The triumvirate of fools at the US Federal Reserve Bank, US Treasury and Federal Deposit Insurance Corporation (FDIC) have abandoned any idea of a limited bailout for depositors in the two recently failed  banks, explains Thos Bishop in this Guest Post. Apparently there is now a new standard just made up by the banking bureaucrats: Too Mid-Size to Fail.
Welcome to the new economic paradigm where laws are broken, the rules are made up and the dollars don’t matter....

A Bank Crisis Was Predictable. Was the Fed Lying or Blind?

by Thos Bishop

Welcome to Whose Economy Is It, Anyway?, where the rules are made up and the dollars don’t matter. Or at least that seems to be the view of the Yellen/Powell regime.

As Doug French noted last week, Silicon Valley Bank (SVB) was the canary in the coal mine. Over the weekend, Signature Bank became the third-largest bank failure in modern history, just weeks after both firms were given a stamp of approval by KPMG, one of the Big Four auditing firms.

While some in the crypto community are suggesting that the closure of Signature Bank has more to do with a larger war on crypto, the regulatory action was enough to push coordinated action from the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Treasury to do what they do best, ignore clearly established rules to flood a financial crisis with liquidity.

Out: FDIC insurance limits on bank deposits lower than $250,000, haircuts for the largest bank depositors, and Walter Bagehot’s golden rule to lenders of last resort, “Lend freely, at a high rate of interest, against good collateral.” In: emergency financing to secure all deposits, accepting collateral at face value (rather than its current diminished market value) with no fee.

Don’t worry, the government promises this is only a year-long programme. It definitely won’t become a standing policy. They promise.

It is poetic that Barney Frank was serving as the director of Signature Bank at the time of its capture. This emergency action from the feds signals the failure of Frank’s key legislative accomplishment, the 2010 Dodd-Frank Act. The bill designated large financial institutions as “systemically important financial institutions,” with an additional layer of regulatory scrutiny as a means to end “too big to fail.”

Instead, the bill consolidated community banks into larger regional banks and empowered financial regulators that have now proven to be blind to the underlying risks of the banks. After all, it was state bank regulators, not the feds, that raised the flag on both SVB and Signature. Meanwhile, the hyper-fragile environment of the post-2008 financial crisis has created an environment where most financial institutions are treated as too big to fail, with no one too small to bear the costs.

Federal bank regulators and KPMG auditors aren’t the only ones blind to the underlying problems facing these large regional banking institutions. Just last week, Jerome Powell said that he saw no systemic risk in the banking sector from the Fed’s aggressive rise in interest rates and signaled confidence that they would continue in the near future. Less than a week later, few buy Powell’s projection.

While Powell deserves a level of credit for his willingness to take inflation risks more seriously than many of his peers, the instability we’re witnessing was predictable. As is repeated regularly on the Mises Wire, the decade-plus reign of low interest rates didn’t only incentivize financial risk but necessitated it. The benefactors were tech firms, the real estate market, and a variety of other financial markets. The consequence has been corporate consolidation and the creation of numerous overly leveraged, unprofitable zombie companies that depend upon refinancing at low interest rates to function. The Fed’s rising interest rates have always been a threat to these parts of the economy.

In defense of Powell, lying about the state of the economy is a necessary part of the modern financial system. Regardless of one’s opinion about the virtues of free banking, state intervention has created a fractional reserve banking system saturated with risk and moral hazard. Since no bank is equipped to deal with a significant increase in demand for deposits, even relatively conservative banks can be brought down by a confidence crisis fueled by the instantaneous communication of social media.

The Feds have signalled a bailout for all because everyone is at risk.

It doesn’t have to be this way. Caitlin Long has been fighting the financial regime for years in her quest to create Custodia Bank, a full-reserve bitcoin bank in Wyoming. There has been a coordinated attempt to stop her efforts, ironically including voicing concerns that Custodia could fuel “systemic risk.” Honk honk. [And despite all the interest-rate chicanery and money-printing Keith Weiner continues his efforts at Monetary Metals to remind everyone that the ultimate money is still a precious metal.]

The short-term question is whether the efforts of the Fed and the Treasury are enough to prop up confidence and prevent escalating pressure on financial institutions. However, these are not solutions to the underlying systemic problems that these bodies have created.

Unfortunately, the consequence of the complete politicisation of the economy is that financial policies are necessarily focused on the short term at the expense of the long term.

There is no serious solution until there is the political will to deal with our monetary hedonism.

Author: Tho Bishop
Tho is an assistant editor for the Mises Wire, and can assist with questions from the press. Prior to working for the Mises Institute, he served as Deputy Communications Director for the House Financial Services Committee. His articles have been featured in 'The Federalist,' the 'Daily Caller,' and 'Business Insider.'

His post first appeared at the Mises Wire.

How the Central Bank's Easy Money Killed Silicon Valley Bank [updated]

 

The second-largest collapse of a bank in recent history would not have existed if not for ultra-loose monetary policy, as Daniel Lacalle explains in this Guest Post. SVB made one big mistake: follow exactly the incentives created by the central bank's loose monetary policy and banking regulations: its lending and asset base read like the clearest example of the old mantra “Don’t fight the Fed.”
[Since this piece was written, of course, we've had the disgraceful announcement by the dumbarse in the White House and from the former Fed chair who helped blow up the tech bubble, of what is effectively a bailout-to-infinity for depositors. UPDATE: David Stockman, Reagan's former Budget Director, calls it A Bailout Most Crooked. "They have done it again [he comments], and in a way that makes a flaming mockery of both honest market economics and the so-called rule of law. In effect, the triumvirate of fools at the Fed, Treasury and FDIC have essentially guaranteed $9 trillion of uninsured bank deposits with no legislative mandate and no capital."]

How the Central Bank's Easy Money Killed Silicon Valley Bank

by Daniel Lacalle

THE SECOND-LARGEST COLLAPSE of a bank in recent history (after Lehman Brothers in 2008)  could have been prevented. Now the impact is too large, and the contagion risk is difficult to measure.

The demise of the Silicon Valley Bank (SVB) is a classic bank run driven by a liquidity event, but the important lesson for everyone is that the enormity of the unrealised losses and the financial hole in the bank’s accounts would not have existed if not for ultra-loose monetary policy. Let me explain why.

According to their public accounts, as of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. Their top shareholders are Vanguard Group (11.3 percent), BlackRock (8.1 percent), StateStreet (5.2 percent) and the Swedish pension fund Alecta (4.5 percent).

The incredible growth and success of SVB could not have happened without negative rates, ultra-loose monetary policy, and the tech bubble that burst in 2022. Furthermore, the bank’s liquidity event could not have happened without the regulatory and monetary policy incentives to accumulate sovereign debt and mortgage-backed securities (MBS).

Silicon Valley Bank’s asset base read like the clearest example of the old mantra “Don’t fight the Fed.” Silicon Valley Bank made one big mistake: follow exactly the incentives created by loose monetary policy and regulation.

WHAT HAPPENED IN 2021? Massive success that, unfortunately, was also the first step to demise. The bank’s deposits nearly doubled with the tech boom. Everyone wanted a piece of the unstoppable new tech paradigm. Silicon Valley Bank’s assets also rose and almost doubled.

The bank’s assets rose in value. More than 40 percent were long-dated Treasuries and Mortage-Backed Securities. The rest were seemingly world-conquering new tech and venture capital investments.

Most of those “low risk” bonds and securities were held to maturity. Silicon Valley Bank was following the mainstream rulebook: low-risk assets to balance the risk in venture capital investments. When the Federal Reserve raised interest rates, Silicon Valley Bank must have been shocked.

Its entire asset base was a single bet: low rates and quantitative easing for longer. Tech valuations soared in the period of loose monetary policy, and the best way to “hedge” that risk was with Treasuries and Mortage-Backed Securities. Why bet on anything else? This is what the Fed was buying in billions every month. These were the lowest-risk assets according to all regulations, and, according to the Fed and all mainstream economists, inflation was purely “transitory,” a base-effect anecdote. What could go wrong?

Inflation was not transitory, and easy money was not endless.

Rate hikes happened. And they caught the bank suffering massive losses everywhere. Goodbye, bonds' and Mortage-Backed Securities' prices. Goodbye, “new paradigm” tech valuations. And hello, panic. A good old bank run, despite the strong recovery of Silicon Valley Bank shares in January. Mark-to-market unrealised losses of $15 billion were almost 100 percent of the bank’s market capitalisation. Wipeout.

As the bank manager said in the famous South Park episode: “Aaaaand it’s gone.” Silicon Valley Bank showed how quickly the capital of a bank can dissolve in front of our eyes.

The Federal Deposit Insurance Corporation (FDIC) will step in [and has - Ed.], but that is not enough because only 3 percent of Silicon Valley Bank deposits were under $250,000. ['So what,' said Janet Yellen, the former Fed Chair ho helped blow up this bubble- Ed.]  According to Time magazine, more than 85 percent of Silicon Valley Bank’s deposits were not insured. [But this has not bothered Yellen, who has now ignored her rules, rewarded this failure, and further ignited the financial industry's glaring moral hazard - Ed.]

It gets worse. One-third of US deposits are in small banks, and around half are uninsured, according to Bloomberg. Depositors at Silicon Valley Bank will likely lose most of their money [or should have - Ed.], and this will also create significant uncertainty in other entities [or should have - Ed.].

SILICON VALLEY BANK WAS the poster boy of banking management by the book. They followed a conservative policy of acquiring the safest assets—long-dated Treasury bills—as deposits soared.

Silicon Valley Bank did exactly what those that blamed the 2008 crisis on “deregulation” recommended. Silicon Valley Bank was a boring, conservative bank that invested its rising deposits in sovereign bonds and mortgage-backed securities, believing that inflation was transitory, as everyone except us, the crazy minority, repeated.

Silicon Valley Bank did nothing but follow regulation, monetary policy incentives, and Keynesian economists’ recommendations point by point. It was the epitome of mainstream economic thinking. And mainstream killed the tech star.

Many will now blame greed, capitalism, and lack of regulation, but guess what? More regulation would have done nothing because regulation and policy incentivise buying these “low risk” assets. Furthermore, regulation and monetary policy are directly responsible for the tech bubble. The increasingly elevated valuations of unprofitable tech and the allegedly unstoppable flow of capital to fund innovation and green investments would never have happened without negative real rates and massive liquidity injections. In the case of Silicon Valley Bank, its phenomenal growth in 2021 was a direct consequence of the insane monetary policy implemented in 2020, when the major central banks increased their balance sheet to $20 trillion as if nothing would happen.

Silicon Valley Bank is a casualty of the narrative that money printing does not cause inflation and can continue forever. They embraced it wholeheartedly, and now they are gone. [Or should be.]

Silicon Valley Bank invested in the entire bubble of everything: Sovereign bonds, Mortage-Backed Securities, and tech. Did they do it because they were stupid or reckless? No. They did it because they perceived that there was very little to no risk in those assets. No bank accumulates risk in an asset it believes is high risk. The only way in which banks accumulate risk is if they perceive that there is none. Why do they perceive no risk? Because the government, regulators, central banks, and the experts tell them there is none. Who will be next?

Many will blame everything except the perverse incentives and bubbles created by monetary policy and regulation, and they will demand rate cuts and quantitative easing to solve the problem. It will only worsen. You do not solve the consequences of a bubble with more bubbles.

The demise of Silicon Valley Bank highlights the enormity of the problem of risk accumulation by political design. Silicon Valley Bank did not collapse due to reckless management, but because they did exactly what Keynesians and monetary interventionists wanted them to do. Congratulations.

Author:
Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).
He is a professor of global economy at IE Business School in Madrid.

His post first appeared at the Mises Economics Blog.

QotD: The gold standard v the PhD standard

"Under the classical gold standard, prices and wages were expected to adjust to economic disequilibria. Under the PhD standard, it’s interest rates and exchange rates and asset prices that are expected to do the adjusting......."Well, if Eisenhower-era America scratched its head over the classical gold standard, what will futurity make of the PhD standard [that now runs the monetary world]? Likely, it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence—after the crash ... that wiped out the youngster’s inheritance and provoked a central bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal Reserve’s methods....."I expect you’ll wind up saying something like this: 'My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates. We put the cart of asset prices before the horse of enterprise. We entertained the fantasy that high asset prices made for prosperity, rather than the other way around. We actually worked to foster inflation, which we called ‘price stability’ ... We seem to have miscalculated.”~ Jim Grant, the world's most famous interest rate observer, speaking in Nov. 2014 on 'An Agenda for Monetary Action'

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Four Reasons the Bernanke-Yellen Asset-Price Inflation May Be Nearing Its End

The American central bank – the Fed – has exported asset-price inflation to the world. But in  recent times there are signs this asset bubble is beginning to burst. In this guest post, Joseph Salerno offers four reasons the Federal Reserve’s asset-price inflation may be nearing its end.

There are strong indications that the remarkable run up of asset prices in the last few years is beginning to run out of steam and may be on the verge of collapse. (We will leave aside the question of whether the asset inflation is symptomatic of a garden-variety inflationary boom or is a more virulent bubble phenomenon in which prices are rising today simply because buyers anticipate that they will rise tomorrow.)

The Evidence

1. The dizzying climb of London real estate prices since the financial crisis, noted in a recent post by Dave Howden, may be fizzling out. Survey data from real-estate agents indicate London housing prices in September fell 0.1 percent from August, their first decline since November 2012. Meanwhile, an index of U.K. housing prices declined for the first time in 17 months. In explaining the "pronounced slowdown" in the London real estate market, the research director of Hometrack Ltd. commented, “Buyer uncertainty is growing in the face of a possible interest-rate rise, a general election on the horizon and recent warnings of a house-price bubble,” which is playing out "against a backdrop of tougher mortgage affordability checks and limits on high loan-to-income lending."

2. Just released data from the Dow Jones S&P/Case Schiller Composite Home Price Indices through July 2014 shows a marked deceleration of U.S. housing prices. 17 of the 20 cities included in the 20-City Composite Index experienced lower price increases in July than in the previous month. Both the 10- and 20-City Index recorded a 6.7 percent year-over-year rate of increase, down sharply from the post-crisis peak of almost 14 percent less than a year ago.

3. More ominously…

Janet Yellen, Bubble Blowing, and a Coming Economic Nightmare

Guest post by Joseph Salerno

On Monday last week, former US Federal Reserve  official Andrew Huszar publicly apologized to the American public for his seminal role in executing the Quantitative Easing (QE) programme, a programme he characterises as “the greatest backdoor Wall Street bailout of all time,” and “the largest financial-markets intervention by any government in world history.”

While this is a momentous admission from an insider (Mr. Huszar is also a former Wall Street banker), perhaps Mr. Huszar’s most revealing statement concerned the results of QE’s “relentlessly pumping money into the financial markets during the past five years.” He referred to the spectacular rally in financial markets and expressed agreement with the growing belief among expert observers that market conditions had become “bubble-like.”

In a paper just released by the American Enterprise Institute, another former policymaker, resident fellow Desmond Lachman, formerly deputy director of the International Monetary Fund’s Policy Development and Review Department, warns that QE and other “unorthodox monetary policies” are having “unintended consequences.” Among other consequences, Lachman sees signs of incipient bubbles forming throughout the world:

An important aim of the QE policies pursued in the United States, the United Kingdom, and Japan has been to encourage risk taking and to raise asset prices as the means to stimulate aggregate demand. The question that now needs to be asked is whether these policies may have given rise to excessive risk taking, overleveraging, and bubbles in asset and credit markets. In this context, one has to wonder whether historically low yields on junk bonds in the industrialized countries now understate the risk of owning those bonds. . . . One also has to wonder whether yields on sovereign bonds in the European periphery have become disassociated from those countries’ underlying economic fundamentals and whether global equity valuations have not become excessively rich.

The markets for gems and for collectibles have also become very frothy of late. Yesterday, new records were set for a gemstone and for an Andy Warhol piece of art sold at auction. The “Pink Dream,” is a 59.60 carat vivid pink diamond, which is the highest colour grade for diamonds, and the purity of its crystals is ranked among the top 2 percent in the world. The record setting price was $83 million. Not coincidentally, the DJIA set an intraday record shortly before the auction. The new record price for the Andy Warhol piece was $105.4 million. The auction’s combined $199.5 million in revenues was also a record for Sotheby’s. During Sotheby’s Geneva fall auction season, records were also set for the prices of an orange diamond and a Rolex Daytona watch.

While the Austrian insight that super-accommodative Fed monetary policy may be causing a recurrence of asset bubbles is making headway in policy circles, it has not yet dawned on Janet Yellen. Nor is such an epiphany likely. Ms. Yellen wears the intellectual blinders of the mainstream macroeconomist which force her to focus narrowly on arbitrary and increasingly irrelevant statistical averages and aggregates like the CPI, the unemployment rate, and GDP and to ignore what is going on around her in real markets.

This was clearly revealed in remarks prepared for her confirmation hearing released yesterday. Ms. Yellen noted that the rate of increase in the CPI index was less than the Fed target of 2.00 percent and that the labour market and the economy were performing far short of their potential (based on the meaningless concept of “potential GDP”). She thus reiterated her commitment to continuing monetary accommodation and “unconventional policy tools such as asset purchases.” It is true that in her testimony before the Senate committee last Thursday she did concede that it is “important for the Fed to attempt to detect asset bubbles when they are forming.” However, she blithely dismissed concerns that recent record highs in asset markets reflected “bubble-like conditions.”

With Ms. Yellen’s confirmation highly likely, we can look forward to the Fed blindly fueling asset bubbles to a fare-thee-well. With the financial system still on shaky ground, this will lead to another financial meltdown and a U.S. government takeover of the financial system, the likes of which will make the last Wall Street bailout appear to be a minor intervention.

Joseph Salerno is an Economics professor at Pace University, academic vice president at the Ludwig von Mises Institute, and editor of the “Quarterly Journal of Austrian Economics.” He is the author of the book ‘Money, Sound and Unsound,’ a sweeping and nearly comprehensive book on applied Austrian monetary theory.
This article first appeared at the Mises Daily.

Living in a Chinese bubble

No, you can’t see bubbles when you’re in them, said Bubble Master Alan Greenspan.

No, there’s no way to tell if you’re a in bubble, said his apprentice Ben Bernanke.

No, no one can see a bubble at the time, says Ben’s successor Janet Yellen, echoed by every central banker in the world busy inflating their bubbles.

Which means there’s nothing at all to see in China.

[Hat tip Hugh Pavletich]

It’s Janet

So, as expected, Obama has finally formally appointed Janet Yellen to chair of the US Federal Reserve, taking over from PrintMaster-in-Chief  Bernanke, who took over from BubbleMaker-in-Chief Greenspan.

That’s Janet Yellen, the woman who sincerely believes that Japan’s biggest problem was they didn’t print enough money. Of whom, when she was appointed as Vice PrintMaster, Gerard Jackson observed,

Janet Yellen is an inflationist first and foremost. She has made it abundantly clear that all of her policy suggestions will be geared to promoting an inflationary policy. Like all Keynesians she seems congenitally incapable of grasping the dangerous microeconomic consequences of inflation for investment, jobs and the standard of living. She is in fact a very dangerous woman.

Do you think this will end well?

New Money Printer in Chief just waiting to be announced

The next Ruler of the Free World’s Bank has been all but announced, after the other leading candidate thought better of grasping what Tyler Durden calls “the Fed’s shitty stick.”

World’s most central Central Banker, the Chairman of the US Federal Reserve and the hope of billions of dollars is to be current Deputy Chairman Janet Yellen, who was one of Chairman Ben Bernanke’s main in-house cheerleaders as he furiously blew up asset bubbles in stocks and bonds.

Which means what we’re likely to see from Yellen is more of the same asset bubble inflation, at least until any more is made impossible.

Mike Shedlock reckons “there was some small chance” that the other candidate, Larry Summers, would be more fiscally responsible than Yellen.

We will never know because "Yellen it is." Yellen is 100% assured to make a mess of things. So would Summers. But Summers has one thing over Yellen: He is smart enough to not want the job.

Does it really matter who runs the Fed, since whatever any candidate does is likely to be little different to what the last Chairman did.

In thart respect perhaps Peter Schiff deserves the final word.  "Choosing between Fed candidates,” he said on CBS’s Market Watch programme, “is like choosing how you want to be executed."

David Stockman on his Book and the Bailouts

I’ve been recommending to friends the bestselling book by former Reagan Budget Director, David Stockman: The Great Deformation: The Corruption of Capitalism in America—a telling account of the twentieth-century’s monetary and political breakdown, and how mistakes begun in the Reagan era and perpetuated by the GOP helped bring about the global financial meltdown.
In this interview with the Mises Institute, Stockman discusses his book, the gold standard, bailouts, and the problems the American economy faces today.

Mises Institute: In the book, you oppose Bernanke’s view of the Great Depression, which you point out relies heavily on the views of Milton Friedman.

David Stockman: Bernanke has cultivated this idea that he is a brilliant scholar of The Great Depression, but that’s not true at all. What Bernanke did was basically copy Milton Friedman’s misguided and very damaging theory that the Federal Reserve didn’t expand its balance sheet fast enough by massive open market purchases of government debt during the Great Depression. Bernanke therefore claimed that monetary stringency deepened and lengthened the depression, but in fact interest rates plummeted during the crucial 1930-1933 period: credit contracted due to genuine and widespread insolvencies in the agricultural districts and industrial boom towns, causing bank deposits to shrink as a passive consequence. So Bernanke had cause and effect upside down — a historical error that he replicated with reckless abandon in response to the bursting of the housing and credit bubble in 2008.
    Friedman’s error about the great depression led him, albeit inadvertently, into the deep waters of statism. He claimed to be the tribune of free markets, but in urging Nixon to scrap the Bretton Woods gold standard he inaugurated the present era of fiat central banking. He held that the central banking branch of the state could improve upon the performance of the free market by targeting the correct level of M1 (money supply) and thereby ensure optimum performance of aggregate demand, real GDP, and inflation. That’s Keynesianism through the monetary control dials, and has led to outright monetary central planning under Greenspan, Bernanke, and most of the other central banks of the world today.

Bernanke: A Tenure of Failure

If stock market’s took a dive when US Federal Reserve chairman Ben Bernanke hinted his psuedo golden shower of monetary stimulus might come to an end, just what might happen when the Great Stimulator leaves the building altogether, asks this guest post by John Cochran.

Fed Chairman Ben Bernanke’s term as chairman of the Fed expires at the end of the year and President Obama has quite ungraciously indicated his intent to replace him, remarking that he had, “already stayed a lot longer than he wanted or he was supposed to.”

Despite what Mort Zukerman has argued in his column titled “Mistreating Ben Bernanke, the Man Who Saved the Economy,” policy under Bernanke has not been good, to say the least. Policy before the crisis expanded created credit and kept rates too low for too long, generating a second (and this time catastrophic) boom-bust cycle. Since then, the Fed’s “dovish” policy of low interest rates and quantitative easing has retarded recovery in three main ways:

1. by keeping interest rates from tracking market levels, which would have better redirect resources to highest value uses;[1]
2. by making it easier for firms to avoid necessary liquidation and reallocation of resources; and
3. by adding to the policy uncertainty which, coupled with the extreme regime uncertainty caused by both Bush and Obama Administrations, is the main cause of the continuing Bush-Obama Great Stagnation.

Mainstream criticism of Fed policy, both before and after the crisis, can be found at John B. Taylor’s blog “Economics One” or his book Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. For an Austrian perspective, besides the Salerno paper cited above, see Frank Shostak’s archive, George A. Selgin’s “Guilty as Charged,” or my “Bernanke: The Good Engineer?”, which concludes, “Bernanke's current monetary policy is a train wreck waiting to happen. The ultimate solution as is pointed out by Roger Garrison: ‘The hope of achieving long-run sustainable growth can only rest on the prospects for decentralizing the business of banking.’”

A picture of how much policy has drifted into “Mondustrial Policy” under Chairman Bernanke and toward ever-more dangerous monetary central planning can be found in the Independent Review, “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner” by Jeffrey Rogers Hummel. Hummel summarizes much of Bernanke’s post-crisis Fed policy as follows:

In sum, phase one and phase two of Bernanke’s policies turned out to be only slight variations on the same theme. Almost nothing that the Fed did during either phase can be accurately described as an effort to stimulate or even stabilise aggregate demand. Whatever the ostensible rationale, everything ended up being a supply-side intervention designed to prop up failing financial institutions. Helicopter Ben talks a good line about being ready to unleash quantitative easing, but this talk only imparts an aura of justification for the Fed’s incredibly expanded role in allocating the country’s scarce supply of savings. If anything, his policies were closer to a quantitative tightening. A better moniker would therefore be “Bailout Ben.”

We are unfortunately back in the situation in which, as bad as Fed policy has been, monetary policy could easily become even more destructive of wealth creation. As I wrote in a letter to the editor in 2010 when Bernanke was last up for reappointment, the only legitimate reason to reappoint Bernanke was that anyone else this administration might appoint would provide leadership which would most likely make policy even worse.

Currently the two leading candidates to replace Bernanke are Janet Yellen and Lawrence Summers. Neither name instils confidence even on the editorial board of the Wall Street Journal which writes on July 29:

The real problem is that neither Ms. Yellen nor Mr. Summers seems likely to do what should be the next chairman’s priority — restoring the Fed’s independence by ending its post-crisis political interventions and focusing above all on maintaining price stability.

Those who believe in sound money should tremble at the prospect of either.

Janet Yellen who is heralded as the “Best Fed Choice” by Fed cheerleader Alan S. Blinder (a leading proponent of Fed activism and more fiscal stimulus) is more aptly described by the Journal:

Ms. Yellen is also seen, in and outside the Fed, as a leading monetary ‘dove.’ That isn’t limited to her backing for Mr. Bernanke’s monetary interventions since the 2008 panic. We’ve followed Ms. Yellen for 20 years and can’t recall a key juncture when her default policy wasn't to keep spiking the punchbowl [emphasis mine]. Many Democrats think the Fed needs to keep interest rates at near zero through the 2016 election, and Ms. Yellen is their woman.

Summers may actually be even more problematic. He is an architect of the failed stimulus of 2009, and a revolving door player between Wall Street and government that would only add to the image of the Fed as a financial central planner—and most likely continue the evolution of monetary policy to mondustrial policy.

Can Fed policy get worse under the leadership of either Dr. Yellen or Dr. Summers? Most definitely YES. Unfortunately leadership of the Fed is not the only problem. An institution that relies on good leadership to avoid harm to the economy and the nation is not a good institution. If banks and other financial institutions should not be too big to fail, neither should the Fed. While in the perception of too many, the Fed is both too big and too important to fail, it is an institution that not only could be, but has been, a complete failure.

The conclusion of my 2010 letter is still relevant:

The FED according to the Washington Post is an “institution that has served us well for decades. ...” However, The FED is not an institution that has served us well. It was set up to protect the value of the dollar and to avoid boom and bust cycles. Since inception of the Fed however the dollar has, in real terms, declined over 87 percent—now having a purchasing power compared to a 1913 dollar of less than 13 cents.
    Just since the mid-1990s, overly easy monetary policy has caused or enabled two significant boom-bust periods with accompanying bubbles in first dot.com stocks and then residential and commercial real estate.
    The Wall Street Journal in a January 25^th editorial, which argues against confirmation partially because of Bernanke’s and the FED’s complicity in causing the most recent boom and resulting bust and financial crisis, unwittingly gives the one legitimate short-run reason to retain Bernanke: that other potential nominees would be even worse. In the long run, instead of celebrating the Fed and central banking, true financial reform would, following Nobel winner F. A. Hayek, look seriously at proposals to “denationalisation of money” including the recent suggestion by economist Richard Ebeling to end the Federal Reserve altogether.

John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research.  He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics.
This post first appeared at the Mises Daily.

[1] Joseph T. Salerno, “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” pp. 37-38. Ronald I. McKinnon makes a similar point in “The Near-Zero Interest Rate Trap.” He summarizes nicely, “By trying to stimulate aggregate demand and reduce unemployment, central banks have pushed interest rates down too much and inadvertently distorted the financial system [and real structure of production] in a way that constrains both short- and long –term business investment. The misnamed monetary stimuli are actually holding the economy back.”

“Conditions left unchanged will invite a credit boom and, inevitably, a bust” [updated]

Some exceptional links indicating that while it may yet be too late, economic sense is slowly going mainstream, among commentators and even Fed officials, if not yet politicians. Gerard Jackson reckons,

    Given the America's horrible fiscal condition I cannot see how higher interest rates can be avoided. The demands now being made on the economy by government must result in a significant reduction if not an actual end to the rate of capital accumulation exceeding population growth. This can only mean a general fall in real wages. furthermore, the government — or a government — will be driven to use inflation to engineer a very large partial default

Driven? They’re compelled:

    Obama has nominated Janet Yellen to be vice chair of the Federal Reserve. This is very bad news for the US economy and signals that Obama intends to pursue a purely Keynesian approach to government. . .
    “Janet Yellen is an inflationist first and foremost. She has made it abundantly clear that all of her policy suggestions will be geared to promoting an inflationary policy. Like all Keynesians she seems congenitally incapable of grasping the dangerous microeconomic consequences of inflation for investment, jobs and the standard of living. She is in fact a very dangerous woman.

But there is at least one senior Fed official (sounding like an Austrian economist) who seems to know what time it is::

    A senior U.S. Federal Reserve official said on Wednesday that interest rates kept too low for too long encourage risky financial behavior and recommended raising borrowing costs to prevent another boom and bust.
    “ ‘I am confident that holding rates down at artificially low levels over extended periods encourages bubbles, because it encourages debt over equity and consumption over savings,’ Kansas City Federal Reserve Bank President Thomas Hoenig told a group of business people.
    “ ‘While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust,’ he said.”

Too right.

Inflation won’t save America: it will only dislocate the capital structure, continue to prop up malinvestments, and destroy whatever pool of real savings still exists.  Not to mention the destructive effects of a cheap dollar:

    Why a "cheap dollar" would not save the US economy: Do the advocates of a depreciating dollar think that by merely increasing exports the US would enjoy rise in per capita investment, especially in view of Obama's crippling fiscal policies? Have these people ever given any serious thought to the actual nature of economic growth?

And the proven preference now of Warren Buffett’s bonds over US Treasuries are simply a sign that investors are now seeing the inevitable: the U.S. government is on its way to bankruptcy:

When it becomes clear that the U.S. government can not make good on its mounting debt obligations by taxing its citizens, its creditors, fearing the debasement of the dollar and therefore the value of their investments, will go from friends to foes, from eager buyers of those treasury bills, notes and bonds to eager sellers. It won't be pretty.

Leaving Nancy Morgan to draw a conclusion that seems almost unavoidable:

Under the leadership of my fellow baby boomers, there is a very good chance that the America that we all know and love could end up on the ash heap of history. . . My generation could well be the first generation in American history to leave [the] country worse off than we found it.”

The conventional wisdom of the baby-boomers has been proven destructively wrong on just about everything, hasn’t it.

Just as a recovering alcoholic first needs to confront reality, effective recovery requires immediate recognition of the reality of the problem.  Sadly, if Yellen’s appointment isn’t a sign that faking economic reality via inflation is still the order of the day at the White House (just as it is here in John Key’s office), the Chairman of Obamas’s Council of Economic Advisors shows that full-blown, hog-tied, piss-blind evasion of reality may be next.

Whatever pragmatists and politicians might think, economic reality is not infinitely malleable.  There will be a reckoning, whether Summers and his clique of alleged economists recognise that or not.

UPDATE:   Perhaps to help relieve the unrelenting pessimism suggested by focussing on the destruction that has been and is continuing to destroy America—in other words, what is—to focus here on what could be and should be, and (at one time in history) almost was. i.e., Capitalism Without Guilt: The Moral Case for Freedom, a compelling 2009 lecture to London’s Adam Smith Institute on the necessary moral revolution that is needed if capitalism is to survive—or even to be discovered. (Part 1 of this 11-part video is below; the complete series is available on a single YouTube Channel.)

 

    Capitalism [explains Yaron] has an undisputed record of wealth generation, yet it has always functioned under a cloud of moral suspicion. In a culture that venerates Mother Teresa as a paragon of virtue, businessmen sit in stoic silence while their pursuit of profits is denounced as selfish greed.
    “Society tells businessmen to sacrifice, to serve others, to ‘give back’—counting on their acceptance of self-interest as a moral crime, with chronic guilt its penance. Is it any wonder that productive giants from John D. Rockefeller to Bill Gates have behaved as if profit-making leaves a moral stain that only tireless philanthropy can launder but never fully remove?
    “It is time America heard the moral case for laissez-faire capitalism.
    “Two centuries ago the Founding Fathers established a nation based on the individual’s rights to life, liberty, property—and the selfish pursuit of his own happiness. But neither the Founders nor their successors could properly defend self-interest and the profit motive in the face of moral denunciation. The result has been a slow destruction of freedom in America, leading us to today’s economic mess.
    “In this lecture, Ayn Rand Center Executive Director Yaron Brook demonstrates how Ayn Rand’s revolutionary ethics of rational self-interest supplied the moral foundation that previous proponents of capitalism lacked. Dr. Brook explains why individual rights are crucial for capitalism’s survival—why productivity and profit, the ‘selfish greed’ that conservatives abhor, are not vices but cardinal virtues. He explains why the world must reject sacrifice and ‘national service’ and instead proudly embrace the radical individualism their lives and happiness require.”

 

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Lying like a Central Banker

"Over at the Mises Economics Blog, Robert Blumen slams the door on boasting by Federal Reserve Bank flunkies so thoroughly, and with the maximum of pith, that it’s worth reposting it here:

From a presentation by Janet Yellin (of the San Francisco Fed) on June 30 to the Commonwealth Club of California,

“I will be the first to say that it is always difficult to get monetary policy just right. But the Fed's analytical prowess is top-notch and our forecasting record is second to none.”

The same Fed that thought there was no housing bubble? Second to none? What about all those Austrian economists who identified the bubble?

But Yellen didn't stop there. She followed up with:

“The FOMC is committed to price stability and has a solid track record in achieving it. “

Really? The same Fed that presided over a 90% depreciation in the purchasing power of the dollar?

And finally, she finishes up with:

“With respect to our tool kit, we certainly have the means to unwind the stimulus when the time is right.”

See my thoughts on that here.

You think NZ’s pseudo-banking inquiry is a farce? It’s no half as ludicrous as watching The Fed wriggling in the spotlight as more and more evidence emerges that The Fed’s (and the NZ Reserve Bank’s) efforts at price stabilisation have delivered only chaos. 

Well done to Blumen for so effectively and summarily dismissing the leading claims of its cheerleaders. Time to shut down the Fed (and by extension the local Reserve Bank) and head back to the system that delivered a half-century of genuine price stability before money was nationalised [head here and scroll down for a discussion of the chart below showing NZ’s gently declining price levels in the late nineteenth century as it became more prosperous].