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Source link: http://archive.mises.org/10356/ben-bernanke-was-incredibly-uncannily-wrong/

Ben Bernanke Was Incredibly, Uncannily Wrong

July 28, 2009 by

The new video is a compilation of the 2005-2007 prognostications of Federal Reserve Chairman Ben Bernanke. In it, Bernanke is shown to have been just as embarrassingly wrong as the Austrians were uncannily right. FULL ARTICLE

{ 14 comments }

SweetLiberty July 28, 2009 at 10:16 am

I read just about every daily article from Mises.org. Not being an economist, some of these editorials plunge into deeper waters than I dare tread. But every now and then, someone posts an article which clearly demonstrates – in layman’s terms – the fallacy of our current economic leaders and the strength of the Austrian philosophy. I believe this is such an article. (It doesn’t hurt that it’s accompanied by evidentiary video links.)

Changing minds in our society is extremely difficult. Once a viewpoint is adopted and christened as mainstream, all other ways of thinking are deemed heretical, pinning a believer of such radical conceptions firmly on the lunatic fringe. Galileo comes to mind. Conspiracy theorists abound, and anyone wanting to be regarded as rational and pragmatic does better to disassociate themselves from such crazed zealots.

But the masses often do not apply critical thinking skills to modern problems. This includes our country’s top economic leaders and advisors. IF, based on a Keynesian philosophy, so many of the forecasts and economic predictions are erroneous (as witnessed in Bernanke’s quotes), THEN a rational human being would realize that such a philosophy needs reconsideration (even if only at the margins). IF the Austrian philosophy can so accurately predict booms and busts (as witnessed in Schiff’s videos), THEN it should be more closely examined and implemented through policy. HOW HARD IS THIS CONCEPT TO GRASP?

Does one need a PhD in Logic to realize that, if an underlying philosophy is so consistently wrong, one must consider modifying or discarding that philosophy entirely? Isn’t a definition of crazy someone who does the same thing over and over again, expecting different results? This being the case, I’m afraid Bernanke and the other inmates are indeed running the asylum, and it is we few who recognize the flaws in the current system and wish to change them that are locked away, shouted down by the pious majority. I hope this Bernanke/Schiff – Keynesian/Austrian contrast spreads beyond the Mises forums and into the minds of every American concerned about the economy. Thank you for bringing this to our attention.

Zach Bush July 28, 2009 at 11:43 am

SweetLiberty,

I feel your pain. I would, however, like to comment on your third paragraph and your logic.

Mises defined rational actions as something different than is commonly thought of today. He showed that all actions are rational based on man’s natural desire to act within his own self interest. The whole idea of “irrational exuberance” is meaningless.

For instance it is perfectly rational for Bernake and the rest of the political establishment to reconsider the validity of Keynesian/Monetarist economics. This is because it is within their self interest to keep these bankrupt theories in the mainstream because it enables them to not only maintain their power, but to increase their power over the lives of citizens.

This is why I have become very interested in public choice political theory. It stresses that, contrary to convention political theory, politicians and bureaucrats are motivated by the same forces as all other men. They do not act in the interest of you and I. They act in the interest of themselves.

Zach Bush July 28, 2009 at 11:45 am

SweetLiberty,

I feel your pain. I would, however, like to comment on your third paragraph and your logic.

Mises defined rational actions as something different than is commonly thought of today. He showed that all actions are rational based on man’s natural desire to act within his own self interest. The whole idea of “irrational exuberance” is meaningless.

For instance it is perfectly rational (and logical) for Bernake and the rest of the political establishment to not reconsider the validity of Keynesian/Monetarist economics. This is because it is within their self interest to keep these bankrupt theories in the mainstream because it enables them to not only maintain their power, but to increase their power over the lives of citizens.

This is why I have become very interested in public choice political theory. It stresses that, contrary to convention political theory, politicians and bureaucrats are motivated by the same forces as all other men. They do not act in the interest of you and I. They act in the interest of themselves.

Zach Bush July 28, 2009 at 11:47 am

Sorry, ignore the first post. I accidentally submitted before proof-reading.

Sonic Ninja Kitty July 28, 2009 at 12:01 pm

I agree with Sweet Liberty in that this article is simply outstanding!! Thank you to the author(s).

Zach, you make an excellent point about self interest. This is what I find to be utterly and frustratingly fascinating in economics and politics–the psychological aspect. The pieces fall together so perfectly when you acknowledge the Marxist emphasis on being a major force in a country’s educational system.

Such a tangled web–the only way to correct things is to snip one string at a time, I guess. It is a daunting task, but it seems more possible than ever at this point in time. I used to gloss over the credo at the top of the Mises page: Tu ne cede malis…… Now I realize its profundity.

SweetLiberty July 28, 2009 at 3:06 pm

Hi Zach,

Thank you for your comments, and I do agree that Bernanke and other Keynesians may indeed recognize their system as flawed but self-serving. However, if we give them the benefit of the doubt and grant that their actions are well meaning and simply misguided, then we must assume a gross incompetence for not recognizing a flawed system. After listening to several “top economists” claim with such passionate zeal that history teaches us the way out of a recession/depression is for the government to increase spending to extreme levels, I am left with the impression that many are not completely selfish in their ideals, but truly believe that massive government spending can solve our economic woes. Whether Bernanke is one of the “true believers” is impossible for me to know.

However, if spending 1 trillion (give or take a billion here or a billion there) doesn’t “solve the problem”, then the solution must be to spend 2 trillion (ala Paul Krugman). And if that doesn’t work, then 4 trillion, etc. By adopting this kind of escalation, don’t Keynesian believers make their hypothesis unfalsifiable? One has to ask then, at what point (if any) would they concede failure? (And also, how do they define success? Is a decline in the rate of unemployment truly a success?)

But too, we must be ever vigilant and ask the same questions of our own philosophies. If government efforts appear to work by this time next year -improving employment, reducing healthcare costs, raising housing equity, and staving off inflation, at what point will the Austrians concede Keynesian success? Understand, I do not expect any of these things to occur in anything more than a very temporary fashion, but if “prosperity” is maintained for 5-10 years due to these interventions before the next wave of boom/bust hits, does this qualify as only the “temporary” effect of government intervention, or must we admit that these interventions may garner more long-term material benefits than otherwise conceived? In other words, at what point are the Austrians willing to concede a point?

Even the Austrians must be open to correction for their philosophy to have enduring merit. Those who study this school of thought must be eager for challenges and generously publish all serious critiques. In the spirit of full disclosure, these guardians and proponents should also be willing to expose their own shortcomings and openly examine areas that are uncertain or unexplored. Are there such areas, or have the Austrians solved every conceivable conflict and speak with one voice?

It is only when all sides explore and strive for the objective truth, sacrificing subjective advocacy, that we will learn and grow together. Challenge me, and you MAY achieve victory. Challenge yourself, and you WILL achieve growth. Rather than economic seminars featuring only Austrian speakers, I would like to see public debate between the various schools. Not the academic debates where victory is the goal, but scientific debates where pragmatic solutions are the objective. For it is only when all who come to the table are open to change that new knowledge is attainable. Even should the Austrian philosophy of economics be 95% complete and accurate (which I expect it approximates), this still leaves room for improvement. Let’s all improve.

Zach Bush July 28, 2009 at 10:37 pm

SweetLiberty,

I do agree that many of the politicians are well-meaning but misguided and usually intellectually lazy. The fact is that nearly all US citizens are educated on a horrible misunderstanding (if not deliberate lie) of american history. We are taught that it took the ‘great emancipator’ to end slavery in the US. We are also taught that it was unregulated capitalism that led to the Great Depression and it was only due to FDRs New Deal that saved civilization. These are all blatant lies. I am not saying that current teachers and historians are liars, only that they are spreading what was originally a purposeful lie to rewrite history and spread the disease of socialism.

It is ironic that you bring up the points you make in your second paragraph as I am currently reading Rothbard’s “America’s Great Depression”. In the first chapter he addresses these issues specifically. Namely, that economic theory cannot be proven through statistics for the reasons you identify. He shows how economic theories can only be proven by testing the logic of the theory because economics ultimately rests on the axioms of human action.

It is for these reasons that I am confident to say that the Austrian economic theory is the only economic theory. I say this because there is no “macro” or “micro” Austrian theory. Imagine if there was a “macro” and “micro” theory of gravity. That some how the laws of gravity behaved differently between planets in a solar system than between objects on a planet. I doubt these “theories” would carry much influence for long.

I would suggest you read the first chapter in “America’s Great Depression”. I believe it is available in pdf on this site.

Michael Wagner July 29, 2009 at 6:32 am

If unemployment declines or the pace of economic activity “improves” over the next few months, it will simply be the beginning of the next bubble.
Without massive liquidations of the malinvestments of the last bubble, any “recovery” will be an illusion. Any “recovery” that results from this massive spending spree will only sow the seeds of the next recession and insure that it will be worse than this one.
In no case will this “recovery” disprove any of the Austrian theory.

C July 29, 2009 at 10:20 am

I like Merle Hazard’s perspective:

http://www.merlehazard.com/Merle_Hazard/BAILOUT.html

SweetLiberty July 29, 2009 at 10:28 am

Zach,

While I do side with the theory that there is no Micro or Macro dividing line for economics in the real world, there does seem to be a Micro and Macro division of physics in nature. Reconciling quantum mechanics (Micro) and Einstein’s theory of relative (Macro) is the holy grail of physicists. So while there is precedence for theories like this to describe reality, the neo-classical economists seem to be imposing a false or unnecessary dichotomy.

Michael,

I appreciate what you are saying, and happen to believe it myself, but under what conditions would the mainstream economists prove their theories to a significant level? In other words, if the actions they take today generally stabilize the economy for 10 years, you would say it’s just another bubble. But what about 20 years? Or 50? At some point, if all the tinkering they do generates prolonged stability and real growth, we must be willing to acknowledge this and reexamine our own theories in light of new evidence. That’s the flexibility we demand from mainstream economists, and we must offer the same acknowledgments of success (should they ever achieve it) in return.

Make no mistake; I firmly believe they are on the wrong path and plunging us off an enormous cliff. But SHOULD they manage to pull us back from the brink in a sustainable way, we must recognize this – even if their level of success isn’t as desirable as the success the free market could provide. If they can somehow keep up from all plunging into hyperinflation and third-world poverty given all that they are doing, that would be a measure of achievement. In fact, I believe that we must whole-heartedly pray that we are wrong and Bernanke is somehow, incalculably, right. Otherwise, the consequences for all of us – including our children – is unthinkable.

fundamentalist July 29, 2009 at 11:58 am

Keep in mind that Austrian theory came about by observation of human behavior first, not by abstract reasoning in a closet. Some people get the idea that Austrians start with an assumption and string together sylogisms. Menger began his study of prices by studying what people do in response to price changes. So in a sense, Austrian economics is the most empirical of all.

Mainstream econ insists that empirical means nothing but tables of figures. Austrians take a broader view of what empirical means and is therefore more grounded in reality. It’s actually the mainstream economists who sit in an empty classroom and play with abstract toys (equat[ons) that have no relationship to reality, not Austrians. Austrian econ is firmly grounded in the reality of human behavior. As such, it should and does find support in history and in sets of historical figures, that is, statistics.

SweetLiberty: “But SHOULD they manage to pull us back from the brink in a sustainable way, we must recognize this…”

Mainstreem economists are saying that the Feds have saved us from Armegeddon because the economy is stabilizing. But what they miss is the historical fact that the US endured dozens of similar depressions from 1800 to 1929 and recovered fully with no state intervention whatsover. As Austrian econ teaches, there are many factors in a market, even a heavily regulated one such as ours, that empower it to recover on its own without state intervention. History is proof.

So when people want to give the feds all of the credit for the recovery, we must remind them that the feds are taking credit for something the market does naturally on its own. Unless the feds can show that their efforts made the depression shorter and shallower than it would have been without them, then they steal credit that is rightly due to the market.

Autolykos July 29, 2009 at 1:43 pm

Excellent points, Fundamentalist. It seems that the proper comparison between Austrian and mainstream economic theories is not one of apriorism vs. empiricism, but one of empiricism in *human action* vs. empiricism in *numbers*.

SweetLiberty, I think the appropriate question to ask here is not “Whither a recovery?” but “A recovery on whose terms?” All of the recent actions undertaken by “our economic leadership” seem to be geared toward one thing — prolonging (if not perpetuating) the inflated values of the elites’ assets.

Autolykos July 29, 2009 at 1:45 pm

Excellent points, Fundamentalist. It seems that the proper comparison between Austrian and mainstream economic theories is not one of apriorism vs. empiricism, but one of empiricism in *human action* vs. empiricism in *numbers*.

SweetLiberty, I think the appropriate question to ask here is not “Whither a recovery?” but “A recovery on whose terms?” All of the recent actions undertaken by “our economic leadership” seem to be geared toward one thing — prolonging (if not perpetuating) the inflated values of the elites’ assets.

Autolykos July 29, 2009 at 6:40 pm

Sorry for the double post. I did not think that either one had gone through.

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