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Source link: http://archive.mises.org/7281/the-new-hubris-in-monetary-policy-award/

The New Hubris in Monetary Policy Award

October 9, 2007 by

Due to credible competition that has emerged among this year’s candidates for the Hubris in Monetary Policy Award, the Award Committee has announced that it is officially deadlocked.

The competition is centered on two candidates. Take, for instance, the submission by Federal Reserve Chairman Ben Bernanke, who provided remarkable testimony to the US House of Representatives’ Financial Services Committee last month. In it, he argued that the subprime crisis could be blamed, in part, on the Fed’s (and his own) effectiveness. It is not that Fed policies did not contribute to the situation, he said, but that long-term rates, made lower by low inflation expectations, played a greater role. FULL ARTICLE

{ 11 comments }

Jaq Phule October 9, 2007 at 12:14 pm

Good, funny article, but the caption picture would have, had I been eating any at the time, made Cheerios fly out of my nose.

Personally, I’ve always believed that Alan’s W.I.N. buttons were brilliant, and I also believe they are the key to understanding his entire political career. Of course, I’ve also long believed that Alan’s objectivist underpinnings compelled him to do … everything he did. I truly believe he … hmm, let me dig out good ol’ Atlas so’s I can state this correctly:

I believe he tried to destroy the Federal Re-serf, “consciously, deliberately, by plan and and by [his] own hand. [He had] to plan it as carefully and work as hard as if [he] were producing a fortune — in order not to let them notice it and stop [him], in order not to let them seize the [FED] until it is too late.”

I mean, if you found yourself with the task of destroying the FED beyond all capacity to be rebuilt, would you have done any different than did “Sir” Alan? History’s experiments in paper money and other creative credit schemes have all ended the same way, and I think we aren’t too terribly far from the inevitable consequences. Closer, perhaps, than we would have been without Alan.

Of course, we also have Alan to thank for “saving” social security in the early 1980s, and even his decades-ago advice that houses should be construed as people’s primary long-term savings account. Alan may go down in history as the (witting or otherwise) architect of the downfall of all kinds of different, state-controlled, American economic institutions.

So is he sick and twisted or a hero? I’m highly ambivalent as to the answer. (or am I just hyper-paranoid?)

It’s even in line with good-little-objectivist principles. “If you want to defeat any kind of vicious fraud,” writes Ayn-as-Francisco, “comply with it literally, adding nothing of your own to disguise its nature.” WIN buttons aside, Alan’s done just that.

Now, I know that this completely unsourced wacky idea goes way beyond the bounds of even normal, run-of-the-mill tin-foil-hat conspiracy theory lunacy, but if I’m right, then let me ask this: is the Hubris in Monetary Policy Award merely an annual thing? Whether for good or for evil, one way or another perhaps we should award a Lifetime Achievement Award for Excellence in Monetary Policy Hubris just for the good Sir Greenspinner?

(awaits pelting by rotting vegetables)

joe October 9, 2007 at 2:11 pm

“consciously, deliberately, by plan and and by [his] own hand. [He had] to plan it as carefully and work as hard as if [he] were producing a fortune — in order not to let them notice it and stop [him], in order not to let them seize the [FED] until it is too late.”

That would be sooo funny!
But I’m more inclined to believe that he was corrupted by power, fame and his own sense of importance.
“I would use this Ring from a desire to do good…”

Pete Canning October 9, 2007 at 5:26 pm

The Bernanke picture needs to be blown up to an art print size. Fantastic.

Anthony October 9, 2007 at 9:33 pm

Well, willingly or not, Greenspan has helped propel the monetary system closer to collapse. Whether that is a good or bad thing remains to be seen.

Paul Marks October 10, 2007 at 7:56 am

Why not award a special “prize” to Senator John McCain, as yesterday (during the Republican debate) he said that he wished that “interest rates were zero”.

However Senator McCain also said that he did not understand monetary policy. These Fed Chairmen, and Yale (and other) academics think that they do understand monetary policy – it is not just their ignorance that makes them dangerious, it is their arrogance as well.

I trust that your article will be sent to the Yale academic and to the journal that was foolish enough to publish his paper.

Artisan October 10, 2007 at 8:09 am

“his decades-ago advice that houses should be construed as people’s primary long-term savings account”

It that wrong? That is debatable imho. If you own your own house, it’s not just an “investment” but more often an essential “working” tool whose value you’re very much in control of . If things go wrong… you are not kicked out w/o a cent in the pocket, like you may be more easily when just renting your tool, and investing your savings in less essential resources…

Jaq Phule October 10, 2007 at 9:13 am

Artisan,

Yes, it is wrong. There is a subtle distinction between an essential “working” tool, which I very much agree with you, versus a speculative “investment” which is supposed to appreciate at some arbitrary rate based on nothing less than bubblerific mass delusion.

Homes depreciate. They require repair, upkeep, decoration, and utility expenses. *Land* appreciates — it’s not being produced anymore. Greenspan indicated that appreciation of your “home” — meaning “house” — can be construed as income. Wrong on multiple levels, and I’m convinced Alan knew it well.

If things go wrong, you are very much kicked out w/o a cent in your pocket. If you are foreclosed upon, the value of your home, such as it is, belongs to your lender. Of course, nowadays most homes are upside down, because the bank lent out more than the value of the home. Why not? Money was easy to get, and *of course* the home was supposed to appreciate several percent per year.

“Irrational exuberance” — the belief that a home is a liquid, appreciating financial asset — drove housing prices up. It also incented people to make frequent “withdrawals” from that account in the form of interest-only mortgages, upside-down mortgages, ARMs, nothing-down mortgages, and other equity-destroying horrors. This in turn drives credit expansion. Who benefits from that credit expansion? Why, the FED, of course… And this clumsily nails more screws into the greenback coffin.

Houses can be real investments, but only if they are income producing. This means rentals, leases, paper instruments, or some other such thing you do with your property that you aren’t currently living in. It is difficult to use a house as an investment if that house is your primary residence, unless you also use it for warehousing for your home business, or for agribusiness or something. Even then, you can’t sell the income stream as-is like you can with a rental home. The “you”ness of the business is still tied up in “you” more than the property itself.

So, yes, your house is a “working” tool for daily life, but it’s not a liquid asset like a savings account, and not really an investment except by speculation, and if you ask some people, you can’t even really consider it an asset (except on the balance sheet where you have no choice in the matter).

Suppose you’re a carpenter. You “invest” in a hammer as a necessary “working” tool of trade. Can you borrow against the value of that hammer? Possibly. Will the value of that hammer appreciate, in real terms? Unlikely.

Suppose you live in your house long enough to pay off all outstanding debt. Great! You sell the house for three times what you bought it for, face value. Now compare your gains, dollar for dollar, against what you paid out in interest, maintenance, upkeep, fixtures, decorations, utilities, taxes, etc. over the years. The stuff you can’t get back, once you sell the house. In dollars, are you really getting any kind of return on your overall “business” that is your house?

And so the return argument goes, “but the balance of that’s the cut taken out for just living there.” Before Greenspan convinced the world that your house is a liquid asset, the purpose of a house was mainly to live in it, comprising the biggest “working” tool of the business of having a family. Somehow, incredibly, this purpose seems to have gotten confused. Any appreciation you got at the end of 30 years was a nice bonus. Second and third mortgages were something you took out only at great need. No one *ever* lent you more than 100% of the value of your home.

How times have changed. Thanks, Alan!

Anthony October 10, 2007 at 9:25 am

It’d be interesting to know how the housing market would’ve moved in a truly free economy. Do you perhaps have any works on the matter Jaq?

Jaq Phule October 10, 2007 at 10:21 am

Anthony,

“Rich Dad, Poor Dad”? Don’t scoff, there’s some sound ideas in there scattered amongst the muck. You just have to extrapolate outward from specifics to general and even normative principles.

I’m guessing you’re looking for something a bit more scholarly, but I’m no kind of scholar. I’ve never managed to even get past the introductory Crusoe chapter in “Man, Economy, and State”. My formal training in economics began and ended in one underclass semester in high school, taught by a bona-fide member of the Michael Moore school of economics.

Everything else has been learned experientially, in seminars (live, purchased, or occasionally bittorrented) or short articles on mises.org which I’ve read faithfully the last five or six years. This place is awesome.

The only work on any praxeological matter I can recommend is Copi’s “Introduction to Logic”. Of course, I also recommend that book for engineering, scientific, literary, and other matters too, so perhaps it’s not quite what you’re looking for :)

My guess, based on the basis of that extensive education, is that housing prices would have moved slowly, either gradually (but not necessarily monotonically) up or down. Land is still increasingly scarce, which drives up one component of the price, but as always, free market competition and technology development should drive the actual sticks and bricks down.

Other factors are at work, including the commodity prices of the housing materials. Since these are at or near the bottom of the structure of production, these are most fundamentally affected by currency movements. In a “perfect” free market, these prices would tend to fall too, and as the production structure of the house is constructed, these cost drops would collect and cascade.

Taxes! Take away the government’s cut of each home sale, and each component in the structure of production, and you get a *really* big savings cascade…

So it would be a race between the technological competition of house construction versus appreciating land. Both are very slow forces. Whatever price changes, up or down, would be gradual. And the result is that the purpose of housing would go back to being “a place to live” and not “somewhere that I can live in and mebbe it will get me rich quick by living in an expensive location I can’t honestly afford” and other such nonsense.

Don_Sauvignon October 12, 2007 at 11:14 pm

“I believe he tried to destroy the Federal Re-serf, ‘consciously, deliberately, by plan and and by [his] own hand. [He had] to plan it as carefully and work as hard as if [he] were producing a fortune — in order not to let them notice it and stop [him], in order not to let them seize the [FED] until it is too late.’”

Me too. It’s crazy you would say that, as it was exactly what I was thinking when I saw him on The Daily Show.

symnmouttox February 27, 2008 at 6:23 am

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