The Myth of Bernanke’s Money Helicopter

From NetRightNation.com

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.

Advertisements

Is this the top ten most influential economists of all time?

Opposing Views put this out. I thought I would see what everyone thought:

10) John Locke – A pioneer in discussing the accumulation of private property (within God’s laws) in the mid 1600’s.

9) David Ricardo – Major writer in the early 1800’s on free trade (specialization and comparative advantage) and the rise of capitalism.

8) Irving Fisher – An American monetarist in the first half of the twentieth century, wrote ‘The Debt-Deflation Theory of Great Depressions’ in 1933, also wrote ‘The Theory of Interest’.

7) Joseph Schumpeter – Austrian economist specializing in business cycle theory, wrote ‘Business Cycles’ in 1939.

6) Friedrich A. Hayek – Member of the modern Austrian school, along with Ludwig von Mises, defenders of democracy and free-markets against socialist thought in the mid-twentieth century. Best books: The Road to Serfdom (Hayek, 1944) and Human Action (Mises, 1949).

5) Alan Greenspan – A pioneer in macro-economic modeling and forecasting, also a pretty good FED Chairman for almost two decades.

4) Milton Friedman – Recently deceased, modern day monetarist. A staunch defender of free markets and limited government intervention, he will be missed.

3) Karl Marx – Father of socialist economics. Very influential from mid-1800’s to mid-1900’s, but losing steam today.

2) John M. Keynes – Father of Keynesian economics. He introduced modern macro-economics in both theory and policy to the world. Keynes died in 1946, but is still intensely debated today.

1) Adam Smith – Revolutionized economics by writing ‘The Wealth of Nations’ in 1776. He is still revered today as father of economics, political economist and moral philosopher. Smith taught that pursuit of individual self-interest acts as an invisible hand to contribute to the common good. My hero!”

Now, of course, talking influential this is probably a very good list. I would imagine that if this is ranked by most compared to least. If this is true, I would imagine Smith would be much lower. Keynes would probably be number one next to Marx. If it was true that Adam Smith was more influential and Milton Friedman was number four, you would imagine our world would be more classically liberal than it is now. I wish it was the case that the most influential was Smith, Hayek, Mises, and Friedman.

This is a good thought in mind, when we think about who to read. Everyone should probably read at least 5 of the above, whether they agree or disagree and explore those thoughts. Of course, beware Greenspan is very different then the stuff he wrote with Ayn Rand.

~PCCapitalist

Obama’s Keynesian Economic Plan: More Spending and Tax Cuts

John Keynes still lives strong in Economics, it seems lately. His idea is that in order to get out of a recession, you must increase government spending and run a deficit for a little while. This would stimulate aggregate demand, which is the same as when you heard stimulating consumer spending. Barack Obama’s economic advisors have came and out said that Obama will increase government spending and lower taxes. The Financial Times has it here:

“The Obama economic team is reportedly considering a plan in the $675bn-$775bn (£462bn- £531bn) range, but some analysts believe the ultimate size of the stimulus will be $850bn or more.

Mr Summers said Barack Obama, the president-elect, faced “what may well be the bleakest economic outlook since world war II.” He cited estimates that unemployment could reach 10 per cent next year, with an output gap between demand and potential supply of $1,000bn – about 7 per cent of gross domestic product.

But Mr Summers rejected calls to “focus exclusively on short-term policies that generate consumer spending” – saying “that approach led to some of the challenges we face today.”

We are already in a major deficit and you have to have a balanced budget in order to do what Keynes prescribed, if you assume it works. Milton Friedman and others have proven that this is not the best policy but that doesn’t stop policy makers from trying. This only works in the short-term and in the long-term it doesn’t do much. In the short-term, it boosts consumer spending and lower unemployment. Monetary policy was the prescription Friedman created after Keynes to pretty much the same thing.

This has been the goal of all government policies is to keep inflation and unemployment low, while keeping consumer spending high. This can not be sustained forever and people will have to come down. This is what this period is known as. It may hurt now but it will help in the long term. The right government policy is to deregulate and cut spending to get closer to balancing the budget.

The more debt we bring upon ourselves the more future taxes we impose upon ourselves. We cannot even return to a balance budget after fiscally stimulating, which is a huge problem in Keynes’ reasoning.

The rest is here.

~PCCapitalist

Published in: on December 31, 2008 at 4:50 pm  Comments (1)  
Tags: , , , , ,

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.

~PCCapitalist

Economics: What is more important data or theory?

A professor once explained to me that those who come up with the best theories are those that are remembered well after they are dead. The problem is, is that they aren’t found until they are dead. If in Economics, you want to be famous in the short-term, then do a well researched paper full of date. This begins the question of which is better?

People like Milton Friedman do both and maybe a hybrid version is best. F.A. Hayek and Adam Smith are mostly theory as far as I can tell. Current books with famous economists like Steven Levitt give great paper with data. But will we remember the abortion vs. crime debate or the more police = more crime?

So as I hopefully continue my career in Economics after this semester should I focus on theory or data? I am naturally better at coming up with fun theories and learning new ones. Those are my thoughts so far this weekend.

~PCCapitalist

Published in: on August 31, 2008 at 6:10 pm  Comments (1)  
Tags: , , , , ,

Inflation Can Haunt You, Pun Intended…

This is a great story from Asia. It helps us remember what Milton Friedman worked so hard for. That was for governments to lower inflation. People often think that any rise in price is inflation. Inflation is nothing but a monetary phenomenon and to normal citizens, it means that it is just the amount of money that the government prints. Most try to print as much as they grow, if they print more than they grow the more we have inflation. Now to the story:

“August is the month when Buddhists provide the hungry ghosts of the dead with food and wine and cigarettes and paper offerings that represent the good things in life – cars, houses, motorbikes, stereo sets, fancy suits of clothes.

But like everything else in Vietnam, these brightly colored offerings have risen steeply in price and shopkeepers say people are buying fewer gifts to burn for the dead than ever before.

With inflation rising to 27 percent last month – the highest in Asia – and food prices rising to 74 percent above those a year earlier, Vietnam is suffering its first serious downturn since it moved from a command economy to an open market nearly two decades ago.”

The only thing that can cure inflation is to stop printing money. This is hard for governments because they can use the money to buy things to help themselves or their people and not feel the effects immediately of throwing that money in.

The rest of the story is here.

~PCCapitalist

Published in: on August 21, 2008 at 9:28 pm  Leave a Comment  
Tags: , , , ,

Happy Birthday Milton Friedman

Today is the 96th birthday of Milton Friedman who passed away in 2006. I remember vividly his passing as I was begining to really get into economics when he did. I heard of him but had no clue what he contributed. Now I know what a great man he was. I highly recommend the book “Milton Friedman: A Biography” by Lanny Ebstein. This book truely gives a perspective of who is was and what he contributed. There is always of course his own work, which can be found in “Capitalism and Freedom” and “Money Mischief.” Both I have read and both excellent. The first one is more for the normal person. The second is more for the economist or someone who loves all things monetary.

This is what the Cato Institute had to say:

“Prominent free-market economist Milton Friedman, recipient of the 1976 Nobel Prize for Economic Science, passed away on November 16, 2006 at the age of 94. Friedman was widely regarded as the leader of the Chicago School of monetary economics, which stresses the importance of the quantity of money as an instrument of government policy and as a determinant of business cycles and inflation. In addition to his scientific work, Friedman also wrote extensively on public policy, always with primary emphasis on the preservation and extension of individual freedom. Friedman’s ideas on economic freedom hugely influenced both the Reagan administration and the Thatcher government in the early 1980s, revolutionized establishment economic thinking across the globe, and have been employed extensively by emerging economies for decades.”

I think as we all think about where the world and our country is going, we should not forget the science behind Dr. Friedman. We were lucky enough to have his knowledge given to us through books and papers.

So Happy Birthday Milton Friedman and let us not forget what you stood for…

~PCCapitalist

Published in: on July 31, 2008 at 10:08 pm  Comments (1)  
Tags: , ,

Book Review: Money Mischief: Episodes in Monetary History

Since the passing of Milton Friedman, I have worried that his pro-Capitalistic rhetoric and all he was able to achieve would melt away. Of course, it is too soon to be able to understand whether this will happen or not. To continue my education from the great Milton Friedman, I read “Money Mischief: Episodes in Monetary History” by him.

For those of you who wish that they took a class in macroeconomics in college or maybe are just interested in money this is a must read. For all others, they may find it hard to get through.

Friedman does a great job of covering topics like the Gold Standard, the Silver Standard/movement, bimetallism, the change to a fiat currency, pegging currencies, and inflation. When I studied macroeconomics, I felt like much of my education in money was incomplete. This book completed it. This book can get overly technical for the non-economist at times but learning about monetary systems is technical within itself.

I highly recommend this book and the continuing education of what Dr. Friedman has done for the current state of economic policy in the world. The one topic that Friedman covers that I think is important is the Silver movement. Most people learn about this movement in high school and the Wizard of Oz is based off of it.

My absolute favorite quote from the book was,

“As a result, the U.S. silver purchase program must be regarded as having contributed, if perhaps only modestly, to the success of the communist revolution in China.”

9/10

~PCCapitalist

Published in: on July 26, 2008 at 4:33 pm  Comments (2)  
Tags: , , ,

Oh No, Israel indirectly gets oil from Iran!

The Jerusalem Post is reporting that Israel cannot be sure that it is not receiving oil from Iran. Here are their words:

“Having adamantly denied for months that Israel could possibly be purchasing any oil originating in Iran, an Israeli official has now acknowledged that the Jewish state cannot be sure that Iranian oil is not coming here indirectly, and a former Israeli energy minister has told The Jerusalem Post that Iranian oil may have been imported indirectly for years and that he would have readily authorized such purchases himself.”

Trade fosters peace, why are people worried about this? If Iran decided to bomb Israel they would be taking out it’s own costumer.

This is my favorite part:

“In my time, people came to me and said we had the opportunity to buy oil from all kinds of exotic locations – including Libyan oil or Syrian oil – countries with whom we obviously don’t have normal relations,” said former Labor MK Shahal, now a lawyer in Tel Aviv. “I approved those purchases, because it was good oil, and it wasn’t coming directly from the governments of those countries, but from private sellers on the free market.”

Mr. Shahal somewhat understands economics because he knows that if he were to try to deny oil from Iran it would just be costly and only raise the price. This wouldn’t even do a thing to Iran because they could easily find another buyer. Trade = Peace, but don’t believe me believe Milton Friedman:

~PCCapitalist
Published in: on June 18, 2008 at 6:03 pm  Comments (3)  
Tags: , , ,