Posts Tagged ‘Ben Bernanke’

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 –

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 –

Painful Opportunity

Friday, August 22nd, 2008


The home page of the Fed says, “The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible and stable monetary and financial system.”

So you can’t say bankers don’t have a sense of humor.

However, in a more “normal” cycle, most people wouldn’t see the joke. Usually, the economy’s actors are too busy getting paid off by apparent short term benefits of fractional reserve banking for any mainstream attention to the system’s contradictions and historical failings. That’s one bright spot today in otherwise dark times– a spotlight on the Federal Reserve System while many of its defenders may be feeling ridiculous (and broke).

Economist Jesús Huerta de Soto traces the historical beginnings of fractional reserve banking to exactly that key “buying off” point where government and banks saw opportunity in partnership:

“At first the bankers did this [reduce reserves below 100% on demand deposits] guiltily and in secret, since they were still aware of the wrongful nature of their actions. Only later when they obtained the government privilege of making personal use of their depositors’ money (generally in the form of loans, which at first were often granted to government itself), did they gain permission to openly and legally violate the principle. The legal orchestration of the privilege is clumsy and usually takes the form of a simple administrative provision authorizing only bankers to maintain a reduced reserve ratio. This marks the beginning of a now traditional relationship of complicity and symbiosis between government and banks… by sacrificing traditional legal principles they could take part in an extremely lucrative financial activity…”As in any corrupt system, some of the lucrativeness needs to be shared to establish and maintain a critical mass of support.  Academics in their turn are paid off to think and promote happy, status quo thoughts (or even angry, pseudo anti-establishment status quo thoughts).  No soul searching required, since for any but the most critical thinkers who happen to be thinking about critical pieces, there’s lots of latitude for intellectual self-accommodation.  An economist for example, can say that populist programs are too big, or one is better than another; it’s only when the economist says that the whole system and the rabbit hole it rode in on is absurd that he or she will be largely cast out from opportunities touched by government or banking, (which in a kind of six degrees of Ben Bernanke, is most of them). 

With this support (and as slightly more widely noted and decried), the purchase of complacency with debt continues through the economy, in government programs, contracts, loans, speculative opportunities and tax policies, where (almost) all actors, big and small, at least appear to get their share of something for nothing.  Lately there are some folks saying “Hey, Wall Street and banks are getting special treatment!”  That’s also rather droll.  But a person ready to see that much may be a step or two from seeing that the Federal Reserve was indeed built from special treatment, among other unsavory qualities.

I recently read an article by financial analyst John Rubino at, (Time to Start Honing the Message), which I found inspiring even as it pointed out a problem: critics of money and banking have gotten used to mainstream society ignoring or even scoffing at their message.

It’s not easy to keep going when explanations of your economic worldview only cause people to call you a crackpot. To make matters worse (or at least mixed from a memetic persistency point of view), the three dimensional economic worldview of the “crackpots” quietly makes money, while the one and two dimensional views of the crackpot critics is causing them to be rather entertainingly stunned by events over and over again.

To me, this opportunity is starting to feel irresistible. It’s more melodramatic and more insulting than I’m comfortable with, but I’m finding the metaphor also hard to resist: for the moment, the lights are on and the cockroaches are scurrying. The bugs in fractional reserve banking and fiat currency systems are as nakedly apparent as they ever get. But if the past is a rough guide (as it generally is), then with even a weak recovery, myths of how we got in and out of the extra deep cycle will start to set, if not sufficiently impeded.

Rubino warns that populism will be speaking loudly, and also puts the coming battle he sees in stark terms: a fight to avoid living in a dictatorship.

So in view of the above and for my own modest anti-dictatorial contribution, I intend to be better prepared for dialogue (assuming I haven’t become too geeky to be in any social settings). When someone says, “I can’t put gas in my car anymore”, or “That’s odd, trading in my bank’s stock has been halted at sixty-three cents”, I’ll forgo the smartass comment and attempt a non-patronizing, cheerful (or as appropriate, commiserative), discussion of first principles.

I intend to keep to this plan until my mother (the probable last holdout) starts calling me a crackpot, or my social calendar is permanently buried. (I hope I don’t have to report back for at least a few days.)

By Les Lafave

Banking Reform –

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 –

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 –