Bernanke’s Publicity Stunt

Federal Reserve Chairman Ben Bernanke has taken his defense of the Federal Reserve System on the road.  In response to recent critics of the central bank, notably Republican presidential candidate Ron Paul, Bernanke is scheduled to deliver four classroom lectures at George Washington University.  In his first discourse, Bernanke was Bernanke, extolling the virtues of the Fed while criticizing calls to return the dollar to a gold standard.

One of Bernanke’s criticisms of a return to the gold standard is that it is not practical.  By that he means “it can be a waste of resources to secure all the gold needed to back currency, moving it from South Africa to the Federal Reserve Bank of New York’s basement”.  But, the benefit of using gold to back currency is precisely because it is scarce and difficult to dig up and transport. Otherwise, it would have little value and be about as valuable as paper money.

A more significant criticism lodged by Bernanke against the gold standard is that it doesn’t prevent “short-term volatility”.  According to the Fed chairman, “Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy”.  By short-term volatility, Bernanke must be referring to those periods in the 19^th Century when the Second Bank of the United States and the federal government from time to time allowed banks to suspend payment in species thus enabling widespread currency inflation and financial volatility.  The fact is that under a true gold standard short-term volatility would not exist.  Prices would be stable and the artificial booms and inevitable busts caused by Fed monetary price fixing would not happen.

But, to his credit, Bernanke did acknowledge that historically countries using the gold standard have experienced long periods of price stability.  In fact, in the United States from the mid-Nineteenth Century until 1940 prices in the United States actually fell on average from year to year – the main exceptions being during war years.

So while even Bernanke admits that the gold standard is an effective means to produce stable prices which after all benefit the poor, the elderly, and others on fixed budgets, why is he still so resistance to a return to the gold standard?  The key is in the answer he gave to one student’s question about why Fed critics are pushing hard to return to a gold standard. Bernanke indicated that they want to remove some “discretion” the Fed has over the economy.  It is this “discretion” that Bernanke and his monetary oligarchs used to dole out trillions of dollars in secret loans to their bank buddies who nearly brought the whole financial system to its knees.  Many of them got a piece of the action – Citigroup – $2.513 trillion, Morgan Stanley – $2.041 trillion, Merrill Lynch – $1.949 trillion, Bank of America – $1.344 trillion, Barclays PLC – $868 billion, Bear Sterns – $853 billion, Goldman Sachs – $814 billion, Royal Bank of Scotland – $541 billion, JP Morgan Chase – $391 billion, Deutsche Bank – $354 billion, UBS – $287 billion, Credit Suisse – $262 billion, Lehman Brothers – $183 billion, Bank of Scotland – $181 billion BNP Paribas – $175 billion, Wells Fargo – $159 billion, Dexia – $159 billion, Wachovia – $142 billion, Dresdner Bank – $135 billion, and Societe Generale – $124 billion.  You see with a gold standard these loans and other Fed schemes to benefit the bankers would not be possible.  Thus, when Bernanke criticizes the gold standard it is more than just professorial theorizing, it is a defense of the current corrupt banking cartel in America.

In the final analysis, Bernanke’s lecture series at G.W. is nothing more than a publicity stunt and not a very good one at that.  The Federal Reserve is an indefensible institution.  Compounding his problem are arguments he is attempting to make against the gold standard which served our country well for so long.  Anything he says cheats the students of valuable educational time.  Perhaps the powers that be at G.W. should invite Ron Paul to debate Bernanke.  Only then will the students get their money’s worth.

Article first published as Bernanke’s Publicity Stunt on Blogcritics.

 

Romney is Focusing on the Wrong Mechanism

Coming off derogatory remarks he recently made about the underclass in America, Republican presidential hopeful Mitt Romney apparently felt the need to throw them a bone. Last week, he reaffirmed his support for linking regular increases in the minimum wage to the rate of inflation. Given that Romney has held this position since he ran for governor of Massachusetts in 2002, one could assume that he really believes the proposal would go a long way to helping the working poor. But, what he is really doing is focusing on the wrong mechanism to help them.

On the surface, Romney’s proposal seems reasonable. As prices increase, so should wages. After all, aren’t Social Security benefits indexed for price inflation?

However, the first realization that must be acknowledged is that government economic policy causes the price increases that allegedly make the minimum wage necessary for some to live a minimal existence. In other words, if the federal government would simply live within its means and cease using the Federal Reserve to monetize huge amounts of debt and maintain artificially low interest rates there would be little or no need for a minimum wage.

As the late, Austrian economist, Murray Rothbard pointed out in his book, The Mystery of Banking, from the mid-eighteenth century until 1940 prices in the United States actually fell on average from year to year with the exception being during war years. Since 1940, the Federal Reserve which became responsible for maintaining price stability and the value of the dollar through monetary policy oversaw a decline in the dollar’s value by more than 93 percent. That calculates to a 1506% annual rate of inflation change! It’s no wonder we have become a society with a low savings rate and two partners working to make ends meet.

What was the difference between these two economic epochs in our nation’s history? The first had a Gold Standard and the second was based on a fiat dollar standard.

The bottom line is that minimum wage laws are a reaction by politicians to their own historical bungling of the economy. If Mitt Romney and his ilk really wanted to help the working poor in America they would endorse a sound money policy instead. In particular, a gold backed currency that would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits. In short, a return to the Gold Standard would stabilize and eliminate the need for a minimum wage.

Washington Should Follow Laissez-Faire

Things are really a mess economically in the United States and it isn’t really an exaggeration to say it is all Washington’s fault.  I mean through the easy money policies of the Federal Reserve and the legislative and monetary support of Congress and the previous administration many Americans who couldn’t otherwise afford to buy a house bought one.  This coupled with reckless lending policies on the part of primary lenders due to explicit and implicit government loan guarantees set the economy up for a massive failure.  Then, when their low teaser rates readjusted up and many could not afford their new higher payments the housing bubble burst.  And what was Washington’s response?  It was to provide trillions more in easy money and a policy of encouraging Americans to borrow and spend it to “stimulate” the economy.

Now that, that policy hasn’t worked we are facing a massive debt crisis, with real unemployment north of 16 percent and price inflation eating away at the standard of living in America.

If that is not bad enough, last week it was reported that bailout beneficiaries and mortgage guarantors Freddie Mac and Fannie Mae asked the federal government for more bailout funds.  Freddie asked for $6 billion more bringing that GSE’s total bailout figure to $72.2 billion.  Fannie asked for $7.8 billion more bringing its total Treasury draw to over $120 billion.

The main reason why Freddie and Fannie are still losing money and require more federal largess is because of the policies coming out of Washington.  Freddie reported $4.8 billion in derivative losses alone due to declining interest rates.  Fannie’s president and CEO, Michael Williams claims his firm’s woes are due to homeowners paying less interest on loans refinanced at historically low mortgage rates.  So while Washington brought on the original crisis that forced Freddie and Fannie into U.S. conservatorship, its response to that crisis has only made the financial conditions of those entities worse.

At the end of the day, Henry Hazlitt’s words from his famous book, Economics in One Lesson ring prophetic.

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

In both instances, Washington’s policies leading to the financial crisis of 2008 and its policies since have helped some groups ( i.e. bankers) and hurt others (Fannie and Freddie).  Since no mortal man can determine with precision how a given economic policy of government or a central bank will affect every group in a society it is best for government and central bankers to abstain from imposing their will on the economy.  Certainly we would be much better off now because our economy wouldn’t be in the mess that it is in.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina