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The Federal Reserve Debate - 4 Economists debate the Fed

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July 26, 2009 – Comments (11)

Below is a debate earlier this month in Las Vegas on abolishing the Federal Reserve. Gene Epstein (of Barron's) and Thomas Woods (Mises Institute) debated John Fund (Wall Street Journal) and Warren Coats (formerly of the IMF.) The whole debate is available as a series of YouTubes posted below or as a single whole via C-SPAN (give it a minute to load). It airs on C-SPAN2 again tomorrow (Sunday) at 9:00am ET. (Here's the blog post Thomas Woods refers to at one point.)

Each video is roughly 10 minutes long.

Part One

Part Two

Part Three

Part Four

Part Five

David in Qatar

11 Comments – Post Your Own

#1) On July 26, 2009 at 1:56 PM, whereaminow (22.93) wrote:

The book that Thomas Woods refers to, Money, Bank Credit, and Economic Cycles by Jesus Huerta De Soto, is available for free on pdf here.  It is, as Woods says, a phenemonal book and provides a roadmap to end the Fed that is quite reasonable.  It is the most significant treatise on economics since Rothbard's Man, Economy, and State

I may repost this entire blog tomorrow during prime viewing time. I haven't decided. It is worth viewing whether you are pro-Fed or anti-Fed or just curious as to what this debate is all about.   

This is not a search for recs. I really feel strongly that this debate is very important, no matter what side you determine is correct.

David in Qatar   

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#2) On July 26, 2009 at 2:47 PM, whereaminow (22.93) wrote:

More on this.

Alluded to at the end of the debate, the pro-Fed as well as the deflationist advocates have not adequately answered this question for me. How will Bernanke pull the massive amounts of new liquidity out of the market when the velocity of money picks up without causing another massive recession?  It is an impossible task.  I believe that he will not even attempt it. 

I also wish the free market supporters would drop the terms "printing money out of thin air" and "the Fed sets interest rates."  They were euphemisms created to help the people understand the Fed's role in the economy, not literal representations of the mechanisms the Fed uses to increase the monetary base.  This sometimes backfireds because the uninformed patriots have taken these slogans out door-to-door with them.  But armed without a true understanding of their meaning, they can end up looking quite foolish.  Some prominent Left wing bloggers have already picked up on this.  

The crucial element is that when the Fed puts money in the hands of bankers - money not demanded by the market - the bankers have no choice but to put that money in circulation.  They're only options are to give it right back to the Fed, and essentially face opportunity costs, or loan it out.  In order to loan it out, they MUST lower rates.  It is a simple supply and demand problem.  If there is no demand for this excess money, the banks must lower the price of money.  

It is disturbing that the man who once held a prominent position at the IMF does not grasp this simple economic principle.

Here are two more recent articles on the Fed

1. An editorial in the Washington Post bashing Ron Paul

2. A critical review of the legality of the Federal Reserve System.

David in Qatar

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#3) On July 26, 2009 at 2:58 PM, whereaminow (22.93) wrote:

And here the New York Times is sending out the Fed propagandists for its Democratic base.  You gotta love the summary line:

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians. 

See readers. This man's ok.  He's advised Democratic politicians.  He's your friend.

This is why I warned free market supporters that the battle to end the Fed will be more difficult than you know.  The supporters of the Fed are any institution that benefits from it, no matter which side of the political or philosophical spectrum they fall.   Military, Big Business, Socialists, Bankers, Lobbyists, Neocons... they all LOVE the Fed.  It helps keep them rich - at your expense.

David in Qatar

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#4) On July 26, 2009 at 4:15 PM, whereaminow (22.93) wrote:

Let's sum up John Fund's argument:  "We need a plan to stop planning."

And Coats?  How about: "The Fed doesn't always suck."

David in Qatar

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#5) On July 26, 2009 at 4:24 PM, whereaminow (22.93) wrote:

Upon re-reading my warning to free market supporters, I noticed three things:

1. It was horribly written. I need an editor and less caffeine.

2. I nailed every point right on the head, but it's just too much info for a blog.

3. I called it back in early April that Obama would oppose Fed transparency.

Some Democrats have co-sponsored Congressman Ron Paul's bill to audit the Fed.  They too will be surprised when President Barack Obama, the self-proclaimed champion of transparency, comes out against the plan, which he is certain to do.  Powerful Progressives understand the value of having a monopoly on the supply of money. 

Hey, even a blind dog finds a bone every now and then.  That was a good call.

David in Qatar

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#6) On July 26, 2009 at 4:38 PM, AdirondackFund (< 20) wrote:

This is all very interesting and true, but it flies directly in the face of History.  In 1787 the Continental Congress fell apart, as did 'the continental' it's dollar of the day.  On that day, was the intersection of Uranus-Mars and pluto at 46 degrees.  The Depression of 1787 toppled the then Government and was replaced by our current format.  In 1835, again Mars-Uranus and pluto aligned and we had a New Depression referred to in it's day colloquially as 'the great weeping'.  In 1873, these same planets also aligned resulting in 'The Crime of 1873' in which the interests of Gold (east coast Bankers) and Silver (west coast Bankers) came into direct combat as the basis and medium of exchange for our economy.  By 1873 we had gone from a corrupt Central Bank and a failure in the 'Continental', a paper currency, to an all precious metal economy between 1835 and 1873.  Still on a Gold Standard by 1907, we had a panic.  This set the stage for a new paper currency and the formation of the FED in 1913.

On January 2008, these same planets came into alignment and now we are having a wonderful debate about elminating the paper currency of today with an economy based on metals.  Round and round and round we go.  The History points out to us that the 'technical merits' of any system are completely irrelevant when in fact it is the character of The People themselves that is all the rage and cause of our problems.  It is NOT a coincidence that Goldman Sachs populates every corner of Our Government.  It is in their interest to be there at such a critical time...and they know this.

What we need is a COP.  Ron Paul is that COP and if the COP has to break out the guns to shoot the Bank Robber, who is attempting to flee the scene with the loot...then so be it.  

Until that actually occurs, I wish you a warm welcome to our "Egghead Depression".  Perhaps Caesar was right.  "The fault lies not in our stars, but in ourselves".  

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#7) On July 26, 2009 at 6:19 PM, DaretothREdux (42.53) wrote:

David,

This is a great debate. You would think that they could have found better "more intelligent" proponents of the Fed....but then again maybe no one is intelligent enough to make nonsense sensical.

Dare

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#8) On July 27, 2009 at 3:30 AM, whereaminow (22.93) wrote:

AdirondackFund,

I have read many of your comments and posts, and I like your point of view.  It's your own and you appear to be an independent thinker.  But I'm not sure what to make of your perspective on this issue.  I will get to the individual events you point out in a second.  But what I really want to know is, do you believe that history is a series of random events?  I do not.  I believe history is shaped by individual actors, most of whom had no idea of the unintended consequences of their actions.  The ensuing result were surprising and random to those actors, and since they directed the historians, this version gets laid down to us.  But I believe a closer inspection reveals that they just kept f*cking up.

Continental Dollar

The Continental Dollar was a Fiat standard much like our own. It was printed in mass quantities to finance the war debts of the Revolution.  It became so utterly worthless that the phrase "not worth a Continental" began during this time. 

As the continental depreciated, the states came under pressure to make it legal tender and thus force people to accept it in exchange for goods and services and in payment for debts. The states complied with this request. Rhode Island declared that anyone who would not accept the paper money would "incur the displeasure of the General Assembly; and ought to be held and esteemed as an enemy to its credit, reputation and happiness; and totally destitute of that regard and obligation he is under to his country and the cause of liberty…. [T]he good people of this colony and America ought to withdraw all communication from such person or persons." The law varied across the states, but in Virginia, for example, refusal to accept the notes amounted to a cancellation of the debt you were owed; other penalties of varying severity were enacted elsewhere. In North Carolina, if you so much as spoke disrespectfully of the paper you were "treated as an enemy to [your] country."

Naturally, the depreciating continental also led to calls for economic controls in order to contain the upward pressure that the inflation was having on wages and prices. The New England states approved price-control statutes in 1776 and early 1777. Other states followed, even after the failure of the New England price-control regimes should have been clear to everyone. Within a couple of years those experiments had been discontinued, partly at the behest of the very Congress that had at one time enthusiastically urged them upon the states.

And no wonder: the price controls had all the predictable effects, including massive shortages, disruption of the division of labor, and more government moralizing — it was bad people, you see, rather than stupid policy, that was responsible for the economic chaos.

John Witherspoon saw through the propaganda. "Fixing the prices of commodities has been attempted by law in several states among us," he explained, "and it has increased the evil it was meant to remedy, as the same practice has done since the beginning of the world."

Likewise, Pelatiah Webster wrote: "As experiment is the surest proof of the natural effects of all speculations of this kind … it is strange, it is marvelous to me, that any person of common discernment, who has been acquainted with all the above-mentioned trials and effects, should entertain any idea of the expediency of trying any such methods again…. Trade, if left alone, will ever make its own way best, and like an irresistible river, will ever run safest, do least mischief and do most good, suffered to run without obstruction in its own natural channel." - Thomas E. Woods, The Revolutionary War and the Destruction of the Currency.

1835?

I'm not sure what you are referring to here. Possible the Panic of 1837?  Either way, from 1816-1836 the United States Central Bank expanded the currency by vast amounts leading to a real estate boom in the 1830's, as well as a panic that matched ours very closely in 1819 (again, the government debased the currency to pay for the War of 1812).  The traditional historian believes that Andrew Jackson caused the panic by ending the central bank and /or the increase in silver specie brought in from Mexico.  A long discussion on this can be found here 

1873 The Long Depression

This is disputed.  Even the Statist hack Charles Morris writing in the New York Times now admits that there was no prolonged depression in the 1870's:

"Historians long attributed the turmoil to a "great depression of the 1870's." But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history." - Charles Morris, Freakoutonomics

Panic of 1907

How did JP Morgan solve the panic of 1907?  He used a scalpel, eliminating fractional reserve banks that couldn't meet liquidity requirements.

It is a myth that the Panic came first and the plans for a Central Bank second.  JP Morgan and fellow financiers had began to write about how they could find support for a Central Bank after McKinley beat Bryan in 1896. 

FRB's are always doomed to failure.  The history of fractional reserve banking and an analysis of our monetary system can be found in a few good sources.  I recommend The Ethics of Money Production by Jorg Hulsmann and The Case Against the Fed by Murray Rothbard.

What if I'm wrong

What if every event we talked about was actually due to the lack of monetary stability supposedly provided by the Fed.  Well, then I'll be happy to know that my system causes a panic once every 30 years, while the Fed causes one once every 10.  I'll be happy to know that my system does not lead to multi decade Great Depressions even if we may have the occasional hiccup.

What if I'm right

Then we know that almost every panic in history is caused by the excess creation of paper money and bank credit.

David in Qatar

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#9) On July 27, 2009 at 5:11 AM, AdirondackFund (< 20) wrote:

The 'great weeping" of 1835 was concurrent with the abolition of the Biddle Bank by President Jackson.  The serious Depression which followed was not unexpected, but it was much more severe than originally thought by those eager to thwart Banking interests.  Those Banking interests  were aligned with Federal Profiteers looking to loot Federal coffers with Public Projects of every kind. Jackson resisted, claiming the Country didn't have the money while also being cautious to prevent a repeat of the English experience of the South Sea Bubble. Asset prices, homes, property all fell in price by a degree equivalent to 10% of the previous level, thus staking the claim as a Great Depression. 

In the time thereafter the economy evolved to a principly metals based economy having had forays with greenbacks issued by both the Union and Confederates and which were found to be worthless. Confederate script proving completely valueless as a result of losing the war.  Script not dissimilar to California I.O.U.'s of today.  Gold became the dominate medium of currency particularly in the decade of the 1860's. Silver was the more prominent measure of wealth in the West.  Banks configured with Silver backed accounts found themselves in conflict with older more established East Coast Banks which preferred Gold.  The Silverites lost out, even though they had the more compelling argument for growing the U.S. Economy, based on the greater availability of Silver vis-a-vis Gold.  It was a Mining outcome more than a technical value of wealth issue.  The rapid rate of increase in asset prices, particularly in the North, because of shortages in Gold Production after the end of the Civil War, came crashing down in the Panic caused by the standoff between East and West Coast Bankers in 1873.  Also in that year, the Carpetbaggers that flooded into the South after the Civil War agreed to leave and thus in their wake, left behind a desolate South without even the tools to resurrect to past glory. 

The Panic of 1907 was a severe reaction to what was then occurring underneath the surface,  that being an intellectual revolution against Gold Mining and shortage, and the move to create a National Central Bank.   Both ideas, being in direct conflict, resolved their differences in markets leading to the Panic and the de facto elevation of JP Morgan for rescuing the Country.  It is from the roots of that miraculous intervention by Morgan that the current day FED sprang.  

We could go on and on.  It is not my belief that they just screw up.  I actually believe that there are some persons who remarkably are intelligent beyond description, who see things from a different light and are able to be opportunists to their own time.  A sort of cyclical trickery based on a dynamic composition of human emotion which is steerable either in a manic or depressive direction depending upon news which is fed to them.  If knowledge is power, then false knowledge is just as powerful, and all too common we find out after the fact that actions deemed 'necessary' have indeed proven fatal.  It would be as if designating 'hemlock' as an anti-dote, instead of a poison.  We have just seen witness of this in our Stimulus Packages, neither of which will prove to any effect other than a complete waste of money and a doubling down on debt...the Enemy of The People.  

 

 

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#10) On July 27, 2009 at 6:18 AM, whereaminow (22.93) wrote:

AdirondackFund,

I choose not to assign god-like powers of intelligence to the people directed to rule over me.  It gives them justification to snuff me out of existence should they deem it necessary (see every war in human history.)  The actions of human leaders have ranged greatly from the very smart to the incredibly stupid - a point I will return to in a moment.

The idea that JP Morgan or Bernanke in present day could be smart enough to plan monetary policy for the entire nation must logically follow the assumption that they can peer into the heads of every American and determine their subjective evaluation of the price of money.  Money is a commodity with a price (the interest rate) just as any other commodity.  It is no different.  Should we assign these superhuman powers to the Federal Reserve chairman, we must also assume that he can determine steel production for the nation, the optimal amount of wheat, the producution of coal, and an endless supply of commodities.

I believe that this endeavor is impossible.  I also believe that the most stupid actions of history's leaders, even the smartest leaders, came when they assigned superhuman powers to themselves and believed in their own infallability to determine prices for all assortments of goods, from gold to labor to corn.  Forty Centuries of Wage and Price Controls is a detailed analysis of this phenomen I find particularly riveting.

I also do not believe that just gold or just silver or just paper should be money.  The market determines what is money, as it always has.  The government never decreed what should exist a measure of commensurability between exchanging parties.  It arose naturally.  That market actors normally chose gold or silver is only evidence that paper must be forced upon the people in order to have any value.  The idea that there is not enough gold or for a maket economy to function is also disputable, as I detailed here.

What there isn't enough of.... is enough gold to cover the losses suffered by Fractional Reserve banks and their customers that have inflated the money supply.  Of that, we are certain.  It is Gresham's Law. 

I do not believe the market will ever solve everyone's problems. It is not a panacea.  Only the individual can solve their own problems.  What the market does better than central planning is adjust to the changes in the subjective valuations of individual actors.  This is the folly of the Federal Reserve - the belief that it can influence those subjective valuations through monetary policy without causing economic distortions (BOOMS) that will lead to massive losses of wealth (BUSTS).

It has exacerbated rather than stabilized the business cycle.

David in Qatar

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#11) On July 27, 2009 at 6:24 AM, XMFSinchiruna (27.56) wrote:

David, thanks for posting. I look forward to coming back and watching the videos when I have a moment.

 

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