Thursday, 18 December 2008

Negative real sanity [update 3]

The US Federal Reserve – the Fed – has now set interest rates at negative real levels, which means it’s given up on a recovery by saving, and with its “blunt announcement” that it “will print as much money as necessary to revive the frozen credit markets” it’s now obvious to everyone that it’s given up on the US dollar. 

Which means, says blogger Jeff Perren, the Fed is now officially insane.

UPDATE 1: There’s a reason the Fed is insane – and most of the world’s economic ‘experts’ who comment with so much apparent authority on the Fed are all equally insane: it’s because of the power of ideas.  To be accurate, I mean the power of bad ideas. And to be specific, I mean the ideas of John Maynard Keynes, the long-dead so-called economist to which today’s so-called experts turn in times of trouble.

Check out this of the frankly frightening praise of the Fed’s frankly insane Ben Bernanke to see conclusive evidence for the charge of insanity for all of CNBC’s talking heads, and to help you understand just how much in thrall these so-called experts are to this so-called economist (so-called experts, it should be pointed out, who are wholly responsible for causing the bloody crisis in the first place).

I won’t repeat all I’ve already said about the bad ideas of this so-called economist -– if you’re keen you can read all those posts here -– except to say that popular advice in times of crisis used to be, “When in trouble or in doubt, run in circles, scream and shout.”  That pretty much describes Keynes’s advice too, leaving somebody else at some time much later to pick up all the pieces.

So why is this the default position in an economic crisis?  Says William Anderson, “the eternal default position on economic crises – the Keynesian one – arises because academic economists foolishly have rejected Austrian Economics and the wise counsel it provides.”  “It is clear, he says

    that modern neoclassical economists are clueless in general about capital… In order to even comprehend the Austrian claims, the mainstream economist needs to discard the simplistic homogeneous notion of the capital stock, and seek a richer framework that reflects the time structure of production…
    Even accomplished economic thinkers like [Nobel prize-winner Gary] Becker seem incapable of understanding the basic Austrian notion of "malinvestment," instead mistakenly calling it "overinvestment" …
    The Austrian School are correct in pointing out that typical academic economists really don’t understand capital very well, and their few attempts at formulating a theory of capital have been failures. Yet, I believe that the mainstream failure of capital theory is due to the greater failure of economists to understand that simple good: money.
    Economists can speak of "money supply" or "price levels," but very few understand the very nature of the money economy and what happens when governments predictably abuse their monopolies of "money creation." Even the "free market" economists often stumble over the issue of money, even when they "specialize" in it, as did Milton Friedman.

All too sadly true.  So why are so many so clueless?  Why so unwilling to embrace, or even to properly address, the answers of the Austrian school of economics? Anderson’s answer:

The failure of economists to embrace Austrianism comes both from ignorance about the economy in general and the fact that Austrian "solutions" do not provide a central role for economists to be seen as heroes or "fixers" of the economy.

So in the absence of genuine knowledge, the so-called experts are competing instead in devising increasingly desperate schemes to "jump start" the economy. As Anderson says, “The blind are leading the blind.”

UPDATE 2: One of the so-called “experts” mentioned above who were heaping praise on the so-called hero of the hour, Ben Barnanke, was Paul McCulley, managing director at PIMCO, the world's largest bond fund, which is unaccountably treated with rapt respect by so-called financial “experts.”

McCulley called Tuesday's move "a glorious day in the history of central banking" in which the Fed "went all in, in poker terms, in the fight against deflation and depression."  This is just fucking insane.

Fortunately, I don’t need to write a long post here explaining why the opinions of McCulley and PIMCO should be treated with kid gloves at best, because Mike Shedlock (known as Mish) has already done a thorough job in a piece I meant to post a few weeks back.  Read it here. Mish gives McCulley a “blue ribbon for complete economic silliness.”  That’s a polite way of saying “this boy’s batshit fucking crazy.”  And he is.

UPDATE 3: The astute Peter Schiff reckons Bernard Madoff’s fraudulent Ponzi scheme offers an important economic lesson, and a candidate for high government office:

    As the multi-billion dollar Ponzi scheme orchestrated by Wall Street insider Bernard Madoff unravels in the media spotlight, the nation is being presented with a rare opportunity to understand the true nature of many of our most cherished financial structures. Hopefully we have the wisdom to connect the dots.
    Although the $50 billion loss engineered by Madoff is truly a staggering accomplishment (and was done using old-fashioned fraud rather than the mathematical wizardry that has characterized Wall Street’s recent larcenies) the size of the scheme pales in comparison to the multi-trillion dollar Ponzi structures run by the United States government. In fact, rather than looking to jail Madoff, President-elect Obama should consider making him our new Treasury secretary…

Read on here: In Madoff We Trust.


  1. A guy who manages bonds (or bond funds) is glad interest rates are ultra-low? Well, I guess if you already have some whose price is rising you might like it (but not for very long).

    People who want to own bonds to keep usually want the interest rate to pay something.

    Insane, to be sure. But then, just one small piece of lunacy in a now-very spacious yet nonetheless overcrowded asylum.

  2. Sheesh. Talk about Krugman-lite. Check out this guy from the Times.

    Kaletsky says print money

    And I thought the Brits were supposed to be smarter than us...


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