No Criticism of Bernanke Is Allowed

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by Gary North: Ron
Paul’s Questions for BenBernanke



Ben Bernanke
has an overwhelming majority on the Federal Reserve System’s Open
Market Committee (FOMC), which meets every six weeks to set Federal
Reserve policy. There is only one dissenter, Thomas Hoenig, who
consistently votes against any expansion of the FOMC’s asset purchases,
meaning any expansion of the FED’s balance sheet: the monetary base.
The vote is consistently 10 to 1.

From mid-November
2009 until late November 2010, the adjusted monetary base remained
flat. There were increases in early 2010, but these were reversed
by subsequent sales of assets. It was with this as background that
Bernanke announced the policy of quantitative easing, meaning the
purchase of an additional $600 billion of Treasury assets, mainly
mid-maturity bonds.

The threat
to the economy, according to Bernanke, is price deflation. Inflation
is not a threat, he says. If it ever becomes a threat, he insists,
the FOMC will reverse its policy and sell assets, thereby shrinking
the monetary base. This will push any overheated economy back into
low price inflation, which he says should be 2% per annum –
a doubling of prices every 35 years.

There has been
mild criticism of the FED from within the conservative camp. The
main critics have been Austrian School economists, best represented
by Ron Paul. Their hostility to central banking extends back almost
a century to Ludwig von Mises’s book, The
Theory of Money and Credit
(1912). That book criticized
central banking as an agency of perpetual price inflation. So they
have all turned out to be.

The non-Austrian
conservatives have generally been silent. About two dozen critics
have gone public about their concerns. On November 15, they
released this letter

believe the Federal Reserve’s large-scale asset purchase plan (so-called
“quantitative easing”) should be reconsidered and discontinued.
We do not believe such a plan is necessary or advisable under current
circumstances. The planned asset purchases risk currency debasement
and inflation, and we do not think they will achieve the Fed’s objective
of promoting employment.

We subscribe
to your statement in The Washington Post on November 4
that “the Federal Reserve cannot solve all the economy’s problems
on its own.” In this case, we think improvements in tax, spending
and regulatory policies must take precedence in a national growth
program, not further monetary stimulus.

We disagree
with the view that inflation needs to be pushed higher, and worry
that another round of asset purchases, with interest rates still
near zero over a year into the recovery, will distort financial
markets and greatly complicate future Fed efforts to normalize
monetary policy.

The Fed’s
purchase program has also met broad opposition from other central
banks and we share their concerns that quantitative easing by
the Fed is neither warranted nor helpful in addressing either
U.S. or global economic problems.


The list included
some economists, plus James Grant of Grant’s Interest Rate Observer,
plus a few others. While we should be thankful for whatever opposition
we can find in the academic community, this is hardly a rallying
cry of protest. The FED is hardly threatened by anything this mild
and signed by so few economists.

There are thousands
of economists either on the payroll of the Federal Reserve System
or else occasional recipients of financial support. From within
the community of economists, only the Austrians have been full-time

This indicates
that the opposition in the electorate has taken its cues from the
Austrian School. Voters who think the FED has gone too far are not
readers of academic papers or James Grant’s newsletter. In any case,
Grant is probably closer to the Austrian School’s position than
the other signers.

The Federal
Reserve has become a kind of lightning rod of protest for the Tea
Party movement. This indicates a major increase in influence by
the Austrians. It is not that their ranks are filling with trained
economists. It is that the public has heard Ron Paul’s message and
has moved on to the sources of his analysis.


Austrian School
economists since the 1930s have offered an analysis of economic
depressions that is tied to the practices of central banks: first
inflating the money supply, then stabilizing it. This creates the
boom-bust cycle. This has been denied by Keynesians from the beginning,
but it also has been denied by the monetarists, who accept in theory
and practice central banking.

The failure
of central bankers prior to 2008 to see the looming recession has
left them without excuse, except for this one: “Nobody could have
seen it coming.” But a lot of somebodies did see it coming: Austrian
School economists and analysts. The defenders refuse to acknowledge
this school of opinion, let alone the analytical framework that
let them forecast what did take place.

Because millions
of voters heard Ron Paul’s ideas in the 2008 Presidential campaign,
they were alerted to the operations of the FED. Most of them had
not heard of the FED in any detail prior to 2008. This was fortuitous.
There was a falling economy at the same time that the only Austrian
School member of Congress decided to run for President. Then the
money rolled in because of the Internet. This stunned the Beltway

This combination
of events has launched a new phase of Austrian School economics.
This has come as an unwelcome surprise to the traditional Republican
Establishment, which includes Chicago School economists in the tradition
of Milton Friedman. The neoconservatives are also upset. They had
enjoyed a near monopoly of opinion within the conservative activist
movement. They are not pleased that far more radical critics of
the government and the FED have begun to get a hearing.


David Frum,
a neoconservative Canadian journalist and former Bush speechwriter,
has lamented this development. He coined part of the phrase, “axis
of evil,” but when his wife went public about his role, he got fired
by the White House.

rewrites the history of conservative economic thought
, as having
favored high interest rates.

years ago, right-of-center economists did not celebrate high interest
rates as a safeguard of the currency.

and Austrian School economists agreed in theory, then as now: the
way to safeguard the currency is to stop inflating the currency.
If this leads to high rates – as it did under Volcker, 1979–82
– so be it. If not, then not. The central issue is the rate
of money expansion. The Austrians oppose central banking because
the system leads to monetary inflation. The monetarists want a rule
to govern the FED. But neither side asks for high rates or low rates.
They ask for market-determined rates.

years ago, they measured inflation by the dollar’s ability to buy
goods and services – not its value relative to gold or some
other commodity.

They still
do. Note: the letter from the two dozen critics did not mention

today, probably most business economists – most Republican
economists! – reject those ideas. I notice that the e21 letter
criticizing the Fed was not signed by two distinguished right-of-center
academic economists, Greg Mankiw and Robert Barro. I notice that
it was not signed by President George W. Bush’s two leading economic
advisers, Glenn Hubbard and Larry Lindsey.

So, having
set up a stick man, Frum mows them down with ease. To do this, he
cited a Harvard economist and a Berkeley economist as if their absence
from the list of two dozen critics meant anything other than their
Establishment positions.

in all, in fact, it’s fascinating to tally all the people who were
likely asked to sign but who opted against – and who have not
yet been heard from in this debate.

But that’s
how political triumphs often happen: not always by winning the
argument, but by deterring those who reject the argument from
speaking out.

First, there
is no political triumph, except by the same crew that has won ever
since 1913: the advocates of central banking. There is no groundswell
of political opposition to the FED. There is some sniping from the
hinterlands, added to Ron Paul’s criticisms – going back to
1976 – and Rand Paul’s.

Frum lives
in a fantasy world, where hobgoblins from Vienna threaten the cozy
arrangement that lines up almost all political factions on the side
of the Federal government and the Federal Reserve System. Even a
hint of opposition to the Federal Reserve is seen as a tidal wave
of opposition.

I wish that
Frum’s fantasy were grounded in reality. I wish that the FOMC were
facing open opposition from the political Establishment, or even
a significant faction within that Establishment. But such is not
the case. The Federal Reserve is still in the driver’s seat. The
FED will inflate without serious criticism.

Compared to
what has gone before, this open rebellion against the FED is significant,
but not as a storm. It is more like the coming storm that God described
to Elijah in the latter’s darkest moment: a cloud no bigger than
a man’s hand. It pointed to a change.

We should think
of the opposition to the FED as the stirrings of a counter-movement.
It is nowhere near an organized political movement yet.


The visible
failures of the FED under Bernanke have led to criticism from outside
the Establishment. This criticism is getting a wide hearing, because
of Ron Paul and also the Internet. The hearing may be wide, but
it is not deep. It is sporadic. People on the fringes of political
life are learning of a hidden story in American history: the story
of central banking and its debarment of the dollar after 1913.

story needs to be told. It points to the future. The critics of
Bernanke today are going to get a greater hearing when the FED’s
interventions cause even more economic pain.

This is a cloud
no bigger than a man’s hand. It will produce a political storm after
the FED’s policies produce an economic storm.

The neoconservatives,
monetarists, supply-siders, and other schools of economic opinion
have bet the farm on the Federal Reserve. They will lose this bet.

24, 2010

North [send him mail]
is the author of Mises
on Money
. Visit
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible

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