Thank you very much and I want to say first it's a thrill to be back at the Mises Institute
after an absence of more than a couple of years and to find that whether the economy
suffers boom or bust, the Institute keeps flourishing.
On a personal note, I should say that while many of us have a story about discovering
Austrian economics and being born again, in my own case it was almost a story of death
Taking my degree, I didn't read it when I initially picked it up.
I think I didn't read it a second time when I initially sort of browsed through it.
But finally, and I don't remember how, I did pick it up and began to read it and gradually saw the light.
But by that point, I'd dropped out of graduate school.
I'd quit teaching in college.
College, I had gone to Wall Street to be a commodities analyst, but had enough money
to be a denizen of the laissez-faire bookshop, which at that point was downtown on Mercer
Street in Manhattan, blew the family fortune on buying book after book, devouring Rothbard
and Mises and other writers, and then gradually drifted back to economics.
I got a job as a senior economist in the New York Stock Exchange, and I was struck one
day when my director told me, Jean, you're the only guy I've ever met who reads economics
for fun.
And I was struck by that, especially because I thought everybody did.
It was, I guess, a sign of how far removed from reality I had become, but I realized,
of course, I read Austrian economics, and that's why I found economics to be fun.
I then, just to complete my little bio, drifted further, got a job at Barron's, and at that
At that time, there was no economics editor position, no economics column being written,
but because I did special features about the economy, I got that job created for me, and
now I not only read economics for fun, I write about it for fun.
So I've been in hog heaven ever since I joined.
Well, I have perhaps the easiest assignment of anybody on the program to talk about why
you can't trust the experts.
But let me meander.
I'm going to meander toward that topic a little bit before I get to a couple of experts that
you can trust and talk about an expert that you can.
That's Roger Garrison, whose work on time and money I heartily recommend.
It lives up to the Austrian tradition in that if you're going to be a literary economist
and use words that does have some charts but mainly words, then it's great to be able to
write well and Roger not only writes clearly, he writes with great elegance and grace.
And as I say, I do recommend that book.
But it's my purpose as somebody who's writing a weekly column and who, if I may use the
is a pretentious phrase as a journalist having the assignment of writing the first draft of
history to try to piece out just how Roger's theory, which of course he borrowed from the
great Austrians, I always call Murray Rothbard Plato to von Mises Socrates, but how did we
observe in certain ways this Austrian business cycle happening?
I should first stress that, somewhat to my dismay, some of my colleagues in the Austrian
tradition, I think, take an excessively dour view of what goes on.
We did have a productivity revival.
We did have an increase in incomes and a general and welcome rise in the standard of living
of the Broad Masses of People over the past several years.
But we also had unhealthy aspects to the boom, and it was readily observable in certain obvious
ways.
Barron's had a series of articles written by a colleague of mine named Jack Willoughby
called The Burn Rate.
And Jack, my colleague, calculated the burn rate by starting with the list of major high-tech
and dot-com start-ups, then calculated the store of cash they had on hand against their
monthly rate of spending.
And with those estimates, he could calculate what he called the burn rate, how many months
Now, this was really a manifestation of an Austrian-driven boom, or an Austrian, or at least a boom that could be explained, claimed by the Austrian theory.
These were clearly upstream projects. They were projects that were, in certain cases, years away from selling a product for a profit, or for a profit, or for a profit.
These were clearly upstream projects. They were projects that were, in certain cases, years away from selling a product for a profit that would be profitable enough to pay their expenses.
So just for starters, it was on that point of the Hayekian Triangle that was far away from turning at a product that could be delivered to the consumer market.
and the fact that they were financed by equity is also a kind of a subtlety that disguises the fact that they were fundamentally financed by debt.
The investment banking firms and the venture capital firms were, of course, borrowing money.
If you think about it, the average investor was benefiting from lower interest rates through mortgage refinancings
Financing, and using a fair amount of that cash to buy stock as well. So there was a
relationship then between the mortgage debt market and the equity market. And of course
even credit card borrowings meant that you could be in debt but have enough cash on hand
to buy stock. Even wages and salaries are financed in part through short-term borrowing.
So the relationship between that kind of bulge in investment via equity and the obvious fact
that these were unsustainable projects, I think made very palpable, very obvious the
reality of Austrian business cycle theory.
Now I also think that in terms of a metal experiment, it's always good to think in
In terms of what the alternative would be, I mean, as Joseph Stromberg was saying earlier,
you can't keep speculating unless somebody gives you money with which to speculate.
And so if we talk about one or another different version of competitive banking, I myself am
persuaded with Roger Garrison that there probably would be some kind of fractional reserve banking
in a free market and that it would almost be virtually impossible to stamp it out.
I mean, we could just voluntarily give our money to a bank that offers a somewhat better rate
and that practice through yield management, a fairly careful way of handling that money.
But even if there were fractional reserve banking, there would only be a limit
to the degree to which you could expand money and credit and then it would stop
and then it just wouldn't happen anymore.
And now I want to play a little game with you.
My God, what did I just do? I've been pressed. Oh, thank you.
I've got to go back. I'm technologically incapable. I've been trusting my own thing, and I gave the game away a little bit.
I'm going to play a little game with you and quote from a source who will go unmentioned at this point, an explanation of how competitive banking might work.
And I want to read it with you. What he does is explain that when banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available, but when the business ventures financed by bank credit are less profitable and slow to pay off, which of course would be in the case of those dot-com ventures, quite slow to pay off, bankers soon find that their loans outstanding or excessive
relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates.
This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability
before they can obtain credit for further expansion.
Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.
But then he explains that the process of curing the slight tendency to access was at one point misdiagnosed as the disease.
If a shortage of bank reserves was causing the business decline, argued economic interventionists,
why not find a way of supplying increased reserves to the banks so they never need be short?
If banks can continue to loan money indefinitely, it was claimed there need never be any slumps
in business.
And so the Federal Reserve system was organized in 1913.
The writer even detours into the 1929 crash and explains that the XX credit which the
Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative
boom.
Well, I think that because I've been stepping on my own accelerator here, you already may
have discovered that I've been quoting Alan Greenspan.
And this was in an article which he published July of 1966 that appeared in a periodical
called The Objectivist.
I found it collected, initially found it collected in a book edited by Aaron Rand called Capitalism,
and the Unknown Ideal, I think it's called.
Greenspan was 40 years old at the time, just turned 40.
He was head of his own consulting firm, Townsend Greenspan,
and he believed in free market principles
and clearly had something against the Federal Reserve.
Eight years later, by the time he was 48,
he was chairman of the Council of Economic Advisors under Ford,
and I gather he was, you know, not quite minding his manners. Even at that time, he talked about gold as being the more desirable currency.
But over time, he realized, I believe, that in order to flourish in government, which was clearly the career he had apparently chosen for himself in middle age,
Houses, he posed this basic question about booms and busts. He asked a central, he began by saying,
a central bank can contain inflation over time under most conditions, but do we have the capability
to eliminate booms and busts in economic activity? Can fiscal and monetary policy acting at their
optimum, notice acting at their optimum, eliminate the business cycle as some of the more optimistic
followers of John Maynard Keynes seem to believe several decades ago.
Notice now he's clearly in the Keynesian tradition.
Now Rabbi Greenspan then proceeded to say, the answer in my judgment is no, because there
is no tool to change human nature.
Too often people are prone to recurring bouts of optimism and pessimism that manifest themselves
from time to time in the build-up or cessation of speculative excesses.
We have met the enemy and he is us.
He is no longer the Fed and he is certainly not Alan Greenspan, who is now head of the
Fed.
And, I mean, this goes back to, I guess, the way Rothbard used to joke about the Whig version
of history that, you know, we build on the understandings of the past.
I mean, in Greenspan's own life, he was unable to do that.
and instead of trying to address himself 35 years ago, dig up a copy of that article,
Golden Economic Freedom, he just decided to forget about it all together and not address it.
He goes on to say, as I have noted in recent years, our only realistic response to a speculative
bubble is to lean against the economic pressures that may accompany a rise in asset prices,
and address forcefully the consequences of sharp deflation of asset prices should they occur.
Well, he certainly has addressed the deflation of asset prices pretty forcefully over the past year or so.
And the Fed funds rate was at six and a half percent, and now it's at one and three quarters percent.
But he was really faced with a whole lot of complicated choices.
This is only beginning, I can only begin to say the strokes, how difficult it is to have that job and do it well.
I mean, there's actually a left-wing political analyst whom I have a high regard for, Noam Chomsky,
when asked, you know, what would you do if you run the world, he'd always answer, well, I would resign.
Obviously, that's what Greenspan should do as head of the central bank, resign and try to propose some alternative to the system that he's running.
But notice he's talking about the realistic response to a speculative bubble being to lean against the economic pressures that may accompany a rise in asset prices.
Well, look at the way he fiddled. That's some of the high points, some of the range of the Fed funds rate starting in February 1995,
The Federal Reserve in 1995 lined up against the average level of the Nasdaq Composite, which is a reasonable proxy for the tech bubble, and noticed that the Fed Funds Rate was at 6% in February 1995, and as the Nasdaq Composite rose, the Fed Funds Rate did nothing but fall and then sort of rise back again to where it was.
Some of the key dates in this are that in December of 1996, that's where Greenspan began sort of the first salvo about blaming it on human nature when he made that reference to rational exuberance, that was in December 96.
Then he was faced with the long-term capital management debacle and the Asian crisis and felt that in order to restore confidence he had to cut rates.
and then only gradually began to hike rates back up again.
Now over the same period, of course, there was an explosion in the money
We're trying to apply Austrian business cycle theory to the realities of the world.
The subtlety is that there is no such thing as a situation in which the Fed takes the
initiative and pumps reserves into the system.
It doesn't take the initiative.
What it does is it fixes a price, the price of short-term money and credit, via the Fed
funds rate.
But in order to maintain that price target, what it does is it satisfies all comers.
It's an infinite, it's like, almost as though I were to tell you that I've got an infinite
amount of wheat at $6 a bushel.
But that obviously means that the greater the demand for wheat, the more I have to supply
in order to maintain that price target of $6 a bushel.
And you will find, over the course of a single day, an enormous amount of volatility in that
The Federal Reserve issues statistics on the weighted average of the Fed funds rate, and there too you'll find a fair range, so even then it's imperfect.
as to how it does it. However, what it does do is simply respond to the demands
of the banking system. It basically tells the banking system you can have all you
want at a certain price. And this has even made manifest and obvious in the
fact that the banking system incurs commitments one week and only four weeks
later does it have to meet reserve requirements on those commitments. It has
has that long a lead time, and what the Fed then is faced with at any one point is to allow it to fill those reserve requirements because the commitments have already been made, it underwrites those commitments, however it underwrites them, the art of managing those open market operations is to maintain the Fed funds rate at a price, but that needn't disguise the fact that this anything goes, have all you want,
at a certain price is clearly expansionist.
But just to kiss off Dr. Greenspan, he didn't even live up to that requirement, which is
that they lean against, he leaned against the inflation of asset prices.
That's pretty clear from this record.
I'm going to have time for just one more expert I can't trust, and the expert I have in mind
is Professor Paul Krugman, lately of Princeton University. He's kind of a piece of work,
honestly. The trouble I have, it's almost like what was occasionally said of Henry Kissinger,
that sometimes the statements he makes are so out of touch with reality that you wonder
What is really his game? Similar to Krugman, the statements he can make from one paragraph
to the next, from one column to the next, are just sometimes so palpably absurd that
it doesn't even make good nonsense. And to discuss it, almost to enter into the arena
of discussion about Krugman, is to almost assume implicitly that he is making somewhat
I want to discuss the substance, the core of his book of 1999, which was called The Return of Depression Economics.
As with everything Krugman writes, it was certainly artfully crafted.
I actually attended a meeting at the Council of Foreign Relations where all the monkey mucks were there,
with Ian Krugman, who was the sole person on the stage, being interviewed about the return of depression economics, of course, in the wake of the Asian crisis.
And what he begins with in this book, in order to give you the core framework, is this tale of a babysitting co-op, monetary theory and the great capital of a babysitting co-op crisis,
This article by Joan and Richard Sweeney, I'm not familiar with them, that he cites.
And now I should stress that there's nothing wrong with a simple story if it yields results.
I don't make fun of Krugman because he's talking about a babysitting co-op.
The problem lies elsewhere.
He begins by saying the tale of the babysitting co-op will turn out to be a powerful tool
for understanding the not at all whimsical problems of real-world economies, understand
that what he's about to do is talk about Mexico and the Asian countries generally.
And so what is this powerful tool?
Well, in the babysitting co-op, what happened was that there were 150 couples, and each
was issued coupons entitling the bear to one hour babysitting.
Now I'm familiar with babysitting co-ops, I raised my own kids, I had a babysitting
and Co-op, and this immediately, it was immediately struck by a little problem that Krugman doesn't
even realize he's edging into, which is that these coupons, entitling the bearer to one
hour of babysitting, aren't really money at all, or even the vaguest semblance of money
since after all they do say one hour of babysitting on them.
But we'll get to that problem in a moment.
Now what happened was that the co-op fell into a recession.
How did that happen?
Well, because, according to Krugman, couples who felt their reserves of coupons to be insufficient
were anxious to babysit and reluctant to go out, so opportunities to babysit became hard
to find, making couples even more reluctant to use their reserves except on special occasions,
which made babysitting opportunities even scarcer.
In short, the co-op went into recession.
Now, an obvious solution would have been to tell everybody in the co-op, forget about
this each coupon being one hour of babysitting.
Just form your transactions as you may.
If you're eager to babysit, then put out your bid.
You'll accept half as many coupons for the babysitting.
You won't insist on such higher price for the service.
That would have been the simplest solution of all,
just a little bit of price deflation
would have solved this so-called recession.
The real point was the rigidity.
The coupons could only buy one hour, one hour only.
So every guy faced a reverse problem when I had a co-op,
but ran a co-op, but that's another issue.
We solved that problem as well by just inflating the price.
But anyway, but that's not good enough recruitment.
He tells us that the Capitol Hill babysitting co-op
There's a miniature economy, the economy of evenness, but then, of course, he grants the problems, he's not that stupid.
The economy of evenness of all nations is, of course, far more complex than that of a babysitting co-op.
Among other things, people in the larger world spend more, not only for their current pleasure, but to invest for the future.
And in the big world, there is also a capital market in which those with spare cash can lend it in interest to those who need it now.
Well, we kiss that off as, you know, we know that's true in the big world, but that doesn't matter because the babysitting co-op is the miniature economy.
and because the fundamentals are the same.
A recession is normally a matter of the public as a whole trying to accumulate cash
and can normally be cured simply by issuing more coupons.
So we just have to inflate.
As I say, ironically, the babysitting co-op didn't even need to do that.
All it had to do was tell everybody in the co-op, you know,
I want you to cut the price you charge and then you can do business in this babysitting co-op.
But that doesn't even occur to Krugman, much less the problem that in the real world there really is a capital market, investment market.
Now, we're all set to read this book and the co-op, you know, we've got this wonderful, simple model in mind and it's artful.
Why not, you know, why not welcome simplicity?
And then Krugman starts writing about what went on with all these economies.
And what does he say? Well, here's a sort of a, you know, a little digest about Mexico, about Japan, about Thailand.
What is he right? The government's financial crisis soon spilled over into the private sector.
Mexico's real GDP would plunge by 7% in 1995. Now he writes about Japan.
There's nothing mysterious about the onset of Japan's slump in 1991.
Well, we're about to hopefully read, was it because of their babysitting co-op problems metaphorically?
No, it was because sooner or later the financial bubble was bound to burst,
and when it did, it would bring a decline in investment in consumption and hence in overall demand while the financial bubble was bursting.
Somehow or other, something about investment is being brought into the picture, which he specifically says the babysitting co-op has nothing to do with.
Thailand, during 1996 and the first half of 1997, the credit machine that created Thailand's boom began to slip into reverse.
Well, that's my problem with this expert. He doesn't even make good nonsense. This
professor is telling us that he's got it all figured out in terms of his babysitting
co-op. And then suddenly he's informing the reader about all kinds of other stuff that
went on in the real world and writes in this book a reasonably competent, albeit extremely
a superficial account of what happened when Mexico and other Asian economies collapsed.
We forgot altogether about the babysitting co-op, except every once in a while when Krugman
talks about how to solve this problem, perhaps we need to reinflate, perhaps reinflating,
perhaps printing more money is going to solve this problem.
But that's the end of it. We close the book and we listen to him on the stage in front
of the Council of Foreign Relations speaking before Peter Peterson and a whole lot of other
establishment types. They stand up, they applaud him, and they go out of the room vaguely thinking
that they've learned something, vaguely thinking that, but I guess much more vividly thinking
that the there's always a role for a central authority in all of this that they they've
still been they have not been dealt out of the game they who who either have the power
to run to to print money or can suggest to others of their friends to print money they're
still they're still in business well I'm in a jump and because I noticed my time is
up, and I'm going to end up with a Jewish telegram. The core of the analysis and reason
why we can't trust the experts is that for them a boom and a bust is just a Jewish telegram.
Start worrying, stop, letter to follow. Thank you.