Open Letter to Ben Bernanke

Well put, sir. Clear and with brevity.

Back on the road and working my way through Keynes' "General Theory of Employment". I got to the part where he states that each of his main factors is worthy of study in its own right when it occurred to me that, he's designing a computer game. That's exactly how sim-world games are designed, by choosing a few major variables and programming cause and effect relations around them that allow the player to get a thrill by entering key sequences. The problem, of course, is that the real world isn't a game, and that Keynes' has given politicians an excuse to act as if it is... and Bernanke is no exception.

The money creation switch at the Fed is, indeed, treading the economy like a sim video game. Just enter the cheat code, get your money, and buy whatever you like.

Hi Don,

Take it easy on BB. He had the unluck to 'be in the ring'. Mopping up the liquidity, ever so gradually, will not be such a difficult thing once recovery is on more stable grounds. Al/FOMC aggressiveness screwed it up in the earlier cycle.

BTW, why not try 1/8% moves, however symbolic, rather than being a slave to 1/4 %?

No. As a fed Governor Bernanke was the most vocal advocate of keeping the FFR at 1% (nominal) long after sound policy would have raised it. Take a look at the 20003 FOMC transcripts for confirmation of this.

The Taylor rule was not a good strategy back then. Woodford was right**: That a central bank's overnight rate could be kept at a particular rate for a longer period as a substitute for further rate cuts.

This policy signaling would reduce the anxiety among economic and financial actors (that is, reduced variability in the overnight rate) when contractionary policy deems that nominal interest rates must rise at some point down the road, putting a business cycle expansion in jeopardy.

It's all about expectations management via policy signaling to help the private sector forecast the future path of policy and pierce the nominal veil.


--Pingry

In "defense" of Ben Bernanke, I think what he means by no "short term political influence" is no interference by Congress. His hand and glove work with Treasury, his usurpation of Congressional budget authority, and his direct intervention into capital markets are all done with the executive branch, and is further entrenching the imperial nature of the presidency, which is arguably less influenced by short run political concerns (there's substantial continuity from Bush to Obama, please note).

His WaPo piece is dreadful.

Markets don't fail, they return consequences.

As for the claim that FED intervention saved us: How is this known?

How do you know we are "saved"?

Perhaps what the FED did was postpone consequences.

Argument by assertion is not argument.

Don, regarding your post "Discrediting the Easy Crediting of Easy Credit"

You target Ben Bernanke's statement that "The Fed played a major part in arresting the [current] crisis," with your own claim that Bernanke wrote as if it were somehow "an incontrovertible fact," only to follow up with "First, it isn’t clear that our economic troubles have been arrested."

Fair enough, and smart economists know the destabilizing force which finance can play in the shortrun, unlike the market fundamentalists who think high finance should be allowed to create massive spillovers to innocent people.

But then, oddly enough, you write, (And as if it were "an incontrovertible fact!") that "More likely, they’ve been delayed and aggravated by the additional moral-hazard unleashed by the bailouts and, even worse, by the Fed’s gargantuan recent increases in the money supply."

If it's fair to say that "it isn’t clear that our economic troubles have been arrested," simply because this episode is not yet over, then it's also fair to say that you are writing about things for which you believe are incontrovertible facts, but which may or may not happen.

Indeed, it isn't clear that there is additional moral hazard, unless you provide some kind of measurement, and I know how you Austrians don't like math.

Also, Don, it also isn't clear that these economic troubles have been delayed and aggravated by the gargantuan increases in the money supply. After all, monetary policy is not a matter of changes in the money supply in any absolute sense.

In fact, if the money supply is not increased in a gargantuan fashion when velocity drops in a gargantuan fashion, then Real GDP drops in a gargantuan fashion, followed by a gargantuan debt deflation. Can you say gargantuan unemployment and an even more gargantuan financial crisis?

Don, it is not an incontrovertible fact that our economic troubles have been delayed and aggravated.

But it is an incontrovertible fact that you are very convenient with how you bandy about qualitative statements in your letters to the editors.

Pingry,

Austrians don't dislike math, just the misuse of it.
Second, there's no such thing as market failure. A market is just buyers and sellers buying and selling at prevailing prices, and haggling over prices as well. Institutions can fail (like firms), but systemic failures of the sort we witnessed over the last 18 months (e.g., Bear Stearns, Lehman, etc.) featuring a massive cluster of entrepreneurial errors, financial losses, and the unemployment of land, labor and capital, were caused by government intervention.
As for criticizing Don's letter for not suggesting a solution, it probably wasn't the place to do so. If I'm not mistaken, Don is in favor of free banking, and for abolishing the Fed, or at least for radically curtailing its powers. Having a free market monetary system would solve the problem.

Thank you Bill,

At least you provided something to discuss...unlike Sandre.

So, you must have a lot of confidence that a free banking system would not take on excessive risks with incredible leverage.

Now, no one is denying that there was moral hazard present in this crisis from previous government actions, but what if some free banks, say, see large profits from failed financial innovation (Spontaneous order of Gaussian Copula has pretty pathetic...that was a terrible model, let's be honest)??

What's to stop them from taking excessive risk and jeopardizing everyone?

If a bank fails, and given the fact that banks are illiquid in the shortrun, this spills over to other banks and financial firms....now what?

Should we sit back idly as the financial sector is about to unravel at the seams, and take down the real economy? The contractionary effects of the financial accelerator and massive increases in asymmetric information for the economy are huge. The money supply will shrink, and the stabilizing mechanisms put forth by the Classical economists are not so robust (Even Friedman admits that AC Pigou falls short!)

Seriously, do you think that the financial system would be stable with free banking and no central bank? I don't think so....finance is a pretty messy proposition.

We will still have nasty financial crises, and innocent people will pay a heavy price for the spillovers created.

And yes, there is most certainly such a thing as market failure. Maybe you have a different definition of market failure, but when prices fail to allocate resources, which they do in the presence of large spillovers and asymmetric information, then markets break down.

--Pingry

Pingry,

Based on the historical research of free banking scholars (e.g., Selgin, White, Schuler), I think free banking would be less cyclical and crisis-prone than central banking. That isn't to say that free banking's historical record was free of failure, but its record was certainly better.
Excessive risk assumed by banks is caused mainly by interest rates that are too low and credit that is mispriced and therefore too freely or readily available. (I obviously don't mean absolutely free, as in costless.)

If interest rates are determined by the supply and demand for loanable funds, then there is no reason for excessive risk to become so pervasive as to lead to systemic cyclical effects. Interest rate spreads would be at
market-determined levels, and not get to levels we saw the last 18 months. Financial risks would generally be well contained.
The short-run illiquidity of banks is not a problem under such a scenario.
I think this answers this point you rightly raise.

As for your last point about market failure, the reason I think there is no such animal is that markets are simply buyers and sellers buying and selling goods and services, and making bids and offers for them. Only individuals and institutions (such as firms) fail. Of course, people and firms go bankrupt every day. The question is: why the cluster of entrepreneurial errors that characterize the downturn. (And we might also ask, why the cluster of high profits in the preceding boom? Remember the dot com era, when you could dress your dog up in a tie and get him a job complete with options? Okay, so they turned out worthless, but hey, you tried for the little guy.) The downturn is caused by government intervention, primarily by the monopoly money purveyor called the Fed. Government intervention, including the failure to enforce property rights, is what leads to the breakdowns economists often refer to, quite wrongly in my view, as market failure. These are institutional failure caused by the State's errors of both commission and omission.

"Excessive risk assumed by banks is caused mainly by interest rates that are too low"

The idea of a Wicksellian natural rate of interest (What Wicksell believed to be the rate which is neutral in a money-less economy where the supply and demand for capital/funds are in equilibrium) only pertains in the long-run. You still must contend with the fact that wages and prices and pretty rigid in the short-run, and this will cause changes in the ex-ante real interest rate which will undoubtedly lead to something akin to Wicksell's cumulative process, even without a central bank targeting some nominal anchor.

In the short-run, the interest rate (What Wicksell called the observed money or market interest rate at which banks and Fi's conduct credit transactions) there is more at play than the supply of and demand for loanable funds, even without a central bank.

When happens, when, say, the demand for liquidity skyrockets? Well, so do short-run interest rates, and the yield curve follows, at precisely the time when the economy is weak and in the throes of a financial crisis.......in fact, this is exactly what happened in this financial crisis, and the Fed responded appropriately by supplying the "gargantuan" (as Don calls it) increase in money which the public wanted. That would not happen under free banking.

I am not confident that "financial risks would generally be well contained."



Taking from my question from above, which I sincerely hope Selgin answers:

Envision a world with free banking, no regulation*, a financial sector subject to 'spontaneous order' with limited central banking (perhaps it mechanically follows a Taylor rule without any deviation) or no central bank at all.

Is it unreasonable for me to think, that given the history of finance and crises, that given the short-run illiquid nature of the financial sector, the asymmetric information present, the spillovers to other financial firms and the real economy, the occasional tendency for so-called 'irrational exuberance' etc., that there will still be financial crises which will pose serious problems and screw over innocent people?

Is it unreasonable for me to think that some of these crises will be absolutely huge and devastating, with the potential to create mass wealth destruction, very high and stagnant unemployment, and the threat of violent social revolution?

The occurrence of financial crises do not follow a normal distribution. These things occur far too often, with alarming regularity, and they're extremely painful to innocent people.

Can you see where I'm coming from?


*Everyone, please note that this does not constitute a position for or against regulation

--Pingry

Pingry: No, I'm not a utopian; so, yes, I believe there would probably be crises in a free-banking world. I also believe that polciy could do no better than to stick to a free banking regime despite them. This isn't being a fatalist: to know the details of free banking theory is to understand the very considerable devices such a system offers for avoiding or containing crises. I invite you to peruse my own articles for treatments of particular issues. Concerning, for example, "irrational exuberance," see my paper "Bank lending 'manias' in theory and history"; for containing irrational runs see "In defense of bank suspension." You must understand that it isn't possible for me to replicate the detailed arguments for free banking--the work of a quarter century and counting--in a blog comment or two, but I can assure you that your challenge is one I've spent most of my career answering--along with Larry White, Kevin Dowd, and several other writers, none of them hacks.

Professor, thank you for taking the time to comment here and on the thread linking to your article. I don't know about Pingry, but I certainly look forward to reading your papers.

The natural rate of interest (note no Wickselling qualifier) obtains in the short- and long-runs, and in a money economy. I define it as whatever rate clears the market for loanable funds, which obviously exist in a money economy. If this is not a short-run institution, there's no such thing.

I disagree that wages and prices are necessarily rigid in the short run.
The stock prices on my screen certainly won't be rigid tomorrow!
I've also been reading lots of stories about falling wages in some industries lately. I don't think either wages and prices are generally fixed in the short run, if by fixed you mean absolutely fixed.

I dop't' think the cumulative process exists in a free market, or at least it doesn't to the degree it does under central banking.
As I said before, the short-run illiquidity of banks is not a big problem in a free market, as interest rates don't get misalligned from their market clearing levels, with all that implies for the allocation of credit and capital investment. I think asymmetric information is also a bogey man.
Different people and institutions always have different degrees of knowledge. Some have more and better knowledge than others, but the fact that some don't have as much knowledge shouldn't by itself lead to a cumulative process.
The fact that financial crises do not follow a normal distribution simply shows that they are complex phenomena (in the Hayekian sense), and not like the distribution of height or weight, which are normal distributions.
See Nassim Taleb's discussions of the distribution of black swan events, such as market melt ups and melt downs, which are fat-tailed.

Of course stock prices are not rigid, but many prices set in the non-financial segment of the economy are very rigid, and that is the problem.....Austrians are just as wrong as the classical economists who assumed that wages and prices would adjust quickly....not so fast....wages and prices will adjust (although it's not everywhere and always a good idea to have unanticipated nominal price adjustments) but in the presence of these sluggish movements, employment will adjust first, with the unemployment rate going up.

I think the new neoclassical synthesis is on point about this, while taking the best of Friedman's monetarism and rational expectations, and avoiding all this stuff about wages and prices quickly clearing markets int the aggregate.

--Pingry

Pingry,
Yes, some prices are more rigid than others. Exhibit(s) A are union contracts. Unions would not be able to have these contracts in a free market. They exist only because the Wagner Act mandates compulsory collective bargaining. Repeal it already.

It seems that the notion that the Fed is independent is very much like the notion that the the peer review process is flawless in the AGW debate.
More wishful thinking than anything else.

When the Fed does exactly what the political class wants are we to assume that it the politicians that suddenly read up on economics? Or is it that the Fed is doing what the politicians want? 500 plus pols all reading the latest NBR articles or 12 Fed board members being bought and paid for....sorry Fed apologists but Occam's Razor rules this one.

Blasphemy, sacrilege! Off with your head!

... like the notion that the the peer review process is flawless in the AGW debate.

HERESY!

I know I know, instead of burning at the Stake, I'll be burning up in the Arctic..while all those poor polar bears die of heat stroke...yadda yadda yadda. ha ha

The only independent Fed is no Fed, as Jeffrey Miron pointed out.

Do you have any reason to believe that the Fed didn't independently decide on this course of action?

Yes. And it doesn't matter. The Fed can't step out of its normal authority without political support. Whether it is the Fed influencing the politicians or the political climate influencing the Fed, it is already not independent - just as the SEC is not an independent regulatory body but a way for politicians to carry out an agenda without the cumbersome and transparent legislative process.

I don't understand the logic - anything the Fed does that you don't like counts as being under "short-term political influence"? Why? I don't see the connection. Do you have any reason to believe that the Fed didn't independently decide on this course of action?

"Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent ... except for the monetary policy deliberations and actions covered by the 1978 exemption."

So we should leave the Fed independent because they are transparent, except for 95% of what they do.

How you even wake up every day to defend people like this is beyond me.

There is no logic with Don....he's very much an ideological hack who hates anything the Fed does, despite his ignorance of macroeconomics.

Even when the Fed saves the day, we hear foolish arguments about allowing the financial system to save itself, and how the economy needs a recession for malinvestment to be liquidated.

Um, macroeconomics is a bunk division of economics that Keynes fallaciously created, and it therefore has no right to be invoked in any logically sound argument. How did the "Fed save the day", by the way? Please explain in a step-by-step fashion? Oh, wait, what, you can't? It's a "just so" story? Man, that seems hard to swallow, me having an IQ above 60. We're just as blindly religious for believing the system can save itself as you are for believing that the government can fix the problem? Oh, just so we're on the same page here. Please, let's keep the bubble going! Oh, please forgive me unthinking acolyte of non-truth!

Well, Barbarosa, saying that "macro is bunk" begs the question: should economists simply not try to answer questions about cycles, unemployment, financial crises, or mass unemployment? If the topics deserve to be better understood, then attempts to understand them can't simply be dismissed. And by the way, only Keynesians believe that Keynes pioneered the investigation of these topics.

Which is precisely why I attribute them to Keynes: because Keynesians believe he pioneered them all, so it simplifies discussion with Keynesians and facilitates refutation of their claims. You make a valid point, though, that we can't simply dismiss such a topic. What I really meant to say was macroeconomic tinkering is useless and harmful, and Keynes was perhaps the grandest and most famous advocate of such tinkering, even if a lot of his ideas were not originally his own.

Your mother wears army boots! My logic is flawless!

Let's see: the Fed has engaged in a unprecedented departure from anything resembling standard Lender of Last Resort action, let alone standard monetary management practice: it has practically turned Bagehot on his head, providing what amounts to capital arbitrarily-selected troubled firms in exchange for potentially worthless assets, while actually seeing to it that the market as a whole remained _illiquid_ (e.g., by paying banks to _not_ lend excess reserves); it has offered bailouts to non-financial firms; and it has done these things in such close cahoots with the Treasury that one wonders why we even bothered to establish a modicum of Fed independence in '35 by removing the Secretary of the Treasury from the Fed Board. And the fact that Don thinks this conduct worth Congressional scrutiny leads you to conclude that he's simply an illogical ideologue who hates "anything" the Fed does!

It seems to me, rather, that the facts point to your being an ideologue, whether logical or no, who _loves_ anything the Fed does--or at least believes it ought to do whatever it likes, without the least risk of scrutiny from the electorate!

George, let me follow up with something else if you wish to answer it:

Envision a world with free banking, no regulation*, a financial sector subject to 'spontaneous order' with limited central banking (perhaps it mechanically follows a Taylor rule without any deviation) or no central bank at all.

Is it unreasonable for me to think, that given the history of finance and crises, that given the short-run illiquid nature of the financial sector, the asymmetric information present, the spillovers to other financial firms and the real economy, the occasional tendency for so-called 'irrational exuberance' etc., that there will still be financial crises which will pose serious problems and screw over innocent people?

Is it unreasonable for me to think that some of these crises will be absolutely huge and devastating, with the potential to create mass wealth destruction, very high and stagnant unemployment, and the threat of violent social revolution?

The occurrence of financial crises do not follow a normal distribution. These things occur far too often, with alarming regularity, and they're extremely painful to innocent people.

Can you see where I'm coming from?


*Everyone, please note that this does not constitute a position for or against regulation

--Pingry

One more point concerning those balance sheets: the right way to have dealt with them is by bankruptcy proceedings or their equivalent--as Jeff Miron has cogently argues in a number of places. Bailouts are a wasteful alternative, and one that also serves to exacerbate the already very serious moral hazard problem--just as Don's supposedly illogical letter points out.

I do see were you're coming from, Pingry. I know the "asymmetric info." literature very well--well enough indeed to know that it includes a great deal of nonsense. Read, on this, the works of George Kaufman and Charles Calomiris, for starters. They show how rare contagions have been--except very limited ones--throughout financial history. That central bankers always claim that they must intervene to prevent a systemic meltdown doesn't itself suffice to give basis to their claims. (And I believe, by the way, that John Taylor is quite right in claiming that the recent general meltdown had more to do with the Bernanke-Geitner chicken little routine than with the failure of Lehman's. He is also right about the Fed's role in the boom: if maintaining a negative real Fed Funds rate for a year isn't contributing to an asset bubble, what is?)

Have a look also, if you wish to see a free bankers' perspective on the systemic crisis problem, at my Cato paper, "Legal Restrictions, Financial Weakening, and the Lender of Last Resort."

What would I have had the Fed do? First of all, I wrote of the dangers of accommodating the productivity surge back in the late 90s, and so am not merely retroactively finding fault with the Fed's post-2001 actions when I say it should have raised rates more aggressively. Second, I would have had it focus on its one essential task throughout the later financial embroglio, to wit: maintaining general liquidity sufficient to keep nominal spending growing at a steady and reasonable rate, say 3 percent annually. That means, among other things, that I would certainly have prevented it from starting to pay interest on bank reserves in October 2008--a policy as absurd as that of raising reserve requirements was back in '36 and '37. Finally, I would have insisted that any Fed lending be done on sound Bagehotian principles--the ones that the vast majority of central bank theorists--not just free bankers--have insisted on ever since Bagehot set them down in 1873, by lending only to solvent banks (yes, _banks_) on good paper at penalty (not subsidized) rates, and especially by having a _consistent_ policy across banks, instead of appearing to act by will of the wisp. (For a non-free-banker central banking expert's assessment of what the Fed actually did try to get hold of Tom Humphrey's scathing indictment for the recent Cato monetary conference--Tom is perhaps the leading expert on LOLR doctrine.)

These are the things I would have done, and they are all consistent with my many writings before the fact, as well as with much received central banking doctrine, monetarist and otherwise. What's more, to claim that the contrary steps actually taken by the Fed were better you have to do some incredible "spinning." I mean, do you really think the macroeconomy was made better off by the Fed's buying up Goldman's junk (and allowing it to pay its executives' bonuses) than if the Fed had instead engaged in quantitative easing (without paying interest on reserves) sufficient to have kept nominal GDP from shrinking? If so, then I have a used central bank I'd like to sell you.

Again, I'm not saying that I liked the bailout, and that it wasn't insanely wasteful, just that there were no viable alternatives in a short-run emergency. Phill Swagel wrote about some of the practical and legal limitations at the time from his experience at Treasury.

As for the sorry state of these FI's, I do not believe that there is any current bankruptcy mechanism in place to deal with them in an orderly fashion to prevent such spillovers. And the FDICA and the FDICIA of 1991 does not allow for an orderly failure of many FI's, like huge bank holding companies, insurance companies (Read, AIG....Epic Fail) and other parts of the nefarious shadaow banking system.

Also, I believe you're mentioning the failure to accommodate a productivity surge (The deflation in a growing economy argument). Now, we have debated this issue of monetary policy in the past here at Cafe Hayek, and if I remember correctly, you were not too fond of my endorsement of an explicit form of inflation targeting.

I'll skip the details because I'm afraid that others here will misinterpret it, but it boils down to this: To have an explicit nominal anchor in the form of an explicitly announced and credible inflation target is just fine to accommodate a growing economy because at low and invariable rates, people will be able to pierce the nominal veil. To allow for a productivity-based deflation, I really think, would come as a surprise and lead to a short-run income redistribution while unhinging the central bank's proper nominal anchor.

Do you believe that the public can truly pierce the veil of a short-run productivity deflation? I'm skeptical....over time, they could probably learn to deal with it, but why not just stick to a solid monetary policy strategy of inflation targeting advocated by those like Bernanke, Gertler, Mishkin, Woodford, etc. ? After all, as I have mentioned here before, I think I am closer to the truth in saying that wages and prices are pretty rigid in the short-run....and not as flexible as Austrians would have anyone believe.

I'm not doubting Calomiris's claim about the moral hazard argument...but banking and finance today is more sophisticated, when back in the first round of globalization, these institutions and markets were either non-existent, or unsophisticated. Today, finance is far more sophisticated and globalized, and I think that financial crises of the future will be even more powerful, ceterus paribus, via financial innovation and the modern development (and globalized nature) of finance and financial markets, both of which were far less important in the first round of globalization which Calomiris contrasts to this round of globalization. Indeed, as I have written here quite a few times, there is much to said about spontaneous disorder when financial innovation goes awry, and, again as I paraphrase Jean Tirole "This is what happens in markets with asymmetric information"

Finally, please correct me if I'm wrong, but you write about targeting a level of nominal GDP, no? The same argument which Scott Sumner makes? Well, do you further believe that we ought to target nominal GDP futures? I doubt that would work as a practical matter. Again, I think it's easier to have an explicit inflation target.

And I like Taylor and the Taylor rule, and I'm all for more rules and less discretion. Indeed, one of the nice things about an inflation targeting framework (Mishkin has written on this a lot) is that it allows for mostly rules, and only an occasional discretion, like, say, when we have a massive financial crisis and the Fed has to increase the money supply in a "gargantuan" amount to satisfy the public and prevent short-run interest rates from shooting up like a rocket, precisely when the economy is weak and FI's are fragile.

But let me just say that I think the Taylor rule was not a good strategy back then, and that Woodford was right; That a central bank's overnight rate could be kept at a particular rate for a longer period as a substitute for further rate cuts and the anxiety that would create among economic and financial actors when contractionary policy deems they must rise at some point down the road.

--Pingry

George,

I said nothing of the sort which disagrees with your statement that the "Fed has engaged in a unprecedented departure from anything resembling standard Lender of Last Resort action, let alone standard monetary management practice..." or, for that matter, the composition of the Fed's balance sheet.

Indeed, I place part of this crisis on the Fed, not for it's conduct of monetary policy in the dotcom bust/post 9/11 recessionary economy (Woodford is right, and Taylor is wrong), but certainly for its failure to better regulate commercial banks (Epic Fail for for NY Fed President Tim Geithner).

And I have never criticized Don for "the fact that [he] thinks this conduct worth Congressional scrutiny." Please, do a search for me in Cafe Hayek's search engine, and I guarantee you will find nothing of the sort.....that is, it's an incontrovertible fact ;-)

I called Don an ideological hack because he is typical of so many libertarians who make silly ex-post statements criticizing policy without offering anything better. And no, having a laissez-faire "let-the-financial-system-save-itself" attitude is not a good substitute because buyers will not "emerge" to save everything.

When asymmetric information makes markets fail, as Jean Tirole has reminded us, and the spillovers to Innocent people are profound, the spontaneous order of which you are all so fond is really a massive spontaneous disorder....Has not Pete Boettke talked about spontaneous disorder? Please, check it out.

So to be clear, my beef is with Austrian Macro/Liquidationist/Treasury View people who feel that financial markets will solve the problem--market fundamentalism according to Stiglitz. And I have not heard a better solution yet. And my other beef is with libertarians (most, but not all) who blame just the government. I am just as angry at the government's role as the rest of you, but we have to be realistic here. The private sector also failed miserably. I mean, let's not sugar coat anything here......they were pretty pathetic just like the government. We've been having financial crises for centuries, and to give a free pass to the private sector is, to put it nicely, very convenient......in fact, it's the kind of stuff which ideologues sweep under the rug to make convince themselves that it's everywhere and always government.

So, given the practical economic and legal realities of the complex situation, what would you have done sir?

I'll make it easy on you. Considering that the Fed has conducted monetary policy as Milton Friedman has thought the Fed should have done to prevent the Great Depression, then exactly how would you and Don have dealt with a financial sector's pathetic balance sheet?

Because to be honest with you, monetary policy ain't enough, and taking a hands off approach is a recipe for, how do you say, "gargantuan" market failure--the result of spontaneous disorder.

I'm serious, I want to start a dialog here, not read Sandre write about how he sticks a bone through his nose while drinking pig's blood with intermittent howling at the moon.

And, as a secondary issue, do you believe that the financial system failed miserably and played a large role without government egging it on?

I'm really curious to know...............

--Pingry

Well said!

Hear hear!

I wouldn't say he's illogical or an ideological hack. I may agree that the logic of this letter is problematic, but that doesn't mean that's characteristic of Don.

And the concern about malinvestments isn't misplaced either - it's the unintended consequences of liquidating malinvestments that are often overlooked that I find disconcerting - not the logic of liquidating malinvestments itself.

Thank GOD Danny was there to defend weak little ole' Don. Why, without Danny jumping to his defense, Don may have lost credibility forever.

The "concern about malinvestments isn't misplaced" but "it's the unintended consequences of liquidating malinvestments that are often overlooked"? Talk about having one's cake and eating it too? Tell me how you have remained consistent and not contradicted yourself by this statement? And if this is not an obvious paradox, please explain in which complex manner it is not. Did you graduate Magna Cum Laude from Doublethink College?

You might want to explain that in a little more detail - I'm not sure how that is inconsistent.

When malinvestments are made they need to be liquidated. It's an inefficient application of capital, and the continued application of capital in that way means continued inefficiencies. But a precipitous withdrawl of capital can have unintended consequences that I think a lot of Austrians ignore at their peril. So it's a concern, but there are certain unintended consequences. Where's the inconsistency?

The malinvestment is the inefficiency, not the liquidation; the liquidation is the market process of discontinuing and reversing the inefficiences, of increasing EFFICIENCY. And you have explained these unintended consequences? What are they? And even if there are "unintended" consequences, I doubt that they aren't foreseeable, and anyway, what if such consequences are absolutely necessary? What if the consequences are the only way for everyone to be better off long-term? Anyway, you're no longer inconsistent, per se; you're just being vague, lol. What unintended consequences?

Pingry,

Mmmmmmwaaaahhh.

I have a picture of Bernanke hanging on my wall. I light candles at his picture. He sprinkled his magic dust on the economy and saved the world. I want to follow Jeffrely Immelt to the board of NY Fed. I want to do "God's work" like Lloyd Blankfein.

Amen.

"By your sorceries were all the nations deceived."

I'm proud to say that I'm ideological. I'm not wishy-washy. My ideology is to use political power for the benefit of mankind - so I can become a billionaire like Al Gore and sit on the board of the NY Fed - like Jeffrey Immelt. Become the next incarnation of God and save humanity from impending collapse - morally & economically - like from the wrath of Goddess Gaia or the recent economic contraction. Mmmmmmwwwwwwwaaaaaaah.

If the Fed has the power to save the day, then the Fed has the power to ruin the day. That's quite a dangerous institution, no? Perhaps worth a look beneath the hood.

Bravo, Don. Audit the Fed!!

The Fed arrested the crises? By inflating asset prices and cranking up the printing presses to Zimbabwean levels? When has that ever proven to arrest anything other than prosperity?