The 16th of November may be considered as the Fourth of July in the economic life of the United States. Coming generations will commemorate it as marking the foundation of our financial emancipation. — Paul M. Warburg, architect of the Federal Reserve System, November 17, 1914
Under the operation of this law [Federal Reserve Act] such financial and commercial crises, or “panics,” as this country experienced in 1873, in 1893, and again in 1907, with their attendant misfortunes and prostrations, seem to be mathematically impossible. — John Skelton Williams, Comptroller of the Currency, December 7, 1914
I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths, and four-legged rats. — Robert Wenzel, economist, in his concluding remarks while addressing members of the Federal Reserve Bank of New York, April 25, 2012
Fourth of July? “Mathematically impossible”?
If you ran a counterfeiting operation that almost everyone thought was a crucial part of the economy, would you shut it down because someone had just made your racket public in painful and humiliating detail? As for your employees, how would the married ones tell their spouses they walked away from their jobs?
Wife: Why are you home early?
Fed: This guy gave a talk today . . . without equations . . . poof!
Wife: Poof?!
Fed: My economic worldview . . . all smoke and mirrors. He said leave the building with me. So I did..
Wife: You . . . quit your job? Because of some speech!?
Fed: I did.
Wife: You didn’t!
It’s not that money trumps truth. Money is truth—see Alan Greenspan. Would he have died with a net worth of $20 million and endless accolades if he had continued writing essays promoting gold and economic freedom?
Of course there are rare exceptions. One is discussed in this article: Robert Wenzel and his incredibly heroic speech at the New York Fed.
In an interview after his talk he explained how he was invited to speak.
Two economists who were there — McCarthy and Peach — wrote in 2005 that the housing market was not in a bubble, and at that time I specifically responded to the paper and said you’re absolutely wrong, you’re making the greatest mistake since Irving Fisher in 1929 said stocks were never going to crash but were at a new high plateau. And they thought it was a joke and went around the country presenting their view that there was no housing bubble and quoted me as an opposing view.
That’s part of why I got the Fed thing. I said, “Hey, looks like we got a crash here, you want to hear why it happened?”
And he told them.
I think you should shut down the entire Federal Reserve System. Why? Because your thinking smacks up against reality.
You think there are constants in economics as there are in science, such as the boiling temperature of water. Economics has no such constants. It deals with human action, which can change at any time. Yet, in endless Fed papers, I see equations and constants.
You go along with Keynes in his assertion that demand drives the economy, not production. Where did all these iPhones come from, if not from production? Keynesians will say you need demand to buy the phones. But it’s supply and demand. Products once made will adjust to a market-clearing price.
Factors of production will adjust to prices at the consumer level. Markets at all levels will thereby clear. It’s Say’s Law, the one Keynes thought he refuted.
Are you saying prices are sticky on the downside, especially labor? And therefore money pumping is needed to get the economy on its feet? President Hoover said put a floor on wages. FDR said raise them. Wages were sticky because government propped them up, in defiance of supply and demand.
Today, government pays people not to work. Presto! We get higher unemployment. In 2010, the Nobel committee awarded three economists the prize for their studies in unemployment. They concluded: “More generous unemployment benefits give rise to higher unemployment and longer search times.” Does anyone find this shocking?
You work for a stable price level. If prices fall, as they do in the computer industry, we get prosperity and lower prices, allowing more people to participate in the economy.
But stable prices are a secondary goal, perhaps. Your real goal is to prevent serious declines in the economy. “Since the start of the Fed, there have been 18 recessions including the Great Depression and the most recent Great Recession. These downturns have resulted in stock-market crashes, tens of millions of unemployed, and untold business bankruptcies.”
Guess what? The Austrian Business Cycle Theory (ABCT) explains all this. No equations needed. Simply stated, printing money causes the business cycle. Former Chairman Bernanke doesn’t understand the ABCT.
The Fed holds gold certificates for which gold should be available. Is it? Congressman Ron Paul asked Bernanke if the Fed provided money to the Watergate burglars. Bernanke launched an investigation of the matter. When Paul repeatedly asked if there was any gold at Fort Knox, Bernanke somehow didn’t think it was important enough to find out.
Wenzel’s Conclusion
The Fed is a total failure, from start to finish. The emperor has no clothes. It depends on printing vast amounts of money to keep the economy afloat. That is to say, it needs high price inflation. If it stops printing we go into a recession.
According to Merriam-Webster, a slumlord is “a landlord who receives unusually large profits from substandard, poorly maintained properties.” Unlike other market organizations the Fed’s unique power to create money offsets any limits imposed on its profits. It cannot go bankrupt in the ordinary sense. While dollar holders watch their wealth disappear from Fed inflation, it sails along with impunity to market mayhem.
