WEBVTT NOTE Ben Bernanke's Pretense of Knowledge 1 00:00:00.000 --> 00:00:05.800 Here we are two years after the Wall Street come apart, and we have an economy that's 2 00:00:05.800 --> 00:00:08.720 still lingering in a funk. 3 00:00:08.720 --> 00:00:14.200 And the Federal Reserve announced the day after the elections, amazingly, they picked 4 00:00:14.200 --> 00:00:21.080 the day after the elections to announce what the Associated Press called a bold effort 5 00:00:21.080 --> 00:00:28.260 to invigorate the economy, the purchase of $600 billion in government bonds from now 6 00:00:28.260 --> 00:00:34.900 Now through the middle of next year, this is a pace of $75 billion a month, $600 billion 7 00:00:34.900 --> 00:00:42.980 is on top of the $250 billion, $300 billion that it would be paying to buy or reinvesting 8 00:00:42.980 --> 00:00:44.580 proceeds in its mortgage portfolio. 9 00:00:44.580 --> 00:00:47.860 Of course, you may ask, well, where does the Fed get this money? 10 00:00:47.860 --> 00:00:51.940 They create it out of nowhere. 11 00:00:51.940 --> 00:00:59.440 The idea is for cheaper loans to get people to spend more and stimulate hiring, says the 12 00:00:59.440 --> 00:01:03.920 Associated Press, who's evidently easily fooled. 13 00:01:03.920 --> 00:01:09.080 The Fed says it will review whether adjustments are needed depending on how the economy is 14 00:01:09.080 --> 00:01:11.480 performing. 15 00:01:11.480 --> 00:01:18.720 And the Fed itself, in its statement, said, consistent with its statutory mandate, the 16 00:01:18.720 --> 00:01:24.280 seeks to foster maximum employment and price stability. 17 00:01:24.280 --> 00:01:30.820 Currently, the unemployment rate is elevated and measures of underlying inflation are somewhat 18 00:01:30.820 --> 00:01:37.560 low relative to levels that the committee judges to be consistent over the long run 19 00:01:37.560 --> 00:01:40.960 with its dual mandate. 20 00:01:40.960 --> 00:01:47.560 Although the committee anticipates a gradual return to higher levels of resource utilization 21 00:01:47.560 --> 00:01:55.520 In a context of price stability, progress toward its objectives have been disappointingly slow. 22 00:01:55.520 --> 00:01:59.400 Yeah, I know, even Sarah Palin is outraged. 23 00:01:59.400 --> 00:02:04.560 She's calling for Ben Bernanke to cease and desist. 24 00:02:04.560 --> 00:02:09.040 I wonder if Sarah can see Ben from her backyard. 25 00:02:09.040 --> 00:02:16.960 But this $600 billion comes after an unprecedented $8 trillion in federal government power that 26 00:02:16.960 --> 00:02:24.000 was unleashed after the financial meltdown that has already come into play. 27 00:02:24.000 --> 00:02:30.520 These are actions by the Federal Reserve, the TARP, guarantees made by the FDIC, the 28 00:02:30.520 --> 00:02:36.920 direct bailouts, and the Fed funds rate has been held at 0 to a quarter percent since 29 00:02:36.920 --> 00:02:38.980 December of 08. 30 00:02:38.980 --> 00:02:41.720 And what's been the result of all that? 31 00:02:41.720 --> 00:02:48.040 Well, at the end of October 08, the yield on the government's tenure bond was 3.92%. 32 00:02:48.040 --> 00:02:52.840 It ended last week yielding 2.52%. 33 00:02:52.840 --> 00:02:59.200 Lending your government for one year snagged you all of 21 basis points last week. 34 00:02:59.200 --> 00:03:06.160 Two years ago, you would have earned a very fat 1.44% for lending your government money. 35 00:03:06.160 --> 00:03:12.840 And the prime lending rate that banks use to base their commercial loan lending rate 36 00:03:12.840 --> 00:03:18.480 on for borrowers, that was slashed to 4% in October of 08. 37 00:03:18.480 --> 00:03:25.320 That was less than half the 8.25 prime rate that it had been a year prior to that. 38 00:03:25.320 --> 00:03:31.640 Banks then cut their prime rate in December of 2008 to 3.25%, where it's been ever since. 39 00:03:31.640 --> 00:03:39.920 30-year mortgages, they were 6.87% 2 years ago, a couple of weeks ago the rate was more 40 00:03:39.920 --> 00:03:47.480 than 200 basis points less, 4.58, so I've got news for the Associated Press, interest 41 00:03:47.480 --> 00:03:54.520 rates are already down, but banks aren't lending the money, borrowers aren't borrowing it, 42 00:03:54.520 --> 00:04:01.120 total bank loans were down 96 billion at the end of the second quarter and commercial and 43 00:04:01.120 --> 00:04:09.520 and Industrial Loans, CNI loans as they're known, that totaled over $800 billion in 2008, 44 00:04:09.520 --> 00:04:15.360 we're down to $600 billion in the latest reporting. 45 00:04:15.360 --> 00:04:22.360 Now CNI loans, these are loans that businesses take out for expansion and short-term hiring 46 00:04:22.360 --> 00:04:23.360 needs. 47 00:04:23.360 --> 00:04:28.440 If businesses aren't borrowing, they probably aren't hiring. 48 00:04:28.440 --> 00:04:30.520 Consumers aren't borrowing either. 49 00:04:30.520 --> 00:04:45.520 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. 50 00:04:45.520 --> 00:04:57.520 And while interest rates have fallen, unemployment rate has risen. October of 2008, unemployment was 6.1. Latest reading, it's 9.6. 51 00:04:57.520 --> 00:05:04.920 If you count discouraged workers and workers having to work part-time, the rate is 17 percent. 52 00:05:04.920 --> 00:05:16.920 There's 1.2 million discouraged workers in September and that was more than double the 503,000 discouraged workers from a year ago. 53 00:05:16.920 --> 00:05:23.020 The average length of official unemployment has increased to 24 and a half weeks, 54 00:05:23.020 --> 00:05:27.920 The longest since the government began tracking data, 1948. 55 00:05:27.920 --> 00:05:32.820 The number of long-term unemployed has now jumped to four and a half million, and nearly 56 00:05:32.820 --> 00:05:40.140 one and a half million have been unemployed or out of work for 99 weeks or more. 57 00:05:40.140 --> 00:05:42.780 So unemployment is up. 58 00:05:42.780 --> 00:05:47.500 GDP is up two and a half percent. 59 00:05:47.500 --> 00:05:55.460 John Williams at ShadowStats reports that 63% of that is from inventory building, despite 60 00:05:55.460 --> 00:05:57.780 reports that consumption is slowing. 61 00:05:57.780 --> 00:06:04.940 In fact, Williams writes, if the quarterly GDP growth were viewed in terms of just quarter-to-quarter 62 00:06:04.940 --> 00:06:11.820 change the way the rest of the world tends to report its GDP, that non-annualized quarterly 63 00:06:11.820 --> 00:06:31.060 In August, over 42 million people were participating in the government's Supplemental Nutrition 64 00:06:31.060 --> 00:06:35.580 Existence Program, SNAP. 65 00:06:35.580 --> 00:06:40.060 In other words, 42 million people are buying their groceries with food stamps. 66 00:06:40.060 --> 00:06:46.540 It's an all-time record, it's a 17.5% increase from a year ago. 67 00:06:46.540 --> 00:06:52.660 So all this rate cutting, monetizing hasn't put anybody to work and it hasn't stabilized 68 00:06:52.660 --> 00:06:58.380 anything except dependence on the government. 69 00:06:58.380 --> 00:07:04.540 And while the folks at the Bureau of Labor Statistics say that there is no inflation 70 00:07:04.540 --> 00:07:15.180 at 1.14% CPI, John Williams calculates CPA the old way, says consumer prices are rising 71 00:07:15.180 --> 00:07:17.840 at 8.5%. 72 00:07:17.840 --> 00:07:24.540 All this money, all this government stimulus, but no growth and no jobs to show for it. 73 00:07:24.540 --> 00:07:31.720 Only higher prices, even if the government says they aren't rising. 74 00:07:31.720 --> 00:07:39.500 But Keynes said a little or a lot of government nudge here and there would bring prosperity. 75 00:07:39.500 --> 00:07:44.240 After all, he claimed that markets were broken, and it was for government and central banks 76 00:07:44.240 --> 00:07:46.440 to intervene. 77 00:07:46.440 --> 00:07:53.760 Hunter Lewis wrote a great book called Where Keynes Went Wrong, and he said it was Keynes's 78 00:07:53.760 --> 00:08:01.120 contention, in addition to, of course, all being dead in the long run, that number one, 79 00:08:01.120 --> 00:08:09.120 Number two, society tends to under-consume and over-save. 80 00:08:09.120 --> 00:08:13.120 Yeah, that describes America recently, sure. 81 00:08:13.120 --> 00:08:16.120 Number three, interest rates tend to be too high. 82 00:08:16.120 --> 00:08:18.120 Not exactly. 83 00:08:18.120 --> 00:08:22.120 Four, monetary policy can lower interest rates by money printing. 84 00:08:22.120 --> 00:08:30.120 And number five, Keynes' core theory, which was unused savings interrupt the flow of money through the economy and lead to unemployment. 85 00:08:30.120 --> 00:08:35.020 Unemployment, unemployment reduces society's income. 86 00:08:35.020 --> 00:08:41.260 So the Keynesians contend that it's not a matter of if their policies are going to work. 87 00:08:41.260 --> 00:08:51.320 It's only a matter of when and if, when Keynesian monetary stimulus is going to work. 88 00:08:51.320 --> 00:08:58.140 And if it hasn't worked already, it's because the Fed hasn't done enough. 89 00:08:58.140 --> 00:09:05.440 Nobel Prize winner and Grey Lady columnist and frequent whipping boy on Mises.org, Paul 90 00:09:05.440 --> 00:09:17.740 Krugman, well he's underwhelmed by Bernanke's announced printing. QE2 is meh, he writes. 91 00:09:17.740 --> 00:09:24.120 He says $600 billion is in diddly when you're trying to turn around a $15 trillion battleship. 92 00:09:24.120 --> 00:09:31.760 And now if he was King Bernanke, he'd make a quote, commitment to achieve 5% annual inflation 93 00:09:31.760 --> 00:09:33.800 over the next five years. 94 00:09:33.800 --> 00:09:41.120 Or perhaps better, to hit a price level 28% higher at the end of 2015 than the level today. 95 00:09:41.120 --> 00:09:45.800 Crucially, this target would have to be non-contingent. 96 00:09:45.800 --> 00:09:49.560 Not something you'd call off if the government recovers. 97 00:09:49.560 --> 00:09:51.520 Why? 98 00:09:51.520 --> 00:10:00.800 is the point is to move expectations and that means locking in price rises whenever it happens. 99 00:10:00.800 --> 00:10:06.920 Most Keynesians think we should already thank our lucky stars for their policies anyway. 100 00:10:06.920 --> 00:10:12.200 economist Alan Blinder and Mark Zandi did a report recently supposedly using a standard 101 00:10:12.200 --> 00:10:18.280 economic model and determined that if the Fed hadn't intervened the decline in GDP would 102 00:10:18.280 --> 00:10:24.800 would have been three times worse, the unemployment rate would have risen to over 16% and then 103 00:10:24.800 --> 00:10:30.160 we would have a federal deficit of $2.6 trillion. 104 00:10:30.160 --> 00:10:39.500 Now if the model is so standard, then as Bill Bonner asks, how come the Obama economic team 105 00:10:39.500 --> 00:10:45.480 since surely Larry Summers and Christina Romer had this standard model sitting in their desk 106 00:10:45.480 --> 00:10:48.480 Somewhere. 107 00:10:48.480 --> 00:10:53.920 Why were they claiming that the initial stimulus would ensure that the unemployment rate wouldn't 108 00:10:53.920 --> 00:10:57.820 climb over 8 percent? 109 00:10:57.820 --> 00:11:01.480 Fact is, it turns out this modeling business is all nonsense. 110 00:11:01.480 --> 00:11:09.760 F.A. Hayek explained in his 1974 Nobel acceptance speech entitled, The Pretense of Knowledge, 111 00:11:09.760 --> 00:11:16.940 that monetary and fiscal policies are the product of what he called the scientistic attitude, 112 00:11:16.940 --> 00:11:24.560 which in fact is unscientific in that it involves a mechanical and uncritical applications of 113 00:11:24.560 --> 00:11:31.620 habit of thought to fields different than those in which they have been formed. 114 00:11:31.620 --> 00:11:37.620 So just as it was 36 years ago when Hayek delivered this seminal speech, the Keynesians 115 00:11:37.620 --> 00:11:42.820 Some people believe that there, quote, exists a simple positive correlation between total 116 00:11:42.820 --> 00:11:47.300 employment and the size of aggregate demand for goods and services. 117 00:11:47.300 --> 00:11:53.700 It leads to the belief that we can permanently assure employment by maintaining total money 118 00:11:53.700 --> 00:11:58.500 expenditure at an appropriate level, unquote. 119 00:11:58.500 --> 00:12:03.180 So while Bernanke, with Paul Krugman looking over his shoulder, telling him where to put 120 00:12:03.180 --> 00:12:08.000 with the paddles and how many volts to shock the patient with, thinks he can crunch the 121 00:12:08.000 --> 00:12:15.100 data, make a diagnosis, concoct the right monetary brew and inject lots of it into us 122 00:12:15.100 --> 00:12:20.140 and we'll be all employed and living happily ever after. 123 00:12:20.140 --> 00:12:22.900 The fact is that's impossible. 124 00:12:22.900 --> 00:12:28.720 In the physical sciences that may work, but as Hayek explains, such complex phenomenon 125 00:12:28.720 --> 00:12:34.900 as the market, which depends on the actions of many individuals, all the circumstances 126 00:12:34.900 --> 00:12:42.360 which will determine the outcome of a process will hardly ever be fully known or measurable. 127 00:12:42.360 --> 00:12:47.600 The wise ones at the Fed and Treasury are only looking at factors that can be quantitatively 128 00:12:47.600 --> 00:12:51.360 measured, and they disregard any factors that can. 129 00:12:51.360 --> 00:12:58.320 Thus, they thereupon happily proceed on the fiction that the factors which they can measure 130 00:12:58.320 --> 00:13:04.720 are the only ones that are relevant. No single observer can know all the factors determining 131 00:13:04.720 --> 00:13:13.060 prices and wages in a well-functioning marketplace. But because policymakers think they know, 132 00:13:13.060 --> 00:13:19.100 an almost exclusive concentration on quantitative measurable surface phenomenon has produced 133 00:13:19.100 --> 00:13:28.500 to Policy, which has made matters worse," Hayek said back in 1974, and nothing has changed. 134 00:13:28.500 --> 00:13:34.060 James Grant explained in a recent Grant's Interest Rate Observer, he wrote, 135 00:13:34.060 --> 00:13:40.580 The trouble with living authorities and money in banking is the ideas they absorbed in school. 136 00:13:40.580 --> 00:13:46.500 For instance, that a central bank can calibrate the rate of debasement and the currency it 137 00:13:46.500 --> 00:13:52.660 prints by adjusting the speed in the digital press, or that the Federal Open Market Committee 138 00:13:52.660 --> 00:13:58.700 can pick the interest rate that will cause the GDP to grow and payrolls to swell and 139 00:13:58.700 --> 00:14:04.260 prices to levitate by 2% per annum, give or take a basis point or two. 140 00:14:04.260 --> 00:14:08.340 Such things are impossible. 141 00:14:08.340 --> 00:14:13.980 Ben Bernanke presumably thought that cutting the Fed funds rate target to zero to a quarter 142 00:14:13.980 --> 00:14:21.100 and nearly tripling his employer's balance sheet from $800 billion to $2.2 trillion would 143 00:14:21.100 --> 00:14:26.940 put everybody who wanted to be not only back to work but swiping their plastic for that 144 00:14:26.940 --> 00:14:34.060 new big screen or maybe taking advantage of GM 0% 60-month financing to drive a new Denali 145 00:14:34.060 --> 00:14:35.900 off the lot. 146 00:14:35.900 --> 00:14:42.280 However, Hayek explains, it seems to me that this failure of economists to guide policy 147 00:14:42.280 --> 00:14:48.960 Researching more successfully is closely connected with their propensity to imitate, as closely 148 00:14:48.960 --> 00:14:55.720 as possible, the procedures of the brilliantly successful physical sciences, an attempt which 149 00:14:55.720 --> 00:15:01.280 in our field may lead to outright error. 150 00:15:01.280 --> 00:15:07.640 While Bernanke and Company have been making errors aplenty by endlessly inflating, bailing 151 00:15:07.640 --> 00:15:16.640 In continuing on that theme, the Fed's proposed QE2 bond purchases will come from the middle 152 00:15:16.640 --> 00:15:21.760 of the yield curve, with two-thirds of the purchases to be notes with durations from 153 00:15:21.760 --> 00:15:25.320 four to ten years, according to the New York Fed. 154 00:15:25.320 --> 00:15:30.380 So it's the nation's big banks that will benefit by QE2 as they pay their customers 155 00:15:30.380 --> 00:15:35.620 zero for their deposits, and they buy treasuries yielding one to two percent, knowing the Fed 156 00:15:35.620 --> 00:15:37.620 has their back. 157 00:15:37.620 --> 00:15:43.720 No loan loss reserves must be retained if the bank is lending to Uncle Sam as opposed 158 00:15:43.720 --> 00:15:50.340 to if the bank lends to your cousin Sam to start a business or build a house. 159 00:15:50.340 --> 00:15:57.860 So while the Fed thinks more money means more employment, the real result of all this stimulating 160 00:15:57.860 --> 00:16:01.100 will be more unemployment, not less. 161 00:16:01.100 --> 00:16:08.140 Frank Szostak explains that QAT undermines capital formation and less capital formation 162 00:16:08.140 --> 00:16:12.060 in turn weakens economic growth. 163 00:16:12.060 --> 00:16:15.620 And the poorer people are the higher their time preferences. 164 00:16:15.620 --> 00:16:21.860 So as he writes, a so-called lowering of real interest rates by means of money pumping is 165 00:16:21.860 --> 00:16:30.060 basically an act of diversion of real wealth from wealth generators to various non-productive 166 00:16:30.060 --> 00:16:32.140 of Activities. 167 00:16:32.140 --> 00:16:35.500 Hence, contrary to popular thinking, 168 00:16:35.500 --> 00:16:38.540 the Fed's attempt to lower the real interest rate, in fact, 169 00:16:38.540 --> 00:16:40.860 leads to higher real interest rate. 170 00:16:43.460 --> 00:16:46.060 Now, the reason we're in this recession in the first place 171 00:16:46.060 --> 00:16:51.460 is that it is a clearing of the malinvestments that took place 172 00:16:51.460 --> 00:16:55.140 when the Fed's easy money rushed into those investments 173 00:16:55.140 --> 00:16:56.480 during the boom. 174 00:16:56.480 --> 00:16:58.500 So producing things that nobody wants 175 00:16:58.500 --> 00:17:06.140 and propping up dysfunctional firms and malinvestments cannot possibly help any economy. 176 00:17:06.140 --> 00:17:12.420 The government's money men are engaging in what Hayek can refer to as the fatal conceit, 177 00:17:12.420 --> 00:17:16.620 thinking that they have the knowledge to fix and plan the economy. 178 00:17:16.620 --> 00:17:23.060 If a man is not to do more harm than good in his efforts to improve the social order, 179 00:17:23.060 --> 00:17:29.460 Hayek lectured, he will have to learn that in this, as in all other fields where essential 180 00:17:29.460 --> 00:17:36.960 complexity of an organized kind prevails, he cannot acquire the full knowledge which 181 00:17:36.960 --> 00:17:41.360 would make mastery of the events possible. 182 00:17:41.360 --> 00:17:47.540 But these Fed Chairman are considered the most powerful men in America, if not the world. 183 00:17:47.540 --> 00:17:52.820 While on the job, the previous Fed Chair, Alan Greenspan, was reverently referred to 184 00:17:52.820 --> 00:18:02.260 as the maestro. However, as Lew Rockwell points out, monetary pumping was his only weapon. 185 00:18:02.260 --> 00:18:09.300 Think about the occasions, the Mexican debt crisis in 96, the Asian contagion of 97, long-term 186 00:18:09.300 --> 00:18:17.620 capital management meltdown in 1998, the Y2K crisis in 99 and 2000, the dot-com collapse 187 00:18:17.620 --> 00:18:28.620 And finally, 9-11 terrorist incidents in Washington and New York. Each time the prescription was more money. 188 00:18:28.620 --> 00:18:39.620 Well, now Greenspan spends his time reinventing history and denying any accountability for the housing bubble and bust, 189 00:18:39.620 --> 00:18:44.620 or accountability for his Fed's monetary policies. 190 00:18:44.620 --> 00:18:49.540 Even that Enron prize he won doesn't look so hot right now. 191 00:18:49.540 --> 00:18:55.460 Current Fed Chair was Time Magazine's Person of the Year last year because he, quote, 192 00:18:55.460 --> 00:19:03.580 didn't just reshape U.S. monetary policy, he led an effort to save the world economy, 193 00:19:03.580 --> 00:19:05.380 quote. 194 00:19:05.380 --> 00:19:09.860 However, Bernanke's reputation may have hit its peak at the end of 2009. 195 00:19:09.860 --> 00:19:15.060 The harder he hits the monetary gas pedal, the further his reputation, along with the 196 00:19:15.060 --> 00:19:19.020 value of the dollar, goes downhill. 197 00:19:19.020 --> 00:19:24.300 And while the self-confidence of central bankers knows no bounds, there's no telling where 198 00:19:24.300 --> 00:19:28.180 the money they create will go or what it will do. 199 00:19:28.180 --> 00:19:34.300 Ludwig von Mises wrote, all monetary policies encounter the difficulty that the effects 200 00:19:34.300 --> 00:19:48.300 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. 201 00:19:48.300 --> 00:19:55.300 Henry Parker Willis wrote in a book called The Theory and Practice of Central Banking back in 1936. 202 00:19:55.300 --> 00:20:01.340 No central bank can, by the mere exercise of its credit-granting power, make something 203 00:20:01.340 --> 00:20:10.260 out of nothing, or save other banks from the disastrous consequences of their past policy. 204 00:20:10.260 --> 00:20:16.500 When a central bank does this, it merely tends to make bad matters worse. 205 00:20:16.500 --> 00:20:22.020 Willis, who, by the way, was the first secretary of the Federal Reserve Board, wrote back in 206 00:20:22.020 --> 00:20:29.020 in a time when central banks were thought to merely be available to liquefy the commercial banking system. 207 00:20:29.020 --> 00:20:35.020 But today, Fed heads and their committees are thought to be benevolent clairvoyants 208 00:20:35.020 --> 00:20:43.020 who can wave their magic interest rate wands, growing aggregate demand, and putting the masses back to work. 209 00:20:43.020 --> 00:20:50.020 But even back in 36, Willis foresaw that central banking would become a tool of politicians 210 00:20:50.020 --> 00:20:55.020 to placate the discontent of the citizenry. 211 00:20:55.020 --> 00:21:03.020 In such cases, Willis wrote, central banking becomes merely an adjunct to a dynasty of political dictators 212 00:21:03.020 --> 00:21:12.020 who desire to bring about an artificial redistribution of purchasing power and wealth. 213 00:21:12.020 --> 00:21:17.020 Concluding his Nobel acceptance speech, Hayek said, 214 00:21:17.020 --> 00:21:34.020 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, 215 00:21:34.020 --> 00:21:40.740 A striving which makes him not only a tyrant over his fellows, but which may well make 216 00:21:40.740 --> 00:21:48.160 him the destroyer of a civilization which no brain has designed, but which has grown 217 00:21:48.160 --> 00:21:53.920 from the free efforts of millions of individuals. 218 00:21:53.920 --> 00:22:01.340 So while the wisdom of Hayek is long forgotten, instead we have central bankers who are worshipped 219 00:22:01.340 --> 00:22:09.060 on Wall Street and in Washington, allowing their hubris to place not only the U.S. economy 220 00:22:09.060 --> 00:22:12.140 but all of society on the brink of destruction.