Fearless at the Fed

 

Regardless of what you think of Austrian economics (your author is sympathetic, if not a full-fledged convert), you have to give credit for chutzpah to Robert Wenzel, editor and publisher of the site Economic Policy Journal and a sharp critic of the Federal Reserve. Last week, Wenzel, at the bank’s invitation, delivered a speech at the New York Fed … where he savaged the central bank’s policies and called for the institution to be abolished.

That may be wise. It may be foolish. But this is undoubtedly one of the most audacious codas ever delivered in a policy speech:

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.

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  1. Profile Photo Inactive
    @Guruforhire

    We need a floating currency, there is no going back.  Going back would be like telling doctors to not wash their hands and use whiskey and bite sticks.

    All that said we need sound monetary policy, and we cant keep monetizing our reckless government.

    • #1
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    @JonathanHorn

    Troy, I just wish the transcript included a few brackets with the audience’s reaction [applause/laughter/stunned silence]. It must have been an interesting lunch.

    • #2
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    @CaptAubrey

    You’ve gotta love an economist who uses simple declaritive statements like that. I’m very sympathetic to Austrian economics although I really became interested in the subject when I read Milton Friedman in ’81 but I’m also sympathetic to the Fed for what they did in the crisis…not since then but I think they saved us from a worse fate at that moment. I have enough respect for the hawks, Fisher, Lacker et al. that I don’t believe they’d be as sanguine if the situation were that dire. I feel sure we’ll have inflation but I think it will slow and insidious.

    • #3
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    @iWe

    I agree with Guru. But then again I think liquidity is most important, and that means that some inflation is a good thing.

    • #4
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    @GreatGhostofGodel
    Guruforhire: We need a floating currency, there is no going back.  Going back would be like telling doctors to not wash their hands and use whiskey and bite sticks.

    Um, no. Going back would be like telling doctors to wash their hands and quit using whiskey and biting sticks.

    Troy Senik, Ed.: Regardless of what you think of Austrian economics (your author is sympathetic, if not a full-fledged convert)…

    Let me help you with that.

    Money, Bank Credit, and Economic Cycles

    An Austrian Perspective on the History of Economic Thought

    The Failure of the New Economics

    Quite honestly, I fail to see how any thoughtful person can be anything but an Austrian.

    • #5
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    @GreatGhostofGodel
    iWc: I agree with Guru. But then again I think liquidity is most important, and that means that some inflation is a good thing.

    You guys are kidding, right? Read this, then please explain to me how the Fed dumping $4T (that’s T, as in trillion) into the economy over the last 3.5 years is not out-and-out currency debasement (prima facie illegal, according to the Constitution), let alone is not “adequate liquidity,” when in fact the issue is not only not a “liquidity crisis” in the first place, but in fact is a credit crisis due to excess debt, keeping in mind that our currency is nothing but debt? You’re insisting that the best way to fight a fire is to pour gasoline on it.

    Then, when you’re done with that, perhaps you can explain why it’s not working.

    • #6
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    @Guruforhire
    Paul Snively

    iWc: I agree with Guru. But then again I think liquidity is most important, and that means that some inflation is a good thing.

    You guys are kidding, right? Read this, then please explain to me how the Fed dumping $4T (that’sT, as in trillion) into the economy over the last 3.5 years is not out-and-out currency debasement (prima facie illegal, according to the Constitution), let alone is not “adequate liquidity,” when in fact the issue is not only not a “liquidity crisis” in the first place, but in fact is acredit crisis due toexcess debt, keeping in mind that our currency is nothingbut debt? You’re insisting that the best way to fight a fire is to pour gasoline on it.

    Young girls cut their wrists all the time, but nobody except a lunatic will tell you that the development of knives was wildly inappropriate.

     A floating currency is something wherein there are wise policies and unwise policies.  I can recognize the need for a floating currency, without saying current policy is wise.

    • #7
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    @GreatGhostofGodel
    Guruforhire Young girls cut their wrists all the time, but nobody except a lunatic will tell you that the development of knives was wildly inappropriate.

    I’ll grant you the nice Keynesian turn of phrase, but I’m still waiting for an answer to my question.

    • #8
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    @Guruforhire
    Paul Snively

    Guruforhire Young girls cut their wrists all the time, but nobody except a lunatic will tell you that the development of knives was wildly inappropriate.

    I’ll grant you the nice Keynesian turn of phrase, but I’m still waiting for an answer to my question. · 1 minute ago

    I stipulated that current policy was unwise in my first post.  Current policy has not a single thing to do with the necessity of a floating currency.  Or the failure of commodity currencies in general before their fetishisation.

    • #9
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    @DocJay

    The biggest scam in history and only catastrophe will undo it.

    • #10
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    @FeliciaB
    Troy Senik, Ed.:  Let’s lock the doors and leave the building to the spiders, moths, and four-legged rats.

    · 45 minutes ago

    As opposed to the two-legged kind.

    • #11
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    @GeorgeSavage
    FeliciaB

    Troy Senik, Ed.:  Let’s lock the doors and leave the building to the spiders, moths, and four-legged rats.

    · 45 minutes ago

    As opposed to the two-legged kind. · 9 minutes ago

    Felicia,you beat me to noting the most glaring insult of all:   “leave the building to the . . . four-legged rats.”  Ouch.

    • #12
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    @GreatGhostofGodel
    Guruforhire I stipulated that current policy was unwise in my first post.

    OK. What would you propose instead?

    Current policy has not a single thing to do with the necessity of a floating currency.

    I’m sure I’ll bump up against a CoC limitation here, but: you cannot possibly be serious. The whole argument for a fiat currency is precisely its “elasticity,” i.e. the ability of the central bank to inflate it at will. Current policy is all about “injecting liquidity,” “quantitative easing,” or whatever the Doublespeak-du-jour to avoid saying “inflation” is. At least Paul Krugman has the cojones to actually say “inflation!” No fiat currency, no ability to inflate at will. No ability to inflate at will, no current policy.

    Or the failure of commodity currencies in general before their fetishisation.

    This is indeed the excuse the central bankers make, and have always made, to justify making things worse while getting rich themselves. Paper Money Collapse is one useful antidote to this pernicious, virulent meme. “Money, Bank Credit, and Economic Cycles,” linked above, goes into considerably more detail.

    • #13
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    @Guruforhire

    The idea that the money supply should not reflect the monetary needs of the economy is patently absurd.

    Again you are making the dubious statement that the potentiality of unwise policy makes all policy illegitimate.

     I dont think the fed should have been playing political games trying to monetize the fiscal irresponsibility of the government, primarily to keep the interest rates low on government debt on the open market.

     There are many good and sound criticisms of current policy, but focusing on arguing that the self-evident baby in the bathwater doesnt exist or should have been aborted anyway, does not advance the arguement for getting rid of the bathwater.

    • #14
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    @FricosisGuy

    The Fed’s approach is time-tested and traditional.  In this case, their diagnosis was/is too much black bile; they therefore flooded the economy with money as a purgative.  I’m confident Dr. Bernanke will apply the cups and leeches in time to balance the Choler!

    Paul Snively

    Guruforhire: We need a floating currency, there is no going back.  Going back would be like telling doctors to not wash their hands and use whiskey and bite sticks.

    Um, no. Going back would be like telling doctors to wash their hands and quit using whiskey and biting sticks.

    • #15
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    @GreatGhostofGodel
    Guruforhire: The idea that the money supply should not reflect the monetary needs of the economy is patently absurd.

    I’m still waiting for an actual argument, as opposed to assertion.

    Again you are making the dubious statement that the potentiality of unwise policy makes all policy illegitimate.

    I’m saying that this unwise policy inevitably follows from the unwise policies of having a fiat currency, a central bank, and fractional-reserve banking. I’ve provided several links to extended arguments supporting this assertion.  I would be delighted if you were to respond to them.

     I dont think the fed should have been playing political games trying to monetize the fiscal irresponsibility of the government, primarily to keep the interest rates low on government debt on the open market.

    On the basis of what economic theory would you have expected them to do anything else, and what would that something else have been?

    …focusing on arguing that the self-evident baby in the bathwater…

    Assumes facts not in evidence. In particular, “self-evident” is a phrase with no place in economics. Arguments, please.

    • #16
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    @FricosisGuy

    Hi Guru… Your statement below gets to a core argument of the Austrian critique, the knowledge problem.  Let’s grant that one should vary the money supply…let’s even grant that the Fed doesn’t want to manipulate it for political purposes.  

    How does one know “the monetary needs of the economy” to allow for money supply planning?  Per the argument I linked to — yes, I know it’s Wikipedia — Austrians would say that one can’t.

    Guruforhire: The idea that the money supply should not reflect the monetary needs of the economy is patently absurd.

    • #17
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    @DanHanson

    Even Hayek struggled with monetary policy.  Friedman was a monetarist.    The problem for Austrians is that the money supply can and does shrink and grow with the velocity of money, and therefore is at risk of accelerating downturns.  Friedman gave a very strong argument that the depression was made worse because of the overly tight monetary policy of the fed back in the day.

    On the other hand, Monetarists have a problem in that it is very difficult to figure out how to manage the money supply while providing stability.  The best idea is to set up hard rules that tie the supply of money to certain indicators, but it’s hard to know what those should be and what their values are. 

    Monetarists have a further problem that once you put the kind of power the fed represents into the hands of individuals, it’s very hard for them to resist the temptation to tinker.  Even Alan Greenspan, who was a fairly hardcore free-marketer before joining the Fed, came to believe that he was smart enough to use monetary policy to manipulate the economy rather than to just maintain stability.

    This isn’t a simple problem.

    • #18
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    @Natalie
    Casey Taylor

    Troy Senik, Ed.: …you have to give credit for chutzpah to Robert Wenzel, editor and publisher of the site Economic Policy Journal and a sharp critic of the Federal Reserve.

    The man positively clangs when he walks. · 8 hours ago

    So he sounds like a junk truck?

    • #19
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    @Gretchen
    Douglas: Please, tell me there’s an MP3 of this somewhere. The transcript isn’t enough. I want to hear the Oooos and Ahhhs of the audience.  · 5 hours ago

    Probably more like the stunned and stony silence.

    • #20
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    @Guruforhire
    Dan Hanson: The Fed should maintain a money supply that increases with GDP growth and population growth, and is tied to some basket of commodity prices such that a nice, low-but-positive inflation rate is maintained.   It’s just very hard to do. · 18 hours ago

    I would agree with this as long as the basket of commodities are not they themselves considered money.

    I put this in the catagory of potentially wise policies.

    • #21
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    @Guruforhire
    Fricosis Guy: Hi Guru… Your statement below gets to a core argument of the Austrian critique, the knowledge problem.  Let’s grant that one should vary the money supply…let’s even grant that the Fed doesn’t want to manipulate it for political purposes.  

    How does one know “the monetary needs of the economy” to allow for money supply planning?  Per the argument I linked to — yes, I know it’s Wikipedia — Austrians would say that one can’t. · 18 hours ago

    All things are subject to this problem.  Paralysis by analysis is worse than no attempt to achieve good policy.  OK, lets consider your thought experiment, and also remove the toxicity of conspiracy theories:

    Let us say that there is a council of people who are studied and wise.  How wrong are they likely to be, and how destructive is that variance from the perfect likely to be?

    We are in a pickle now, because the fed had to paper over the failure of the keynesians in regards to federal spending.  The fed is no crap paying interest to keep banks from putting the money in circulation, so that they can also monetize our government spending.

    • #22
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    @Guruforhire
    Dan Hanson: On the other hand, Monetarists have a problem in that it is very difficult to figure out how to manage the money supply while providing stability.  The best idea is to set up hard rules that tie the supply of money to certain indicators, but it’s hard to know what those should be and what their values are. 

    Monetarists have a further problem that once you put the kind of power the fed represents into the hands of individuals, it’s very hard for them to resist the temptation to tinker.  Even Alan Greenspan, who was a fairly hardcore free-marketer before joining the Fed, came to believe that he was smart enough to use monetary policy to manipulate the economy rather than to just maintain stability.

    This isn’t a simple problem.

    Yes it is a problem in all systems governed by people, whereby the realization that tinkering at the edges can have some positive and negative consequences, but at some point the tinkering at the edges supplants the original purpose of policy as its existential purpose.  Consider how much time we discuss fairness and incentives instead of raising revenues in our tax discussions.

    • #23
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    @CaseyTaylor
    Troy Senik, Ed.: …you have to give credit for chutzpah to Robert Wenzel, editor and publisher of the site Economic Policy Journal and a sharp critic of the Federal Reserve.

    The man positively clangs when he walks.

    • #24
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    @CaseyTaylor
    Natalie

    Casey Taylor

    Troy Senik, Ed.: …you have to give credit for chutzpah to Robert Wenzel, editor and publisher of the site Economic Policy Journal and a sharp critic of the Federal Reserve.

    The man positively clangs when he walks. · 8 hours ago

    So he sounds like a junk truck? · 8 hours ago

    Those things they hang off trailer hitches were modeled after Robert Wenzel.  I hear groupies used to do something similar to Jimi Hendrix.

    • #25
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    @DanHanson

    I think the Austrians are essentially right that during periods of high growth, a fixed money supply causes the price of money to go up in the form of interest rates, which is a very important signal to the economy.  High interest rates cause money to move away from long-term and low value investments and towards short term and high value investments.  In short, the money goes where it is supposed to go under those conditions.

    When the economy slows down, demand sags for short term investment (inventory building, factory expansion, etc).  This causes capital to be freed up for long-term investments. 

    Problems arise when the fed tries to fix interest rates instead of maintaining stable money.  The interest rate signal is destroyed and you get malinvestment of capital,  making the economy less efficient.   But that’s not necessarily an argument against monetary policy – it’s an argument of a specific kind of monetary policy. 

    The Fed should maintain a money supply that increases with GDP growth and population growth, and is tied to some basket of commodity prices such that a nice, low-but-positive inflation rate is maintained.   It’s just very hard to do.

    • #26
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    @FricosisGuy

    Fair points… IMO, the Austrian School’s insights have the most practical power as critiques or cautionary tales, especially given our persistent delusion that we can manage the economy.   Of course, a good Austrian would say we’re the ones causing the business cycle!

    Dan Hanson: Even Hayek struggled with monetary policy.  Friedman was a monetarist.    The problem for Austrians is that the money supply can and does shrink and grow with the velocity of money, and therefore is at risk of accelerating downturns. 

    • #27
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    @Douglas

    Please, tell me there’s an MP3 of this somewhere. The transcript isn’t enough. I want to hear the Oooos and Ahhhs of the audience. 

    • #28
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    @Natalie
    Casey Taylor

    Natalie

    Casey Taylor

    Troy Senik, Ed.: …you have to give credit for chutzpah to Robert Wenzel, editor and publisher of the site Economic Policy Journal and a sharp critic of the Federal Reserve.

    The man positively clangs when he walks. · 8 hours ago

    So he sounds like a junk truck? · 8 hours ago

    Those things they hang off trailer hitches were modeled after Robert Wenzel.  I hear groupies used to something similar to Jimi Hendrix. · 5 hours ago

    I am raising my lighter ablaze in solidarity…

    • #29
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