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

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 –

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