Club Fed: Where Fantasies Are a Way of Life

The Nobel prize-winning Austrian School economist F.A. Hayek titled his last book The Fatal Conceit to describe the conceit of the notion that socialist central planners could possibly possess all of the detailed knowledge that is in the minds of millions in a market economy to “plan” a socialist economy. His 1974 Nobel prize speech was entitled “The Pretense of Knowledge” and conveyed the same message. Despite the fact that the whole world learned of just how right Hayek, Mises, and the Austrians were for so many decades about socialism upon its worldwide collapse in the late 1980s, America’s central planners keep marching ahead with more and more failed central plans that are based on pretentious fantasies dressed up with unintelligible mathematical economic models – just like the Soviet central planners of the twentieth century. I speak of course of the Federal Reserve Board and its economic central planners. A caricature of this socialistic central planning mentality was recently on display in the 2012 Annual Report of the Federal Reserve Bank of Minneapolis. The entire 40-page publication is devoted to not one but two interviews with the Minneapolis Fed’s president, one Narayana R. Kocherlakota, who had one of his employees (Doug Clement) throw him a series of softball pitch-style questions. What one first learns by the interviews is that Fed bureaucrats ignore the age-old economic wisdom about the folly of government-imposed price controls. In this case the price being controlled is various interest rates. Kocherlakota talks of an economic “liftoff plan” that is “to sustain low interest rates; that is, we’ll keep the fed funds rate extraordinarily low at least until unemployment falls below 5½ percent . . .” The Federal Reserve Open Market Committee (FOMC), he says, “will keep interest rates low until, say, mid-2016.”

The Fed’s “quantitative easing,” which used to be called “inflationary monetary policy,” is hailed as a tremendous success by Kocherlakota, citing a speech by Fed Chairman Ben Bernanke as “an excellent assessment of the effectiveness of quantitative easing.” This of course is sheer fantasy and butt kissing of the first order by Kocherlakota. The Fed’s zero interest rate policy is a war on savings, which is to say a war on economic investment, productivity, and economic growth. Savings and capital accumulation must fuel business investment in order for economic growth to occur. Free-market interest rates allow individuals to determine for themselves, based on their rates of time preference (whether to spend more or save more in the present) how much to save and how much to spend. The Fed’s central planners are hell bent on destroying all incentives to save because they are all Keynesian ideologues who believe in the Keynesian superstition that it is possible to consume without first working and producing income with which to purchase goods and services. “[Q]uantitative easing has the impact of pushing down on longer-term interest rates,” says Kocherlakota, “And that should be directly stimulative of the economy because by pushing down on market interest rates, people are led to think, ‘Hmm, maybe I shouldn’t be buying those assets that are paying such a low yield. I should spend money instead.’” Of course it has NOT been “directly stimulative” of the economy. Anything but. So Fed bureaucrats: 1) deny that the Greenspan Fed had anything to do with the housing bubble and its bursting, despite years of pursuing the goal of near-zero mortgage interest rates; and 2) claim that five years of the exact same policies have succeeded when it is apparent to the entire world that they have not. Kocherlakota’s central planning hubris and pretentiousness get even worse when he inadvertently contradicts himself by saying that there is a need to do more than pursue a zero interest rate policy. (If it’s been such a “success,” why is something more needed?). Specifically, he states that “[W]e’d like to push it [interest rates] down further and can’t.” That, however, “should be a signal to the fiscal authority to be more interventionist in the economy . . . ”

Translation: Quantitative easing has failed, so the congress and the president (a.k.a. “the fiscal authority”) need to experiment with even more central planning schemes. The particular central planning scheme proposed by Kocherlakota is “raising futureconsumption taxes” (emphasis added) which he speculates will “make future spending more costly and thereby encourage current spending.” More failed Keynesian central planning, in other words. The assumption here is that there is no need to save, invest, work, and produce; we just need to spend, spend, spend like a nation of spoiled little rich kids. One thing all of these Fed central planning schemes have in common is that they always call for more money printing, more government spending, more taxation, and more intervention of all kinds. Kocherlakota is absolutely dogmatic about his (and his fellow Fed bureaucrats’) devotion to the imposition of price controls via the manipulation of interest rates. “[W]e’re not going to get in the way of economic recovery by raising [interest] rates,” he declares. No, sir! The Fed will not allow any incentives for savings and investment; kiss your retirement savings goodbye. “Price controls forever!” is apparently the third Fed “mandate” along with the preposterous and ridiculous claims that it is charged with controlling both inflation and unemployment (the “dual mandate” in Washingtonese). Just in case the reader missed his repeated statements about keeping interest rates as close to zero as possible, thereby destroying the capital-reallocation processes of the free market, there is a blue page at the end of the two interviews that declares, in all capital letters, that: “THIS POLICY IS ABOUT LETTING THE PUBLIC KNOW WE’RE NOT GOING TO GET IN THE WAY OF RECOVERY BY RAISING RATES UNTIL RECOVERY IS CLOSE TO COMPLETE.” Never, in other words, because government bureaucrats never, ever, admit that their job is done and they can go home. The academic economics profession almost entirely abandoned Keynesianism during the 1970s when it failed to have a coherent explanation for stagflation – the simultaneous increase of inflation and unemployment. Even old Keynesian lions like Franco Modigliani of MIT publicly admitted that Keynesian “stabilization policy” had failed. The fundamental reason for rejecting Keynesianism became even stronger during the 1980s when inflation and unemployment fell simultaneously for the entire decade. These events proved once and for all the folly of the “Phillips Curve” as the essential tool of Keyensian central planning – the idea that lower unemployment can be “purchased” by central planners by creating more inflation through money printing.

All of this is ingored by today’s Fed bureaucrats like Kocherlakota and Bernanke who still follow the Keynesian central planning guidelines from the 1948 edition of Paul Samuelson’s principles of (Keyensian and interventionist) economics textbook. The Phillips Curve superstition is repeated throughout Kocherlakota’s interviews. “By providing more monetary stimulus, the FOMC can facilitate a faster transition of unemployment to its long-run lower level,” he says. “Having a balanced approach to the two mandates [i.e., lower unemployement and inflation] means that you should be willing to allow inflation to be above its 2 percent target in order to facilitate a faster transition of unemployment back to its lower . . . levels.” Keynesianism may have been rejected by serious academic economists, but it will never be rejected by politicians and their court historians because it gives them intellectual cover for never-ending interventionism, which enhances their own power, perks, incomes, and prestige. Endless Triviality Like all government bureaucrats, Kocherlakota can go on and on forever about absolutely trivial, unimportant, and unrealistic matters. He devotes a good bit of his interview to patting himself on the back for taking the “daring” stand of suggesting that Ben Bernanke’s “target” of 2 percent inflation /year might be revised to say, 2¼ percent. Oooooooooooh. “We could say 3 percent, but I don’t think we’d get to 3 percent. So, I think 2¼ percent is allowing as much leeway as we really need,” he babbles. Such babbling suggests that Fed bureaucrats like Kocherlakota believe that “setting” the annual inflation rate is as easy as setting the thermostat in one’s home. This of course is gross nonsense, as history has proven over and over again. And by the way, Bernanke’s goal of “only” 2 percent inflation per year forever, if achieved, would reduce the purchasing power of the dollar by about 50 percent during the career of the average American worker. Some “target.” Club Fed

Fed bureaucrats and their academic accomplices think of themselves as a closed club of central planners who can do no wrong and make no mistakes. For example, Kocherlakota boasts of the Fed conferences he has attended in places like Jackson Hole, Wyoming, and of all the wisdom he gleaned there from fellow Fed functionaries. He singles out the economist Edward Lazear, for example, the former Bush economic advisor who advised that the wars in Iraq and Afghanistan would actually be good for the U.S. economy by providing a Keyensian “stimulus.” This false notion is an example of the famous “broken window fallacy” of Bastiat and Hazlitt. Spending money on war does not “stimulate” the economy; it merely diverts resources from the productive, private sector of the economy to the task of mass murder and the destruction of civilizations in foreign countries. Calling war an economic stimulus is one of the worst examples of “free-lunch economics” that every freshman economic student should be aware of. It was also Edward Lazear, writes David Stockman in The Great Deformation: The Corruption of Capitalism in America(p. 557), who “had insisted in May 2008 that ‘the data are pretty clear that we are not in a recession.’” When the “Wall Street meltdown” did occur, writes Stockman, “Lazear did not have the foggiest notion of why it happened.” Kocherlakota is himself just as clueless about many of the subjects he pontificates about in his interviews. He bemoans unemployment caused by “job mismatch” but is silent on the fact that the most colossal example of the creation of job mismatch was the Fed-generated housing bubble that seduced millions of Americans into employment in housing and housing-related industries in the early 2000s, and then losing their jobs, careers, homes, and savings when the bubble burst. This was the mother of all mismatch unemployment crises, caused by the Fed-generated boom-and-bust cycle. All Kocherlakota can say about it is that “it would take a lot bigger increase in inflation to generate a desired fall in unemployment.” The Fed bureaucracy failed utterly to forecast the bursting of the real estate bubble it had created, as the above quotation of Edward Lazear shows. Such gross failures do not deter Fed bureaucrats from continuing to pretend that they are fortune tellers and mystics, however. Kocherlakota announces that the FOMC “expects that we will get to 6½ percent unemployment around mid-2015.” Not 6¼ or 6¾, but 6½. Not not September or October of 2015, but June. What conceit, hubris, and pretentiousness.

The Best of Thomas DiLorenzo at LRC

Thomas DiLorenzo Archives at