Krugman And The "Heroic" Fed

Once an avid reader of Paul Krugman’s New York Times twice-weekly columns, I admit to rarely even glancing at his work now, since I know that anything he writes is going to have the theme of “Trump evil, Democrats good” each time, and it doesn’t take long to get one’s fill of that, even if one disagrees with Donald Trump’s policies or cringes at some of his public statements. The real problem, however, is that Krugman also manages to endorse unsound and inflationary economic policies as a “solution” to what he calls “Trumpism.”

If one reads Krugman to see what “vulgar” Keynesian fallacies he is promoting, the man rarely disappoints, and a recent column in which he attacks what he believes will be Trump’s future choice to head the Federal Reserve System only burnishes Krugman’s Keynesian credentials. After claiming that Trump has been like a “Category 5 hurricane sweeping through the U.S. government, leaving devastation in his wake,” Krugman then worries if the Fed will suffer the same fate. One only could hope….

Before looking at Krugman’s worshipful commentary on the current Fed leadership, a brief point is in order regarding the rest of official Washington that Trump allegedly has devastated. People like Krugman believe that Washington and its gaggle of Alphabet-Soup agencies regulating nearly every aspect of individual lives is the very source of social stability and economic prosperity in this country – provided there are little or no restraints on what government agents can do. As Krugman and his fellow progressives see it, we need more, not less, bureaucratic control of our lives, and especially control by people of progressive bent with “elite” academic credentials, since they are smarter than the rest of us, so they should be able to tell us what to do.

In his classic 1945 paper, “The Use of Knowledge in Society,” F.A. Hayek wrote that the kind of knowledge needed within a growing and prosperous economy is not the distant academic knowledge, but rather the boots-on-the-ground knowledge undergirded by a price system held by entrepreneurs and others directly involved with enterprises. Ludwig von Mises in many of his writings, including Bureaucracy, pointed out that free-market pricing of goods, along with profit (and loss) management, serves as an irreplaceable guide for an economy.

Krugman is having none of that, and his academic biases are exposed in his recent column. He writes:

The Fed, which sets monetary policy, is by far our most important economic agency; its chairwoman (or chairman) is arguably the most powerful economic official in the world, more than the president himself. Its institutional status is peculiar: It isn’t exactly part of the executive branch, but it isn’t exactly independent, either. Its board members are appointed by the president subject to congressional approval, but have traditionally been technocrats expected to distance themselves from partisan politics.

That is, however, a norm rather than a legal requirement. And we know what tends to happen to norms in the Trump era.

For more than a decade the Fed chair has been a distinguished academic economist — first Ben Bernanke, then Janet Yellen. You might wonder how such people, who have never been in the business world, who have never met a payroll, would deal with real-world economic problems; the answer, in both cases: superbly.

In particular, both Bernanke and Yellen responded effectively to a once-in-three-generations economic crisis despite constant heckling from back-seat drivers in Congress and on the political right in general. And their intellectual and moral courage has been completely vindicated by events.

Given this track record, you might expect to see either Yellen reappointed or an equally qualified technocrat take her place. But remember, we’re living in the age of Trump, which means that we should actually expect the worst.

And what were the policies driven by “intellectual and moral courage”? More inflation. That’s right, printing money. Writes Krugman:

When the financial crisis struck in 2008, it was essential that the Fed engage in aggressive monetary expansion — loosely speaking, print lots of money. There are circumstances in which that kind of action would be inflationary, but economists (like Bernanke and, well, yours truly) who had studied the subject understood that this wasn’t one of those times. Indeed, inflation stayed quiescent even as the Fed quadrupled the monetary base.

Beyond debating Krugman and others regarding the presence of Keynes’s “liquidity trap” that supposedly turns laws of economics upside down, there is another point I believe needs to be made, and it goes back to the Hayek-Mises theme of economic calculation driven by profits and losses and a free price system. In Krugman’s view, it is the market economy driven by ignorant and greedy know-nothings and always is prone to collapsing into the maw of “underconsumption” that is the real problem. If academics like Krugman, Bernanke, and Yellen were in charge of the economy, things would work smoothly and rationally.

For example, Krugman and many of his fellow intellectuals believe that the mortgage securities which bundled mortgages considered to be “sub-prime” (and later collapsed, bringing down much of the financial system with it) were the “natural” result of a laissez-faire economy, something the Austrians would have created if left to their own devices. The Alan Greenspan-Ben Bernanke Fed, along with government housing policies, had nothing to do with the creation and distribution of these doomed securities. Indeed, Bernanke and his minions only wisely reacted to the crisis once the free market, which created the disaster in the first place, had run its destructive course.

This is a re-occurring theme in Krugman’s writings: the free market creates crisis after crisis and then the “adults” from the federal regulatory agencies must step in and repair the damage, and if Krugman could have political control, those agencies would have unlimited powers to control the economy, since the agencies consist of people who know more than everyone else.

There are exceptions to the academics-must-rule-the-economy theme: Austrians, who have the effrontery to hold to doctrines of sound money and who argue for free markets, are not included in the guest list. Austrians, after all, are delusional, and actually know little-to-nothing about real economics. Properly-vetted economists such as Krugman and Bernanke know that federal policies that promise to backstop banking losses, push home ownership through artificial financial means (including Fed policies of pushing down interest rates to near-zero), and then manipulate housing prices actually had nothing to do with the financial madness known as the Housing Bubble. (That Austrians, such as Mark Thornton, warned long before the 2008 meltdown that the housing market was destined to fail spectacularly garners Austrians no credit; even a broken clock is correct twice a day.)

People like Krugman perpetuate the myth that the U.S. economy is a pure, laissez-faire entity that is driven to collapse by free markets, only to be rescued by the Ph.D. economists and federal regulators that are more intelligent than everyone else and set things right again, like an unstable democracy that every so often experiences a coup by its army, which cleans out the corruption and steers the government back onto a righteous path.

The future picks Donald Trump may have for the Fed leadership really is not the issue here, no matter what Krugman claims. Far from being the incorruptible general whose troops must clean up the wreckage left by the hurricane of free-market economics, the Fed usually is ground zero (or at least nearby) when it comes to economic crises. Instead of the hero academic economist “who saved the world,” Ben Bernanke actually helped to create and nurture the crisis, and then prevented a full recovery – along with his successor, Janet Yellen.

One does not answer Krugman’s claim that progressive academics should run the world by urging the appointment of more “conservative” academics – who also should the run the world the “right” way. No, one replies by saying that the last thing any credentialed academic economist should be doing is becoming the “visible hand” that substitutes for free market processes. Let markets work on their own, period.

Exposing Our Lawless Central Bank

The economic arguments against central banks are numerous to say the least. Through the writings of Ludwig von Mises and Murray Rothbard we have a wide variety of critiques that explain the many ways the central banks distort economies, cause booms and busts, punish savers, and chose winners and losers through monetary policy. 

But, even if confronted with these arguments, and one remains supportive of central banks, other non-economic arguments must still be addressed.

For example, it is becoming increasing important — in our current age of "non-traditional" monetary policy — to take note of the fact that central banks, and especially the Federal Reserve, are essentially unrestrained by law. 

Economists themselves often defend this total unmooring from legal or political accountability, saying it is necessary for the Fed to have "independence" from elected officials. 

In reality, however, this "independence" is best described as "total lack of accountability." 

Writing in today"s Dallas Morning News, Texas Tech economist Alexander William Salter writes: 

A phenomenal amount of time and money is spent trying to anticipate what the Fed will do and, afterwards, what the ramifications will be. The reason it takes so many experts to weigh in on Fed behavior is because the Fed"s actions are fundamentally unpredictable. This is a huge defect in an organization of such public importance in a nation whose founding principles include the sanctity of the rule of law.

"Rule of law" does not merely mean "according to some official procedure." In order to be truly lawful, the behaviors of government entities must adhere to a more general framework of rules, so that these behaviors are not arbitrary. The more general rules must be more or less fixed, known in advance, and — most importantly — not subject to reinterpretation by those whose hands the rule is supposed to bind. This concept of the rule of law is central to classically liberal constitutionalism and jurisprudence, which underlies the American experiment in ordered liberty.

The behavior of the Fed fails to meet any of these criteria.

Fed activities are more or less unpredictable on any given day, as indicated by the need for various financial houses to devote significant resources to Fed-watching. Congress has almost entirely abdicated its responsibility in holding the Fed accountable, so Fed"s actions are not in conformity with any general rule other than what the Fed Board of Governors thinks is expedient. This means the Fed is a judge in its own cause and a law unto itself. 

In recent years, some observers — Robert Higgs, for instance — have focused on "regime uncertainty" which is a problem arising from "a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights."

Much of the focus in this research has been on the presidency and the Congress and the courts while ignoring the central role of the Fed itself in promoting this uncertainty. 

As Salter notes, the Fed is now unpredictable, and it"s anyone"s guess what policy change might be coming down the road at any given time. Needless to say, this isn"t great for economic growth for all the reasons laid out in the regime-uncertainty research. 

Of course, the Fed has always essentially been unaccountable to any outside institutions. Nevertheless, both political ideology and prevailing views among many economists helped to restrain Fed action over the past century. Since World War II, another important factor has been the fact that the US economy has often been relatively strong, and there rarely appeared to be ample justification for the sorts of radical monetary policy now routinely being discussed among Fed policymakers. 

As a perfect example of how radical monetary thought has become might be the discussion surrounding Marvin Goodfriend, who was recently revealed to be a leading candidate for appointment by Donald Trump to the Fed"s board of governors. According to the Financial Times, Goodfriend possesses "a radical willingness to embrace deeply negative rates."

As a member of the Fed"s board, would Goodfriend push for negative rates under the "right" conditions? Who knows? 

But if he was successful in winning over a majority of voting members to such a position what could anyone do about it? More importantly, what documents, guidelines, or statutes would indicate for us ahead of time what the "right" conditions would be for implementing negative rates? 

There are none. Whether or not the "time is right" for negative rates is completely up to the whims of Board members. 

This situation is, as Salter points out, the complete opposite of "the Rule of Law" and has no place in a legal or political regime that claims to respect such a concept. 

Moreover, the situation that now prevails at the Fed is exactly the sort of thing F.A. Hayek warned about in The Road to Serfdom when Hayek outlines the incompatibility between the rule of law and an economy controlled by government planners. 

Hayek writes: 

...stripped of all its technicalities, [the rule of law] means that government in all its actions is bound by rules fixed and announced beforehand — rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one"s individual affairs on the basis of this knowledge.

Serious problems begin to arise, Hayek continues, when "ad hoc actions" on the part of government planners prevent market actors from planning for their own economic futures. 

Unfortunately, "ad hoc" would appear to be one of the most apt phrases for describing how the Fed functions in today"s world. 

The Fed"s defenders will tell us that this unrestrained capriciousness must be tolerated or else the Fed will no longer have its precious "independence." 

Of course, applying this logic to any other political institution — and the Fed most certainly is a political institution — would be immediately denounced as absurdly authoritarian. 

And rightly so.

But the Fed"s lack of accountability continues to be sacrosanct among many in power — and it continues in spite of a decade of lackluster economic performance under the Fed"s "leadership. Salter is forced to conclude: 

But when money is governed by the arbitrary rule of central bankers, things become much more uncertain. Trade slows. The economy stagnates, jobs are hard to come by, and the gains from trade mostly accrue to politically connected financial elites. The Fed bears no small responsibility for the past 10 years of anemic economic performance.

"The End Of Truth" - Hayek Saw It All Coming Over 70 Years Ago

The Road To Serfdom (authored by F.A. Hayek, first publ;ished in 1944)

Excerpts from Chapter 11 - The End of Truth

Annotated via Crossroad.to/heaven,

"The most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everybody believe in those ends. To make a totalitarian system function efficiently, it is not enough that everybody should be forced to work for the same ends. It is essential that the people should come to regard them as their own ends."[p.171]

Berit"s comment: Ponder that statement. It helps explain the significance of universal service-learning. Like socialist youth in Nazi (National Socialism) and Communist countries, all must embrace the new ideology. Those who don"t -- the intolerable dissenters -- must be silenced.

The next section elaborates:

"Although the beliefs must be chosen for the people and imposed upon them, they must become their beliefs, a generally accepted creed which makes the individuals as far as possible act spontaneously in the way the planner wants. If the feeling of oppression in totalitarian countries is in general much less acute than most people in liberal countries imagine, this is because the totalitarian governments succeed to a high degree in making people think as they want them to."[p.171]

The strategies that accomplish this mental change include numerous subtle and obvious forms of propaganda. Schools, the media, children- and youth-service teams, corporations, etc.... every source of propaganda must share the same vision. Though totalitarian, it will be designed to sound noble, compassionate and fair to all. Yet the result with be the exact opposite.

Ponder this warning from Dr. Thomas Sowell"s review of Road to Serfdom:

"At the heart of the socialist vision is the notion that a compassionate society can create more humane living conditions for all through government "planning" and control of the economy...

"The rule of law, on which freedom itself ultimately depends, is inherently incompatible with socialism. People who are free to do as they wish will not do as the economic planners wish. Differences in values and priories are enough to ensure that. These differences must be ironed out by propaganda or power, if socialism is to be socialism. Indoctrination must be part of the program, not because socialist want to be brainwashers, but because socialism requires brainwashing.

"Idealist socialist create systems in which idealist are almost certain to lose and be superseded by those whose drive for power, and ruthlessness in achieving it, make them the "fittest" to survive under a system where government power is the ultimate prize.... The issue is not what anyone intends but what consequences are in fact likely to follow."

In his article, aptly titled "A Road to Hell Paved with Good Intentions," Sowell points out that "Marxism as an ideal continues to flourish on American college campuses, as perhaps nowhere else in the world." Collectivist visions appeal to academic idealists and others who ignore the lessons of history.

"....all propaganda serves the same goal—that all the instruments of propaganda are coordinated to influence the individuals in the same direction.... The skillful propagandist then has power to mold their minds in any direction he chooses, and even the most intelligent and independent people cannot entirely escape that influence if they are long isolated from all other sources of information. [p.171-172]

President Obama took control of this change process by transferring workers from the private sector (corporations, private enterprise...) to the government service sector. With the controlled media on his side, the masses are not exposed to contrary facts.

"...even the striving for equality by means of a directed economy can result only in an officially enforced inequality—an authoritarian determination of the status of each individual in the new hierarchical order—and that most of the humanitarian elements of our morals, the respect for human life, for the weak, and for the individual generally, will disappear....

"The moral consequences of totalitarian propaganda which we must now consider are, however, of an even more profound kind. They are destructive of all morals because they undermine one of the foundations of all morals: the sense of and the respect for truth.

"...in order to induce people to accept the official values, these must be justified, or shown to be connected with the values already held by the people, which usually will involve assertions about causal connections between means and ends.  ...people must be brought to agree not only with the ultimate aims but also with the views about the facts and possibilities on which the particular measures are based.[p.172]

Al Gore"s battle against a mythical man-made global warming crisis illustrates this point. Globalist change agents agree that a worldwide crisis is needed to persuade humanity to embrace all the costly restrictions and regulations of government controlled "sustainable development." So they are willing to ignore facts and embrace myths and pseudo-science in order to reach their goal.

"We have seen that agreement on that complete ethical code, that all-comprehensive system of values which is implicit in an economic plan, does not exist in a free society but would have to be created....

"And while the planning authority will constantly have to decide issues on merits about which there exist no definite moral rules [apart from the Bible], it will have to justify its decisions to the people—or, at least, have somehow to make the people believe that they are the right decisions....

"This process of creating a "myth" to justify his action need not be conscious. ...  So [the totalitarian leader] will readily embrace theories which seem to provide a rational justification for the prejudices which he shares with many of his fellows. Thus a pseudoscientific theory becomes part of the official creed which to a greater or lesser degree directs everybody’s action. [p.173]

"The need for such official doctrines... has been clearly foreseen by the various theoreticians of the totalitarian system.... They are all necessarily based on particular views about facts which are then elaborated into scientific theories in order to justify a preconceived opinion.

"The most effective way of making people accept the validity of the values they are to serve is to persuade them that they are really the same as those which they... have always held, but which were not properly understood or recognized.... The people are made to transfer their allegiance from the old gods to the new under the pretense that the new gods really are what their sound instinct had always told them but what before they had only dimly seen. And the most efficient technique to this end is to use the old words but change their meaning. Few traits of totalitarian regimes are ... so characteristic of the whole intellectual climate as the complete perversion of language....

"The worst sufferer in this respect is, of course, the word "liberty." It is a word used as freely in totalitarian states as elsewhere.... Dr. Karl Mannheim... warns us that "a conception of freedom modeled on the preceding age is an obstacle to any real understanding of the problem. But his use of the word freedom is as misleading it is in the mouth of totalitarian politicians. Like their freedom, the "collective freedom" he offers us is not the freedom of the members of society but the unlimited freedom of the planner to do with society what he pleases....[pps.174-175]

"In this particular case the perversion of the meaning of the word has, of course, been well prepared .... by many of the theoreticians of socialism. But "freedom" or "liberty" are by no means the only words whose meaning has been changed into their opposites to make them serve as instruments of totalitarian propaganda. We have already seen how the same happens to "justice" and “law," "right" and "equality." The list could be extended until it includes almost all moral and political terms in general use.

"... the confusion becomes worse because this change of meaning of the words describing political ideals is not a single event but a continuous process, a technique employed consciously or unconsciously to direct the people....

"It is not difficult to deprive the great majority of independent thought. But the minority who will retain an inclination to criticize must also be silenced. ... Since many parts of this code will never be explicitly stated... every act of the government, must become sacrosanct and exempt from criticism. If the people are to support the common effort without hesitation, they must be convinced that not only the end aimed at but also the means chosen are the right ones."[p.175]

"Facts and theories must thus become no less the object of an official doctrine than views about values. And the whole apparatus for spreading knowledge—the schools and the press, radio and motion picture—will be used exclusively of to spread those views which, whether true or false, will strengthen the belief in the rightness of the decisions taken by the authority; and all information that might cause doubt or hesitation will be withheld."[p.176]

Stanford University Professor Steven Schneider illustrates it well. He said,

"On the one hand, as scientists, we are ethically bound to the scientific method, in effect promising to tell the truth, the whole truth, and nothing but--which means that we must include all the doubts, the caveats, the ifs, ands, and buts. On the other hand, we are not just scientists but human beings as well. And like most people, we"d like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climatic change.

"To do that, we need to get some broad based support, to capture the public"s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements and make little mention of any doubts we might have... Each of us has to decide what the right balance is between being effective and being honest."

This applies even to fields apparently most remote from any political interests and particularly to all the sciences, even the most abstract.

"That in the disciplines dealing directly with human affairs and therefore most immediately affecting political views, such as history, law or economics, the disinterested search for truth cannot be allowed.... These disciplines have, indeed, in all totalitarian countries become the most fertile factories of the official myths which the rulers use to guide the minds and wills of their subjects...." [p.176]

In "Government religion in the United States," Erica Carle wrote:

"The separation of church and state argument for removing all traces of Biblical teaching from public life and public land is a gigantic fraud. Why? Because there is no separation of church and state. Government religion is a fact in the United States. What is wanted by the government religion adherents is not separation of church and state, but exclusive rights for their religion.

"What is the government religion? Auguste Comte (1798-1857), its French founder, called it the Religion of Humanity. The doctrines of the Positive Religion are now taught in the schools as a science which Comte called sociology. Sociology was to be the ruler science over all the other sciences and also the science of managing the world.... In a country that is supposed to be free,

• its citizens are being subjected to sociological management,


• its scientists and elected officials to sociological control, and


• its youth to sociological education.

Hayek went on...

"...we must yet be on our a guard not to dismiss .[these aberrations] as mere accidental by-products which have nothing to do with the essential character of a planned or totalitarian system....They are a direct result of that same desire to see everything directed by a "unitary conception of the whole."...

"Once science has to serve, not truth, but the interests of a class, a community or a state.... As the Nazi minister of justice has explained, the question which every new scientific theory must ask itself is: "Do I serve National Socialism for the greatest benefit of all?"

"The word "truth" itself ceases to have its old meaning.  ...it becomes something to be laid down by authority, something which has to be believed in the interest of the unity of the organized effort and which may have to be altered as the exigencies of this organized effort require it.

"The general intellectual climate which this produces, the spirit of complete cynicism as regards truth which it engenders, the loss of the sense of even the meaning of truth, the disappearance of the spirit of independent inquiry.... Perhaps the most alarming fact is that contempt for intellectual liberty is not a thing which arises only once the totalitarian system is established but one which can be found everywhere among intellectuals who have embraced a collectivist faith and who are acclaimed as intellectual leaders even in countries still under a liberal regime.

"Not only is even the worst oppression condoned if it is committed in the name of socialism, and the creation of a totalitarian system openly advocated by people who pretend to speak for the scientists of liberal countries; intolerance, too, is openly extolled...." [p.178]

"This view is, of course, practically indistinguishable from the views which led the Nazis to the persecution of men of science, the burning of scientific books, and the systematic eradication of the intelligentsia of the subjected people.

"The desire to force upon the people a creed which is regarded as salutary for them is, of course, not a thing that is new or peculiar to our time. New, however, is the argument by which many of our intellectuals try to justify such attempts." [p.179]

The tragedy of collectivist thought is that, while it starts out to make reason supreme, it ends by destroying reason...."[p.180]

And as a reminder, this was writen in 1944!