The Fed has committed itself to maintaining its zero interest rate policy as well as quantitative easing for as long as the unemployment rate remains above 6.5 percent (and inflation rate below 2.5 percent). James Bullard, the President of the Federal Reserve Bank of St. Louis, heroically dissents from this policy of unemployment targeting, which is basically a reversion to the crude and discredited Old Keynesian doctrine. In a speech last month entitled “Some Unpleasant Implications for Unemployment Targeters”, Bullard, himself a New Keynesian inflation targeter, stated:

Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions. . . . monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems.

Unfortunately, President Bullard did not articulate those “more direct labor market policies,” but they would include: the repeal of minimum-wage legislation, which destroys jobs for the unskilled; the repeal of the National Labor Relations Act, which coerces employers into collective bargaining and privileges union “insiders” against non-union “outsiders” causing unemployment or lower wage rates among the latter; and the phasing out of unemployment “insurance,” which encourages unemployed workers to spend an excessive amount of time in “searching” for jobs.

The full PowerPoint presentation of Bullard’s speech can be found here.

The Mises Institute will be hosting the David Stockman Seminar in New York City on Tuesday May 21. Lew Rockwell, Judge Andrew Napolitano, and myself will be in attendance. Mr. Stockman will be talking about his hard-hitting new book on crony capitalism, The Great Deformation.

The Great Deformation is an indispensable book, packed with insights and careful historical analysis. The massive bailouts injected into the economy by the Bush Administration in response to the 2008 crisis were not needed to stave off a collapse of the monetary system. To the contrary, Stockman shows, they were a triumph of “crony capitalism”. This nefarious system, based on massive government debt, has deep roots in twentieth-century economic history. Stockman offers one of the best discussions I have ever read of Roosevelt’s New Deal, and the vital role of Richard Nixon on our road to financial ruin receives much needed stress. Neither Keynes nor Milton Friedman fares very well here, and readers will learn why the policies of both of them have led to disaster. The Great Deformation is a magnificent defense of a free economy and sound money.

You would not think that there would be any worthwhile ideas in an article entitled “Bring on the ‘Helicopter’ Money.” Written by hedge-fund manager Daniel Arbess in today’s Wall Street Journal, the article contains a very good idea buried among many bad ones.

Arbess argues that quantitative easing is failing because there is a lack of demand for credit, so that Fed policy is “pushing on a string,” as it were. In addition, Arbess contends, fiscal policy is acting as a “headwind” to the economic recovery because of higher payroll taxes and rising health care costs.

To combat such “monetary impotence” and “fiscal paralysis,” Arbess recommends a “helicopter drop of money” directly into the economy. In technical terms this is today called “overt monetary finance,” which means that the Fed would bypass the banking system and credit markets in creating money and send the new money directly to the Treasury where Congress would decide on how to use it. Since it is illegal for the Fed to purchase debt directly from the Treasury, this procedure would be considered “a direct equity investment” in the Treasury. Sure this policy poses the obvious risks of inflation in the hands of an undisciplined Congress, but Arbess believes that these risks are “manageable” and that this mechanism offers “an optimum combination of fiscal and monetary stimulus without increasing private or public debt.” Thus, Arbess’s main concern seems to be to expand government spending without further bloating Federal deficits and the national debt.

Of course these are all very bad ideas and are based on the crude and destructive Keynesian notion that money and spending–more paper tickets or their electronic substitutes changing hands–will lead to the creation of more real goods and jobs. But the Fed has created $2.3 trillion (M2) since 2008. What makes Mr. Arbess think that creating dollars through a different channel will alter the result? Furthermore, what is retarding the economic recovery is not the Federal budget deficit or the size of the national debt per se. It is rather the amount of resources that the Federal government is prying from the hands of productive entrepreneurs, investors and laborers, and siphoning out of the private economy into wasteful subsidies to domestic special interests, the financing of unnecessary wars, the feeding of an insatiable and gigantic military machine, and the payment of the salaries of the unproductive politicians and bureaucrats who oversee it all. This is the true burden dragging down the economy and is measured by precisely total government spending that Mr. Arbess so desperately seeks to increase. It matters very little whether such spending is financed by taxes or by deficits funded by debt issuance and money creation.

The one good idea in the article is overt monetary finance, but for different reasons than Mr. Arbess gives. Arbess sees this measure as only a temporary “crisis-fighting tool” that will be stowed away as soon as the economy recovers. But as a permanent policy, it would be a wonderful device for wresting control of monetary policy from un-elected, secretive, and pseudo-scientific Fed bureaucrats and placing it under a Congress subject to popular scrutiny and elections. Of course this would not be an ideal system, which would be a hard money consisting of a market supplied commodity like gold. But it would have a number of significant advantages over the present Fed-dominated system. First, as just noted, money creation by Congress would be far more transparent and understandable to the public than the arcane procedures by which the Fed expands the money supply. Second, the injection of new money directly into the economy via government purchases of goods and services would avoid the continual and systematic distortion of financial markets and the interest rate currently caused by Fed open market operations. This process of “simple inflation” as Mises called it would, therefore, certainly produce rising prices but would not generate business cycles of recurring booms and busts. Finally, the Fed could no longer operate as a bailer-outer of last resort, surreptitiously bailing out gigantic domestic and foreign financial institutions in the absence of discussion and consent by Congress and the knowledge of the public.

For a more detailed discussion of the pros and cons of placing the Fed directly under Congressional control see my article The Flipside of the Trillion Dollar Coin.

Responding to a question after his speech in Stockholm earlier today, Federal Reserve Bank of Philadelphia President Charles Plosser admitted that the Fed’s policy of targeting a zero interest rate “is increasingly troubling to many people on the Fed.” Plosser went on to state, “We’re very conscious of the fact that keeping rates at zero for very long periods of time can distort decision making in various ways.” Ya think?

http://www.youtube.com/watch?v=iwNLRNpVbN8

In an interview on The Lew Rockwell Show, economist Harry Veryser of the University of Detroit-Mercy and author of It Didn’t Have to Be This Way shared the following recollection:

I remember being in a conference with Ludwig von Mises in the sixties at FEE [the Foundation for Economic Education]. And I asked him about Friedman and economics. And he waved his hand in the typical Austrian way and he said: “Friedman is not an economist. He’s a statistician.”

Now in describing Friedman in these terms, Mises was not name calling but had a very specific meaning in mind. For Mises (pp. 247-48) a “statistician” was someone “who aim[s] at discovering economic laws from the study of economic experience.” But Mises maintained that statistics is not a method useful for research in economic theory because it deals with historical facts. According to Mises:

Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history.

Indeed in his magnum opus, A Monetary History of the United States, co-authored with Anna Schwartz, Friedman confirmed the accuracy of Mises’s characterization. In their Preface (p. xxii), Friedman and Schwartz stated that their aim in writing the book was “to provide a prologue and a background for a statistical analysis of the secular and cyclical behavior of money in the United States and to exclude any material not relevant to that purpose.” In the final chapter, entitled “A Summing Up,” the authors (Friedman and Schwartz, p. 676) listed three propositions regarding money that they discovered to be “common” to U.S. monetary history and concluded, “These common elements of monetary experience can be expected to characterize our future as they have our past.” It would be difficult to find a better expression of the statistician’s view of the social world.

. . . asked Tony Durden at Zero Hedge the other day. His answer: the Treasury Borrowing Advisory Committee to the US Treasury chaired by Matt Zames of J.P. Morgan. Durden discovered the following passage by Friedrich Hayek quoted in the TBAC’s quarterly refunding presentation made at the beginning of May. Here it is as found on p. 86 of the appendix of the slide show presentation:

“There can be no doubt that besides the regular types of the circulating
medium, such as coin, notes and bank deposits, which are generally
recognised to be money or currency, and the quantity of which is
regulated by some central authority or can at least be imagined to be so
regulated, there exist still other forms of media of exchange which
occasionally or permanently do the service of money.
Now while for certain practical purposes we are accustomed to
distinguish these forms of media of exchange from money proper as
being mere substitutes for money, it is clear that, other things equal, any
increase or decrease of these money substitutes will have exactly the
same effects as an increase or decrease of the quantity of money proper,
and should therefore, for the purposes of theoretical analysis, be counted
as money.”
Friedrich Hayek, Prices and Production 1931 – 1935.37

Durden concluded with the following ruminations:

That’s right: it would appear that the long hand of Austrian economics has penetrated deep into the narrative offered by the JPM and Goldman-chaired TBAC.

But… if that is the case, and if indeed the Treasury’s advisors are fundamentally at heart, Austrian, then that would diametrically change the entire ballgame. Simply because it would mean that whoever wrote the TBAC’s most recent slideshow understand perfectly well that the path the US has set off on is not only not going to have a happy ending . . . but will, naturally, end in tears.

So, one wonders: is that precisely what JPM and Goldman (the two heads of the TBAC) have had in mind all along?

And if so, one also wonders just how they really feel about gold…

Three of the four largest banks in Sweden continue to phase out the manual handling of cash at their branch offices at a rapid pace, according to recent data reported today in Naringsliv, a leading Swedish Money and Finance newspaper insert. Taken together, Swedbank, Nordea, and SEB, have stopped offering cash services at their branches at the rate of three branches per week since 2010. Thus during the period 2010-2012, cash disappeared from 465 Swedish bank branches. At Swedberg bank, only 75 of its 340 branches still handle cash.

Leif Faithful, Head of Financial Infrastructure at the Swedish Bankers’ Association, believes that eventually all Swedes will need a bank card and sees this development as beneficial to “both consumers and trade.” Odd that he does not mention the great benefit to the banks of revenues generated by the cards and the fact that with few bank branches paying out cash it makes fractional-reserve banks much more secure against bank runs during crises generated by the credit expansion of these same banks. Nor does he mention the obvious benefits from the spread of electronic transactions that will accrue to the Swedish government, which will have much greater ability to snoop into and monitor the private financial dealings of its citizens

Fortunately, one heroic Swedish bank among the largest four, Handelsbanken, has resisted this pernicious trend toward abolishing cash and empowering the government and the fractional-reserve banking cartel at the expense of the public. From early 2010, Handelsbanken has actually increased the number of its branches that handles cash and today all 461 branches do so, but with a limit of $15,000.

HT to Per Bylund.

The AEI, a centrist-establishment think tank, published a compelling policy study this week by Timothy P. Carney. The Case against Cronies: Libertarians Must Stand Up to Corporate Greed is a hard-hitting critique of crony capitalism that goes beyond merely recounting the ubiquitous and shameful instances of gigantic U.S corporations seeking and obtaining subsidies and monopoly privileges from Big Government at the expense of taxpayers, consumers and more efficient competitors. Indeed, Carney calls into question the conservative mantra as classically enunciated by Milton Friedman: ‘The social responsibility of business is to increase its profits.” Not so fast, Carney says. For what if investing in lobbying for a government subsidy or political barrier to entry is the best way for a corporation to increases its profits? Isn’t such behavior not only ethically dubious, but also inconsistent with the free market? While Carney does not formulate a libertarian standard of corporate responsibility to replace Friedman’s, he does make a powerful case that it should include explicit prohibitions against violating the principles of the free market. As Carney concludes:

Conservatives are good at criticizing the government for picking winners and losers — and they’re right to do so. Politicians and bureaucrats cannot allocate resources as efficiently as the market. The free market is the greatest welfare program ever invented.

But if the free market is worth protecting, conservatives must do a better job calling out corporations that participate in cronyism, as well. Doing so will raise tricky questions for conservatives. To what standard must we hold companies? What is ethically acceptable and what is not? . . .

When the ethanol industry writes an ethanol mandate, or H&R Block hatches a policy that crushes its small competitors, it’s legal. But it’s also a naked attempt to extract money from unwilling payers, restrict the freedom of competitors, and deny options to customers. This is the sort of behavior conservatives and libertarians need to denounce.

While Carney concedes that there is a grey area in practically judging corporate behavior in a mixed economy that raises some tough questions, he insists “these are questions free-market folks need to start discussing. . . . even if it means using the language of corporate social responsibility.”

It appears that the Fed’s zero-interest-rate and QE policies have finally achieved its insane goal of re-igniting a housing bubble.

The Case-Schiller 20-City Index shows that housing prices increased by 1.2 percent in February and 9.3 percent year-over-year. All cities included in the index experienced substantial gains, which have been driven by staggeringly large increases in the bottom tier of the market. In Phoenix housing prices rose by 23 percent over the past year, but by 39 percent in the bottom third of the housing market. Las Vegas home prices were up by 17.6 percent in the past year while prices for houses in the bottom tier rose by 34.2 percent, and at an annual rate of 56.2 percent in the last three months. In Atlanta, bottom-tier home prices rose 36 percent year-over-year and at an annual rate of 70 percent in the past three months.

In light of the current data, Dean Baker, one of the few left-of-center economists to issue an early warning about the last housing bubble, sees signs of a renewed housing bubble on the horizon:

This rapid increase in house prices should be prompting serious concern among regulators. At the moment, it is not driving the economy in the same way as the housing bubble did in the last decade. Construction is still at very low levels, so a plunge in prices could not have impact on the economy through this channel. While saving rates are again low, possibly due in part to increasing home equity, it is likely that the data are somewhat distorted by the large dividend payouts of the fourth quarter. If the saving rate remains below 3.0 percent into the second half of the year (the post-World War II average is more than 8.0 percent) then this would suggest that inflated house prices are playing a role. If that is the case, a decline in house prices would lead to another hit to consumption.

However the main reason that the rapid run-up in prices in the bottom tier should be a cause for a concern is that moderate-income homebuyers may again take a big hit if these prices plunge in a correction.

For some compelling anecdotal evidence on the high-end market, consider this. Crain’s reports on the sale of three condos sold in the Gretsch Building, a former guitar factory in Williamsburg, Brooklyn:

Two of the condos, adjacent two-bedrooms on the ninth floor, closed this week for $1.4 million and $1.5 million, while a larger two-bedroom on the 10th floor will close next week for $2.5 million.
The units averaged $1,150 per square foot. That compares to a building-wide average of $750 a foot, though recent listings have topped out around $900 per square foot, according to StreetEasy—a clear sign of the soaring local market.

“It’s unbelievable, what’s going on out there,” declared the real estate agent involved in these deals.

Commenting on this story at Zero Hedge, Tyler Durden writes:

Great job Bernanke & Co. You have succeeded at rolling up the housing, credit, bond, tech and equity bubbles all into one. Watching the glorious unwind of all this unprecedented academic-created stupidity will be worth the hyperinflated price of admission alone.

Right on, Tyler.