I React to William C. Dudley's Speech

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Dudley, who holds several important positions in the central bank of the U.S., is President and CEO of the New York Federal Reserve Bank. His speech given at the University at Buffalo on October 27, 2010, which I attended, was one of several in his tour of the New York hinterlands.

Several student classes and the student business fraternity augmented the audience, which numbered about 350. The audience gave Dudley a minimally warm but not enthusiastic reception, as there was little to get enthusiastic about. You can read his speech here.

Dudley’s personal bodyguard stood at one exit during the speech. He faced and scanned the audience. I could not see a bulge under his black suit, but a Glock really makes no bulge. After the speech, he rapidly hustled Dudley out to his car, insulating him from any personal contact. However, I happened to pass them standing outside their vehicle as I walked to the parking lot, whereupon I approached and asked Dudley "How does it feel to work for an unconstitutional organization?" The smile on his face vanished and he looked down. Did he even hear me, I wondered? I think so, but he chose not to reply. Instead, a grinning assistant answered me "We don’t look at it that way," or words to that effect. "You guys got off real easy," I responded. "Not even one sign saying u2018End the Fed’."

The audience didn’t challenge Dudley in any way. It would not have made any difference. A skilled speaker in this kind of a setup can make almost any questioner look like a fool if he wants to and turn a question in his own favor. The question-answer format at these events is strictly window-dressing to impart the illusion of a participatory democracy. This was not a seminar. There was no opportunity for intense or meaningful exchange. Had Dudley been interested in such an exchange, he could have arranged a long-distance interactive event.

My guess is that Dudley put in these appearances to burnish his and the Fed’s image. The Fed likes to present itself as a ground roots regional institution. His presence was designed to show that the organization is not insulated from the public, that it listens, that it responds, that its aims are to help people, and that it has helped during the crisis. The idea of this junket is to maintain grass roots support, which is why a portion of the speech was about regional conditions.

Dudley has been politicking. The politicking is stage-managed. Dudley took only three or four questions. He avoided personal interaction. He didn’t show up at the reception prior to the speech. The first question was from a young lady who asked about healthcare from the perspective of "What are you going to do to help us?" Dudley told her we’d have to wait and see how the latest legislation worked out. Another question asked about help for the beleaguered pension funds of state and local governments. Dudley replied with a euphemism. He said there would have to be some "adjustments" made over a long period of time. A third question asked how the Fed would help the Western (or Upstate) New York region.

Dudley’s tour and speech helped elicit the local focus of the questions. The questioners brought to the table their attitude "What’s massa going to do for us?"

Early on in the speech, Dudley wrapped himself and the Fed in democracy and the Constitution:

"The New York Fed is part of the Federal Reserve System, America’s central bank, and was created by Congress in 1913. With this act, Congress delegated to the Fed System its constitutional authority to manage the money supply — and designed it [sic] be decentralized, representative of all of America and independent of the political process."

Congress doesn’t have any constitutional authority "to manage" the nation’s money supply, and even if it did, the constitutional money of the government is not the same as that which people themselves might choose to use. And the money that the government is empowered to use is, in any event, gold and silver. It is not money manufactured by the Federal Reserve System. Furthermore, the Fed is the furthest thing from being "representative of all of America," whatever that means, and it’s certainly not independent of politics. In other words, the second sentence of this Dudley quote is wrong in every which way one can think of. It’s totally false.

The main thing, however, is that the Fed’s money and the Federal Reserve System are both unconstitutional (see here).

That was my first main reaction to the speech itself as I heard it.

My second reaction occurred when he said "The financial crisis that broke in mid-2007 and intensified dramatically following the failure of Lehman Brothers has been among the most virulent ever."

Dudley stumbled a bit when he pronounced the word "failure." It came out something like "f-f-failure," as if he were reluctant to say it. He was more nervous than he seemed. In fact, after that, he stumbled at other times. When a man reads a speech, as Dudley did, and fails to interact with his audience, and when the audience goes into a state of repose or nervous movement or becomes somewhat sullen, the speaker is apt to become nervous.

But this was of no great moment. Of more interest were certain portions of the speech where Dudley was not nervous or when he became more forceful or when he revealed certain automatic features of his thought.

One of these came in regard to QE2 (quantitative easing two, i.e., another round of Fed inflation). He firmly and loudly told us

"In a recent speech, I said that both the current levels of unemployment and inflation and the timeframe [sic] over which they are likely to return to levels consistent with our mandate are unacceptable. I said that I thought further Fed action was likely to be warranted unless the economic outlook were to evolve in a way that made me more confident we would see better outcomes for both employment and inflation before too long."

Dudley sold this politically by mentioning the Fed’s dual mandate three times ("Congress has set an explicit objective for monetary policy: To pursue the highest level of employment consistent with price stability.").

Showing every sign of true belief and adherence, Dudley dished out the standard and deeply flawed macroeconomic stories. True to his training, he can think in no other but Keynesian ways.

Dudley, like Paul Krugman, argued that there is a free lunch. In so many words, he said that the Fed can push down long-term interest rates without any ill effects or costs, at least over some range, or at least the benefits are so great that they outweigh any unmentioned-by-him costs, such as creating asset price and debt-leveraging and inflation bubbles that lead to recessions and depressions. He was great with praise for such a policy:

"When the Fed buys long-term assets, it pushes down long-term interest rates. This supports economic activity in a number of ways, including by making housing more affordable and boosting consumption in households that can refinance their mortgages at lower rates. In addition, low long-term rates reduce the cost of capital for businesses, thereby fostering more hiring and investment spending (on equipment, construction and machinery, for example) for any given economic outlook."

Dudley didn’t mention even one of the downsides of this Fed intervention. Austrian economics has not penetrated his consciousness, or, if it has, he doesn’t accept it. Neither has finance.

Is it possible that each and every one of us is better off when the Fed prints money, buys assets, and lowers interest rates? Is everyone better off when new money is borrowed and spent? Or do some of us find the worth of our savings diminished? Do lenders find they are unable to secure a reasonable return on their saving? Is proper accounting lost when such inflation occurs? Does money-printing do anything to improve invention, or technology, or productivity? Can it produce a permanent or sustainable gain? Can we all gain by having the Fed create electronic account entries for more money? Can we really get something for nothing? Or does that money flow into particular activities that otherwise would not be funded and are not financially viable? Do certain industries become overbuilt and unable to sell their wares unless further inflation occurs in a never-ending spiral? Do such inflations end in inevitable busts?

Five paragraphs later, Dudley’s own speech gives us an answer. It is a garbled answer, but it’s still enough of an answer to point up the immense contradiction in Dudley’s prescription. He prescribes more money-printing, but yet he informs us that a bust followed the last money-printing boom!

"The slow recovery of consumer spending and housing in the face of very substantial monetary and fiscal stimulus reflects the painful unwinding of the dynamics at work during the expansion that preceded it. Beginning around 2003, underwriting standards for residential mortgages were significantly relaxed, leading to a sharp rise in household borrowing and in home prices. The rise in home prices helped support more borrowing as households used lines of credit and second mortgages to tap into their rising home equity. This also fueled a strong boom in home construction. But house price increases could not be sustained without limit. When home prices peaked and started to turn down, the dynamic linking house prices, credit and consumption went into reverse."

Again, Dudley reverts to euphemism. The prior inflationary, unsustainable, phony, Fed-induced, Greenspan-applauded, money-driven boom is covered up by the term "dynamics at work during the expansion."

Even though Dudley has just got done telling us that driving down long-term interest rates is a good thing because it helps homeowners refinance at lower rates, he now looks askance at the "rise in home prices" that "helped support more borrowing as households used lines of credit and second mortgages to tap into their rising home equity."

Dudley sees no contradiction because he blames lenders: "Beginning around 2003, underwriting standards for residential mortgages were significantly relaxed, leading to a sharp rise in household borrowing and in home prices."

But this is no answer. The question is why underwriting standards were relaxed at that time? I provided a detailed answer two years ago. In short, the Fed encouraged the boom, lending, and the relaxation of credit standards. This has happened in many earlier boom-bust episodes, going back to at least the 1830s, when governments have encouraged bank lending in land speculation, railroads, and other lines.

Economists (?) like Dudley and Krugman keep playing the same old broken and warped record. Inflate, inflate, inflate. It happens that both are 57 years old. It is hard for many adults to change their ways of thinking. It is especially hard when one’s career and livelihood depend on the Keynesian fallacies.

I sat there with my eyes closed so that I could better absorb what the man was saying. He launched off into a Keynesian consumption and spending story. This story is simple (and fallacious). Consumption or spending is good. It makes the economy go round and round. Saving is bad. He also called saving "deleveraging."

To Dudley, the word "progress" means that people stop saving and instead spend: "Have households completed their deleveraging, so they will soon spend more? Although we believe that substantial progress has been made, it is hard to tell how much further this process has to run." Dudley can’t reconcile this kind of thinking with the fact that saving is the source of investment, and investment is the source of improvements in technology and invention that improve people’s lives. We cannot advance and progress without saving.

Foreign to Dudley is the idea that you and I make our own saving and spending decisions, unmanipulated and unhampered by central bankers and governments. Foreign to him is the idea that he and his buddies in government cannot improve upon the outcomes of that free market process. He certainly doesn’t accept the fact that when he tries to improve on free market outcomes, he makes matters far, far worse.

The august view from above of a central banker is that markets and economies don’t work. They need his help manufacturing money and fueling up bankers. He thinks his job is to make the economy work, and he thinks it needs his help. His be-all and end-all is to jack up "real gross domestic product growth," so as to reduce unemployment, and his available method is inflation. He ignores the after-effects or blames others when the inevitable booms that he ignites end in busts. He washes his hands of any responsibility for that.

And so the central bankers, like all the other politicians, run around the country selling their snake oil and trying to convince everyone that they are responsible officials who represent Americans and are doing their jobs holding together something — the economy — that doesn’t need them in order to function, and that functions best when they are nowhere to be seen or heard, and that is only messed up every time they attempt to manipulate it and us.

I have now seen and heard two central bankers. The first was Alan Greenspan, who filled a local restaurant some years back. He put me to sleep. The second is Dudley. Unless another central banker falls over me, this will be my last expenditure of effort to see one in the flesh.

I have a dream, and it is that central bankers and politicians sink into oblivion — that they sink into the quicksand like the Mummy or Dracula or any other respectable Hollywood or Hammer monster and that they stop haunting us and giving us a continuing nightmare.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

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