Alack and Alas, We Are Undone for Bernanke Has Twist (and QE1, QE2,
QE3, and QE Forever)
William L. Anderson
by William L. Anderson: Bailouts
and the Wonderland Economy
Potterís classic The
Tailor of Gloucester the poor tailor laments the loss of
the "twist" of silk needed for the waistcoat he is creating,
declaring, "Alack and alas, I am undone, for I have no twist."
When Potter wrote the story in 1902, the notion that a central bank
(the U.S. Federal Reserve System did not exist then) would come
up with "clever" means to hide the fact that its operations
were bankrupt was not quite in the realm of politically-acceptable
shenanigans would come a decade later, when Europe burst into warfare
and governments hopelessly inflated their currencies to pay for
the carnage, leading to what has been a permanent "twist"
in policy. Continuing in that vein of deception, Ben Bernanke and
the Fed have come up with schemes such as "Operation Twist"
and Quantitative Easing to hide the fact that it is bankrupting
Screw" by financial analyst Peter Schiff, Bernankeís "Operation
Twist" scheme has been an attempt to have the Fed purchase
long-term federal treasuries and sell some of its portfolio of short-term
paper in order to bring long-term and short-term interest rates
closer, bringing down long-term rates in the process. I say "scheme"
because that is exactly what it is: an attempt by the Fed to use
monetary trickery in an attempt to fool the markets.
line from Bernanke and his admirers (and even some of his critics,
such as Paul Krugman, for whom the Fed never can inflate enough)
is that the U.S. economy is in the doldrums because "aggregate
demand" is lacking following the financial crisis of 2008.
Thus, any action by the Fed to lower interest rates and to improve
liquidity is bound to result in increased "aggregate demand,"
which means that Americans will buy things and lead to an economic
rebound that will put people back to work.
in a much better position than the conventional wisdom would suggest;
the economy isnít booming, but itís growing, and the labor market
is moving sideways rather than down. Itís not Reaganís morning
in America (which reflects the different and much more intractable
nature of the 2008 crisis and aftermath), but itís not the political
disaster you might imagine.
is right in that a semi-stagnant economy that does not seem to be
in crisis plus a decidedly-weak Republican presidential candidate,
Mitt Romney, probably does spell victory for Barack Obama in November.
So be it. I cannot imagine a President Romney actually doing what
is necessary to bring the economy to a real recovery and to let
people know what actually is happening.
In the arena
of political economy, the Keynesian theory wins hands down over
anything the Austrians can produce for the simple reason that under
Keynesianism, there is no such thing as malinvestment. All capital
theoretically is interchangeable, and no matter where government
funnels new money, be it in road construction or paying for new
solar energy panels, the economic effect pretty much is the same:
increased "aggregate demand."
purchases $40 billion a month of housing securities, as the Fed
has announced it will do, all the better, as it will drive down
mortgage interest rates and give households more money to spend.
Bernankeís only mistake, at least according to the critics on the
Left, is that it is still too little, and that the only thing that
really will light a fire under the economy is hardcore inflation.
On the other
hand, Austrians are derided as "liquidationists." Just
let the economy fail, have people put out of work, and the Austrians
are in full-blown celebration. Contrary to the Keynesians, however,
Austrians do not believe the entire economy somehow must be liquidated.
For that matter, unlike the Keynesians, Austrians do not believe
that liquidation of the malivested portions of the economy would
mean that everything else had to fall apart, too. Writes Schiff:
of quantitative easing have done little to revive our economy
or set us on a path for real recovery. We are now in more debt,
have more people out of work, and have deeper fiscal problems
than we had before the Fed began down this path. All the supporters
can say is things would have been worse absent the stimulus. While
counterfactual arguments are hard to prove, I do not doubt that
things would have been worse in the short-term if we had simply
allowed the imbalances of the old economy to work themselves out.
But in exchange for that pain, I believe that we would be on the
road to a real recovery. Instead, we have artificially sustained
a borrow-and-spend model that puts us farther away from solid
ground. (Emphasis mine)
To put it another
way, Schiff is agreeing that had the Fed and Congress not bailed
out the banks and financial houses in the aftermath of the Lehman
Brothers failure four years ago, the initial downturn would have
been worse than what happened. Being that the crisis came in the
middle of a presidential campaign, it is not surprising that Congress
and the Fed acted as they did.
As a short-run
strategy, the bailouts and the Obama "stimulus" that followed
the presidentís inauguration provided what seemed to be a "softer
landing" than what a hard-nosed policy of allowing the malinvestments
to liquidate might have been. However, the "soft landing"
was not landing at all, but rather a fall into an economic version
of quicksand. True, another round of "quantitative easing"
or yet another financial trick by the Fed will have some effect,
but on the margin, each "pull-another-rabbit-out-of-the-hat"
scheme will be less effective than the previous action.
At some point,
the economy stops growing and all there is left is the inflation,
and this result is inevitable no matter what the Keynesians might
claim. The problem is that Keynesians believe that an economy is
nothing more than a homogeneous mass of factors of production and
final products into which one stirs money. If things slow down,
just add more money.
to the tenets of what is known as Sayís Law, which is nothing more
than an acknowledgement that consumption requires production, and
that the source of increasing standards of living come from the
ability of an economy to produce goods that help consumers fulfill
their different needs. (No, Say never wrote that everything that
is produced will be consumed, contrary to Keynesian claims. Say
just was arguing that the real source of purchasing power within
an economy comes from those things that are produced. Furthermore,
Keynes did not "discredit" Sayís Law; instead, he created
a straw man and then demolished the false argument.)
From this vantage
point, it is easy to see what is happening as the Fed floods the
world with more dollars, be it through Operation Twist, or the endless
QEs. If, as Austrians believe, that a price system helps to determine
the value relationships between the different factors of production,
including labor, then anything that distorts a price system ultimately
will distort those factor relationship. The longer the distortions
continue, the harder it becomes for the economy to have a meaningful
the time the housing bubble collapsed, the distortions within the
economy were obvious. Had the economy been allowed to correct itself,
as Austrians were recommending, then the U.S. economy would have
been on the road to a real recovery by now. Instead, Congress, the
president, and the Fed pursued policies that not only stymied the
needed correction, but actually tried to undo it.
One must understand
that without a meaningful correction, there is no recovery. What
Twist and the QEs are doing is to block the correction by forcing
even more distortions upon the economy, which means that not only
must the economy work through the damage caused by the original
housing bubble (and the Tech Bubble before it), but it now must
deal with the distortions that Bernanke and others have imposed.
what Washington is telling us, Bernanke is not "fighting"
a recession; he is creating a depression. By insisting that inflation
will cure our economic ills, Bernanke and others are only making
the economy worse. Be prepared for depressed conditions for years
L. Anderson, Ph.D. [send him
mail], teaches economics at Frostburg State University in Maryland,
and is an adjunct scholar of the Ludwig
von Mises Institute. He
also is a consultant with American Economic Services. Visit
© 2012 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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