Archive for the ‘Federal Reserve’ Category

Environmental Banking

Saturday, December 6th, 2008

When someone runs for office under a promise of fiscal reform, the office seeker may try to grab some press by throwing out big budget cut numbers.

Once the numbers make a big splash, the cuts may turn out to be in the category of “waste, fraud, and abuse”, whereupon everybody rolls their eyes.  We’ve heard this one before.

No doubt there’s plenty of waste, fraud and abuse, but is this genius who’s just discovered the concept of cutting it from government budgets really going to out do the hundreds of predecessor geniuses who said the same thing, and then watched it all grow again while nurturing their own pet budget items?  It’s not that easy.

As a matter of fact, it is that easy.  There’s a simple, structural way to cut waste, fraud and abuse, not just at every level of government, but in every corporation, big or small, in every industry, politically connected or otherwise, and indeed, in the budget of every individual person, rich or poor.

The magic bullet is bank reform, and the beast to be slain is artificial credit creation (artificial in that it’s created wholly from bookkeeping entries of central banks and commercial banks, not from real savings).

Take a look at a couple of modern day financial bubbles– always credit fueled– Japan real estate, the Internet bubble, the U.S. housing bubble.  We’re clearly talking about trillions of dollars of wasted resources (with plentiful enablement of fraud and abuse built in).

If this credit had never been born, we could almost picture the environmental backwards film: Strip mines filling themselves in, forests jumping back to life, smokestacks sucking back pollutants.

Think of the fuel that was used for billions of trips and commutes, the electricity, office supplies, computers, communication equipment, new constructions, building customizations, and trash haul aways, the unneeded businesses, to support other businesses that support businesses, and all, in the iconic Internet bubble example of, amounting only to the fruitless, temporary support of a sock puppet.

To all the above, staggering as it is, we need to add another layer from decades of excessive consumer credit, and the consequent misjudgment of the level of consumerism that society can currently support– again an illusion that would not have been possible without artificially created credit.

I was struck by this vignette of excess from Satyajit Das’s “Traders, Guns, and Money”: “A colleague – Chris, the head of hedge fund sales – was recently divorced.  He began to travel frequently to Paris for business meetings.  It turned out he travelled to have his laundry done.  He did not know how to use the washing machine and liked the way the Hôtel Plaza Athénée in Paris did his shirts.”

Any society with division of labor will have parallel stories of excess, but usually limited to a handful of those directly in the ruling class, or perhaps in the actual owners of large businesses, not in the upper echelons of the “laborers”, as in this story.  (It seems telling that in contemporary America we get stories like this exactly where the credit creation rubber meets the economic road.)

And of course, there really is such a thing as trickle down.  If you’ve taken a recent look (like I have), at your personal budget and purchasing patterns in light of the seemingly unstoppable march of economic uncertainty, you may be wishing (as I do), that you could have back some of the purchasing power you took for granted in past years– money used to replace a cool item with a slightly cooler item, an extra purchase of this or that because the price seemed right, the little luxuries that you deserved, because you work hard.

A healthy society probably has no way to avoid some small percent of conspicuous consumers, and perhaps a little envy and modest emulation from many of those quite humanly wishing to join the fortunate few.  If this “waste” comes from real savings, then any harm will be less than what society would get from a habit of trying to make subjective top down judgements to force people away from their personal assessments of what is or is not an acceptable level of profligacy.

However, we’ve had very significant waste that’s risen above the level of any possible subjectivity, and with a clear first cause of artificial credit “created out of thin air”.

The efforts of policymakers, and particularly of the Federal Reserve, to give businesses and consumers a positive economic outlook and keep them borrowing and spending have, in the past, worked, but only as the confidence game that they always were– ultimately these careless policies had to get to where they were always headed, to the destruction, not the creation, of wealth.

Corporations spent their potential, not on creating real efficiencies and innovations, but on frantically buying each other up and financial engineering– neglecting core business in favor of debt enabled breadth and mass in preparation for imaginary future growth.

And at least some of us who’ve been buying a new luxury car every other year, should (in the absence of excessive credit), have been duct taping patches on the tail lights of our ten year old sub-compacts instead.

All of this may sound like just a little too much dismalness from the dismal science, but if we could decide to refrain from ramping the leverage back up again, I think that most of us would handle it with a sense of relief.

Leverage is a giant fog.  Who knows what we actually have or can actually do with this kind of borrowing? It makes it impossible for us to talk to each other about anything– certainly not subjects like entitlements or sustainability or taxes.

If we decide to get rid of central banking altogether, and replace it with a simple system of 100% bank reserving, where every loan must come from the use of someone’s real savings, then the “small footprints” that environmentalists have vainly exhorted us toward could get a second channel of support.

And who knows?  Maybe if we can clear away the fog of debt to sensibly concentrate on real business and science, we’ll find that we can sustainably afford medium size footprints after all.

By Les Lafave

Abolish the Federal Reserve –

Originally Published at Strike The Root – 12/5/08

We Will End the Fed?

Thursday, November 27th, 2008

I returned from the “End the Fed” rally at the Federal Reserve Bank of Atlanta, and zapped on the news to hear the tag end of a story on enormous nationwide protests (about Prop 8).

If thirty word columns ever got published, it’d be tempting to leave it there, with the quick ironic reflection of an obvious key question– just how memetically challenging is the eradication of a central bank?

That was already an expected theme as I approached the Atlanta Fed on 11/28/08 (End the Fed protest day), and (rather unexpectedly), started to hear demonstrators from almost two blocks away.

What would I pick, if the chant was up to me?  “Down with artificial credit created entrepreneurial error?”  Or maybe, “Hey, hey, ho, ho, negative real interest rates have got to go?”

Again, not an easy handle.  Most demonstrators went with, “End the Fed!”, and sometimes optimistically, “We Will End the Fed!”

I asked a Campaign for Liberty coordinator what organizations were represented.  Other than Campaign for Liberty, he didn’t seem too sure.  “We tend to be individualists here,” he concluded pleasantly.

End the Fed has a website, but apparently not a formal structure.  (Restore the Republic and Campaign for Liberty appear to be providing some organization for the demonstrations.)  An End the Fed pamphlet starts out, “The Federal Reserve Bank is the Cause of our Economic Crisis”.  Pithy, true, and getting remarkably little traction so far.

From demonstrator signs, the story emerges a little more: “No fiat currencies”; “Lawful money is only gold and silver”; “No more banker bailouts”.  And a couple of my favorites: “Irony is Andrew Jackson on a c-note”  (I think that’s giving him a promotion, but either way it is ironic); and Ben Bernanke quoted saying, “Inflation is a tax.”  (The sign maker explained that Rep. Ron Paul got this admission from Fed Chairman Bernanke during congressional testimony.)

There’s also a sign with a picture of Bernanke and Paulson, apparently only one sign but it seems to be everywhere, which says, “Wanted for Treason”.  (I might have found a less patriotically charged way of putting it, perhaps only, “Wanted for first degree criminal tunnel vision”, but I may not be asked to take charge either of a future demonstration signage team, or a Bernanke/Paulson defense team.)

Georgia End the Fed organizer Michael Frisbee talked to me for a few minutes on clearly one of his favorite topics– Federal Reserve history.  I get a little nervous about histories of the Fed, turning squeamish if the discussion gets too Bilderbergish.  But no, just a nice conversation about history.  Another demonstrator, joined to note that he’d heard that President Woodrow Wilson had expressed regret that he’d enabled the “Creature from Jekyll Island”, and we tried to figure out if, what, when.  (A Woodrow Wilson quote of regret over the Fed’s creation appears to be at least partly apocryphal, if I’m understanding what I see now on Wikiquote.)

(With the next pass of the Bernanke/Paulson treason sign, someone has drawn devil horns, Hitler mustaches, and dollar signs in the eyes of the principals.  In my non-existent capacity as Future Imaginary Protest Sign Team Leader, the horns and mustaches seem a little over the top, and the dollar signs spot on.)

At a little after the 1 p.m. scheduled mid-point, I got a head count just shy of a hundred demonstrators.

Michael Frisbee does an interview with Atlanta Channel 5. It’s the only media I see (I’m told that Atlanta Channel 2 was by earlier).

I later looked for the piece on Channel 5 News, but never saw it.  (I did see a good place for it, right between the spot on another in the string of Georgia bank closures, and a piece about strapped consumers and economic malaise.)  Maybe End the Fed will be on the late edition (which I intend to sleep through).

No presence or thoughts about local police, except once when a police car stops to tell pamphleteers to stick to the sidewalk, and once when Mr. Frisbee notices that the ubiquitous dollar-signs-in-their-eyes wanted poster of Bernanke and Paulson has now been propped under the eagle, well onto Atlanta Fed territory, and thus as Frisbee explains, demonstrationally incorrect as far as the police would be concerned.  The wanted poster is forced to retreat.

Overall though, Atlanta Police must have been unconcerned that the Fed might be literally toppled today.  A proper assessment– the demonstrators generally seem a nice (and in my biased opinion, smart) bunch of people.

Ike Hall, a state coordinator for Campaign for Liberty says, “It may not end until people look at their dollar bills and realize it’s garbage.  I just hope it’s peaceful, and nobody starves.”

Which seems like a good two sentence summary of everything Fed.

By Les Lafave

Banking Reform –


Originally Published at Strike The Root – 11/25/08

Good News for the Fed: Half-Baked is the New Guile

Monday, September 15th, 2008

Recently on CNBC Squawk Box I heard Richard LeFrak of The LeFrak Organization (real estate development), outline a plan to solve the housing crisis by allowing immigrants into the U.S. if they agree to buy a house.  LeFrak admitted that his plan isn’t likely to be embraced by either the left or the right.

I’d like to give kudos to the left and right. Mr. LeFrak’s idea is crazy– left, right or in a circle.  Unfortunately, his way of looking at economic and social policy decisions, far from being out of line, is what’s most common.  (Hey, we’ve got a couple of problems, so why not get them together and let them solve each other?  It worked when I was seven and helped my friend build a tree house…)

Economist Thomas Sowell calls it “one stage thinking”.  It’s not like not thinking at all.  Nor does one stage thinking necessarily lack volume and detail– the world’s most intensive, multi-billion dollar plans can (unfortunately) be one stage. It’s more about making a plan without ever understanding that your goal is a moving target, or perhaps doesn’t even fit the concept of “target” or “goal” at all.

(Try performing the following experiment.  Find the nearest time machine, and travel back in time even just three years. Walk up to any politician and say, “Housing crisis.”  The response you get will be something like, “Yes, I agree absolutely! And I promise we’ll do everything in our power to make housing more affordable.”  So really, given that, you’d have to say that everything’s gone according to plan– the goal was met.)

Mr. LeFrak’s plan now to make housing less affordable would probably work.  It’s also an invitation to unimaginable unintended consequences.  (An imaginable example of one unpredictable factor– some regions suddenly booming uncontrollably from new LeFrak plan demand and sucking out all the air, while others areas rather less suddenly extend their imitations of molding bread.)

What LeFrak has missed, is what so many economists have tried in vain for decades to tell us: Economic calculations have to be made in the economy.  Central planning must be prone to one stage thinking (even leaving aside the inevitable political side-tracking), because it must aggregate decision making above the point that the economy can still adjust organically.  It’s as if you were moving about your business, trying at the same time to consciously tell all your internal organs how, and how much, to operate.  Central planning in an economy must end up with as many errors as there are people whose decisions are stolen from them by the planners.  (Which needless to say, but I’ll say it anyway, is a lot of errors.)

To me, the Federal Reserve is the biggest decision thief of all.  A handful of appointees and executives with the power to adjust (or for that matter destroy) money and interest– the touchstone of the “free market”.  This is surely one of history’s greatest unchallenged oxymorons.  Congress and the Executive may have broad powers of befuddlement, but no one can twiddle a knob or pull a lever quicker than the Fed, and no one has a closer economic relationship with every person in the world.

People tend to confuse the Fed’s inability to achieve results with a lack of power.  (As in, “The Fed doesn’t really set interest rates, they just follow along behind the market and fine tune things.”)  But the Fed is a market decision subversion machine.  There’s a nano-Ben Bernanke in everyone’s wallet, and slipped into the invisible print of any contract.  We shouldn’t confuse the impossibility of the Fed’s mission with low impact.

Almost any decision making that could be kicked back out into the real world would help– especially if we could find some way to resist political pressure during the inevitable mixed economy conflagrations.

But society can never run like the tuned up super computer we could all make it, (and we can never avoid credit collapses like the one we’ve got now), until we get rid of the “mixed” in mixed economy– until we have real money, real banking, and no Federal Reserve Bank.

By Les Lafave

Abolish The Federal Reserve –

Alan Greenspan Announces That Savings Are Important

Sunday, September 7th, 2008

It only took former Federal Reserve Chairman Alan Greenspan eighty-two years to figure it out– perhaps it’s something that a government economist better grasps once semi-retired– savings matter.

In the clips I’ve seen of the film I.O.U.S.A., one does admittedly need to untangle multiple strands of unregenerate Greenspan self-inoculation to discover the savings devotee.

But if Greenspan knew how to speak something other than Fedspeak, and had even a slight capacity for self-contemplation, he might have addressed the topic something like this: “Suppose that America had the great fortune that I had never been born, and somehow a less narcissistic appointee with a little more resilience of character than a newborn lamprey had been Fed Chairman in my stead.  Further suppose that this responsible Fed Chairman didn’t believe that his or her primary career goal should be to make the U.S. dollar a persistently unproductive vehicle for domestic saving, and savings for Americans a punishment.”

“Under this circumstance,” the imaginary reflective Greenspan might continue, “a person might forgo consuming all his or her income– perhaps for example, buying a used economy car instead of the new luxury car the saver’s full income might have bought, investing the difference.  If this additional investment is productive (and I assume it might be provided I’m not in charge), then the saver can someday buy the new luxury car as a proportionally smaller expenditure, and still keep up the additional saving, therefore further on up the road also buying, investing in, or accomplishing who knows what else. Extrapolate this to a nation, and its various economic actors, and the story is similar, but much bigger– almost unimaginably bigger.”

Henry Hazlitt titles a chapter of “Economics in One Lesson“, “The Assault on Saving”.  Here’s a passage on what real saving can accomplish on a national (or higher) level.  The context of the quote is Hazlitt’s assessment of the much too common and perverse assertion that excessive saving could cause an economy to stall:

“There will not be a ‘surplus’ of capital until the most backward country is as well equipped technologically as the most advanced, until the most inefficient factory in America is brought abreast of the factory with the latest and finest equipment, and until the most modern tools of production have reached a point where human ingenuity is at a dead end, and can improve them no further.”

In other words, quite possibly never.  Hazlitt continues:

“But how can the additional capital be ‘absorbed’?  How can it be ‘paid for’?  If it is set aside and saved, it will absorb itself and pay for itself.  For producers invest in new capital goods—that is, they buy new and better and more ingenious tools—because these tools reduce costs of production.  They either bring into existence goods that completely unaided hand labor could not bring into existence at all (and this now includes most of the goods around us… ); or they increase enormously the quantities in which these can be produced; or (and this is merely saying these things in a different way) they reduce unit costs of production.  And there is no assignable limit to the extent to which unit costs of production can be reduced—until everything can be produced at no cost at all—there is no assignable limit to the amount of new capital that can be absorbed.”

The saving and investing that Hazlitt points to– the type that perhaps the U.S. could have continued at a high rate in the absence of obfuscation from Greenspan and government– wouldn’t necessarily have been used for Corvettes and Cristal. (Although for me personally, the lack of these luxuries may explain my persistent episodes of Greenspan rage.)  As much of these additional available investments would in likelihood have been made in child education and smokestack scrubbers.There’s all the political traction of a greased Gordon Gekko on roller blades, but if we want them, the facts are there.  On both an individual and societal level, our behavior changes as we hit new levels of copiousness.  Wealthy individuals may treat themselves pretty well before they start the charitable foundations, but they overwhelmingly do start the foundations.  The U.S. interest by consumers and entrepreneurs in the environment may follow interest in SUV’s and yachts, but it does follow– we can see its elevation in the U.S. compared with what’s yet to be awakened in China’s fresher consumerism.If we could have maintained an adherence to first legal principles, economic common sense, and a level playing field, then the evidence is that we could have had it all– individuals happy in making their own choices, and society benefiting (at the margin so to speak), from individual satisfaction. We decided to try Greenspan instead.

If a corporation borrows more than they can ever repay from their production, then they’ll have to pay back out of capital- the company has to shrink.

The same can happen to a nation, and we can tell it’s happening to the U.S. as we watch the purchase of American producing assets by foreign entities.

Here’s a Hazlitt quote again, that makes a pretty good summary of the wondrous work that Greenspan (and the Federal Reserve) has done in “managing” money and interest rates:

“The money rate can, indeed, be kept artificially low only by continuous new injections of currency or bank credit in place of real savings. This can create the illusion of more capital just as the addition of water can create the illusion of more milk.”

Alan Greenspan was indeed “The Maestro”, and what he orchestrated was The Great American Liquidation– a kind of yard sale where we could grab and quickly spend a few cents on the dollar from broken up pieces of hundred year gains.

By Les Lafave

Abolish The Federal Reserve –

The Federal Reserve’s Mistake(s)

Wednesday, July 2nd, 2008

Recently there was a segment on CNBC Squawk Box with Peter Schiff (Euro-Pacific Capital) and Brian Wesbury (First Trust Advisors).

It was set up as a debate, though the two agreed on much about the causes of the U.S. economy’s problems. But while Wesbury says that the Federal Reserve “made a mistake” six years ago with interest rates that were too low, Schiff says that we’ve had Fed problems pretty much forever.

The Fed “made a mistake”. Wesbury’s phrase is the one I’m afraid to hear– the phrase that tends to pop up like a scared meerkat when there’s even a precursur thought for a question that could tap on central banking’s fortress:

“Hello? What if…”

“They made a mistake, o.k.? Anyone can make a mistake. Or rather, only Ben Bernanke can make a mistake, but now neither he nor anyone else can make one again, because we’ve learned so many lessons– millions of lessons in fact, since each of us has our own version of the lesson we’ve learned and the mistake we’ll never make again.”

“Hello?… Loose tight loose tight loose loose?”

“Shut up! It was a mistake!!”

The good news is, if we made that one mistake, all we have to do is not make it again. The bad news is that believing the good news is exactly why we may never plunge a wooden stake through this delusion. The Fed is an archetype for our desire to believe we can manipulate the world to have it all, skipping right past any helpless feelings or tough choices to tomorrow’s best sounding best case scenario.

With budget deficits including Social Security and Medicare running at four trillion dollars annually while political debate is about how much more to add to government obligations (should it be only a lot, or really, really a lot?), how likely is it that any central banker could ride a horse grown that big and not “make a mistake”?

In the unlikely event that some sunny day politicians can resist stretching the central piggy bank until “mistakes” are inevitably made, it would be an astonishing accomplishment that wouldn’t matter, because Austrian Business Cycle Theory malinvestment is waiting in the wings anyway. It seems more likely that ABCT is correct, rather than the assumed but never quite explained Fed Mistake Cycle Theory, where every time something blows up it actually would have been perfect if it wasn’t for another darn mistake showing up just when we didn’t need it the most.

Chairman Bernanke himself talked about “the mistake” that the Fed made to set off the Great Depression, a mistake he said we’d learned from and would never repeat. Now Bernanke’s becoming Mr. Made-A-Mistake in the eyes of many. That irony in itself seems like an indicator that in this system the mistakes are built in, and if a mistake has your name on it, don’t bother to run, it’ll find you.

By Les Lafave

Abolish The Federal Reserve –

Bear Stearns Should Have Guessed Better

Tuesday, April 8th, 2008

There’s been a lot of commentary that the recently exploded Bear Stearns “should have known better.  “Really?  How can anyone be sure that they know better about how much leverage to use in a financial system that’s based on deliberately mysterious fluctuations in leverage?  One can certainly argue in retrospect that Bear Stearns made plenty of mistakes, but the “should have known better” comments have a strong element of whistling in the dark.  (Silly Bear, they used leverage.  Can you imagine?  Oh well, just one (cross your fingers) of those things.)

We have immense leverage in our system starting right down in our central bank bones.  We eat, drink and breathe leverage.  (And if it seems like we’re not getting enough, we cry to the market nannies in the Federal Reserve System for more.)

It’s never a steady predictable stream of leverage– that would be too easy (no pun intended).  Instead, the Fed tries to “stay ahead of the curve” and make “surprise moves” to manipulate “market expectations”.  With these Fed moves as a perpetually shifting funhouse floor on which to build our economic judgments, how confident can we be that we know better?  We’re getting an answer to that question, courtesy of the Federal Reserve (even as we’re shifting the blame to a supposed market failure.)

In our financial system, we all have to make decisions about how much leverage to take on.  Take no leverage, and you’ll fall behind and die as your money is debased right out of your hands.  It’s particularly tough on business.  You can do everything right about your core business, but misjudge your use of debt– too much or too little– and you’re toast.  If you’re in demand as a wage slave instead, then you can relax– but that’s only as long as you never retire.

I feel pretty sorry for the people at Bear Stearns.  They’ve been sacrificed twice on the Federal Reserve’s now thoroughly blood-soaked alter.  Once during the monetary policy whip-sawing (still ongoing), about which Bear supposedly should have known better, and again during the company’s forced liquidation, when to all appearances any choice to shop for a better offer were squelched by the Fed.  (Maybe that’s another area where a “knowing better” mythology helps us out– it deleverages our empathy, giving us a short-cut away from imagining the next shoe dropping smack on top of us.)

The Bear Stearns story, all whistling aside, is not very extraordinary.  Somebody has to explode in every cycle, or why would the expansionary credit good times ever end?

What is extraordinary is that even now we’re not questioning our occult, erratic (and highly leveraged) monetary system. Instead, we point to a few companies, industries, or government officials scattered here and there, who “should have known better”, or “made a mistake”, or “got behind the curve”.

There was an item on MarketWatch giving comments from Lehman Brothers’ CFO about the Fed’s new broader access policy for the Discount Window.  “I think as shareholders our ability to access that form of financing (and) to do more business for clients is incredibly interesting.  It presents a very good opportunity.”

That probably isn’t (or shouldn’t) be what the Fed had in mind, although the idea that the Federal Reserve can finely control where the credit it creates goes is a silly (if nevertheless commonly held) conceit.

The Bear Stearns folks who read those Lehman Brothers’ comments while preparing to pack up their stuff must be thinking, “It sure would have been nice to have that ‘good opportunity’ a couple of weeks ago.  Maybe we could have been offered for sale at $50 a share instead of $2, and been saved some pain”.

It just goes to show, you never know (better).

By Les Lafave

Banking Reform –

The Fed And The Robot Brownie Experiment

Tuesday, March 11th, 2008

There’s been a lot of commentary that Fed Chairman Ben Bernanke was “too slow”.

Bernanke has been “too slow” sort of the same way as if a bunch of us sit around a big puddle of gasoline, passing around lit matches until we catch fire, then shout as we roll out the flames, ‘Man, that one person sure was stupid– he got “too close”.’

Federal Reserve operations have failure built in.  Chairman Bernanke is just the lucky one left holding the hand grenade. Now we’re starting to hear the first murmurs that the Fed Chairman is being too accommodative.  Soon he’ll have experts shouting “too slow”, “too fast”, “too loose” and “too tight”, in exact cacophonous balance.

A poignant irony for Wrong Way Ben, but most of us are going to be too pre-occupied with our own private (crashing) economies to spare him much sympathy.

Let me demonstrate what I mean about the Federal Reserve as built to fail– never really in control of monetary policy– with another lame allegory.  Because the key elements are robots and brownies, I call it The Robot Brownie Experiment:

Monetary Policy Lab 1 (The Robot Brownie Experiment)

Equipment: -Robot with a finely adjustable cattle prod.

-Large supply of brownies.Subjects: -50 University Students (Preferably economics majors).

The Experiment: A small brownie is placed before the student subject.  When subject reaches for the brownie, the robot with a cattle prod gives the subject a mild shock.  On further iterations of the experiment, the subject is tempted with ever-larger brownies, but deterred with increasingly severe electric shocks. 

Hypothesis: Although most of the subjects will initially take and enjoy the brownie, at some point this behavior will cease.   Secondly, if the brownie size and cattle prod voltage is increased at the threshold of student perception, the point at which he or she will cease attempting to get the brownie can’t be predicted.  Third and last, if the robot was produced under a government contracting process, it will go berserk and chase me out of the lab and down the street, until I escape by throwing the brownies I’d pinched at the feet of a mother and child while shouting, “There they are, get ‘em!”

While the ethics of the experiment may be questioned, I believe that the theory and principles (including a lack of ethics) can be overlaid directly onto modern day central banking.

Like myself as the robot brownie experimenter, our Fed tempts economic actors and then shocks them, trying to drive them toward the economic course deemed to be in the economy’s interest.  And similarly, there is no way to predict how or when the behavior of people independently looking to determine their interests might change, or exactly how punchy and out of touch they may get from easy credit, or how scared, angry and tentative when a shock feels unexpected.

Government economists and TV commentators discuss supply and demand as if supervising someone making soup. It’s just a matter of a few key ingredients and temperature adjustments.  What’s so obvious that of course it has to get lost– people are behind what happens in the economy– people supply the supply and demand the demand.

People aren’t numbers– they aren’t even lab rats or university student archetypes.  The idea that the Fed can manipulate money and stay one step ahead of our responses as we try to adjust to such a key factor in our lives and ambitions is silly. Conventional economics doesn’t have much to say here– if you start with a silly premise, then PhD’s, brilliant formulas and complex measurements may be able to make the silly premise appear serious, but they can’t make it actually work.

The Fed can’t control money demand, since it can’t control us.  We may ignore stimulus, then adjust to it, and then ignore it again.  We’re alternately (in no particular order, which is kind of the point)– too emotional, too calculating, too smart, too stupid, too cocky and too afraid– all in varied, fractally periods and sizes simultaneously too small for Fed tweezers and too big for their cranes.

Then again, once in a while we may abandon all of the above ‘cause we’re just plain tired of getting zapped.

By Les Lafave

Abolish The Federal Reserve –

Going for Broke with a Stimulus Package

Wednesday, February 13th, 2008

Isn’t it awesome that the government can fix any problem that can possibly occur, and at any time set the economy on track with a stimulus package?

However, since the government can easily set up our economic future, our stimulus package goals are starting to seem a little modest.

Hopefully it’s not too late for the Senate to address this.  Here are some recommendations:

Since we don’t want to have nothing to aspire to, or to taint the American reputation for frugal modesty, the poorest person in America should have only two cars– a workhorse car, and a backup.  I’d suggest a Toyota Prius and a Corvette.

The housing for the poorest person in America should be a two or three bedroom condo with three or four HiDef TV’s, a Nintendo Wii or a Stairmaster (depending on individual results for the fast food portion of the survey mandated by the Full Housing Act Really This Time– the acronym for which may be congressional thoughtfulness appropriate, but here redacted), a front porch, a shared swimming pool (with good filtration in case a rich person tries to sneak up and pee in it), and of course a two car garage to protect the poor person cars from the elements.

The richest person in America should be capped out at a Mercedes hovercraft, one personal jet, and a perpetual motion machine.  (If the rich need a helicopter, they can borrow Ben Bernanke’s).  Al Gore’s house should do as the top-level rich person house in America (although perhaps we should give an option to choose John Edwards’ house– since this is a freedom loving democracy– a rich person should have a choice).

Now that the broad strokes of this economy boosting plan have been laid out, comes the easy part: the Federal Reserve, the President’s Council of Economic Advisers and the banking industry fill in the details, Congress votes on the plan and helpfully attaches some pork, and countless federal bureaucracies spring in to action to add the finer details on top of the fine details and stir.

The rest of us sit back and wait (since elected reps couldn’t expect to get our votes if they expect us to do anything else).

If my economic stimulus plan is starting to seem a little absurd to you, congratulations– you’re not qualified to be the President of the United States, a member of Congress, or a U.S. government economist.  Sorry, but you may or may not still be qualified to be poor.

Some may agree that there’s a lot of fiscal stimulus magic thinking going on, but nevertheless think that having a package creates some activity and maybe some hope, so if we’re lucky that’s what we net while the redistribution itself is a wash.

That’s not much less of a fantasy.

For one thing, moving resources from point A to point B in itself costs resources.

Second, what economic actors need is accurate information and continuity for decision making, not smoke and mirrors. The smoke and mirrors have long term consequences that short term stimulus (assuming it actually works at all) can’t overcome.

Finally, I was interested to see a step-by-step analysis of the net result of the fiscal stimulus from mutual fund manager John Hussman.  He predicts that only a small portion of the fiscal stimulus rebates will end up directed toward consumption (similar to the last rebate, where more went to paying down private debt), and that little of the government debt created can possibly be monetized.  The result is that, “In the end, the U.S. economy will carry a larger amount of U.S. Treasury debt, and a somewhat smaller amount of mortgage and credit card debt than it would have in the absence of the fiscal stimulus.”

In view of the plunging U.S. dollar, it would seem that it’s not only Ma and Pa Consumer’s debt that’s attracting questions out in the economy– U.S. Government debt might be under the microscope too.

Whose credit rating is more important to America’s economic future?

From that perspective, fiscal stimulus looks like a big mistake.

By Les Lafave

Abolish The Federal Reserve –

Abolish the Fed

Sunday, February 3rd, 2008

If you’re falling down a mountain, should you breathe through your mouth or your nose?  Should you hum an opera, a rock anthem, or a sea shanty?  Cross your fingers or your toes?


These questions make less sense than the question of what Federal Reserve Chairman Ben Bernanke should do about the economy– but the margin may be a slim one.


Many are clinging to a hope that rate cuts will be our rescue.  Larry Kudlow (CNBC and NRO) believes the Fed has created our current problems by being too tight:  “Credit blow ups, liquidity freezes, dysfunctional commercial paper markets, and suspect bank-loan quality do not exist– nor do they spill over into London and European money markets– when central bank policies are easy and accommodative”.


That’s like saying that you can never have a car wreck, as long as you can smoothly accelerate to the speed of light.  (Kudlow’s last item, that bank-loan quality could never be suspect as long as money is easy, is a clear non sequitur– subprime problems can only be created as a loose money phenomenon.)

The premise of arguments like Kudlow’s is that if we don’t have low interest rates (and a perpetual trickle of new money), liquidity could get stuck.  In trying times, some people might hoard cash.


The argument is arrogant in the extreme.  Why should a few people like Kudlow (or Bernanke), determine for all Americans that they’re “stuck” or “hoarding” if said Americans make spending decisions that these few consider irrational?  Kudlow in particular has been so wrong so often about so much, he’d need an entire month of his hour-long shows to apologize to all the bears he’s baited. 


As we move from their determination to make the spending and investment decisions of others, to their method of persuasion, we go from arrogance in its purified crystalline form, to falsely confident Kafkaesquian fog.  Saving is made into an unreasonable choice by controlled degradation of money in hand, as overseen by the Fed.  These aren’t free market capitalists– these are central planners who decry central planning, and market manipulators who bemoan the loss of free markets ideals.   They need therapy.


Could we ever really get stuck?  No.  A liquidity trap is just a difference of opinion.  People will come around when conditions come around.  And with the provision that there must be a limit to the reactive follies of politicians, conditions always come around.


You can’t eat money, nor for practical purposes can you knit it into a pair of pants.  “Hoarding” will be disgorged as people need or want things, whether it’s food and clothing, a new computer and a ticket to a Tom Hanks movie, or new factory equipment and an advertising campaign.  If for a time some people have a preference for security via savings, that’s their decision– why not respect it?  If you believe it’s the smartest decision in the world or the stupidest– whether you’re Larry Kudlow, Ben Bernanke, Barney Frank, or George Bush– you’re still just one individual making one individual’s educated guess. 


More input– more educated guesses– is better. The aggregate of countless individual decisions will always be better than the cleverest conceit of the central planner.  That’s why decisions about the utility of spending versus saving are best made by the individual person involved– the person closest to that one particular decision in that one particular place and time.  That’s true not just for the interest of the individual whose life and welfare is at stake, but also in terms of society’s and the economy’s interest.  Fed junkies like Larry Kudlow argue this passionately for everything else, but chicken out when it comes to banking and money.


The individual decisions admittedly won’t be perfect.  Wants, needs, desires and aspirations aren’t subject to perfection– they’re subject to subjectivity.


Which is better, macaroni salad, or colored pushpins?  Such a question could only be asked by a demented kung fu master in a bad martial arts movie (or well, I guess by me).  An economist can’t peer behind that veil of personal choices– you might as well ask what’s the correct thing to think when it’s cloudy on Tuesday (usually chocolate chip cookies and Scarlett Johansson).  There’s no right answer to economic questions at that level, and it’s a mistake to listen to only one class of people (who may happen to love macaroni salad and detest push pins).


We need to accept the economic input of each individual, humble or exalted, into the grand equation.  To try to trick them instead and take away some of their options, is really pretty disgusting– especially when you look now and see lives being ruined as the accumulation of tricks has finally crested and crashed.


Economist Murray Rothbard wrote in “The Case Against the Fed”, (which of course pre-dates today’s thorough central bank whip-sawing which he surely would have enjoyed), that the idea of the Fed as the great protector of the public and its money is a “fraudulent legend”. 


The Fed, conspiratorially or not, ends up as an instrument of misdirection, cover for inflationary action, and playing field tilting.  As Rothbard said:  it’s “the old ploy by the robber who starts shouting “Stop, thief!” and runs down the street pointing ahead at others.”


Rothbard thought that fractional reserve banking was a terrible wrong turn.  He didn’t buy arguments about economic stimulation, but beyond that felt that it was simply too unfair– great for governments and bankers– terrible for working class people trying to save.  He preferred a gold standard without fractional reserves, where each paper dollar would effectively be a receipt for warehouse gold.  (Or rather, that’s what he thought we’d get if government didn’t interfere and enable fractional reserve banking– Rothbard thought that the market should choose what’s used as money, whether that be gold, silver, other metals, silk underwear or golf balls.)


In Rothbard’s system, you could get credit– for it isn’t only created money that can be loaned– saved money can be loaned too. Maybe it won’t be quite as easy, but right now easy is the problem.  Meanwhile in such a world, productivity, creativity and intelligence would still expand economies– which is as close to a sure thing as you’re able to get.


Such purity of vision may be politically improbable.  But the situation we’re in now, where money supply sometimes expands at ten or fifteen percent, and there’s no real ceiling (or for the dollar, no real floor), should start to seem questionable as the damage done becomes clear.  


Over the short-term, maybe Kudlow does have a point about where we should go (though not how we got here).  Maybe there’s a tiny chance we can pop the balloon slowly if Bernanke’s helicopter drops just the right amount of money over just the right places. 


If you do fall off a mountain, even if it’s a couple of thousand feet, I suppose you might as well try to land on your feet.  In the long run though, you may want to stop falling off mountains. 

By Les Lafave

Banking Reform –

Hedge Funds Explode; Former Fed Chairman Hired By Aliens For Infinite Salary

Thursday, January 17th, 2008

As credit crunches and mortgages melt, former U.S. Federal Reserve Chairman Alan Greenspan has been hired as Galactic Reserve Chairman of an un-named Local Group Galaxy, according to alien sources.The compensation package for the former Fed Chief is rumored to be unquantifiable.“It is a rich package,” admitted an alien spokes-entity. “However, we were so impressed with Greenspan’s ability to preside over a multitude of growing financial WMD’s on your planet Earth, and then walk away a hero before any of them went off.  We put our best offer up front, since we felt a bidding war from other galaxies was on the radar.” Greenspan faced heavy competition to earn the top Galactic finance job. “It came down to a choice between the human, and a fuzzy ball of pus-riddled slime from Andromeda. Both had excellent records, but when we asked the Slime to furrow its brow thoughtfully, it exploded in a gelatinous hail, which disqualified it completely.”Greenspan will not have a salary in his new post, but will be given his own Galactic Reserve printing press, enabling him to monetize private as well as public debt. He will also get a special bonus if the price of gold goes parabolic, as well as a unique escalator clause based on the number of alien media photos of galaxy citizens tearing up reserve notes in anger, or using them to blow one or both of their noses.The incentive bonuses may allow Greenspan to earn up to fifteen additional printing presses. (incentives that must have current Chairman Ben Bernanke green with envy– or is that Treasury ink?)  Also included in the Greenspan compensation agreement is another item that any currency defender would find useful– a custom forged rare metal superhero cape, with the letters “A.G.” in flaming plasma.  

The alien offer short-circuited a potential Chinese bid for Greenspan’s services.  It’s thought that China hasn’t been able to determine an endgame for all the U.S. Treasuries it holds, and considered simply giving them to Greenspan as a joke.  However, now that he has accepted the alien offer, many will consider this a proud moment for the United States, if not all humankind: “Greenspan is the first human we’ve ever hired,” said the alien source, “though we have been harvesting humans as space ship reactor fuel for thousands of years.”


The alien spokes-entity was more “reserved” in comments about our current Fed Chairman, Ben Bernanke.  “We think that it’s unlikely he’ll climb out of the box he’s in.  If he does, however, Bernanke would go straight to the “A” list, with a cluster wide bidding war that could command him a salary even higher than Greenspan’s.”


Those in the financial industries may find it intriguing that system requirements outside our galaxy relate so well to our own environment.  According to the aliens:  “The competition to devalue currencies at the galactic level is intense.  Galaxies have been known to buy the currency of a rival and burn the notes, or break into their reserve bank vaults and leave behind silver and gold, just to get an inflationary leg up.  As we perfect our strategy of long-term pain for short-term gain, it’s vital that we leave our average citizens holding the bag, but sufficiently confused so that they won’t know who to blame.  We believe Greenspan is up to the task.”


Greenspan will still need to go through a confirmation process, but he’s widely considered a lock (except on our earthly dollar’s safety and wellbeing).  The prospective Galactic Chairman has already been fawned over by alien congresspersons of all stripes, as they sported fake wise, grave demeanors quite reminiscent of the shallow deportment of our Earth congresspersons.  


At the press scrum as the former and future Chairman was boarding the spacecraft taking him to his new responsibilities, he was pelted with questions (and a couple of rocks).  Greenspan, wearing a “Happiness Is Negative Real Interest Rates” T-shirt, declined to comment, and then spoke for three hours on a variety of subjects.


One of the more interesting of Greenspan’s topics– he favors a North American Union. 


“A few years ago I would have been concerned about destabilizing effects for the United States economy,” Greenspan intoned in that somnolent sing-song we’ve already started to miss.  “However, since my tenure as Federal Reserve Chairman the business cycle has become so elliptical, that I believe we should just start lobbing policy meteors to see what happens.”

By Les Lafave Abolish The Federal Reserve –