The Ongoing Presidential Policy of Inflation

In every major United States presidential election until the early 1990’s, monetary policy was a major hot button issue. And believe it or not it even captured the popular fancy. For example, The Wizard of Oz written by L. Frank Baum, a populist sympathizer, portrayed the struggles of the movement to add silver to the American currency in his book with metaphors and symbols.

But what most people do not know is that this movement was actually fomented by a group of people who simply owed a lot of money and decided to lobby for a policy of inflation.

As a result, the Federal Reserve Act of 1913 actually began a new era of monetary policy in the United States with one primary motivation in mind: controlling inflation. The politicians, conniving as usual, had figured out an easy way to finance their debt… the printing press.

So those who wanted to rein in the recklessness decided that by making the Federal Reserve independent from Congress, they could prevent skyrocketing inflation. But, as so often occur with “the best laid plans of mice and men,” what actually happened was an inflationary credit boom that created the “roaring twenties” and a bust which the world coined “the Great Depression.”

Now if you think this sounds familiar to the current financial crisis with the housing boom and bust, you are not alone. Nor are you observing an exception to the rule.

The Federal Reserve, since it’s founding, has fostered a constant uncontrollable policy of inflation. But since they claim that they are independent, they insist that the inflation is not due to political pressures.

This, of course, is completely false.

Economist Thomas DiLorenzo finds that the Federal Reserve board has been little more than the President’s handmaiden time and time again. For example, when President Jimmy Carter wanted a strong growth in the money supply to further social welfare programs, Americans saw a jump in inflation to 8.5 per cent. Later, Ronald Reagan, wanted to stop Carter’s damaging policies and stabilize the American economy. He called in newly appointed Fed Chair Paul Volcker. And lo and behold, the “independent” Fed reversed its policies.

So, if the Federal Reserve gives in to the pressures of the President, then why is it that mainstream scholars believe that the Fed is independent? Well, the confusion begins at the divide between instrumental versus goal independence.

It’s true that the Federal Reserve has the independence to set day-to-day monetary policy without any interference, which is called instrumental independence. But the President can heavily influence and direct the goals of monetary policy, thereby making the instrumental independence worthless.

The President does this by exercising his powers of appointing the members to the Board of Governors. This board is comprised of the most powerful players in the Federal Reserve. With only five of the seven positions filled, President Obama now holds an enormous amount of power because he could add two votes to an already small board, making the current members less powerful and insisting his own appointee further his political goals.

Already, with the massive new amounts of spending, there is no doubt that Obama has been leaning on the Fed Chairman Ben Bernanke to help finance all of the new bailouts and outright spending sprees to pay the debt.

The argument is that the United States needs to provide liquidity, or more cash, to the banks so that they can continue lending out money. What is going to inevitably occur, of course, is another boom period followed by a catastrophic bust.

All the while, the American people sit in the dark, while their money is being continually devalued by the Federal Reserve’s printing press, which will cause an artificial unsustainable boom and allow Obama to claim to be economic savior. Then, when the massive bubble eventually—inevitably—bursts, Obama will be either out of office, or (particularly if the mainstream media shameless idolatry continues) simply out of reach.

Perhaps, the last best hope for preventing all of this is the passage of H.R. 1207. The bill now gathering growing support in Congress to audit the Fed already has a staggering 227 supporters. If it reaches 300, Nancy Pelosi will certainly have to hold a vote.

And the beleaguered American people—victims of the “independent” Fed’s obstinacy for well nigh a full century—will finally have a prayer.

Justin Williams is a Contributing Editor of ALG News Bureau.

The Myth of Bernanke’s Money Helicopter


When the Federal Reserve Chairman Ben Bernanke spoke at famed economist Milton Friedman’s ninetieth birthday, he praised the Nobel laureate for his work on the “permanent-income theory of consumer spending.” This seemed to demonstrate that he understood consumer spending was not dependant on current income, but instead was influenced by future expectations. But that was then and times change.

Earlier this year, Chairman Bernanke did a complete about face when he supported Congress’ efforts to plunge the United States into more debt in the name of a fiscal stimulus. Bernanke 2.0 said he believed that because of the strong likelihood that there would be an economic slowdown, “…consideration of a fiscal package by the Congress at this juncture seems appropriate.” So much for the Fed Chair’s monetarist root or at least so it seems. Fortunately, there is more to the story.

Chairman Bernanke 3.0 has now begun to denounce the massive government spending, doing a highly adept fiscal two-step. Bernanke now states that the United States “…cannot allow ourselves to be in a situation where the debt continues to rise; that means more and more interest payments, which then swell the deficit, which leads to an unsustainable situation.”

Yet through it all, while Bernanke spends time bouncing back and forth between Keynesianism and Monetarism, he completely misses the real problem, one for which he is directly responsible.

The Federal Reserve is currently using monetary policy to try to stimulate the economy, while the Congress is trying to use deficit spending, also known as fiscal stimulus, to stimulate the economy. The two now are apparently fighting over which they think would be most effective. What they do not realize is that the real solution is neither.

As Friedman showed in much of his work, “crowding-out” prevents a fiscal stimulus bill from ever being effective. “Crowding-out” means that since the government can only raise money from debt or taxes, all Congress is doing is uselessly moving money around.

Raising taxes to fiscally stimulate would just cause private sector spending to decrease, as they have less disposable income. Debt financed stimulus, which is what Congress has been doing, causes interest rates to rise thus making it harder for new private investment to sprout up. In other words, this debt actually causes the banks to be more hesitant to gives out loans, thus exacerbating the current financial problem.

Where the monetarists, like Friedman and Bernanke, went wrong is supporting monetary policy as a safe alternative. They believed in printing money during a recession in order to prevent a contraction in the money supply, which is what they attribute as the primary cause of the Great Depression. Their reasoning (unsound as it may be) is that, unlike a fiscal stimulus, the newly printed money would be evenly distributed inside the economy.

This “Helicopter Effect” is supposed to give people the comforting vision of the Federal Reserve flying over the country throwing free money out the window, thus saving us from an economic downturn. This way the money would not discriminately go to special interests and everyone would be health, wealthy, and though certainly not wise enough to know they were being duped.

Granted it sounds good in touchy-feely theory. Unfortunately, it is poppycock, flapdoodle, and unmitigated balderdash in raw fact.

The Austrian School of Economics exposes this myth for what it is. Ludwig von Mises and Murray Rothbard both crushed this theory and show that the helicopter ends up being just as discriminatory as other politically mattered hijinks. Rothbard, in The Case Against the Fed, states that the Fed printing money is “…a process of transmitting new money from one pocket to another, and not the result of a magical and equiproportionate expansion of money in everyone’s pocket simultaneously.”

In the current financial crisis, the Fed caters to a clearly exclusive club that receives the money: mostly the big banks. Now with the threat of nationalization and massive governmental controls on the banks, the bankers will have no choice but to loan the new money out to whomever they are told to by the bureaucrats. And the bureaucrats, in turn, will favor those that are in the good graces of their political paymasters.

Now with the Fed being responsible for more than $7.76 trillion of financial “rescues” over the past 22 months, the chance of handing out that money indiscriminately is patently absurd. Men, after all, are not angels. Yet, thanks to the many government laws barring auditors from the Fed’s books, the American people (as well as their representatives in Congress) are unable to check and see if these discriminatory practices really do go on.

The Government Accounting Office cannot audit the Federal Reserve’s transactions with foreign governments and banks, transactions made by the Federal Open Market Committee, and they cannot even look at the discussions of major policy decisions. The Fed’s reserve banks have argued that they are private institutions, beyond the reach of any action including the Freedom of Information Act (FOIA). The Board of Governors simply refuses to comply, stating they are allowed to withhold “internal” memos as well as commercial and trade secrets information

In short, the Fed’s message to the American people is even worse than “give us your money—or else.” It’s simply “give us your money and there is no else.” Not even an “elsewhere”—since no other agency anywhere else in government has to power to rein in the Federal Reserve autocrats.

That is why Congress needs now to pass the bill to audit the Federal Reserve, their Board of Governors, and the Reserve Banks that was proposed on February 26th by Congressman Ron Paul. Since then it has gained 186 cosponsors, including 36 Democrats and 150 Republicans, and this number needs to continue to grow to ensure passage.

Without these audits, Chairman Bernanke and his Board will continue to pretend that they have some magical money helicopter that will indiscriminately hand out these newly printed fiat bills. And the once-respected “permanent income theory of consumer spending” will continue to give rapid way to the “eternal fact of Federal Reserve autocracy.”

Justin Williams is a Contributing Editor of ALG News Bureau.

Give Bernanke Credit—For Chutzpah by Robert Higgs

Today’s article of the day comes from the Independent Institute:

In my mind’s eye, I envision a street fair—one of those happy community gatherings at which sellers of handcrafted ceramics, funky clothing, herbal remedies, fresh vegetables, and edible delicacies congregate to display their wares for the strolling customers, who chat amiably with the stall-keepers and with one another. Suddenly, amid horrified shrieks and the roar of a giant engine, a truck plows through this placid setting, scattering twisted debris and broken bodies in its wake. Finally, after wreaking a hundred-yard swath of death and devastation, the truck stops, and the driver, Ben Bernanke, climbs down from the cab.

“People, people,” he exhorts them in a calm, world-weary voice, “do not panic. I am here to assess the damage and make recommendations for reforms that will prevent a recurrence of this unfortunate and wholly unforeseen act of God.” Whereupon he proceeds to lay out his assessment and recommendations, always speaking in the same quiet, unemotional voice. The stunned and wounded survivors gaze at him in astonishment. “He’s a madman,” one cries out.

Undismayed by the swelling chorus of curses and the groans of the injured, the truck driver addresses the gathering crowd of stunned onlookers. “We must have a strategy that regulates the street-fair system as a whole . . . not just its individual components.” He then methodically lays out a series of recommendations for strengthening the construction materials of stalls and regulating their placement along the street, for ensuring that each transient merchant have an adequate capital cushion against such crises, for monitoring fruitmongers and hippy artists deemed “too big to fail,” to keep them from taking excessive risk. He proposes that the city council consider new ordinances to require that wooden crafts such a birdhouses be made sturdier and to establish a “limited system of insurance” to protect against customer runs on the most daring drug-paraphernalia sellers.

“Moreover,” he continues, “street fairs are too important to be left for each town to regulate on an ad hoc basis.” He proposes that the rules be harmonized among the mayors of all the world’s great cities and that a global street-fair authority be created to monitor street-fair risks and protect the people from accidents such as the one that has just occurred. Listeners look on in amazement, their mouths agape. (more…)

The Fed Creating Another Bubble



Published in: on December 20, 2008 at 1:43 pm  Leave a Comment  
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Bernanke’s Secret Bailout

This from

“Nov. 10 (Bloomberg) — The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.”

This is a huge problem. An impeachable problem, except we cannot impeach a Fed Chairman or a Secretary in a Presidential administration. This is a complete outrage. It is our money and we should be told where it is going. At least when the U.S. Congress wastes are money they aren’t doing it behind my back.

(HT: Reason Hit & Run)


Published in: on November 10, 2008 at 7:44 pm  Leave a Comment  
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Friedman Co-Author Schwartz on the Crisis

Most people do not know Anna Schwartz but she is the Co-Author with the famous Economist Milton Friedman called “The Monetary History of the United States 1867 – 1961.” This book has been very popular inside and out of economics. In fact, the current Fed Chairman believes that it is one of the greatest books written. Now that Friedman has passed away this leaves Schwartz to be the expert that people should be listening to in this crisis situation. On this blog, I have been crying that we shouldn’t bail these banks out and they should fail. Mrs. Schwartz agrees here at The Wall Street Journal:

“Rather, “firms that made wrong decisions should fail,” she says bluntly. “You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich.” The trouble is, “that’s not the way the world has been going in recent years.”

It isn’t like I am a genius this is a simple, let them fail argument. It is how life works and it isn’t even Darwinist. It is simple those who make bad decisions should have to pay for those bad decisions. We learn this lesson as children and it shouldn’t change. Of course, the next argument is children are different than the financial institution, which would hurt us if the failed. Schwartz has great stuff to say about this too:

“Ms. Schwartz doesn’t buy it. “It’s very easy when you’re a market participant,” she notes with a smile, “to claim that you shouldn’t shut down a firm that’s in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that’s their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn’t have to save them, just as it didn’t save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what’s been going on.”

Next she basically claims the Austrian Business Cycle as the winner. You can find an explanation here and here from me:

“The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.”

If she can figure it out then why can’t the Fed Chairman. She is the number one person to call in a situation like this. The Fed Chairman actually gave a speech on Milton Friedman’s 90th Birthday and this is what he said: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

So why doesn’t he follow this? The rest is here.


Economic Stimulus Round 2

President Bush was grilled today on the current state of economic affairs, during which he was asked if any further federal aid packages were in the works. Bush did not commit to anything solid, but agreed with the idea of a second wave of artificial stimulus in order to boost the economic conditions.

Bush was essentially backing the proposition of Fed Chair Ben Bernanke; to alleviate the economic situation with another dose of “fiscal aid”. What is unclear at this point, is whether the notion will materialize, and what exactly Bush and Bernanke are talking about.

This is a bit unfortunate, as the Bush administration has been continuously resisting the demands of Democrats to offer a second wave of stimulus checks to taxpayers. This resistance has been one saving grace on the part of the administration, that no seems threatened.

If the Fed does release another round of checks, that’s just one more blow to our already hurt economy. Bush has been frequently denying the release of additional checks, but he may offer some alternative source of “economic relief”. Either way, if any significant action is done by the federal government in the name of economic stimulation, it simply can’t be good news.


Published in: on October 20, 2008 at 6:54 pm  Leave a Comment  
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Ron Paul vs. Ben Bernanke

Supposedly, Fed Chairman Ben Bernanke is an expert about the Great Depression. I even own his book on the Depression. I bought it a long time ago and haven’t read it again. Ron Paul decides to school him on Austrian Economics. Here it is: