Ben Bernanke's Pretense of Knowledge

0:00Here we are two years after the Wall Street come apart, and we have an economy that's still lingering in a funk. And the Federal Reserve announced the day after the elections, amazingly, they picked the day after the elections to announce what the Associated Press called a bold effort to invigorate the economy, the purchase of $600 billion in government bonds from now Now through the middle of next year, this is a pace of $75 billion a month, $600 billion is on top of the $250 billion, $300 billion that it would be paying to buy or reinvesting proceeds in its mortgage portfolio. Of course, you may ask, well, where does the Fed get this money?

0:47They create it out of nowhere. The idea is for cheaper loans to get people to spend more and stimulate hiring, says the Associated Press, who's evidently easily fooled. The Fed says it will review whether adjustments are needed depending on how the economy is performing. And the Fed itself, in its statement, said, consistent with its statutory mandate, the seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated and measures of underlying inflation are somewhat low relative to levels that the committee judges to be consistent over the long run with its dual mandate.

1:40Although the committee anticipates a gradual return to higher levels of resource utilization In a context of price stability, progress toward its objectives have been disappointingly slow. Yeah, I know, even Sarah Palin is outraged. She's calling for Ben Bernanke to cease and desist. I wonder if Sarah can see Ben from her backyard. But this $600 billion comes after an unprecedented $8 trillion in federal government power that was unleashed after the financial meltdown that has already come into play. These are actions by the Federal Reserve, the TARP, guarantees made by the FDIC, the direct bailouts, and the Fed funds rate has been held at 0 to a quarter percent since December of 08.

2:38And what's been the result of all that? Well, at the end of October 08, the yield on the government's tenure bond was 3.92%. It ended last week yielding 2.52%. Lending your government for one year snagged you all of 21 basis points last week. Two years ago, you would have earned a very fat 1.44% for lending your government money. And the prime lending rate that banks use to base their commercial loan lending rate on for borrowers, that was slashed to 4% in October of 08. That was less than half the 8.25 prime rate that it had been a year prior to that.

3:25Banks then cut their prime rate in December of 2008 to 3.25%, where it's been ever since. 30-year mortgages, they were 6.87% 2 years ago, a couple of weeks ago the rate was more than 200 basis points less, 4.58, so I've got news for the Associated Press, interest rates are already down, but banks aren't lending the money, borrowers aren't borrowing it, total bank loans were down 96 billion at the end of the second quarter and commercial and and Industrial Loans, CNI loans as they're known, that totaled over $800 billion in 2008, we're down to $600 billion in the latest reporting.

4:15Now CNI loans, these are loans that businesses take out for expansion and short-term hiring needs. If businesses aren't borrowing, they probably aren't hiring. Consumers aren't borrowing either. The consumer indebtedness was down 110 billion from just the end of June. Households have slashed a trillion dollars in their outstanding consumer debts since the peak of the third quarter of 2008. And while interest rates have fallen, unemployment rate has risen. October of 2008, unemployment was 6.1. Latest reading, it's 9.6. If you count discouraged workers and workers having to work part-time, the rate is 17 percent.

5:04There's 1.2 million discouraged workers in September and that was more than double the 503,000 discouraged workers from a year ago. The average length of official unemployment has increased to 24 and a half weeks, The longest since the government began tracking data, 1948. The number of long-term unemployed has now jumped to four and a half million, and nearly one and a half million have been unemployed or out of work for 99 weeks or more. So unemployment is up. GDP is up two and a half percent. John Williams at ShadowStats reports that 63% of that is from inventory building, despite reports that consumption is slowing.

5:57In fact, Williams writes, if the quarterly GDP growth were viewed in terms of just quarter-to-quarter change the way the rest of the world tends to report its GDP, that non-annualized quarterly In August, over 42 million people were participating in the government's Supplemental Nutrition Existence Program, SNAP. In other words, 42 million people are buying their groceries with food stamps. It's an all-time record, it's a 17.5% increase from a year ago.

6:46So all this rate cutting, monetizing hasn't put anybody to work and it hasn't stabilized anything except dependence on the government. And while the folks at the Bureau of Labor Statistics say that there is no inflation at 1.14% CPI, John Williams calculates CPA the old way, says consumer prices are rising at 8.5%. All this money, all this government stimulus, but no growth and no jobs to show for it. Only higher prices, even if the government says they aren't rising.

7:31But Keynes said a little or a lot of government nudge here and there would bring prosperity. After all, he claimed that markets were broken, and it was for government and central banks to intervene. Hunter Lewis wrote a great book called Where Keynes Went Wrong, and he said it was Keynes's contention, in addition to, of course, all being dead in the long run, that number one, Number two, society tends to under-consume and over-save. Yeah, that describes America recently, sure. Number three, interest rates tend to be too high. Not exactly.

8:18Four, monetary policy can lower interest rates by money printing. And number five, Keynes' core theory, which was unused savings interrupt the flow of money through the economy and lead to unemployment. Unemployment, unemployment reduces society's income. So the Keynesians contend that it's not a matter of if their policies are going to work. It's only a matter of when and if, when Keynesian monetary stimulus is going to work. And if it hasn't worked already, it's because the Fed hasn't done enough. Nobel Prize winner and Grey Lady columnist and frequent whipping boy on Mises.org, Paul Krugman, well he's underwhelmed by Bernanke's announced printing. QE2 is meh, he writes.

9:17He says $600 billion is in diddly when you're trying to turn around a $15 trillion battleship. And now if he was King Bernanke, he'd make a quote, commitment to achieve 5% annual inflation over the next five years. Or perhaps better, to hit a price level 28% higher at the end of 2015 than the level today. Crucially, this target would have to be non-contingent. Not something you'd call off if the government recovers. Why? is the point is to move expectations and that means locking in price rises whenever it happens. Most Keynesians think we should already thank our lucky stars for their policies anyway.

10:06economist Alan Blinder and Mark Zandi did a report recently supposedly using a standard economic model and determined that if the Fed hadn't intervened the decline in GDP would would have been three times worse, the unemployment rate would have risen to over 16% and then we would have a federal deficit of $2.6 trillion. Now if the model is so standard, then as Bill Bonner asks, how come the Obama economic team since surely Larry Summers and Christina Romer had this standard model sitting in their desk Somewhere. Why were they claiming that the initial stimulus would ensure that the unemployment rate wouldn't climb over 8 percent?

10:57Fact is, it turns out this modeling business is all nonsense. F.A. Hayek explained in his 1974 Nobel acceptance speech entitled, The Pretense of Knowledge, that monetary and fiscal policies are the product of what he called the scientistic attitude, which in fact is unscientific in that it involves a mechanical and uncritical applications of habit of thought to fields different than those in which they have been formed. So just as it was 36 years ago when Hayek delivered this seminal speech, the Keynesians Some people believe that there, quote, exists a simple positive correlation between total employment and the size of aggregate demand for goods and services.

11:47It leads to the belief that we can permanently assure employment by maintaining total money expenditure at an appropriate level, unquote. So while Bernanke, with Paul Krugman looking over his shoulder, telling him where to put with the paddles and how many volts to shock the patient with, thinks he can crunch the data, make a diagnosis, concoct the right monetary brew and inject lots of it into us and we'll be all employed and living happily ever after. The fact is that's impossible. In the physical sciences that may work, but as Hayek explains, such complex phenomenon as the market, which depends on the actions of many individuals, all the circumstances which will determine the outcome of a process will hardly ever be fully known or measurable.

12:42The wise ones at the Fed and Treasury are only looking at factors that can be quantitatively measured, and they disregard any factors that can. Thus, they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant. No single observer can know all the factors determining prices and wages in a well-functioning marketplace. But because policymakers think they know, an almost exclusive concentration on quantitative measurable surface phenomenon has produced to Policy, which has made matters worse," Hayek said back in 1974, and nothing has changed.

13:28James Grant explained in a recent Grant's Interest Rate Observer, he wrote, The trouble with living authorities and money in banking is the ideas they absorbed in school. For instance, that a central bank can calibrate the rate of debasement and the currency it prints by adjusting the speed in the digital press, or that the Federal Open Market Committee can pick the interest rate that will cause the GDP to grow and payrolls to swell and prices to levitate by 2% per annum, give or take a basis point or two. Such things are impossible. Ben Bernanke presumably thought that cutting the Fed funds rate target to zero to a quarter and nearly tripling his employer's balance sheet from $800 billion to $2.2 trillion would put everybody who wanted to be not only back to work but swiping their plastic for that new big screen or maybe taking advantage of GM 0% 60-month financing to drive a new Denali off the lot.

14:35However, Hayek explains, it seems to me that this failure of economists to guide policy Researching more successfully is closely connected with their propensity to imitate, as closely as possible, the procedures of the brilliantly successful physical sciences, an attempt which in our field may lead to outright error. While Bernanke and Company have been making errors aplenty by endlessly inflating, bailing In continuing on that theme, the Fed's proposed QE2 bond purchases will come from the middle of the yield curve, with two-thirds of the purchases to be notes with durations from four to ten years, according to the New York Fed.

15:25So it's the nation's big banks that will benefit by QE2 as they pay their customers zero for their deposits, and they buy treasuries yielding one to two percent, knowing the Fed has their back. No loan loss reserves must be retained if the bank is lending to Uncle Sam as opposed to if the bank lends to your cousin Sam to start a business or build a house. So while the Fed thinks more money means more employment, the real result of all this stimulating will be more unemployment, not less. Frank Szostak explains that QAT undermines capital formation and less capital formation in turn weakens economic growth.

16:12And the poorer people are the higher their time preferences. So as he writes, a so-called lowering of real interest rates by means of money pumping is basically an act of diversion of real wealth from wealth generators to various non-productive of Activities. Hence, contrary to popular thinking, the Fed's attempt to lower the real interest rate, in fact, leads to higher real interest rate. Now, the reason we're in this recession in the first place is that it is a clearing of the malinvestments that took place when the Fed's easy money rushed into those investments during the boom. So producing things that nobody wants and propping up dysfunctional firms and malinvestments cannot possibly help any economy.

17:06The government's money men are engaging in what Hayek can refer to as the fatal conceit, thinking that they have the knowledge to fix and plan the economy. If a man is not to do more harm than good in his efforts to improve the social order, Hayek lectured, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. But these Fed Chairman are considered the most powerful men in America, if not the world. While on the job, the previous Fed Chair, Alan Greenspan, was reverently referred to as the maestro. However, as Lew Rockwell points out, monetary pumping was his only weapon.

18:02Think about the occasions, the Mexican debt crisis in 96, the Asian contagion of 97, long-term capital management meltdown in 1998, the Y2K crisis in 99 and 2000, the dot-com collapse And finally, 9-11 terrorist incidents in Washington and New York. Each time the prescription was more money. Well, now Greenspan spends his time reinventing history and denying any accountability for the housing bubble and bust, or accountability for his Fed's monetary policies. Even that Enron prize he won doesn't look so hot right now.

18:49Current Fed Chair was Time Magazine's Person of the Year last year because he, quote, didn't just reshape U.S. monetary policy, he led an effort to save the world economy, quote. However, Bernanke's reputation may have hit its peak at the end of 2009. The harder he hits the monetary gas pedal, the further his reputation, along with the value of the dollar, goes downhill. And while the self-confidence of central bankers knows no bounds, there's no telling where the money they create will go or what it will do. Ludwig von Mises wrote, all monetary policies encounter the difficulty that the effects The interests of any measures taken can never be foreseen in advance, nor their nature and magnitude be determined even after they have been already occurred.

19:48Henry Parker Willis wrote in a book called The Theory and Practice of Central Banking back in 1936. No central bank can, by the mere exercise of its credit-granting power, make something out of nothing, or save other banks from the disastrous consequences of their past policy. When a central bank does this, it merely tends to make bad matters worse. Willis, who, by the way, was the first secretary of the Federal Reserve Board, wrote back in in a time when central banks were thought to merely be available to liquefy the commercial banking system. But today, Fed heads and their committees are thought to be benevolent clairvoyants who can wave their magic interest rate wands, growing aggregate demand, and putting the masses back to work.

20:43But even back in 36, Willis foresaw that central banking would become a tool of politicians to placate the discontent of the citizenry. In such cases, Willis wrote, central banking becomes merely an adjunct to a dynasty of political dictators who desire to bring about an artificial redistribution of purchasing power and wealth. Concluding his Nobel acceptance speech, Hayek said, The recognition of the insufferable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in man's fatal striving to control society, A striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed, but which has grown from the free efforts of millions of individuals.

21:53So while the wisdom of Hayek is long forgotten, instead we have central bankers who are worshipped on Wall Street and in Washington, allowing their hubris to place not only the U.S. economy but all of society on the brink of destruction.