Economist Robert Wenzel edits and publishes the EconomicPolicyJournal.com Web site, where he regularly takes Fed policies to task. Nonetheless, the New York Federal Reserve Bank recently invited him to speak. Below is a condensed version of his remarks.
Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.
Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.
That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System
No Constants in Economics
I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek, and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.
In the science of physics, we know that water freezes at 32 degrees. There is preciseness because there are constants, which do not change and upon which equations can be constructed.
There are no such constants in the field of economics, since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.
And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. I scratch my head.
Production Key to Economy
I also find curious the general belief in the Keynesian model of the economy that somehow results in the belief that demand drives the economy, rather than production. I look out at the world and see iPhones, iPads, microwave ovens, flat-screen televisions, which suggest to me that it is production that boosts an economy. Without production of these things and millions of other items, where would we be?
Yet the Keynesians in this room will reply, “But you need demand to buy these products.” And I will reply, “Do you not believe in supply and demand? Do you not believe that products, once made, will adjust to a market-clearing price?”
I scratch my head that somehow most of you on some academic level believe in the theory of supply and demand and how market-setting prices result, yet you deny them in your macro thinking about the economy.
You will argue that prices are sticky on the downside, especially labor prices, and therefore you must pump money to get the economy going. And I will look on in amazement as your fellow Keynesian brethren in the government create an environment of sticky, non-downward-bending wages.
The economist Robert Murphy reports that President Herbert Hoover continually pressured businessmen to not lower wages.
He quoted Hoover in a speech delivered to a group of businessmen: “In this country there has been a concerted and determined effort on the part of government and business . . . to prevent any reduction in wages.”
He then reports that FDR actually outdid Hoover by seeking to “raise wages rates rather than merely put a floor under them.”
I ask you, with presidents actively conducting policies that attempt to defy supply and demand and prop up wages, are you really surprised that wages were sticky downward during the Great Depression?
In present-day America, the government focus has changed a bit. In the new focus, the government attempts much more to prop up the unemployed by extended payments for not working. Is it really a surprise that unemployment is so high when you pay people not to work? The 2010 Nobel Prize was awarded to economists for their studies that showed, and I quote from the Nobel press release announcing the award: “One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.”
Don’t you think it would make more sense to stop these policies, which are a direct factor in causing unemployment, than to add to the mess and devalue the currency by printing more money?
I scratch my head that somehow your conclusions about unemployment are so different from mine and that you call for the printing of money to boost “demand.” A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230 percent.
Price Stability Errors
I also must scratch my head at the view that the Federal Reserve should maintain a stable price level. What is wrong with having falling prices across the economy, like we now have in the computer sector, the flat screen television sector, and the cell phone sector?
Since the start of the Fed, prices have increased at the consumer level by 2,241 percent. I will repeat, since the start of the Fed, prices have increased at the consumer level by 2,241 percent.
So you then might tell me that stable prices are only a secondary goal of the Federal Reserve and that your real goal is to prevent serious declines in the economy. But since the start of the Fed, there have been 18 recessions, including the Great Depression and the most recent Great Recession. These downturns have resulted in stock market crashes, tens of millions of unemployed, and untold business bankruptcies.
Business Cycle Theory
I am especially confused, since Austrian business cycle theory (ABCT), developed by Mises, Hayek, and Rothbard, has warned about all these things.
According to ABCT, if you print money, those sectors where the money goes will boom; stop printing, and those sectors will crash. Fed printing tends to find its way to Wall Street and other capital goods sectors first, thus it is no surprise to Austrian school economists that the crashes are most dramatic in these sectors, such as the stock market and real estate sectors. The economist Murray Rothbard, in his book America’s Great Depression, went into painstaking detail outlining how the changes in money supply growth resulted in the Great Depression.
Advance Warning Given
On a more personal level, as the recent crisis was developing here, I warned throughout the summer of 2008 of the impending crisis. On July 11, 2008 at EconomicPolicyJournal.com, I wrote, “SUPER ALERT: Dramatic Slowdown In Money Supply Growth.
After growing at near double-digit rates for months, money growth has slowed dramatically. Annualized money growth over the last 3 months is only 5.2%. Over the last two months, there has been zero growth in the M2NSA money measure.
This is something that must be watched carefully. If such a dramatic slowdown continues, a severe recession is inevitable.
We have never seen such a dramatic change in money supply growth from a double-digit climb to 5% growth. Does Bernanke have any clue as to what the hell he is doing?”
On July 20, 2008, I wrote, “I have previously noted that over the last two months money supply has been collapsing. M2NSA has gone from double digit growth to nearly zero growth.
A review of the credit situation appears worse. According to recent Fed data, for the 13 weeks ended June 25, bank credit (securities and loans) contracted at an annual rate of 7.9%.
There has been a minor blip up since June 25 in both credit growth and M2NSA, but the growth rates remain extremely slow.
If a dramatic turnaround in these numbers doesn’t happen within the next few weeks, we are going to have to warn of a possible Great Depression style downturn.”
Yet, just weeks before these warnings from me, Chairman Bernanke had a decidedly much more optimistic outlook. In a speech on June 9, 2008, at the Federal Reserve Bank of Boston’s 53rd Annual Economic Conference, he said:
“I would like to provide a brief update on the outlook for the economy and policy, beginning with the prospects for growth. Despite the unwelcome rise in the unemployment rate that was reported last week, the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly. Indeed, although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. Over the remainder of 2008, the effects of monetary and fiscal stimulus, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad should provide some offset to the headwinds that still face the economy.”
I believe the Great Recession that followed is still fresh enough in our minds so it is not necessary to recount in detail as to whose forecast, mine or the chairman’s, was more accurate.
Fed Dismissed Bubble Concerns
No one seems to care at the Fed about the gold supposedly backing up the gold certificates on the Fed balance sheet. The emperor has no clothes. Austrian Business cycle theorists are regularly ignored by the Fed, yet they have the best records with regard to spotting overall downturns, and further they specifically recognized the developing housing bubble.
Let it not be forgotten that in 2004, two economists here at the New York Fed wrote a paper denying there was a housing bubble. I responded to the paper and wrote:
“The faulty analysis by [these] Federal Reserve economists . . . may go down in financial history as the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stocks prices looked to be at a permanently high plateau.”
Data released just yesterday now show housing prices have crashed to 2002 levels.
The noose is tightening on your organization; vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or, if you stop printing, another massive economic crash will occur. There is no other way out.
Again, thank you for inviting me. You have prepared food, so I will not be rude; I will stay and eat.
Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths, and four-legged rats.
Robert Wenzel ([email protected]) is editor and publisher of EconomicPolicyJournal.com. Used with permission.
Robert Wenzel’s full remarks to the New York Federal Reserve Bank: http://www.economicpolicyjournal.com/2012/04/my-speech-delivered-at-new-york-federal.html