Saturday, January 30, 2010

Ron Paul’s Wet Dream May Come To Fruition

Ben Bernanke passed the Senate and can now start his second term. It wasn’t pretty but Bernanke made it out alive. The WSJ article about Bernanke’s approval was laced with comments about the Fed losing its credibility. It was filled with quotes from angry senators talking about translucency and accountability, and it all sounds nice.

Dr. Ron Paul’s bill passed the House of Representatives that would allow the General Accountability Office to audit the Fed. There some talk that Congress wants all the Fed’s bankers to be presidentially appointed and approved by Congress. This all sounds nice. It really does. Accountability, translucency: these are nice words.

Head of the Federal Reserve Bank of Dallas, Richard Fisher wrote an interesting Op-Ed in the WSJ about this subject. His feeling is that making the Fed less autonomous would turn the central bank into a highly politicized inflationary monster. Bankers would pander to Congress in the hopes of keeping their jobs, instead of looking out for “Main Street.”

Fisher touches on an important part of this issue but doesn’t outright say it: accountability and translucency don’t really matter if it’s Congress that’s holding you accountable. Is it really better to have an incompetent, imbecilic body with no macroeconomic expertise control the most powerful central bank in the world? Fisher’s argument is a little less valid. He argues that Congress will demand the Fed print away all of their problems and lead to massive inflation. He’s just using scare tactics to further his point, which is unnecessary since he has a valid point to make.

There is a reason this bill is picking up steam though. It is the inverse of the old phrase, “If it ain’t broke, don’t fix it.” In this case, “If it’s clearly broken, just do something.” The Fed has been increasingly autonomous for the last 40 years and it didn’t work. Greenspan ran the Fed without anyone second-guessing him anywhere along the way. Bernanke ran the Fed and didn’t see the bubble and there was no one else around to notice the bubble either. One of the major flaws of the Fed is that everyone there thinks the same way so nobody ever notices a mistake. Every Fed chairman has been an ideologue and this is a problem. The answer however, is not Congress.

Monday, January 25, 2010

Teaching Bernanke A Lesson

So the Democrats in Massachusetts provide the world with another unlikeable, dull politician (list of Massachusetts’ Democrats whom I don’t want to have a beer with: Kerry, John; Dukakis, Michael; Affleck, Ben) and manage to lose Ted Kennedy’s ancient senate seat. The fallout from this is probably overblown, and there is no need for me to go into depth about why since it’s been talked about in pretty great length. The thing I find interesting is how this affects Mr. Bernanke’s reconfirmation.

It seems as though Bernanke will pass the Senate, but not without getting dragged through the mud first. (To the left I have an image of what Bernanke will experience.) Senators of both parties will point out how Bernanke failed to predict the financial crisis and how he has made many other mistakes. Despite these just criticisms Bernanke will pass and for one reason: where are you going to find someone better than Bernanke?

Paul Krugman has talked about this on his blog and mentions the idea of Paul Volcker taking his old position back. But Krugman essentially admits that he has no clue what Volcker would do differently policy-wise. At the end of the day, what is the Senate gonna do? Not pass Bernanke? Then what? Obama nominates someone else who has less impressive credentials and follows the same ideology as Bernanke and the senate passes him for the sake of change.

If the Senate wants to influence the economy, get Bernanke in and out as quickly as you can and pass Barney Frank’s finance reform. If you have issues with the Federal Reserve, pass Dr. Paul’s bill allowing Congress to audit the Federal Reserve. Criticizing Bernanke if you have no other realistic options is just a waste of energy. If Bernanke is capable of learning a lesson, he learned it some time ago.

Monday, January 11, 2010

Poking Fun At Paul Krugman

I sat at home researching some info about Japan in the 90’s since it seemed relevant to our current crisis and I was going to write something about Japan (still will) and I stumbled upon a series of things Paul Krugman wrote in the 90’s (back when he worked at MIT) about Japan. To no one’s surprise, his solution to Japan’s problems was to simply print more money, a plan he continues to advocate for here and now. I generally like Krugman but it occurred to me that he is an ideologue. He seems to live by strict neo-Keynesian code, which made me wonder: does Krugman apply his neo-Keynesian ideals to all facets of life?

Here is a little dialogue from Krugman’s home life:

Mrs. Krugman: Honey the sink is broken.
Paul: Oh, we should print more money then.
Mrs. Krugman: How would that fix the sink?
Paul: Because people have money illusion; it’s all here in this book. (Pulls out copy of General Theory of Employment, Interest and Money) Have you read this yet like I asked? And for that matter, have you been printing money like I asked?
Mrs. Krugman: No, but Little Billy didn’t do so well on his latest report card.
Paul: Did you tell him to print more money?
Mrs. Krugman: No…
Paul: I’ll go talk to him then.
Billy: Hi dad, how are you?
Paul: Never mind me, are you printing more money at school like I told you to?
Billy: No…
Paul: Well no wonder your grades aren’t good, you have to print more money.
Billy: Why?
Paul: Because people have money illusion; it’s all here in this book. (Pulls out copy of General Theory of Employment, Interest and Money) Have you read this yet like I asked?
Billy: I’m seven.
Paul: Oh please, if you need me, I’ll be in the garage printing money while repeatedly texting Ben Bernanke trying to convince him to print more money.

Vacation Is Over

My vacation is over and I'll have a couple of new posts this week, I promise.

Sunday, January 3, 2010

The Castration of Ben Bernanke

The New York Times reported recently that Ben Bernanke believes, “Regulation is the best way to prevent financial speculation from getting out of hand and throwing the economy in a new crisis.” This is understandable especially from Bernanke's position. Time's “Man of the Year” makes major decisions in the hopes of fixing the economy but finds that Wall Street's speculations about his actions ultimately have a greater impact than his actual actions, which is probably very frustrating. He keeps interest rates low in the hopes of getting banks to lend money to small businesses and stimulate the economy, but instead, banks hold onto their cash because of speculation that the Fed will raise interest rates in the future. Then in the future, if he doesn't raise interest rates, people will still fear that he will raise interest rates even farther into the future and the cycle continues.

In a sense, Bernanke is completely powerless. It is eerily similar to Japan and the “Lost Decade.” The Lost Decade isn't cool like the Lost Generation but rather a frightening period in Japan's recent history. In 1989, in the middle of gigantic asset price bubble, Japan's central bank raised interest rates to counteract speculating and the aforementioned bubble. The high interest rates acted as a very large needle which popped the bubble and led to a stock market crash, real state market crash and then several government bailout of Japanese banks. Sound familiar? I know that this comparison is hardly groundbreaking. Obama warned about the potential Lost Decade less than a month after his inauguration. What I want to show is how little an impact the central bank has in both cases.

Paul Krugman wrote Japan's economics problems of the 90's were, "simply because its consumers and investors do not spend enough." Krugman, as you might imagine, felt that this could be assuaged just by printing more money. Although it seems to me that the high savings rate among the Japanese is too ingrained in Japanese culture for a simple monetary policy tweak to fix. Japan tried to encourage spending by giving out non-savable tax refunds but the Japanese simply used the refund to buy their essentials and saved the money they would have used for their essentials.

Not to sound fatalistic but you can't make people behave a certain way. If the Japanese don't understand the Paradox of Frugality then you can't make them and even if they do understand the concept, there's still the "rat choice" issue. Samuel Popkin explains, "Everybody’s business is nobody’s business. If everyone spends an additional hour evaluating the candidates, we all benefit from a better-informed electorate. If everyone but me spends the hour evaluating the candidates and I spend it choosing where to invest my savings, I will get a better return on my investments as well as a better government."

Consider Popkin's example but think in terms of the Paradox of Frugality. If everyone spends more money then we all benefit from a strong, stimulated economy. If everyone spends but me, then I benefit from the strong, stimulated economy and I benefit from my extra savings. It's for predicaments like this that government exists. Government coerces people into paying taxes so that everyone has to contribute to things like defense. If everyone contributes money to an army we all benefit from the extra defense, if everyone but me contributes then I benefit from the defense and the extra money. So government makes people contribute for these universal causes because they wouldn't be feasible otherwise. It is the business of government to prevent those who try and take advantage of others collective goodwill.

Now Ben Bernanke is trying to do a similar thing, get Americans to spend money. More specifically, he's trying to get banks to loan money to small businesses to hire people to spend money, but he's having trouble. The banks simply won't loan out money. The Fed has done all you can ask. They're giving the banks easy money to loan but the banks just pocket it.

Bernanke is almost powerless. All he can do his is try to encourage positive economic behavior; he can't actually make it happen. This is why Bernanke wants regulation; he wants to be able to control things. If he can give easy money to the banks then he should be able to make them give loans. He wants a government mandate that says, "Do what Ben says." He won't get the regulation he wants because all of the easy money he's given the banks stimulates the stock market, which a lot of people believe is a economic litmus test, and people will believe the economy is fine and won't need any new tweaks. But be wary because the easy money and the obsession with stock prices is what got us here in the first place. If we come out of this financial crisis without learning a lesson, we'll be doomed to repeat history.