Guest Post: Central Bankers Still Don't Get It

Tyler Durden's picture




 

Submitted by Logan Albright via the Ludwig von Mises Institute of Canada,

In the wake of the financial collapse of 2007, central banks around the world run by Keynesian zealots religiously applied the formulas they had been taught would boost aggregate demand and rescue the economy from the brink of total catastrophe. Easy money, going under the euphemistic  moniker of “quantitative easing” was supposed to stimulate borrowing, spending and growth through the mechanism of historically low interest rates.

Predictably, this approach failed miserably, and more than five years later the United States is still struggling with the high unemployment and low growth of the worst recovery in history. While Canada has done somewhat better, in no small part due to its less aggressive monetary policy, there is still a long way to go towards genuine prosperity.  Now, finally, some policy makers are beginning to realize that a different approach is needed. This week, the head of the Canadian Central Bank, Mark Carney, announced that interest rates will slowly be allowed to rise from the current rate of 1% in the future. To call this a modest move would be an understatement, but the fact that, unlike in the United States, the Bank is beginning to move away from the policy of flooding the economy with money in a desperate effort to keep rates artificially low is at least encouraging.

Still, these kind of policy decisions largely miss the point of how the economy really works. While interest rates do need to rise, the fact that the central bank is setting them at all is the true problem that is almost never addressed. Despite the failures of easy money policies to cause a noticeable improvement in economic conditions, central banks maintain the fiction that they can engineer optimal outcomes if only they use just the right combination of policy tools, if only they print enough money, if only they get the interest rate just right.

Interest rates are supposed to function just as the price system does-as a way of coordinating the diverse activities of millions of people and providing that information to borrowers and lenders. When these signals are altered due to artificial tampering by a central bank, it prevents businesses and individuals from being able to make informed investment decisions and results in a misallocation of resources.

The boom and bust cycle commonly thought to be a natural and unavoidable consequence of capitalism is actually the direct result of these malinvestments and the correction process that follows. The pain that results from correction is actually good insofar as it realigns the signalling process with the actual behavior of participants in the economy. The actions taken by central banks to fight this correction only prolong the pain and prevent the economy from coming back into alignment as it should.

As long as central banks continue to meddle with the money supply, investments will not be made efficiently and the economy as a whole will suffer. Unfortunately, the political need to assure voters that the government is taking action in times of recession means that this is a trend unlikely to reverse any time soon. Hopefully the emergence of alternative currencies such as Bitcoin [or precious metals] will demonstrate the value of a fixed-quantity, non-inflationary money supply.

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Sat, 06/01/2013 - 19:16 | 3617187 razorthin
razorthin's picture

While interest rates do need to rise, the fact that the central bank is setting them at all is the true problem that is almost never addressed.

I love you, man!

Sat, 06/01/2013 - 19:50 | 3617248 otto skorzeny
otto skorzeny's picture

These guys lose me at "bitcoin". At that point the whole article becomes moot.

Sat, 06/01/2013 - 20:56 | 3617384 smlbizman
smlbizman's picture

usually its tips with me....

Sun, 06/02/2013 - 01:44 | 3617734 FreedomGuy
FreedomGuy's picture

Ditto"s, Razor. The fact that rates are set at all means they are not market signals.

Personally, I despise the extreme arrogance that even dares to believe they can run and manipulate an economy with billions of moving parts and decisions daily. My hope is that somewhere in the future we will give up the religious belief in government.

Sun, 06/02/2013 - 08:08 | 3617935 rbg81
rbg81's picture

One reason the Economy will not recover under the current Regime is that the mechanism for pricing $$ is broken.  When interest rates are at zero, it encourages people to either take all kinds of stupid risks or hoard their $$ (vs. practically giving it away).  Meanwhile real inflation continues unabated--especially food inflation.  This especially hurts people who saved all their life for a comfortable retirement:  inflation without the possibility of income on your savings.

Mon, 06/03/2013 - 02:23 | 3619658 JeffB
JeffB's picture

Right on,  rbg81

Sun, 06/02/2013 - 03:39 | 3617795 Kiwi Pete
Kiwi Pete's picture

So when the economy is going gangbusters and inflation rears its ugly head how does the central bank control it? Or do they just let it run wild?

Sun, 06/02/2013 - 08:12 | 3617940 Doña K
Doña K's picture

They freeze prices and create scarcity and black markets. You and I have to pay more but  the friends of .gov run the black markets

So no matter what, .gov pays the oligarchs.

What if we were all to agree to not pay any taxes? Those of you that have them deducted declare about 15 or so on your W4 and they deduct practically nothing.

Sun, 06/02/2013 - 04:42 | 3617823 bank guy in Brussels
bank guy in Brussels's picture

Difference between USA and Europe on Central Banks

In America no protesters surround Federal Reserve headquarters in Washington, people stay at home

But a bunch of Americans go on blogs on the internet, and call Fed chief Ben Bernanke a 'Communist'

In Europe we have thousands of demonstrators assaulting the area of European Central Bank headquarters in Frankfurt, confronting riot police, blockading streets and denying access to the ECB and Deutsche Bank

While our demonstrators carry a big banner that says, 'Let's Choose Communism' !

http://www.euronews.com/2013/06/01/scuffles-with-police-at-frankfurt-pro...

Sun, 06/02/2013 - 13:51 | 3618417 noless
noless's picture

You have no idea what happened during the last widespread protests in America.

Sun, 06/02/2013 - 17:40 | 3618793 ILLILLILLI
ILLILLILLI's picture

Here's a commercial for" teh Bens":

http://www.reuters.com/article/2013/06/02/us-wapshott-bernanke-idUSBRE9510DU20130602 

 

Fucking media collaborators...

Sat, 06/01/2013 - 19:30 | 3617197 economics9698
economics9698's picture

Duhhhh I think they get it 100 percent.

"We the elites have about 5 years to put enough cash into our funds to be able to outbid the peasants for assets when the SHTF."

October 2008...2009...2010...2011...2012...2013.

Any questions?

Sat, 06/01/2013 - 19:46 | 3617243 Nehweh Gahnin
Nehweh Gahnin's picture

Exactly.

How does anyone, such as the author and those arguing that a let-em-burn approach should have been taken in '08, not understand at this point that it is all very intentional?  Everything is under control.  (Not for you serfs, though.  You are going to be right miserable soon.)

Sat, 06/01/2013 - 19:23 | 3617199 DaddyO
DaddyO's picture

Central Banks, The Road to Serfdom, bitchez...

DaddyO

Sat, 06/01/2013 - 19:25 | 3617200 l1b3rty
l1b3rty's picture

Actually, if you take Keynesianism to its logical end, which is the destruction of civilization itself, the Keynesians might be onto something: at least then, we could rebuild...

http://goldsilverbitcoin.com

Sat, 06/01/2013 - 19:49 | 3617246 Nehweh Gahnin
Nehweh Gahnin's picture

+1 dude, even though you got the part about rebuilding wrong.  Ain't gonna happen.

Sat, 06/01/2013 - 19:25 | 3617202 Dareconomics
Dareconomics's picture

Essentially, intervention is preferable to not acting.  Allowing everything to crash in 2009 would have caused more damage, but we would be well on the path to sustainable growth by now. 

http://dareconomics.wordpress.com/2013/06/01/around-the-globe-06-01-2013/

Sat, 06/01/2013 - 19:28 | 3617208 Divine Wind
Divine Wind's picture

 

 

The Iceland way!

 

 

Sat, 06/01/2013 - 19:27 | 3617211 economics9698
economics9698's picture

Yes sir you are correct.

Sat, 06/01/2013 - 19:26 | 3617209 economics9698
economics9698's picture

Yep, the crash in 2008 would have been epic but it would be over now and the economy would have real growth today.

Sat, 06/01/2013 - 19:31 | 3617218 DaddyO
DaddyO's picture

Sorry guys, until the real problem of the Central Bank is addressed, the idea of allowing the crash and real healing taking place is sheer folly...

DaddyO

Sat, 06/01/2013 - 19:41 | 3617228 economics9698
economics9698's picture

I guess was thinking of gold as money, my bad.

Sat, 06/01/2013 - 19:57 | 3617260 LetThemEatRand
LetThemEatRand's picture

So you are saying that taxpayer funded public universities should pay gold to taxpayer funded teachers such as yourself?

Sat, 06/01/2013 - 23:04 | 3617581 economics9698
economics9698's picture

Gold is money, yes pay me in gold.

Sat, 06/01/2013 - 19:55 | 3617256 otto skorzeny
otto skorzeny's picture

So would I be paying $8 a gallon if the world economy was humming along? Also-I missed the part where the US would be doing better since we would be shipping jobs overseas even faster than we are now.

Sat, 06/01/2013 - 20:00 | 3617271 LetThemEatRand
LetThemEatRand's picture

You're talking to a public servant paid by taxpayers (Economics9698).  Don't expect consistency from him.

Sun, 06/02/2013 - 01:56 | 3617740 FreedomGuy
FreedomGuy's picture

Yes., Econ. The other important and overlooked item is that the lessons that would be learned are lost. When you remove consequences from actions you do not get any change in behaviors. Had there been a real crash, there would be things to see and learn. I also believe there would have been bankers and politicians hanging from lamp posts. These would be excellent lessons for surviving bankers and politicians. As of now, they are all still wealthy and getting reelected. Hence...the bailouts.

Sat, 06/01/2013 - 20:05 | 3617279 Mentaliusanything
Mentaliusanything's picture

Well this article might confirm what is happening but not talked about

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/100878...

Its called painting yourself into a corner then realising you need a Toilet call, real bad

Sun, 06/02/2013 - 01:04 | 3617719 Keynesian Mess
Keynesian Mess's picture

"Yes, the answer is bigger and bigger bubbles!"  Another moronic Keynesian takes us down the same idiotic path.  You and Krugidiot need to die a sudden painful death!  What a putz!

Sun, 06/02/2013 - 12:50 | 3618284 shermacman
shermacman's picture

Why would it have been worse?
The big banks would have collapsed and smaller mammals would have eaten their eggs.
As it should be.

Sat, 06/01/2013 - 19:27 | 3617206 Loophole
Loophole's picture

The govt forces us to use its fiat money and uses the Fed and fractional reserve banking to rob us blind in many different ways.

What possible reason is there to expect such a system to produce anything but destitution?

Sat, 06/01/2013 - 19:26 | 3617210 Skateboarder
Skateboarder's picture

Oh central banks get it alright, it's the people who don't get it. YOU CAN'T HAVE INFINITE MONEY, BECAUSE THERE ARE NOT INFINITE RESOURCES.

Please tell me that's not too much to ask of a person to understand.

Sat, 06/01/2013 - 19:38 | 3617215 Voltaire
Voltaire's picture

This was the big political battleground of the 19th century. Unfortunately Jackson, Lincoln, Garfield etc lost the battle and we are trapped in this system wich got institutionalized with the 1913 Federal reserve act. We need to revive that political battle because it trumps every other issue. We need to kick out the big international capital from money creation. Not just the central banks but the whole banking system as it works in tandem and is owned by the very same parasites. Do we want to be perpetual debt slaves? We buried democracy in 1913. Time to wake up, people! 

“I sincerely believe that banking institutions are more dangerous to our liberties than standing armies. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.” - U.S. President Thomas Jefferson

Sat, 06/01/2013 - 23:39 | 3617627 economics9698
economics9698's picture

Jackson won his battle and killed the Second Bank of the US.

Lincoln was a green backer, inflationist, fiat proponent.

 

Garfield was a true hard money guy.

Sun, 06/02/2013 - 00:10 | 3617637 Pure Evil
Pure Evil's picture

The myth of Lincoln as a proponent of hard money lives on.

"The myth of 'Lincoln money' is perhaps the most deceptive historical error of the Greenbackers. It ignores what Lincoln said and did."

"As economic historian Thomas DiLorenzo points out,

By 1860 Lincoln was the most prominent attorney/lobbyist the railroad industry had. He was so prominent that the New York financier Erastus Corning offered him the job of general counsel of the New York Central Railroad at a salary of $10,000 a year, an incredible sum at the time. Lincoln turned down the offer after agonizing over it."

"Lincoln did not "foil" the bankers. He made the big ones even richer by creating a more centralized banking system. And why not? He had been a rich lawyer for the Illinois Central Railroad. The Illinois Central funded its operations through the sale of bonds. The entire industry did. Anything that threatened the bankers threatened Lincoln's post-Presidential career."

 

Source: Historical Error #3: Abraham Lincoln Promoted Debt-Free Paper Money (the Greenbacks)

Sat, 06/01/2013 - 19:34 | 3617220 thinkahappythou...
thinkahappythoughtandfly's picture

i cant wait for america to go bankrupt i mean that will be awesome you know with all the riots and people getting robbed for food and water yeah i cant wait. lol. Sounds like im listening to something off faux news.

Sat, 06/01/2013 - 19:48 | 3617245 Poor Grogman
Poor Grogman's picture

But how can America go bankrupt when it has all those printing presses?

Sat, 06/01/2013 - 19:53 | 3617251 akak
akak's picture

You expect the entire Western Hemisphere to go bankrupt?

Note: it is incorrect, and insulting to hundreds of millions of people from Mexico on southward, to refer to the United States of America as simply "America".  That would be like referring to Germany as "Europe".

Sat, 06/01/2013 - 19:36 | 3617225 decentralizedsc...
decentralizedscutinizer's picture

"Meteorologists from all over the world are gathering in Geneva to impose more sunshine and warmer weather on Northern Europe to satisfy the demand for bananas and coconuts in Germany while bringing more snow to Hawaii for the millions of sports enthusiasts who'd like more South Pacific skiing. "

The very existence of "economic policy" should be a tip-off that something is fundamentally wrong with our understanding of economic modeling. In a truly free market, if such a lofty goal were to ever be achieved, GDP would be the *result* of billions of unique transactions between independent buyers and non-monopolistic sellers in an open marketplace , not a “policy goal” as we currently view it. Whenever banks or governments try to alter the outcome of economic activity, they inevitably fail to achieve the sustainable equilibrium of a theoretically free market because the natural tendencies of suppliers to meet the demand of consumers will always trump the attempts of mortal men to disrupt and distort the commerce necessary for societal specialization to exist.

Is the human tendency to trade goods and services any less influential to a society's economy than the tendency for hot air to rise is to a planet's weather? Like planetary weather, popular economies are influenced by various dynamic forces, most of which lie beyond the understanding or control of science (“Economics is not a Hard Science”(?)). Mankind can disrupt and distort the weather by burning rainforests, damming rivers, seeding clouds, or polluting the air; but such distortions are minor compared to the effect of sunspots, volcanoes, and meteorite strikes; but none of the above constitute “control”, and one certainly can't realistically “plan” an outcome. Only a fool (or government military/industrial contractor) would think of “planning” weather; yet self-serving bankers and politicians think they can plan and control the world-wide economy by imposing arbitrary restrictions here, inserting unnatural assets there, disrupting the flow of money, or otherwise thwarting the natural tendency of suppliers to trade with consumers. In either case the “Law of Unintended Consequences”, of which there are numerous examples, reveals the folly of tampering with forces beyond our understanding or control.

What you cannot control, you cannot plan. The Economy, which thanks to technology is now global, is simply too big to “manage”, as a whole. Rivers can be dammed and clouds can be seeded but these controls are only effective at a local level and “planning” would still depend on the presence of clouds and air. Likewise, local economies are manageable but would still depend on the presence of “natural” money. And what constitutes “natural” money? I think whatever is universally recognized as “money” is money. If it can be corrupted it won't be “money” because it won't be universally recognized as such, or accepted.

Remember that margarine commercial: “It's not nice to fool Mother Nature”? We know instinctively that this is true, and experience proves it.

Perhaps Economics is merely the book-keepers' account of civilization and as weather follows the laws of thermodynamics (and so forth), civilization follows the laws of supply and demand (and so forth). Meteorologists don't plan the weather; they can only predict and respond to it. Economists can't plan the economy; they can only predict and respond to it. Neither are very accurate.  

Governments can serve their economies by providing an adequate supply of stable currency to facilitate trade. Banks best serve the economy when they restrict their activities to *serving* the economy with loans and safe storage of savings. Any attempt, on either banks' or governments' part, to serve each other or themselves, is bound to corrupt the underlying (and relatively fragile) balance of forces on which millions of individual economic actors place their trust when conducting everyday trade.

It is that trust that makes people want to invest in a better future. Or not.

Sat, 06/01/2013 - 19:43 | 3617236 Scisco
Scisco's picture

Canada doing well? Wake me when we the long over due housing correction hits. When that happens, I but you a 1 ounce gold maple that the central bank will make the exact same policy response and the Fed. I remember the US economy doing very well until one of its central pillars, housing, collapsed. I don't think it is any different in Canada.

Sat, 06/01/2013 - 19:46 | 3617240 ebworthen
ebworthen's picture

"... it prevents businesses and individuals from being able to make informed investment decisions and results in a misallocation of resources."

Exactly.

It's choices with no consequences, and consequences with no choices.

Sat, 06/01/2013 - 19:46 | 3617241 Westcoastliberal
Westcoastliberal's picture

Looks to me like they've painted us into a corner, because if interest rates rise then the debt service goes ballistic.

The main problem as I see it is guys like Bennie have no real-world experience and it's all theory to them-fact is small business drives the economy, not Wall St.  The market follows the economy.  We need to put this sucker in full reverse and undo all the damage that's been done over the past 30 years.  Sherman antitrust act, Glass Steagal, Mark to market, at least 10% down on home purchases and eliminate "mortage insurance" (the biggest rip-off of the 20th century).

And THAT'S just for starters!

Let me repeat myself once more-the problem is Bernanke & the rest actually think pumping the market will revive the economy.  And in other through the looking glass news, can Obama REALLY be considering Larry Summers for Bennie's job? POTUS must get some excellent reefer if it's true; maybe Larry is his connection!

Sat, 06/01/2013 - 19:59 | 3617254 LetThemEatRand
LetThemEatRand's picture

"The boom and bust cycle commonly thought to be a natural and unavoidable consequence of capitalism is actually the direct result of these malinvestments and the correction process that follows."

For once I agree with much of what this author said in this article, except the quoted portion above.  Give me a fucking break.  Pure capitalism does not involve unicorns or rainbows.  There would still be cycles and malinvestments caused by monopolies, oligarchs, etc.    Miller is preaching that we should give the keys to the bankers and everything will be fine.  Bullshit.

Sat, 06/01/2013 - 20:26 | 3617325 FreeMktFisherMN
FreeMktFisherMN's picture

yeah, there still would be some periods of unwarranted 'exuberance' but they would be quickly quelled and exposed and those who bought in learn their lesson. Growth would be legitimate in terms of purchasing power going up, instead of having to be 'deflated' as is done now, let alone the fact that their 'deflator' is the CPI, which is a concocted product of the Burea of Lies and Statistics. A central bank just tries to stave off the pain to keep the sugar high going, but the crash is that much more epic and the in between is just mediocrity and artificial.

And by the way, among the few 'panics' in the 19th century, most of them I believe were caused by JP Morgan and the extreme elite banks, and I don't think they were 'un'-intended, as they were trying to fear the people into accepting the central bank they envisioned where they could facilitate usury and confiscation of wealth more easily. 

Sat, 06/01/2013 - 21:19 | 3617421 LetThemEatRand
LetThemEatRand's picture

So you're admitting that a private bank scared the people into tyranny?  Say it ain't so.  But it will be different next time, right?

Sat, 06/01/2013 - 23:07 | 3617589 FreeMktFisherMN
FreeMktFisherMN's picture

Well the Fed was formed on Jekyll Island kind of like NDAA was at midnight, so it wasn't exactly people aware of what was going on. I'm just saying that panics were smoothed out eventually and there was no force involved. Lenders had to pay the price, too, that's why there is a risk premium.

Sat, 06/01/2013 - 23:20 | 3617607 FreeMktFisherMN
FreeMktFisherMN's picture

Generally the panics were about surprise surprise too many banknotes issued and not backed by anything, even the other ones. The market kept things in check, though, and speculators could and would get in trouble if they were over-leveraged.

Gold is money and naturally its value would be known through the markets. It should not be arbitrarily decided by some bureaucrat. 

 

Sat, 06/01/2013 - 23:22 | 3617615 FreeMktFisherMN
FreeMktFisherMN's picture

no doubt evil still can flourish if people don't defend against it, and unfortunately folks were not mindful evidently of the Founders' warnings about a central bank. 

I think what I'm referring to is an ethic of liberty. That is pretty much the one common thing people need to have in a free market. 

Sat, 06/01/2013 - 23:44 | 3617634 ebworthen
ebworthen's picture

The problem is the lack of rule-of-law and honest media.

Add to that bailouts and rescuing capitalists when they don't deserve it.

Sat, 06/01/2013 - 19:55 | 3617255 Peter Pan
Peter Pan's picture

The major problem with a collapse is two-fold.

First, all little investors will be destroyed.

Secondly, even though the system collapses the top 10% will still own and control well over 80% of the large companies as well as the banks.

Following such a collapse they would still control the financial infrastructure , mass media as well as continuing to have control over government even though they are in a damaged state.

Unless their actual stranglehold over the system is addressed no real change will take place.

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