Ben Bernanke had a commentary piece in yesterday’s Wall Street Journal in which he sought to argue, perhaps because his new book is released today, that under his oversight the Federal Reserve did save the economy after all. It’s rather remarkable, one might reflect, that while the current FOMC members are not yet comfortable enough with “the data” to initiate a small increase in the target federal funds rate, that Bernanke can continue to pat himself on the back for “saving” American from her financial woes.
It is the Austrian view however, despite all Bernanke’s triumphalism, that shows the opposite is true; namely, rather than saving the economy, the Fed’s post-crisis actions have merely prepared the economy for more pain in the future. Moreover, the economy “needed saving” (we will get to this) in 2008 precisely because of the Fed’s historical actions. In other words, the debate should not be– but unfortunately is– whether Bernanke did a good or bad job in doing his duty to heal the economy. For those that disagree with Bernanke that he “handled” things well, they should not simply lament that there was not a better manager in Bernanke’s place doing “The Lord’s Work” in fixing what needed to be fixed. No, the true debate lies with the role of the Fed in the first place; whether it should be involved in the dangerous activities of interest rate manipulation and whether it should have even done anything at all after the 2008 crisis.
Bernanke takes his column to “evaluate the results of those [extraordinary] measures [such as ZIRP], and to consider where policy makers should go from here.” Such measures were adopted, according to Bernanke, to “help the economy recover from a historic financial crisis.” Unfortunately, Bernanke does not ever consider how the Fed’s own actions in the first decade of the 21st century led to, and in fact directly caused, the “historic financial crisis.”
Bernanke addresses the Fed critics who say: “you can’t print your way to prosperity.” Bernanke agrees, nominally (though his actions directly contradict his calculated agreement). But it is not enough to agree; one needs to realize that printing more money, which is a catchy way of communicating the idea of expanding the supply of money and credit in an economy, is precisely the chief cause of economic booms and busts. The saying should really go: “you can’t print your way to prosperity and in fact printing more money unleashes the very forces that undermine prosperity.”
The Fed, Bernanke argues, cannot control long-term economic fundamentals, but what it can do is the following: 1) mitigate recessions and 2) keep inflation low.
Let’s start with number two. It has long been a “mandate” of the Fed’s to pursue price stability (Federal Reserve Act 1977), that is, to ensure that the purchasing power of the dollar remains level. While this may sound great in our era of monetary instability and stock prices that shoot toward the moon, under free market conditions there is actually no need for “prices” to remain stable. In fact, under a pure free market, prices would– horror of horrors in the land of Professional Economists– tend to come down over the years as production expands. At any rate, the Fed’s mandate states that it ought to keep prices stable; and as such, one wonders why the Fed has set an “inflation target rate” of 2%. Actually, the reason is obvious: the Fed wants an excuse to print. It needs a reason to expand its balance sheet. Never mind the fact that the 2% figure is a completely made up number; there never being any evidence that an economy somehow expands at a comfortable rate when inflation is at 2%.
As a side note, it is important to mention that we are here using the word “inflation” to mean overall price increases. This is the modern definition. The historical meaning of inflation is an increase in the supply of money. One common result of inflation, though not demanded by the inflation, is rising prices.
Now, this understanding of the proper definition of inflation helps a great deal when confronted with the Professional Economists who argue that they are trying to “keep inflation low.” The answer is simple: stop inflating. The Fed is the agency that manages the money supply. It is the agency that, year by year, decade by decade, continues to add to the supply of money and influence the addition of new credit into the economy. The Fed is therefore an inflation machine and we certainly don’t need a Fed to “keep inflation low.” In fact, to keep inflation low, the best thing is not to have a Fed at all. Thus, what the Fed “can do” is against its very nature, its interests, and its own guiding Keynesian philosophy.
Now then, what happens if the Fed does in fact decide to inflate, to expand the money supply in the various ways that it does (including “Open Market Operations,” the “Discount Window,” and the Reserve Ratio Requirements)? What happens is an artificial boom. It inspires borrowing and long-term investment, since the increase in the money supply pushes down the cost of borrowing that money (interest rates). But this boom was not set into motion by the voluntary actions of an economy’s savers and borrowers; rather, it was set into motion by the increase in money which told borrowers that there were savers, when in reality there was not. This corrupts the entire structure of the economy and sows the seeds for the economy’s destruction. Before the inevitable crisis, things look great: wages are up, profits are up, new companies are entering the market. But when the crash comes, everything reverses back and a recession comes to reality.
Thus, by refusing to “keep inflation low” the Fed causes the very recession that Bernanke claims the Fed exists to mitigate. Rather than saving the economy, the Fed is the perpetrator that ensures that the economy needs saving.
Now then, what has Bernanke to say about the Fed’s “scorecard” in these two areas? He praises the present 5.1% unemployment rate. But there are three important facts that do damage to Bernanke’s cheering. First, the headline unemployment rate does not address the fact that the number is calculated without counting those many people who have given up finding a job and have left the labor force. This labor participation rate has never been lower.
Second, the headline rate does not consider the types of jobs that are being created. Largely as a result of Obamacare, but also for other reasons, the number of part time jobs has exploded. This means that while there are technically more jobs than there otherwise would be if we only counted meaningful jobs by which households could afford to feed their families, these are not the type of jobs that would be being created in a flourishing economy.
Third, and perhaps most importantly, we realize that whenever the Fed expands the money supply to the great proportions that it has done, unemployment tends to trickle downward. But remember, this is still the boom phase of the artificial bubble. What happens when the inevitable bust comes? All these jobs will suddenly be no more. In other words, there is nothing sustainable about the labor rates; and this is something to criticize, not praise. We should not praise bubbles; temporary moments of pain alleviation before the coming recession.
On the inflation front, various measures suggest that underlying inflation is around 1.5%. That is somewhat below the 2% target, a situation the Fed needs to remedy. But if there is a problem with inflation, it isn’t the one expected by the Fed’s critics, who repeatedly predicted that the Fed’s policies would lead to high inflation (if not hyperinflation), a collapsing dollar and surging commodity prices. None of that has happened.
To be clear, the Austrian theory of the business cycle does not “predict” that price increases are inevitable, especially to the point of hyperinflation. This is one of the most common confusions about Austrian Business Cycle Theory. In fact, as demonstrated in stunning detail in Murray Rothbard’s book on the Great Depression, prices in the 1920s leading up to the Great Depression, even fell a small bit due to the increased productivity at the time. But in any case, the Austrian view of money expansion allows for rising prices, but certainly does not demand it. Unfortunately, a few in the Austrian camp were predicting said price increases when the most they should have done was state that price increases were possible or even likely. My point here is that the core of our argument has little to do with rising prices. We are not against the expansion of the money supply for the simple reason that our prices might go up; though we certainly aren’t fans of such a phenomenon. No, our case against money expansion is the damaging effect it has on the strength of the economy and the distortions it causes in the structure of production. Our case against “printing money” has to do with the boom and bust cycle.
Now, with that out of the way, we ought to point out that there actually has indeed been rising prices, even though Bernanke and many other professional economists completely ignore it. What about the stunning record level highs in the stock markets, the bond markets, the housing markets (inducing rental prices)? Why do these markets not count as proof of price increase rates above the Fed’s arbitrary “2% target?”
As Bernanke goes on to cheer the fact that the United States has outpaced Europe (which was also busy printing money over the last several years) and also that the US economy has had an output of 8.9% (that’s about 1% per year — certainly not worth having a party over), we see a stunning narrative show up at the end: Bernanke aims to lavish praise on the Fed for the “good things” in the economy, while he essentially says of the bad things that “These, unfortunately, aren’t problems that the Fed has the power to alleviate.” This is remarkably convenient, that wherever there is good in the economy, it was the Fed’s going; but wherever there is bad, sorry, the Fed can’t really do anything about those things anyways.
It is difficult not to see Bernanke’s essay as anything other than self-serving. The Central Bankers are trying desperately to maintain the relevance to central banking around the world. In this pursuit, they have to continue to shift the blame for all the bad things on the free market, on the lack of power, and the lack of government intervention. What we never hear is an admittance that they were wrong; that they have caused the corrosion of the US dollar, that the inability to earn a return on one’s investments is their fault, and that without them, the boom and bust cycle may have never reared its ugly head.