4 (2001).

[2] See John P. Cochran’s, Bernanke: The Good Engineer? Mises Daily Article, 21 March 2013 and Bernanke: A Tenure of Failure, Mises Daily Article, 31, July 2013.

[3] See John P. Cochran, Recessions: The Don’t Do List, Mises Daily Article, 17 February 2013.

John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics. Send him mail. See John P. Cochran’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.