Club Fed

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Club Fed

May 18th, 2013

Peter Nolan

by
Thomas J. DiLorenzo

Recently
by Thomas DiLorenzo: Limbaugh’s
‘Big Lie’ Strategy

The Nobel
prize-winning Austrian School economist F.A. Hayek titled his last
book The
Fatal Conceit to describe the conceit of the notion that
socialist central planners could possibly possess all of the detailed
knowledge that is in the minds of millions in a market economy to
“plan” a socialist economy. His 1974 Nobel prize speech
was entitled “The Pretense of Knowledge” and conveyed
the same message. Despite the fact that the whole world learned
of just how right Hayek, Mises, and the Austrians were for so many
decades about socialism upon its worldwide collapse in the late
1980s, America’s central planners keep marching ahead with more
and more failed central plans that are based on pretentious fantasies
dressed up with unintelligible mathematical economic models – just
like the Soviet central planners of the twentieth century.

I speak of
course of the Federal Reserve Board and its economic central planners.
A caricature of this socialistic central planning mentality was
recently on display in the 2012 Annual Report of the Federal
Reserve Bank of Minneapolis. The entire 40-page publication
is devoted to not one but two interviews with the Minneapolis Fed’s
president, one Narayana R. Kocherlakota, who had one of his employees
(Doug Clement) throw him a series of softball pitch-style questions.

What one first
learns by the interviews is that Fed bureaucrats ignore the age-old
economic wisdom about the folly of government-imposed price controls.
In this case the price being controlled is various interest rates.
Kocherlakota talks of an economic “liftoff plan” that
is “to sustain low interest rates; that is, we’ll keep the
fed funds rate extraordinarily low at least until unemployment falls
below 5½ percent . . .” The Federal Reserve Open Market Committee
(FOMC), he says, “will keep interest rates low until, say,
mid-2016.”

The Fed’s “quantitative
easing,” which used to be called “inflationary monetary
policy,” is hailed as a tremendous success by Kocherlakota,
citing a speech by Fed Chairman Ben Bernanke as “an excellent
assessment of the effectiveness of quantitative easing.” This
of course is sheer fantasy and butt kissing of the first order by
Kocherlakota.

The Fed’s zero
interest rate policy is a war on savings, which is to say a war
on economic investment, productivity, and economic growth. Savings
and capital accumulation must fuel business investment in order
for economic growth to occur. Free-market interest rates allow individuals
to determine for themselves, based on their rates of time preference
(whether to spend more or save more in the present) how much to
save and how much to spend. The Fed’s central planners are hell
bent on destroying all incentives to save because they are all Keynesian
ideologues who believe in the Keynesian superstition that it is
possible to consume without first working and producing income with
which to purchase goods and services. “[Q]uantitative easing
has the impact of pushing down on longer-term interest rates,”
says Kocherlakota, “And that should be directly stimulative
of the economy because by pushing down on market interest rates,
people are led to think, ‘Hmm, maybe I shouldn’t be buying those
assets that are paying such a low yield. I should spend money instead.’”
Of course it has NOT been “directly stimulative” of the
economy. Anything but.

So Fed bureaucrats:
1) deny that the Greenspan Fed had anything to do with the housing
bubble and its bursting, despite years of pursuing the goal of near-zero
mortgage interest rates; and 2) claim that five years of the exact
same policies have succeeded when it is apparent to the entire world
that they have not.

Kocherlakota’s
central planning hubris and pretentiousness get even worse when
he inadvertently contradicts himself by saying that there is a need
to do more than pursue a zero interest rate policy. (If it’s been
such a “success,” why is something more needed?). Specifically,
he states that “[W]e’d like to push it [interest rates] down
further and can’t.” That, however, “should be a signal
to the fiscal authority to be more interventionist in the economy
. . . “

Translation:
Quantitative easing has failed, so the congress and the president
(a.k.a. “the fiscal authority”) need to experiment with
even more central planning schemes. The particular central planning
scheme proposed by Kocherlakota is “raising future consumption
taxes” (emphasis added) which he speculates will “make
future spending more costly and thereby encourage current spending.”
More failed Keynesian central planning, in other words. The assumption
here is that there is no need to save, invest, work, and produce;
we just need to spend, spend, spend like a nation of spoiled little
rich kids. One thing all of these Fed central planning schemes have
in common is that they always call for more money printing, more
government spending, more taxation, and more intervention of all
kinds.

Kocherlakota
is absolutely dogmatic about his (and his fellow Fed bureaucrats’)
devotion to the imposition of price controls via the manipulation
of interest rates. “[W]e’re not going to get in the way of
economic recovery by raising [interest] rates,” he declares.
No, sir! The Fed will not allow any incentives for savings and investment;
kiss your retirement savings goodbye. “Price controls forever!”
is apparently the third Fed “mandate” along with the preposterous
and ridiculous claims that it is charged with controlling both inflation
and unemployment (the “dual mandate” in Washingtonese).
Just in case the reader missed his repeated statements about keeping
interest rates as close to zero as possible, thereby destroying
the capital-reallocation processes of the free market, there is
a blue page at the end of the two interviews that declares, in all
capital letters, that: “THIS POLICY IS ABOUT LETTING THE PUBLIC
KNOW WE’RE NOT GOING TO GET IN THE WAY OF RECOVERY BY RAISING RATES
UNTIL RECOVERY IS CLOSE TO COMPLETE.” Never, in other words,
because government bureaucrats never, ever, admit that their job
is done and they can go home.

The academic
economics profession almost entirely abandoned Keynesianism during
the 1970s when it failed to have a coherent explanation for stagflation
– the simultaneous increase of inflation and unemployment. Even
old Keynesian lions like Franco Modigliani of MIT publicly admitted
that Keynesian “stabilization policy” had failed. The
fundamental reason for rejecting Keynesianism became even stronger
during the 1980s when inflation and unemployment fell simultaneously
for the entire decade. These events proved once and for all the
folly of the “Phillips Curve” as the essential tool of
Keyensian central planning – the idea that lower unemployment can
be “purchased” by central planners by creating more inflation
through money printing.

All of this
is ingored by today’s Fed bureaucrats like Kocherlakota and Bernanke
who still follow the Keynesian central planning guidelines from
the 1948 edition of Paul Samuelson’s principles of (Keyensian and
interventionist) economics textbook. The Phillips Curve superstition
is repeated throughout Kocherlakota’s interviews. “By providing
more monetary stimulus, the FOMC can facilitate a faster transition
of unemployment to its long-run lower level,” he says. “Having
a balanced approach to the two mandates [i.e., lower unemployement
and inflation] means that you should be willing to allow inflation
to be above its 2 percent target in order to facilitate a faster
transition of unemployment back to its lower . . . levels.”
Keynesianism may have been rejected by serious academic economists,
but it will never be rejected by politicians and their court historians
because it gives them intellectual cover for never-ending interventionism,
which enhances their own power, perks, incomes, and prestige.

Endless
Triviality

Like all government
bureaucrats, Kocherlakota can go on and on forever about absolutely
trivial, unimportant, and unrealistic matters. He devotes a good
bit of his interview to patting himself on the back for taking the
“daring” stand of suggesting that Ben Bernanke’s “target”
of 2 percent inflation /year might be revised to say, 2¼ percent.
Oooooooooooh. “We could say 3 percent, but I don’t think we’d
get to 3 percent. So, I think 2¼ percent is allowing as much leeway
as we really need,” he babbles.

Such babbling
suggests that Fed bureaucrats like Kocherlakota believe that “setting”
the annual inflation rate is as easy as setting the thermostat in
one’s home. This of course is gross nonsense, as history has proven
over and over again. And by the way, Bernanke’s goal of “only”
2 percent inflation per year forever, if achieved, would reduce
the purchasing power of the dollar by about 50 percent during the
career of the average American worker. Some “target.”

Club Fed

Fed bureaucrats
and their academic accomplices think of themselves as a closed club
of central planners who can do no wrong and make no mistakes. For
example, Kocherlakota boasts of the Fed conferences he has attended
in places like Jackson Hole, Wyoming, and of all the wisdom he gleaned
there from fellow Fed functionaries. He singles out the economist
Edward Lazear, for example, the former Bush economic advisor who
advised that the wars in Iraq and Afghanistan would actually be
good for the U.S. economy by providing a Keyensian “stimulus.”
This false notion is an example of the famous “broken window
fallacy” of Bastiat and Hazlitt. Spending money on war does
not “stimulate” the economy; it merely diverts resources
from the productive, private sector of the economy to the task of
mass murder and the destruction of civilizations in foreign countries.
Calling war an economic stimulus is one of the worst examples of
“free-lunch economics” that every freshman economic student
should be aware of.

It was also
Edward Lazear, writes David Stockman in The
Great Deformation: The Corruption of Capitalism in America (p.
557), who “had insisted in May 2008 that ‘the data are pretty
clear that we are not in a recession.’” When the “Wall
Street meltdown” did occur, writes Stockman, “Lazear did
not have the foggiest notion of why it happened.”

Kocherlakota
is himself just as clueless about many of the subjects he pontificates
about in his interviews. He bemoans unemployment caused by “job
mismatch” but is silent on the fact that the most colossal
example of the creation of job mismatch was the Fed-generated housing
bubble that seduced millions of Americans into employment in housing
and housing-related industries in the early 2000s, and then losing
their jobs, careers, homes, and savings when the bubble burst. This
was the mother of all mismatch unemployment crises, caused by the
Fed-generated boom-and-bust cycle. All Kocherlakota can say about
it is that “it would take a lot bigger increase in inflation
to generate a desired fall in unemployment.”

The Fed bureaucracy
failed utterly to forecast the bursting of the real estate bubble
it had created, as the above quotation of Edward Lazear shows. Such
gross failures do not deter Fed bureaucrats from continuing to pretend
that they are fortune tellers and mystics, however. Kocherlakota
announces that the FOMC “expects that we will get to 6½ percent
unemployment around mid-2015.” Not 6¼ or 6¾, but 6½. Not not
September or October of 2015, but June. What conceit, hubris, and
pretentiousness.

May
18, 2013

Thomas
J. DiLorenzo [send him mail]
is professor of economics at Loyola College in Maryland and the
author of The
Real Lincoln; Lincoln
Unmasked: What You’re Not Supposed To Know about Dishonest Abe,
How
Capitalism Saved America, and Hamilton’s
Curse: How Jefferson’s Archenemy Betrayed the American Revolution
– And What It Means for America Today. His latest book is
Organized
Crime: The Unvarnished Truth About Government.