Tom Woods and Mateusz Machaj discuss the problem with John Taylor’s rule for monetary policy.
Tom Woods and Mateusz Machaj discuss the problem with John Taylor’s rule for monetary policy.
Jeff Deist and David Howden discuss the history of banking in America before 1913, the supposed justifications for the Federal Reserve Act, and why American economists all seem to be thrall to—and on the payroll of—the Fed. David also lays out the realities behind transitioning to a future without the Fed. Next, they discuss his book about the Icelandic banking crisis, and how that country’s deposit insurance scheme created enormous moral hazards. David explains how Iceland, however, mostly had the good sense to allow its bad banks to fail and its foreign creditors to take a well-deserved haircut. The lessons to be learned, he tells us, are both cautionary and optimistic, at least for a homogeneous nation of 325,000 people.
Mises Daily Wednesday by Devin Leary-Hanebrink:
The Fed and it’s friends blamed cold weather for much of the year’s lackluster economic growth. But cold weather does not explain the economic slowdown because cold weather does not stop economic activity, it merely shifts it to other activities and products.
Mises Daily Tuesday by Dante Bayona:
The Fed and the Treasury are betting on the fact that the dollar will remain the world’s reserve currency forever, and that the US can inflate without consequences indefinitely. The international victims of the scheme, however, are looking for a way out.
A recent “Notable and Quotable” in the Wall Street Journal highlights insights from Steve Forbes and Elizabeth Ames’s new book Money: How the Destruction of the Dollar Threatens the Global Economy—and What We Can Do About It. There is much to like in this short excerpt.
Echoing Roger Garrison on the housing crisis, Forbes and Ames point out, “For example, few connected the housing bubble of the mid-2000s with the Fed’s weak dollar.” They add, “The weak dollar was not the only factor, but there would have been no bubble without the Fed’s flooding of the subprime mortgage market with cheap dollars.” They point out other factors often blamed for the crisis, regulatory factors, greed, affordable housing laws and the role of the government-created mortgage enterprises were in effect through much of the nineties without creating “housing mania” and correctly surmise that Fed credit creation was the factor that, to borrow a phrase from Roger, “turbo charged” a policy distorted market eventually generating the boom-bust, the Great Recession, and setting the stage for the now prolonged stagnation. Too bad Bernanke, Yellen, Krugman, and Blinder continue to ignore this fundamental truth which Garrison summarizes nicely:
Had the Fed provided no fuel for the boom, federal housing policy, though perverse, would not have been unsustainable. The mortgage market would have had to compete with all other markets for the funds that savers provided. There would have been a continuing bias in favor of the mortgage market, and the ongoing rate of foreclosures would have been higher. House prices would have been higher (because houses and mortgage loans are complements), but they would not have been high and rising.
Forbes and Aims go wrong when they fail to recognize that the Fed policy was loose in the 1990s. They ask, “Why did it (housing crisis) happen in the 2000s and not in the previous decade?” They respond, “The answer is that the 1990s was not a period of loose money.” Like John B. Taylor, who yearns for a rules based policy and a return to the “Great Moderation”, Forbes and Aims fail to recognize Fed policy was amiss during the late 1990s as well. The both downplay or ignore the dot.com boom-bust and the less severe recession of the early 2000s. The significance of this first cycle for the role of monetary policy was perhaps missed because it occurred at the end of the relatively long period of growth and stability known as the “Great Moderation.” This period was a time of better—at least compared to monetary policy of the 1960s and 1970s—but not necessarily good policy
Garrison again is right on target:
The dot-com crisis of the 1990s occurred because a credit expansion took place during a time when technological innovations associated with the digital revolutions created a strong demand for investment funds in that sector. The housing crisis in 2008 occurred because a credit expansion took place during a time when the federal government was pushing hard for increased home ownership for low-income families. We understandably identify these different cyclical episodes (the dot-com crisis, the housing crisis) with “what was going on at the time.” The common denominator, however, is the Fed’s propensity to expand credit.
Garrison provides a suggestion for the use of bubble and boom terminology that should be more widely adopted.
The terms boom and bubble are often used interchangeably in the literature on business cycles. It may be preferable, however, to use boom—or more specifically artificial boom—to refer to the credit-induced simultaneous expansion to various degrees of different interest sensitive sectors of the economy and to use bubble to refer to the artificial boom’s most dramatic manifestation. Which sector reveals itself as the bubble depends on the circumstances in which the credit expansion occurs. As indicated earlier, artificial booms entail a turbo charging of whatever else is going on at the time.
For a longer discussion of these back to back boom-bust see my “Hayek and the 21st Century Boom-Bust and Recession-Recovery.”
Some great contributors. This might even be worth the high price:
Including contributions from David Howden, Guido Hulsmann, Thomas DiLorenzo, Thomas Woods, Robert Murphy, Shawn Ritenour, Jeffrey Herbener, Mark Thornton, William Barnett, Peter Klein, Lucas Engelhardt, and Douglas French.
The book was edited by David Howden and Joseph Salerno, and includes a forward by Hunter Lewis.
Joe Salerno discussed the book at the most recent Austrian Economics Research Conference.
…it un-ironically wonders aloud who’s been suppressing volatility and compressing yields. “Who could it be who’s been doing that?” Grant asks.
Grant notes there are some investment opportunities in Russia and then says “One form of investment that is almost as thoroughly hated as Russia is gold and gold mining shares.” He then explains that gold “is a sound inoculation against the harebrained doctrine of modern central bankers,” and important when dealing with “the likely crackup” of modern monetary arrangements.
Mises Daily Wednesday by Brendan Brown:
All too many of the reforms being proposed for the central bank are just more of the same central planning. Real reform of the Fed begins with setting interest rates free, the abolition of deposit insurance, and ending the Fed’s position as lender of last resort.
Mises Daily Monday by Frank Hollenbeck:
Those who are calling for small reforms like changes to the Fed’s dual mandate are wrong. It is now clear that the Fed and the European Central Bank are hard-wired to inflate the money supply while encouraging banks to make excessively risky loans. Radical changes are needed
Germany has now decided that its gold is safe in the hands of the Federal Reserve after all. The budget spokesman for Angela Merkel’s Christian Democratic Union party, Norbert Barthle, said “The Americans are taking good care of our gold.” Germany initially made the request in January of 2013 after attempts to inventory the gold in 2012 were rebuffed. Juergen Hardt, also from the Christian Democratic Union party told reporters in May that there was no concern that German gold in the New York Fed has been tampered with. “It’s my view that the gold reserves should be stored wherever they might be needed in an emergency.” Of course Germany has never seen or possessed its gold. It obtained the gold in exchange for its surplus dollars in international trade prior to the breakdown of the Bretton Woods system. So I guess there really is no cause for concern.
Jeff Deist discusses how the Fed creates a perilous landscape in which there is no honest pricing—everything has been distorted—even at the consumer level.
Ben Wiegold writes in Mises Daily Monday:
The Federal Reserve System turned 100 years old last December and Fed supporters have been celebrating ever since. In recent months, the Dallas Fed opened an historical exhibit, the Kansas City Fed released a documentary, and the New York Fed even started a Facebook page, all to commemorate the date.
The mainstream media has also been vocal, as CNN posted a piece claiming Janet Yellen’s becoming the first female chair is an “apt way to mark the anniversary,” while National Reviewpublished an article of their own. Although the two outlets differ on politics, it seems nearly everyone agrees the Fed has fulfilled its purpose: grow the economy and prevent economic downturns.
Today’s Mises Daily article covered the impact of government subsidies and infrastructure on the fracking boom. But there is another big player in the oil and gas boom that is routinely ignored by “energy independence” enthusiasts who claim the sky is the limit for fracking: cheap money from the central bank.
Energy companies are employing massive debt schemes to finance exploration and initiation of extraction plans. According to Bloomberg:
Quicksilver acknowledges the company is over-leveraged, said David Erdman, a spokesman for Quicksilver. The company’s interest expense equaled almost 45 percent of revenue in the first quarter. “We have taken concrete measures to reduce debt,” he said.
Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells.
“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”
Chauhan wrote a report last year titled “The Other Tale of Shale” that showed interest expenses are gobbling up a growing share of revenue at 35 companies he studied. Interest expense for the 61 companies examined by Bloomberg totalled almost $2 billion in the first quarter, 4.1 percent of revenue, up from 2.3 percent four years ago.
Yes, “interest rates are rising,” but they’re still extremely low in the big scheme of things, thanks to the unending new money flowing from central banks. Even with rising rates, however, fracking operations, in order to remain viable, will need to keep borrowing since, as it turns out, fracking is extremely expensive. Bloomberg explains:
Mises Daily Monday by James Grant:
In 1946, as now, the government held up the threat of deflation to justify a policy of ultra-low interest rates. Hazlitt, a student of Mises, exposed the folly of this position in the pages ofNewsweek and elsewhere for more than twenty years. Little has changed since Hazlitt’s day.
It may be a stillbirth. As mentioned here and here, banks refuse to conduct business with legal cannabis-related businesses in Colorado because federal regulations prohibit banks from doing business with merchants who deal with substances deemed illegal by the federal government.
In response, the Colorado legislature passed legislation providing for the creation of “marijuana banks”:
Gov. John Hickenlooper has signed legislation to try to establish the world’s first financial system for the largely cash-only marijuana industry.
The bill signed Friday morning seeks to form a network of uninsured cooperatives designed to give pot businesses a way to access basic banking services.
Banks that fear violating federal law don’t allow marijuana businesses access to basic financial services. That has led to fears that the burgeoning marijuana industry can be a target for robberies.
Here we see a state government attempting an end run around federal regulations. It’s a mild form of nullification at work. Unfortunately, the nature of the new banks requires the Federal Reserve to sign off on the plan, which possibly ensures the plan will never come to fruition.
In much of the country, politicians still seem to think that the legalization of cannabis is some sort of dangerous social experiment (even though cannabis was legal pretty much everywhere on earth prior to the 1930s), but in Colorado, within 18 months of the voter-forced legalization taking effect, people who oppose legalization are now considered the eccentric ones.
“We are trying to improvise and come up with something in Colorado to give marijuana business some opportunity,” remarks one conservative Republican. “This is not something that we can wait for any further,” says a Democrat.
Meanwhile, a member of Congress from Colorado has introduced the Marijuana Businesses Access to Banking Act of 2013 in DC.
Photo credit: DJ Spiess
Contrary to popular thinking, an economic cleansing is a must to “fix” the mess caused by the Fed’s loose policies. To prevent future economic pain, what is required is the closure of all the Fed’s means of creating money out of “thin air.”
Lew Rockwell writes in today’s Mises Daily:
We do not need “monetary policy” any more than we need a paintbrush policy, a baseball bat policy, or an automobile policy. We do not need a monopoly institution to create money for us. Money, like any good, is better produced on the market within the nexus of economic calculation. Money creation by government or its privileged central bank yields us business cycles, monetary debasement, and an increase in the power of government. It is desirable from neither an economic nor a libertarian standpoint. If we are going to utter monetary truths, this one is the most central and subversive of all.
Janet Yellen spoke to lawmakers today. After making it very, very clear that bad weather is the cause of the lackluster economy, Yellen then went on to confirm that the Fed will wind down quantitative easing (specifically, the bond-buying stimulus program) seven months from now if ”the labor market continues to improve and inflation remains low.”
Yellen is clear that if the Fed concludes that things are just right somewhere down the line, the Fed may or may not reduce bond-buying to zero. Even then, however, the Fed’s commitment to low interest rates remains in force indefinitely, we’re told.
If you were asked how we should go about achieving real economic growth throughout the economy rather than just certain sectors of it, what would you suggest? Would you revisit the Keynesian toolbox and call for a really, really big stimulus instead of just another really big one? Would you impose more controls on business, especially the financial sector? Some people want to revive Glass-Steagall, the gem from the Depression era that was abandoned in 1999 — sound good to you?. How about officially merging the Fed and the Treasury — i.e., turn “monetary policy” over to the government? Perhaps you’d break out Sheila Bair’s plan to allow each American household to “borrow $10 million from the Fed at zero interest”? Her proposal was tongue-in-cheek, you say? Ms. Bair, the former head of the Federal Deposit Insurance Corporation, proposed a plan that in its essentials would be received enthusiastically by those in the know — provided it was confined to special interests. But if it’s good for some, why not everyone?
“Look out 1 percent, here we come,” Ms. Bair trumpeted.
Many readers are familiar with the anecdote about a 1681 meeting between French finance minister Jean-Baptiste Colbert and a group of businessmen that included one M. Le Gendre. Colbert, a mercantilist, was eager for industry to prosper because it would boost tax revenue . . . sort of a fatten-the-goose approach to economics. When he asked how their government could be of service to the business community, Le Gendre famously replied, “Laissez-nous faire” — “Let us be.”
Foreign individuals and businesses long ago cut back on their purchases of U.S. bonds. Their place was taken by foreign central banks. The central banks simply created money in their own currency and used it to buy our bonds.
The Federal Reserve always knew that we couldn’t rely on foreign central banks to buy our bonds forever. This may be the main reason it began the program called quantitative easing, in which the Fed created money out of thin air specifically to buy back U.S. debt.
Quantitative easing may have been intended to be a kind of insurance policy. If foreign central bank buying of U.S. bonds collapsed, the Fed would already have a program in place to buy them back itself.
The Fed said that quantitative easing was meant to create U.S. jobs, but this never made much sense. Even a hard core proponent of QE, Fed official William Dudley ( formerly of Goldman Sachs), admitted that the Fed’s own economic models could not explain how creating money out of thin air and using it to buy U.S. bonds would increase employment. Some link to rising stock prices could be demonstrated, if only through the cheap financing of corporate stock buy-backs, but then rising stock prices could not be shown to create jobs either.
One inference from this was that chairman Ben Bernanke, and now new chairman Janet Yellen, were just taking wild stabs in the dark. A more reasonable inference is that they had another reason for QE, one which they did not want to acknowledge.
Viewed in this way, the 2008 bail-out should be viewed not as a bail-out of Wall Street, but rather as a bail-out of Washington. The Federal Reserve feared that the market for government bonds was about to collapse, which would lead to soaring interest rates, and a complete collapse of our bubble financed government.
The Fed did not have the option of creating money and buying debt directly from the Treasury. That would be illegal. The Treasury must first sell its bonds to Wall Street, after which the Fed can then use its newly created money to buy them back. Hence, in order to rescue the Treasury, the Fed felt it had to rescue Wall Street.
This is a simplification of what happened, and only part of the story, but it is the untold part of the story, and in all likelihood the most important part. The Fed was in a panic in 2008, but not primarily about what might happen to Wall Street, and certainly not about what might happen to Main Street. It was in a panic over what might happen to government finance.
This interpretation is strengthened by new information contained in former Treasury secretary Hank Paulson’s recent book. He revealed that Russia tried in 2008 to persuade China to join in a collaborative effort to dump U.S. bonds in order to bring down the U.S. financial system. Although China refused to do so at the time, its government would clearly like to end dollar dominance, and has been paring U.S. bond purchases.
At the moment, Janet Yellen’s worries about finding buyers of government bonds can only be getting worse. For much of last year, foreign central bank purchases of U.S. bonds in aggregate fell. As of October of 2013, they had been negative for three and six months. Then they turned up a smidge, only to fall again, so that the last three months show a decrease of just over 12%.
It is known that Russia withdrew its U.S. bonds from custody of the Fed after the Crimea invasion, and has either been selling or could sell at any time. It will no doubt try again to persuade other countries to join in undermining the U.S. bond market and replacing the dollar as the mainstay of world trade.
Under these circumstances, it should not be surprising that the Fed is today taking only baby steps to reduce its program of creating new money to buy U.S. bonds. This program is probably not just meant to revive the economy, which it has not done and cannot do. It is more likely designed as a desperate and in the long run counterproductive effort to finance the U.S. government and save today’s dollar dominated financial system.
William Anderson Walter Block Per Bylund John Cochran Jeff Deist Thomas DiLorenzo Carmen Elena Dorobăț Gary Galles David Gordon Jeffrey Herbener Robert Higgs Randall Holcombe David Howden Jörg Guido Hülsmann Peter Klein Hunter Lewis Matt McCaffrey Ryan McMaken Thorsten Polleit Joseph Salerno Timothy Terrell Mark Thornton Hunt Tooley Christopher Westley