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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 5� 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 future consumption
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, 2� percent.
Oooooooooooh. "We could say 3 percent, but I don't think we'd get to 3
percent. So, I think 2� 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 6� percent unemployment
around mid-2015." Not 6� or 6�, but 6�. Not not September or October of
2015, but June. What conceit, hubris, and pretentiousness.
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