Saturday, June 4, 2011

Uncle Ben Spoke, and a couple Economics Lessons

Uncle Ben had a press conference a couple weeks ago – a first for a Fed Chairman.  (Uncle Ben Bernanke, Chairman of the Federal Reserve Board.)

And didn’t really say anything. Transparent! Transparent = Nothing! Fits.

So, Ben said that inflation expectations are low and that core inflation is low and the Fed isn’t responsible for anything that might be bad and everything that the Fed is responsible for is good and coming along, perhaps slowly, but coming along. Notice that when he discusses his policies he refers to the models and intellectual justifications, not to the results and consequences, not to the facts of reality.

Bernanke’s history at the Fed has shown that he does not believe that any of the problems that the economy has experienced are the result of the Fed’s policies. The Fed does the right thing and somehow, some other source of economic action causes things to go wrong. The Fed, Bernanke, is always right. He knows that he is right. He doesn’t know why things go bad.

More fundamentally, no result could cause Bernanke to question his beliefs. He is not reality oriented. He also hasn’t seen anything bad that was coming. In 2004, 2005, 2006, and 2007 he kept saying that everything was just fine. Then, in 2008, he said things weren’t doing so badly. Then, in 2009, he said that his actions had saved us all.

He does have the power, by being the Federal Reserve Board Chairman, to manipulate the economy. And he is intent on doing so. We are at his mercy, at the mercy of his mistaken views, at the mercy of his lack of contact with reality. We, the American people and the world, will continue to suffer.

But here is where I get very upset with the people who are criticizing him, those who post blogs and comments, etc. I include many Objectivists. The only thing they apparently see is inflation. Apparently, if commodity, food, and oil prices weren’t rising, they would have no problem with Bernanke. Well, they would probably howl that Bernanke’s policies would lead to inflation, but it would always be inflation, inflation, inflation. One note Johnnys.

It is certainly the case that the Fed’s only purview is monetary policy, i.e., pumping money. But controlling the money supply has other consequences, and to ignore those consequences is to leave Bernanke and his fellow government manipulators a free area of activity, damaging activity, deadly activity, immoral activity.

For example, one of the actions of the Fed is aimed at keeping interest rates low (the activity they have some direct control over, as opposed to the money supply, which is controlled indirectly) completely distorts a basic, key price in the economy. Interest rates are important in an economy and impact many decisions and other prices. People are just not able to make rational decisions in such an environment. I mean, since rationality consists of observing reality and acting accordingly, without basic, accurate information about the economic situation, rational decision-making is not possible.

I know that some argue that businessmen are smart and know that the interest rates do not reflect reality and adjust their thinking. I am sure that they do. But how much do they adjust? What can they think is the reality of the situation? I mean, without the facts, the businessman is only guessing. It might be a smart, experienced, wise guess. But it is still a guess, not knowledge. As a guess, it could still be way off. It could still be damaging. Further, since it has been literally decades since a market for capital has existed, any guess cannot be based on any actual market experience. A businessman’s wisdom is not an argument that changes the significance or the damage done by the manipulation of interest rates by the Fed.

The impact of the Fed is much wider than real or potential rising prices. People need to stop thinking that inflation is the only or even the major issue in every situation.

By the way, I was looking at copper and corn, two of the “commodities” that people are referring to when they say that “commodity” prices are rising. It may not be significant (you can’t really tell until sometime later), but both have backed off their recent high prices. I don’t know why yet, that is, I don’t know if it is a lowering of demand or if new production has come into the market, but if this trend continues, or if they just don’t keep going up, the contention that the Fed causes every bad economic consequence in the world will be even more questionable. Then the problem of being unscientific, i.e., not looking for causes, will have bigger consequences because it will make all criticism of the Fed look unsupported.

There is another error in the thinking of many about the economy. It is thinking that by knowing at least some of the consequences of the actions of government in the economy that one knows something about economics. Recently I have seen people dismiss comments I have made merely because I didn’t attribute what they viewed as negative economic consequences to a government. It is as if the only economic actor who has any efficacy is the government. Certainly, they conclude, that if anything happens that they don’t like it must be the fault of the government. There are several fallacies involved in such thinking, e.g., affirming the consequence, but the most basic fallacy is just not having taken the effort to learning the subject.

As a reader of Ayn Rand, we have learned that one must use one’s own judgment. This is important for many different, fundamental reasons, including moral ones. There is, however, an important context: a judgment without knowledge is not rational. That is, in order to decide, judge, conclude, make any kind of rational decision, one has to have knowledge of reality. Making a statement, declaring a judgment about an economic subject means you have to know economics, the fundamentals, and not marginally.

The fundamentals of economics involve the actions of individuals, people, acting as producers and consumers. It involves markets, prices, costs, production, and making economic choices. The actions of government overlay the reality of production and consumption. The actions of government affect what people do, the prices resulting from market actions, what people ultimately produce and consume. But the governmental actions are not fundamental to an economy, or its study. The fundamentals are the reason for the existence of markets, prices, and the creation of wealth. People acting for their own benefit are efficacious. Government action only corrupts.

It is often next to impossible to foretell what the results of government action is going to be because of the complexity of an economy, of the large number of actors, of differing interests and motives. In that government action is intended to get people to act differently than they would normally, the results cannot be good. But to identify and understand those results, you have to include the primary market participants. To ignore them is to drop the context. The primary actors are the individuals.


  1. Great post.

    On the fixation with inflation, I think Friedman is to blame for making the Quantity Theory of Money a populist notion. (von Mises warned against the use of the Quantity Theory of Money and thought it was a poor way to conceptualize reality, and could lead to grave errors in time like we're seeing now.

    Even some who think of themselves as Austrians seem to have imbibed monetarist doctrine on this issue. Apart from a focus on narrow money-supply, it also causes an excessive focus on Monetary policy as opposed to Fiscal policy -- which is the real dog that wags the tail among those two.

    One of the many immoral things the Fed is guilty of these days is robbing grandma of yield on her CDs. The low rates have cut grandma's income by over 10%. Bernanke doesn't care as long as it is for what he considers the greater good; but, where are the other commentators shouting about grandma's plight!

  2. From an FB status:

    "Imagine that instead of having a Fed that tried to help fix the economy, we had an arch-bishop. Imagine that all he did was prayed a lot and told people to work their way through a few years of pain. Such a silly system would be more effective than what we have now: some times obvious ritualistic stupidity can "do no harm" where stupidly following complex (but bad and rationalistic) ideas can do much worse."

  3. The argument that businessmen are smart and won't be 'conned by manipulated interest rates' might well be true. However, as the recent crisis has shown excess supply of loanable funds will find its into some asset class in the real economy, even if the businessmen who would have built power plants are smart enough to know that the interest rates are artificially low, the money will find some other outlet and create distortions there. Hence as housing prices rose and equity loans were taken out virtually all industries were affected and NO investment decision would have been the one taken in case there had not been a credit expansion.
    The article points to something that is all but forgotten in economics classes, whether macro or micro. The realization that acting individuals with free will make an economy has to form the basis of the science.
    I am very much looking forward to Dr. Buechner's contribution, since he seems to be the first to rigorously apply a rational epistemology in the field of economics.

  4. Do you know that Dr. Buechner is working on a "contribution" or on the verge of publishing?

    Thank you both for your comments. I think that you have made good points. Thank you, too, for the compliments.

  5. Thank you! I always enjoy your blog posts.
    Here is the table of contents of Buechner's forthcoming book

    I am especially curious about the chapter on methodology.