Posts Tagged ‘Abolish The Federal Reserve’

Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

Sunday, February 22nd, 2009

In this adventure of Robinson Crusoe, the writer is so bitter that he takes it out on innocent characters in his own imagination, meanly depriving Crusoe of tools, supplies and opportunity.

Seven hundredths of a second after Crusoe thinks, “I wonder if I could rescue some supplies from the ship?” it sinks almost instantaneously with a perverse Champagne cork popping sound, into a trench a thousand fathoms deep.

Fish leap and play daily in Crusoe’s sight, but too far off for hand fishing.  The giant dwarf coconuts are five hundred feet tall, but with mini-nuts that take ten minutes each to crack and yield one calorie.  The island’s unique tortoises can outrun him.

Scrounging for enough food to starve over years instead of days is an exhausting grind.  Crusoe can only dream of capital projects.  There appear to be sources for tool making, but always a little too far from food sources to consider risking.

The problem that Crusoe has, as delineated by many Austrian School economists, is that he must have savings in order to produce tools (higher order capital goods).  Without savings of food he has to continue as he is, hand gathering for subsistence.  Crusoe plans, estimates and saves a few scraps.

Then Friday shows up.  The two divide the subsistence chores and start to do a little better.

They work out a detailed plan– by the standards of the island, it’s a massive capital project.  It involves building tools, and tools for building tools, in assembly line fashion.  The savings needed for them to complete their capital project according to their estimate– a thirty day supply of food.

Crusoe has been maintaining a rather ambitious food storage cave. He shows this to Friday.  It contains some pathetic food scraps of surplus over subsistence– the space carefully organized for the bounty that never comes.

Friday, now with considerable excitement about the thirty day plan, examines the potential of the space.  After all this waiting Crusoe is also catching emerging economy fever, and so as difficult as communication is for them anyway, they’re both hasty, and tragically fail to understand each other.

Friday thinks that Crusuoe is showing a food storage cave prepared for Friday to store Friday’s surplus.  Crusoe had only intended to convey that Friday should prepare a similar larder.

The two men dive into the tasks of hand gathering food, sometimes working together, sometimes apart, in accordance with the master plan.  When they work together, Crusue makes sure to leave half the production outside the food storage cave for Friday to move to his own larder.  Friday is a little puzzled by the extra work that Crusoe keeps leaving for him, but doesn’t wish to confront his friend, and so simply moves the food into the same cave later.

When Crusoe’s tally indicates that he has thirty days supply, he asks Friday what help he needs with finishing his supply, and is amazed at Friday’s indication that everything’s finished.  Both men are so elated that the savings plan went better than they’d dared to imagine, that they even expand the tool building plan.  They dive in with a near delirium of hope and ambition.

They’re so excited and work so hard over the following days, that their savings are almost depleted before they realize the error.

The more they look at it, the more sobering the disaster begins to appear.

Without adequate saving to deal with all of the plan’s dependencies, it has turned into a trap.  None of the tools on their assembly line are more than half completed.

A lot of the early production went to make fresh vine lashings.  These lashings need to be in place on the constructed item within a few weeks at most, or they become useless.

A half completed fish weir will wash away without ever endangering a fish.  They become despondent as they look at the same picture everywhere– it looks like some aggressively inattentive kids have been playing– half dug pits, trampled brush, scattered rocks, chopped trees.

How could they have been so foolish?

As a matter of fact it’s pretty easy.  Crusoe and Friday have just engaged in an accidental experiment with fractional reserve banking, absent the banks.  Perhaps (since most central bankers have magic powers), Ben Bernanke was even there, sneaking in to rearrange the supply cave to make it look like the savings were abundant for a little longer so as to protect the illusion of growth.  Regardless, Crusoe and Friday both perceived that the same savings were available for their particular use.  The illusion lasted until they realized their mistake, and then their economy crashed.

As Crusoe and Friday try to re-capture their subsistence methods, there’ll be further depressing damage assessment as they see how much of the low hanging fruit, in some cases literally, they’ve stripped away.  The assumption had been that the completed capital projects would more than make up for any lack of care and husbandry during early stages (something we duplicate in real life bubble economies).  For Crusoe and Friday, it may be a more serious issue than just wasteful projects– the upcoming time of malnourishment may kill them before they can regain their footing.  (From that perspective we can also see that the quicker the crash came to their economic boom, the better off they would have been.)

Of course they note a radical difference in work energy from the period of boundless hope, to that of seemingly bottomless despair.  But noticing it won’t entirely cure it. (Rather similar to the way it’s useless for some idiot financial analyst on TV to decry that consumers are turning their pessimism into a self-fulfilling prophecy by failing to spend and/or borrow.)

Both “Crusoe Economics” and identification of the bubble inducing problem of credit expansion are traditions of Austrian Business Cycle Theory.  I’ve borrowed particularly from economist Jesús Huerta de Soto for the above Crusoe and credit adventure.

But since I’ve personally found a sarcasm engendered catharsis to roll back the bitter tide for perhaps even as much as a full day, it’s at this point, while Crusoe and Friday have their heads in their hands, that a disoriented whale beaches next to them, and before they can recover from their astonishment, a lightening bolt knocks over and flames a dead palm, creating an impromptu barbecue pit.  (In the roots of the flaming palm, the two discover more than their collective weights in plump, wild sweet potatoes, with a scattering of wild herbs.)

Great rejoicing.

A barbecued whale for our sliding economy, however, absent an intervention from an advanced alien culture, would seem to have a problem of scale.  Too many credit bubbles have been layered on top of each other.  There’s nothing Fed Chairman Bernanke can do, with money or fish, to hide the waste anymore.  Credit expansion from fractional reserves– credit money out of “thin air”– must always leave us high and dry (and whaleless) at some point, but as perverse as it may seem, the sooner the better.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

Where Does Speculation Come From?

Wednesday, January 21st, 2009

Speculation, as we know, comes about when bridge trolls get hold of refined sugar.  The rush of the abrupt shift from their normal grumpy diet of bone marrow and gruel, causes the trolls to dance out from under their bridges in a miasma of invisible gaseous trollulose, which makes the human world go mad.  Florida real estate soon follows.

This makes as much sense as most more commonplace explanations, when explanations are considered at all, and like “greed” most trolls are invisible– all you’ll ever see is their supposed primary effects.  (Something else: it’s frustrating that Congress has made no determination to regulate this bridge troll problem– a simple matter of requiring that no sugar, sodas, or baked goods be transported within five miles of any bridges– easily accomplishable by the use of dirigibles.)

Words must be made to work properly, and work hard, on behalf of their human (or egg) masters, contended Humpty Dumpty.  (I believe that Mr. Dumpty would have no issue with the slight shock transition here, since he’s willing to end poems in the middle of a sentence.  I’m not sure that every egg would have the guts to do that.)

It’s because of my humble attempts to make Mr. Dumpty’s philosophy of language live and breathe, and to do as he says (not to criticize too harshly, but as he says, not always as the great but inconstant semanticist does), that my keyboard caps lock key remains nearly virginal.  Its use could be viewed as a kind of cheating, since it deprives words of their proper labor.  I hardly ever even use exclamation points!!

But I’m drawn to embark on a strange desperate exercise:

Locate caps lock.  Check.

Fingers limber.  Check.

Brain function engaged…

Brain function engaged…

BRAIN FUNCTION ENGAGED!!… CHECK!!

CAPS LOCK ON…

OH… ALREADY ON.  I MEAN CHECK.

SPECULATIVE BUBBLES ARE NOT CAUSED BY BRIDGE TROLLS:

SPECULATIVE BUBBLES ARE CAUSED BY MONEY AND CREDIT CREATION. THIS WAS TRUE IN THE MISSISSIPPI BUBBLE IN THE 18TH CENTURY.  IT WAS TRUE IN THE STOCK MARKET BUBBLE OF THE ROARING 20’S.  AND IT’S TRUE TODAY.

One can sort of understand– though not without some contemptuous lip curl– why our leaders skip over this simple analysis to get straight to their “solutions”.  Sub-consciously at least, they must know that close examination of speculative causes would for them be an exercise even more perilous than my latent discovery of the caps lock key will no doubt be for me.  Blame is a dish best served over-spiced, over-garnished, and over-sauced, to someone else, who really only wanted a sesame bagel.

And anyway, there’s an easy short cut for politicians to skip from their vigorous, over-sauced non-analysis to expensive, fatuous, over-garnished non-solutions.  That short cut of course, is GREED.

Why was there speculation?

Greed caused it.

Oh well then, there you go.  We need a solution for that.

Never mind that greed can cause or not cause anything, or anything’s opposite.  A greedy child could hoard all his lollipops, or give all of them away hoping to be rewarded with ice cream.  Gordon Gekko had it completely wrong, even from his own imperturbable perspective.  “Greed,” Gekko should have said, “is meaningless.  Greed, for lack of two better words, doesn’t tell us crap about crap.”

Great bubbles aren’t arithmetic sequences.  They need pyramids of money, to enrich early speculators and stimulate the fantasies of growing numbers of newbies.  Whatever any politician or central banker (or non-central banker) says, we need to keep track of this fact– it’s not possible to come by these pyramids honestly– an honest society with honest institutions would never be able to keep these pyramids marching.

In The Theory of Money and Credit Ludwig von Mises said, “It is impossible to grasp the meaning of sound money, if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.  Ideologically it belongs in the same class with political constitutions and bills of rights.”

We could hardly be further away from such a concept.  In fact (as some have recently pointed out), it’s more like we’re living in Atlas Shrugged, with very unsound money “solutions” that cause problems which appear to need more problem causing solutions.  No where on the horizon is there any Atlas capable of shrugging.  (At this point, I think most tax payers would settle for an Atlas with any capability to restrain himself from whimpering behind an outstretched begging hand.)

AS FOR THE U.S. MONETARY SYSTEM, THAT’S A CONTRIVANCE THAT ONLY TYRANTS AND SPECULATORS COULD LOVE.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

Originally Published at Strike The Root – 01/20/09 

Fed Chairman Bernanke Clowns Around, Exceeds Stock Market Expectations

Sunday, November 2nd, 2008

Anyone who’s watched the business channels for more than an hour or two will have been well indoctrinated in the magic thinking that is the Federal Reserve mandate.

The Fed plays “an expectations game”.  In order to maximize the impact of their manipulation, the Fed will try to “surprise” the markets, because if the markets “expect” an action, they may not react.  Often it’s market analysts explaining what the Fed could do that might or might not meet market expectations, or surprise them.  We also hear members and spokespersons for the Fed adapt this habit of speaking.  You’d think they were generals in war, analyzing enemy preparations.

But if surprises work so well in that piece of the economy, why not try them everywhere?

UPS could surprise its customers by sometimes delivering next day, sometimes putting your package in storage for six months, or perhaps even delivering something when you’ve asked for a pickup.

Burger King could sell its customers dollar burgers on Wednesday, thirty-five dollar porterhouse steaks on Thursday, and plumbing supplies on Friday.

If other economic sectors would follow suit (suits being available at garden supply stores… or are they? Maybe your expectations are being managed again… ?), then you can start to see that soon we’d have an unprecedented economic boom, since according to Fed lore, no one knowing what’s going on is a sure path to success (as long as it’s not so sure that we can’t still be surprised).

Has the Fed itself fully explored all the possibilities for surprise?

Maybe Chairman Bernanke could show up at press conferences in drag or funny costumes:

“Chairman Bernanke surprised the financial press today when he attended a briefing wearing an old raincoat and a Harpo Marx wig.  Attendees were further taken aback when the Chairman answered all questions by honking a clown horn.  Reporters quickly adapted, requesting that Bernanke answer questions with one honk for yes, and two honks for no.  All market participants were adjusting to the new conditions, but then Chairman Bernanke yanked away the coat and wig to reveal a Spiderman costume, stunning markets and precipitating an enormous rally…”

While Treasury Secretary Henry Paulson may or may not be glad to see us, but always carries a bazooka, for the Fed, the talk is of how many bullets they may have left, and how they can maximize their potential for impact on the markets.

And why use bullets on the market?  Why surprise them (us) at all? This talk is of a clear effort to take a group of actors who believe one thing, and get them to believe another.  It’s the not very disguised language (in fact pretty much says what it is) of confirmed serial bubble makers.

Yet when the bubbles inevitably occur, then the folks with the self-proclaimed power over expectations, with the bazookas and bullets, have an epiphany– it’s the market’s fault.  “Sure, we had all the advantages, privileges, power and information, but we couldn’t have foreseen that if we threw money at people, they might try to grab it.  We need more bullets to get the benighted, frightened public to trust (and borrow) again so we can re ignite the markets that we perpetually mistake for the economy.”

It should be pretty clear who provides and produces, and who makes noise and pretends.  Unsurprisingly (the actual word that the economy as a whole prefers), the people who produce goods and services are the people who produce goods and services.  It isn’t Wall Street or the banks, and it certainly isn’t the Fed or the government.

Creation of money and credit doesn’t, in the long run, produce anything except a boon for the creators and early spenders, and confusion and malinvestment for the rest of us.  Attempted management of the perceptions of the beneficiaries and victims of fiat money and credit creation may sometimes keep the game cycling a little longer— but more time spent obliviously making poor investments is a worse outcome, not a better one.

Banks and government don’t grow or manage the economy; they don’t run it, expand it, or stabilize it. What banks and government do to the economy is rape it.

And what would any rapist do to try and dodge consequences from his crime?  Blame the victim, of course.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

Alan Greenspan Isn’t a Libertarian, Complacency Isn’t Stability, and Debt Isn’t Wealth

Wednesday, October 15th, 2008

A recent New York Times article “Taking a Hard New Look at Alan Greenspan’s Legacy” (Peter S. Goodman), did an entertaining job of slamming former Federal Reserve Chairman Alan Greenspan, and for that, I’d gratefully subscribe (if I could afford it).

But there was a pigeon sized fly in the Timesian ointment– the article calls Greenspan a libertarian with a straight face, and blames the financial crisis, not on Chairman Greenspan’s monetary policy lead foot, but on his “faith” in “free markets”.

Anyone who spends his entire (much too long) career horsing interest rates up and down according to his own bad forecasts can’t possibly be a libertarian, no matter if he once knew Ayn Rand (who said she wasn’t a libertarian anyway), and no matter how many times he may have said the words “free market” (undoubtedly with his fingers crossed).

It doesn’t matter anyway what ideology Greenspan (or anyone else) may say that he has– he’s betrayed them all, or any combination of them all.  Alan Greenspan has always readily taken on or cast off whatever belief best suited his unquenchable narcissism.

Goodman’s Times article focuses on credit derivatives, and makes a convincing case that when they explode, they aren’t very helpful.

But if former Fed Chairman Greenspan et al weren’t continuously stuffing credit into every possible economic crevasse, there wouldn’t have been either a need or a mechanism for the derivatives market to come into existence in the first place.

The most entertaining part of the Times piece is the description of the confrontation of Fed Chairman Greenspan and Treasury allies Robert Rubin and Lawrence Summers with then CFTC Chairman Brooksley E. Born.  She wanted to review the derivatives market, while this triumvirate instead made the argument that even talking about derivatives regulation could trigger a financial crisis.

The Greenspan/Rubin/Summers argument appears appropriately ludicrous in current light, yet their viewpoint remains prevalent in government, Wall Street, and banking circles.  This mental map, which absurdly gets called “free market” is based on:

Assumption #1.  Markets are delicately balanced, and the upside down pyramid can get harpooned and yanked over randomly (like by a suddenly uppity CFTC Chairman).  This is true, but it’s manufactured truth– the pyramid could balance nicely on its base; we choose to stand it on its tip.

Assumption #2.  Once the economy stumbles then government, having in their view not infinite power, but infinite possibilities for power and the country’s sharpest minds to develop and use it, can always push the market upright and back to “stable growth”.  This isn’t true– they mistake the market’s strong organic self-correcting predisposition (often even against the head wind of their efforts), for their self-important wish fulfillment.  (Picture a pre-historic band of sun worshipping priests, who begin to think that their pre-dawn rituals bring up the sun.  If one day they sleep in and the sun comes up anyway, do they change their minds?  Of course not– they’d say, “We sure got lucky that time.  Tomorrow, let’s do two rituals.”  The human capacity to shoehorn powerless insignificance into self-aggrandizing puffery is stunning (and I’m no longer talking about the ancient sun priests, but the modern monetary priests, who should have every advantage to know better).)

So, I’ll repeat the question that one can imagine Ms. Born asking Mr. Greenspan (and apparently Mr. Summers and maybe Mr. Rubin).  “Just what kind of “stable”, “free market” system might it be, that will collapse if it’s even discussed?”

That would of course be ours, as we’re finding out ten years later.  However, instead of not discussing it, maybe we should consider a financial system that doesn’t balance (upside down) on a pyramid of debt?

By Les Lafave 

Abolish The Federal Reserve – themaestrosrep.org

Treasury Secretary Henry Paulson: White Queen Redux

Thursday, October 9th, 2008

Treasury Secretary Henry Paulson is going to put capital in the banks.  In this concept, he shares a rich tradition with Santa Claus and the Easter Bunny.  (He leaves free presents, theoretically only to the relatively good, but realistically rather more arbitrarily with a bias toward the privileged, and lastly and most importantly– it’s all a fantasy.)

It’s true that Secretary Paulson may be able to improve bank capital, in the sense of benefiting the entries on the bank’s balance sheet, but not in the sense of giving a productive capability that didn’t exist elsewhere and now has come into being out of nothing. What Paulson can give is only a representation of real capital.

The Department of the Treasury can “inject capital” (Paulson’s words from his statement of October 8, 2008), in the same way that the Federal Reserve can increase the money supply, but can’t increase (or even maintain) the purchasing power of the new money at the same time.

There are some who’d argue that the balance sheets that Secretary Paulson can manipulate do matter– that “injecting” “capital” (it’s hard to choose which of the prior sets of quotation marks to invest with the most sneering invective; please feel free to curl your lip at both), into banks will buy time until the economy rebalances.

This can only have the appearance of truth when the economy isn’t overextended (i.e., it only works when it doesn’t matter).  The markets are “frightened” and there’s a “liquidity freeze” because of the recognition that real capital has been overextended and wasted.

The markets recognize that the only thing to do is sort through the rubble looking for salvage– that when you’re overextended you have to find a way to prioritize– while Paulson and the government are convinced that they can spin the rubble in really fast circles and make it look like something shiny.

We mistake paper money for real purchasing power and real savings, when in fact it can only potentially represent these things, and that dependent entirely on government trustworthiness.  We mistake the bank balance sheet capital (now demonstrating how real it really wasn’t with the astounding speed with which it can disappear) for actual resources and capacity to produce– again it’s only a representation (and again an unstable one, since it’s considered capable of whimsical “expansion” to “stimulate the economy”).

Treasury Secretary Henry Paulson has asked for patience.  He wants us to trust government, and share his confidence (his favorite word as things fall apart) that strength will be restored to the American economy.

Secretary Paulson doesn’t deserve our trust and belief; the government doesn’t deserve our trust and belief, and it’s not because they’ve asked for this all along and failed all along– it’s because they’re lost now, and can’t possibly find their way in the future since their compasses are backwards.

It’s not good for Americans to have confidence in something that’s doomed to fail– it’s better to question folly than to have confidence in it.  If for example, confidence in mortgage finance and real estate value was yet ongoing today in a continuation of yesterday’s real estate bubble, then the confidence would be moving us from stunningly stupid waste of capital and opportunity, to supersaturated thermonuclear stunningly stupid waste of capital and opportunity.  Economic confidence is very far from deserving the knighthood that government perpetually offers it.

While it’s true that economic and political systems require trust, that only works when they also require trustworthiness.  It’s not a duty for Americans to unquestioningly accept government foolishness and waste, no matter how insistently the government tells us that questions are destabilizing.  The reason our system can fall apart from too much questioning is not because it’s built on trust (which we might have a duty to maintain); it’s because it’s built on leverage (which we do not).

Now I’ll give you something to believe.  [the Queen remarked]  I’m just one hundred and one, five months and a day.’  `I can’t believe that!‘ said Alice. `Can’t you?’ the Queen said in a pitying tone.  `Try again: draw a long breath, and shut your eyes.’  Alice laughed.  `There’s no use trying,’ she said `one can’t believe impossible things.’  `I daresay you haven’t had much practice,’ said the Queen.  `When I was your age, I always did it for half-an-hour a day.  Why, sometimes I’ve believed as many as six impossible things before breakfast.’   (Lewis Carroll)By Les LafaveAbolish The Federal Reserve – themaestrosrep.org

Can’t Wait to Get My Piece of the Bailout Profits

Thursday, October 2nd, 2008

The hubris of assuming that all you need to do to make a profit is find a spread between borrowed and lent funds should sound familiar– that’s how Wall Street (with a little grease from the Fed) got us into apocalyptic trouble.

So… Congress is going to take over the financial industry’s disastrous investments, and their disastrous methods, and then, being the nation’s experts on profit, quickly turn a profit.  It’s only a matter of deciding how to divvy up the loot.

Mutual fund manager John Hussman points out that if the Paulson plan means buying the distressed assets at distressed prices, then balance sheet deterioration continues: “The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.”

In other words, you can’t have it both ways– will it be a bailout, and lose money, or will it fail in its purported mission, and make a profit?  (This is politics– it’ll lose money.)

But after all, there’s no other choice right?  Without money and credit created out of nothing so that we have exponentially expanding debt as a stable base for the economy, and a congress to direct it all, there’d clearly be no economic activity at all.  We’d all sit on our butts, suffering C-Span withdrawals– building, creating and doing nothing.

The few lonely voices who predicted this credit collapse years ago, are now even more lonely.  Jim Rogers and Peter Schiff, for example, say that doing nothing is indeed an option– the best of a lot of bad options.  American T.V. bookings for them appear to have actually gone down.

Producers had booked them in the past to keep panel discussions lively.  It wasn’t possible that they could actually be right (they were saying bad things about Wall Street and government).  Now it’s either too embarrassing or too scary to invite them back.  The expanded crisis coverage is dominated instead by those analysts who, with stunning brain-deadness, were forecasting even two months ago that there wouldn’t be a recession.  By and large it’s these incorrect forecasters now demanding our attention again to tell us “there’s no other choice”.

The old saw that if you’re in a hole, the first thing is to stop digging, can’t be heard over the sound of turning shovels. Congress will manage to stagger into some sort of active crisis role.  A bad bailout package is unlikely to be their last effort to throw sand in the gears, but they can always unload their failures on “the free market” (which they badly and intensively regulate).

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

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 – themaestrosrep.org

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 – themaestrosrep.org

Bernanke Can’t Do It Alone

Tuesday, July 15th, 2008

Ben Bernanke will testify for Congress this week, and they’ll ask him tough questions.

Bernanke isn’t my vote as witness most likely to turn into Al Pacino and start screaming, but it sure would be nice if that, or some other trigger could make us step back and look at the economy from scratch. Congress in particular could use a long look in the mirror. (Presumably an undertaking that would not end in a mass puke, unless it’s somewhere provided in rules and precedents.)

The free market (the concept, not the CEO’s) should get a pass, for a simple reason– there isn’t one. I’m not sure how many Volkswagen Beetles it would take to hold in printed form all the federal and state laws, regulations, interpretations and rulings that the financial industry is constructed from (along with government debt), but I’d bet it’s more than one. It’s a free market only when compared to Lenin’s tomb.

The Federal Reserve and Chairman Bernanke in contrast, deserve the grilling Bernanke will get– but are they the most deserving?

There’s a fuzzy, wish fulfillment theory that the federal deficit doesn’t matter– or at least doesn’t make the top five– a rare but unfortunate instance of functioning nonpartisan agreement.

A deficit with a constant rate of growth somewhere near the growth rate of the economy may or may not matter, but a deficit with an accelerating rate of growth in a shrinking economy in a country that doesn’t care is likely to matter a lot. As in any overly creative household that starts with wealthy foundations, it could take some time for the mattering to become a matter of clear unrestrainable fact.

Although to me Federal Reserve mandates don’t make sense, in postulating for the moment that the mandates are meetable, I’d suggest the Fed can no longer fulfill them anyway in the face of our quietly obscene fiscal laxity. The Fed can’t realistically be independent of size and demand at Treasury auctions for long (like decades, for example).

If Ben Bernanke decides it’s best to minimize his support for the Treasury, the potential scope of his “independence” is already determined– relating to what’s already on the fiscal plate– perhaps not exactly like a child who defies a parental directive to clean his plate by leaving one spoonful of peas disguised in dispersion, but not exactly unlike it either. The Fed can monetize, it can let interest rates soar, or in the end maybe both. That’s not exactly superhero omnipotence.

Laurence Gonzales in his book Deep Survival, titles a chapter on being lost “Bending The Map”. When we’re lost, our identity itself instinctively comes into question, making us prone to panics of emotive self-delusion, with a bias for quickly moving forward and thoughtless repetition, not for backtracking or stopping to think. The bending the map metaphor for human reaction to being lost is also a good metaphor for our mental map of the Fed.

The Federal Reserve is both blamed for the current economy, and widely expected to be the instrument of a rapid and happy emergence into the sunlit clearing. That the Federal Reserve is a small, secretive planning committee that’s thought of as consistent with “free markets”, while the committee’s deliberate creation of fluctuations and unpredictability are parsed and rationalized as clever policy, is the ultimate, deluded, century long “map bend”.

The scary part of the bending the map metaphor is what it implies for the future. It should be clear that we’re thrashing around in the forest, thoughtlessly repeating mistakes– looking for the Federal Reserve to solve problems that it’s far more likely to cause. But in translating the lost person bias to a lost society bias, it implies that to question central banking as a foundation of the economy (and so in a sense, human life itself), will be like questioning our future existence– and not with a cheery camaraderie while sitting by the campfire with a cooler of beer, but while lost and weakened and under stress.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org

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 – themaestrosrep.org