We keep hearing from the Fed’s defenders that the current spate of new stimulus and bailouts from the central bank are really not a big deal and are all very prudent and moderate. Ryan McMaken asked Senior Fellow Bob Murphy to provide some much needed perspective.
Ryan McMaken:
We’re in a very odd situation right now in terms of evaluating the state of the economy. We can see that there is rising unemployment, and there is likely to be a wave of missed mortgage and rent payments. Is this all just due to the government-mandated “shutdowns” or are there deeper economic issues here?
Robert P. Murphy:
In economics there are no controlled experiments, so partisans on a policy dispute can both continue to claim that the evidence is on their side. That’s why Keynesians and Austrians still disagree about the “lessons” of the 1930s, or whether the Obama stimulus package created or destroyed jobs.
During the present economic crisis, I am firmly in the camp that it was not due merely to the coronavirus or even to the (counterproductive) coercive lockdowns that various governments instituted, ostensibly as a public health response. I agree with Jeff Deist, who argued back in April that “The supposed greatest economy in US history actually was a walking sick man, made comfortable with painkillers, and looking far better than he felt—yet ultimately fragile and infirm. The coronavirus pandemic simply exposed the underlying sickness of the US economy. If anything, the crash was overdue.”
What evidence can we marshal to support such a perspective? Well, I have been far from flawless in my economic prognostications, but back in October 2007 I did write an article for Mises.org, worrying that the US could be in store for the worst recession in twenty-five years—this was almost a full year before the actual crash in the fall of 2008. And in that article I wasn’t throwing darts at a GDP chart; instead I used Austrian business cycle theory to gauge the extent of Fed distortions in the financial system.
Now, if I then made a good prediction in real time based on Austrian theory and Greenspan’s artificially low interest rates, that gives me confidence that the Fed’s post-2008 rounds of QE (quantitative easing) and seven full years of virtually zero percent interest rates quite clearly drove the booming stock market under Obama, yet set us up for a much bigger crash.
Even non-Austrians had enough information to know to worry. Back in September of 2019, I explained how the inverted yield curve signaled an impending recession for the summer of 2020—i.e., right now.
RM:
As the crisis grew during March, the Fed lowered the target rate from 1.75 to 0.25 percent in a two-week period. That’s a big drop. What was the Fed trying to do when it did this, and can it achieve its goals?
RPM:
I think regular Americans would be shocked if they realized just how crude the basic models are that guide central banking policy. I’m simplifying somewhat, but the official rationale was that a weak/panicked economy needs more spending in order to maintain employment, and the way you goose spending is to lower interest rates. There’s also the notion that the markets want reassurance that the Fed is waiting to help, and so by taking a “bold” move quickly, the Fed could possibly nip a self-fulfilling prophecy in the bud.
Having said all of that, it’s possible that behind the scenes the real reason the Fed did what it did was that certain powerful players were caught with their pants down, and they needed cheap loans to salvage their positions.
I don’t think this was a wise move, and no, it won’t (in the long run) help the financial sector or the broader economy. In the Austrian view, interest rates aren’t merely a gas pedal/brake for spending; they help coordinate long-term plans made by consumers and businesses. So if the Fed pushes interest rates below the correct market level corresponding to genuine saving decisions and the state of the economy, then it will foster an unsustainable structure of production. This was Ludwig von Mises’s theory of the business cycle, which has yet to be appreciated by most other free market economists—let alone the Keynesians.
RM:
Many commentators on the Fed’s stimulus packages have claimed that it’s not really that big a deal because the Fed is only exchanging liquidity for collateral, and Fed stimulus is mostly just loans that will be paid back anyway. So is this just much ado about nothing?
RPM:
Back when the Fed’s “extraordinary” injections of liquidity started, I argued that this nonchalance was wrong. Look, if the Fed wrote me a check for my Nissan Sentra for $100,000, then on the moment of sale my car would have a “market value” of $100,000 and the Fed would just be adding equal amounts to its assets and liabilities. Yet that clearly would bail me out, even though it would appear to be a mere “asset swap” rather than a transfer payment.
Put it this way: If the Fed’s injections of “liquidity” don’t really help the fat cats in the financial sector, then we can just cancel them and won’t affect anybody, right?
RM:
We seem to now be in a time of unprecedented fiscal and monetary stimulus. In the past, there seemed to be some political and legal limits on what could be done in this regard. Why do you think there are now almost no limits on what the Fed and Congress can get away with in terms of spending and bailouts?
RPM:
In an essay I wrote for a collection edited by David Howden and Joe Salerno, I argued that Ben Bernanke was “the FDR of central bankers.” What I meant was the Bernanke took the economic crisis and used it as an opportunity to fundamentally expand what Americans perceived as the proper role of the Federal Reserve. It wasn’t merely that Bernanke doubled the holdings of the Fed in mere months, but that the type of assets the Fed bought or lent against was greatly expanded.
To appreciate just how dubious these moves were, realize that the Fed back in 2008 created “Maiden Lane” LLCs, which were intermediate companies that would get loans from the Fed, then go out and buy mortgage-backed securities (MBS). Since the Fed didn’t have the statutory authority to buy MBS, they could say, “We’re not buying these forbidden assets, we’re just lending money to Maiden Lane LLC. We have the ability to lend money to whichever institution we want. Now if Maiden Lane LLC takes the money and goes and buys some mortgage-backed securities, that’s their business…” So, to reiterate, it’s not just that Bernanke’s Fed did things that were bad policies. They were also arguably illegal.
We see a similar phenomenon with Jay Powell and the coronavirus panic. When people are scared they let the authorities get away with all sorts of nonsense. The Fed got rid of reserve requirements in the last section of an addendum to the main press release of a surprise Sunday night meeting, and barely anybody even covered it.
Likewise with fiscal policy. Apparently the folks who brought us the Obama stimulus package were afraid of having its price tag exceed $1 trillion, but that’s obviously not stopping anybody now. The American people have been so desensitized to these gigantic numbers that nothing is shocking. But for what it’s worth, the CBO (Congressional Budget Office) itself is now saying that federal debt held by the public—as a share of the economy—will break 101 percent by October.
I think the only thing that will reinstill a sense of discipline is if there is a tangible and immediate reaction to these crazy policies. If a Fed announcement of more asset purchases causes the dollar to fall 20 percent against other currencies, or if the projection of another $1 trillion deficit causes Treasury rates to spike, then maybe Americans will stop looking to Washington as a magic source of financing.
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Is the following of interest ?
Jim Carter
[email protected]
FEDERAL RESERVE :
CON ARTIST EXTRAORDINAIRE
revised * * * daily
The creation of a deficit Treasury security and the National Debt has been the subject of a previous writing. It was inspired by a professor who informed his graduate class the Federal Reserve credits a government account with book-entry value only after receiving a deficit security from the Treasury Department. Ref. https://thedailycoin.org/2018/08/21/the-federal-reserve-a-different-view-updated/. What happens to the security, as concluded by the writer, after being received by the Fed is the subject of this writing.
The Fed’s only disposal of new marketable Treasury securities is by auctions which are, in fact, handled by the FRBNY as fiscal agent for the government. Ref. 31 CFR 375.3. TreasuryDirect [TD] institutional tabulations of auctions of Treasury securities for roll-over of maturing securities historically included a ~10% ‘new cash’ component on virtually all sales. [Currently new cash can be 100% to a negative (input) of the issue.] All other funds are to redeem maturing securities and are government money. Ref. https://www.treasurydirect.gov/instit/annceresult/press/press_cashpydwn.htm. There goes the deficit spending Treasury security.
31 CFR 375.3 establishes FRBNY’s exclusive responsibility for disbursement of the auction funds and any related function they wish to claim. With the Fed setting the parameters of the auctions, the TD must obviously obtain the values from the bank. The GAO has twice reviewed the FRBNY’s security of bid and fund handling of the auctions. The accounts maintained by FRBNY, despite CRS misleading innuendo, have never been audited. There is no mention of them in the Annual Report to Congress.
The 90% of the auction funds used for roll-over of maturing securities are government funds. FRBNY, as fiscal agent for the government, disburses those funds, in large part, to the Primary Dealers who are tasked with collecting securities to be redeemed. The FRBNY is a franchise (purchased by commercial banks within each of the twelve districts) with a nine member Board of Directors. Administrative and regulatory control is vested in the FR Board of Governors. Any of the 108 franchise directors may be fired by the BOG without cause and without recourse, The System was designed by a furtive cabal of New York City bankers, under the guidance of a European banker, assumed to be for some gain.
TreasuryDirect will not respond to requests for documented destination of ‘new cash’ funds. The funds from deficit Treasury securities cannot go to government and still result in inflation. Such an action would also negate any increase of the National Debt. The only feasible alternate destination of deficit spending funds is to the [covert] owners of the FR Board of Governors, Inc. [The Federal Reserve System is not deemed to readily lend itself to a corporate structure.] A privately held corporation is not required to file records with the SEC; i.e., the operation is invisible. All profit of the system, by charter, legally belongs to the government. The value appears to be embezzled. Status as a government agency is not applicable to an entity created for private profit, or for theft.
Whether legal consideration is received from the Federal Reserve system in the creation of book-entry credit, which can be readily distinguished from consideration created by commercial banks in the creation of a loan, may be a question that must be judicially determined. The commercial bank took a risk in the loan creation; such a risk does not appear apparent from the FR creation.
The Bloomberg v. Federal Reserve case of 2010 has the federal appellate court apply the statute that extends FOIA coverage to all official records of FR banks. Ref. 12 CFR 261.2(i)(1)(i) and (ii). The court confirms all system profit belongs to the government. Extensive labor will be required to demands relevant new cash records by FOIA, then for the court enforcement of the denied requests (optimistically) , and then for the subsequent analysis of several years of commingled funds [which exceed $12 trillion annually] to determine validity. [Better hurry. The Fed is trying to change FOIA.]
Whether a qui tam suit for securities violation, or a false claim with a relator’s award, or exposure of a criminal act is the resultant subsequent action of FOIA record production, it is obvious that continuation of humongous deficit spending will escalate the nefarious wealth transfer to owners of the BOG. The current transfer exceeds $3 billion daily, 7/52. Each trillion dollar annual increase in deficit spending will give another $3 billion daily to the PD cabal. Unrelated use of the Fed’s new Special Purpose Vehicles (SPV) program to sell Wall Street’s trash to the Treasury Department (read Stephen Mnuchin of Goldman Sachs) at inflated prices to procrastinate bankruptcy of Wall Street banks will additionally balloon the national debt. Ref. https://www.bloomberg.com/opinion/articles/2020-03-27/federal-reserve-s-financial-cure-risks-being-worse-than-disease Quote: “To put it bluntly, the Fed isn’t allowed to do any of this.”
Blackrock is central to the scam. Ref. https://wallstreetonparade.com/2020/06/blackrock-is-bailing-out-its-etfs-with-fed-money-and-taxpayers-eating-losses-its-also-the-sole-manager-for-335-billion-of-federal-employees-retirement-funds/.
The historic booty may have been used to construct the six mega-corporations that control all major corporations and eliminate competition; or it could have been laundered in the stock market and drive their prior investments to even higher value; or it could have funded David Rockefeller’s utopian world domination as documented by John Perkins, William Blum, and others; or to initiate false flag warfare as documented by General Smedley Butler, John Stennett, among others; or to fund many of the nefarious CIA actions. The money is all hidden.
Bankruptcy of the Nation is inherent. The FR Ponzi scheme creates an expanding National Debt with no possible way to pay it off. The principle of a ‘loan’ is created by deficit spending. [Notice that the ‘loan’ (sic, credit that is never negated) is from the Federal Reserve system but the taxpayers have become responsible for it.] The required interest to pay it off is never created. Only more debt, with the new principal being used to pay the prior interest, delays the Ponzi’s collapse. The growth required to perpetuate such a scheme, of interest upon interest upon interest, is exponential as evidenced in any graph of the National Debt. A contract that cannot be culminated is an act of fraud and is void from its inception.
During national bankruptcy, the FRBNY will handle redemption of the PD’s tendered securities they have purchased in the market for pennies. They will demand face value from the U.S. Treasury; i.e., a financial rape of the nation. They are all one clan. Hello Greece and a U.S. troika controlled by financial entities.
Benjamin Ginsberg has chronicled a history of financiers with government in FATAL EMBRACE; (financiers) AND THE STATE. He attributes the Baron’s revolt/Magna Carta to King John’s decree they would fund and staff John’s invasion of Normandy. The instigation of war by London financiers would have been highly profitable. Ben identifies numerous subsequent medieval uprisings and social chaos occurred in Europe from financiers exploitation of societies. It was the unique uprising of John’s appointed governors, a political power, that advanced the unprecedented concept of citizens having the Right to govern themselves; feudalism (totalitarian rule) was fractured. Regression is apparent. A similar replay in today’s society would seem to require state bodies, perhaps singular individuals, to lead a revolt.
Commerce cannot thrive without a readily agreeable value of transfer. Devaluation of the means of value exchange condemns a nation to the ash pit of history.
Do you know of any party that would consider becoming involved in a FOIA suit ?
This writing is not copyrighted. Feel free to distribute.