Speech Delivered at the New York Federal Reserve Bank
by Robert Wenzel: If
You Ever Need To Escape With Your Wealth From a Totalitarian State...
invitation of the New York Federal Reserve Bank, I spoke and had
lunch in the bank's Liberty Room. Below are my prepared remarks.
Thank you very
much for inviting me to speak here at the New York Federal Reserve
discourse is, of course, extraordinarily valuable in reaching truth.
In this sense, I welcome the opportunity to discuss my views on
the economy and monetary policy and how they may differ with those
of you here at the Fed.
I suspect my views are so different from those of you here today
that my comments will be a complete failure in convincing you to
do what I believe should be done, which is to close down the entire
Federal Reserve System
My views, I
suspect, differ from beginning to end. From the proper methodology
to be used in the science of economics, to the manner in which the
macro-economy functions, to the role of the Federal Reserve, and
to the accomplishments of the Federal Reserve, I stand here confused
as to how you see the world so differently than I do.
I simply do
not understand most of the thinking that goes on here at the Fed
and I do not understand how this thinking can go on when in my view
it smacks up against reality.
me to begin with methodology, I hold the view developed by such
great economic thinkers as Ludwig von Mises, Friedrich Hayek and
Murray Rothbard that there are no constants in the science of economics
similar to those in the physical sciences.
In the science
of physics, we know that ice freezes at 32 degrees. We can predict
with immense accuracy exactly how far a rocket ship will travel
filled with 500 gallons of fuel. There is preciseness because there
are constants, which do not change and upon which equations can
There are no
such constants in the field of economics since the science of economics
deals with human action, which can change at any time. If potato
prices remain the same for 10 weeks, it does not mean they will
be the same the following day. I defy anyone in this room to provide
me with a constant in the field of economics that has the same unchanging
constancy that exists in the fields of physics or chemistry.
And yet, in
paper after paper here at the Federal Reserve, I see equations built
as though constants do exist. It is as if one were to assume a constant
relationship existed between interest rates here and in Russia and
throughout the world, and create equations based on this belief
and then attempt to trade based on these equations. That was tried
and the result was the blow up of the fund Long Term Capital Management,
a blow up that resulted in high level meetings in this very building.
It is as if
traders assumed a given default rate was constant for subprime mortgage
paper and traded on that belief. Only to see it blow up in their
faces, as it did, again, with intense meetings being held in this
Yet, the equations,
assuming constants, continue to be published in papers throughout
the Fed system. I scratch my head.
I also find
curious the general belief in the Keynesian model of the economy
that somehow results in the belief that demand drives the economy,
rather than production. I look out at the world and see iPhones,
iPads, microwave ovens, flat screen televisions, which suggest to
me that it is production that boosts an economy. Without production
of these things and millions of other items, where would we be?
Yet, the Keynesians in this room will reply, But you need
demand to buy these products. And I will reply, Do you
not believe in supply and demand? Do you not believe that products
once made will adjust to a market clearing price?
will argue that the price of the factors of production will adjust
to prices at the consumer level and that thus the markets at all
levels will clear. Again do you believe in supply or demand or not?
I scratch my
head that somehow most of you on some academic level believe in
the theory of supply and demand and how market setting prices result,
but yet you deny them in your macro thinking about the economy.
You will argue
with me that prices are sticky on the downside, especially labor
prices and therefore that you must pump money to get the economy
going. And, I will look on in amazement as your fellow Keynesian
brethren in the government create an environment of sticky non-downward
Robert Murphy reports that President Herbert Hoover continually
pressured businessmen to not lower wages.
He quoted Hoover
in a speech delivered to a group of businessmen:
country there has been a concerted and determined effort on the
part of government and business... to prevent any reduction in wages.
He then reports
that FDR actually outdid Hoover by seeking to raise wages
rates rather than merely put a floor under them.
I ask you,
with presidents actively conducting policies that attempt to defy
supply and demand and prop up wages, are you really surprised that
wages were sticky downward during the Great Depression?
day America, the government focus has changed a bit. In the new
focus, the government attempts much more to prop up the unemployed
by extended payments for not working. Is it really a surprise that
unemployment is so high when you pay people not to work.? The 2010
Nobel Prize was awarded to economists for their studies which showed
that, and I quote from the Noble press release announcing the award:
is that more generous unemployment benefits give rise to higher
unemployment and longer search times.
you think it would make more sense to stop these policies which
are a direct factor in causing unemployment, than to add to the
mess and devalue the currency by printing money money?
I scratch my
head that somehow your conclusions about unemployment are so different
than mine and that you call for the printing of money to boost demand.
A call, I add, that since the founding of the Federal Reserve has
resulted in an increase of the money supply by 12,230%.
I also must
scratch my head at the view that the Federal Reserve should maintain
a stable price level. What is wrong with having falling prices across
the economy, like we now have in the computer sector, the flat screen
television sector and the cell phone sector? Why, I ask, do you
want stable prices? And, oh by the way, hows that stable price
thing going for you here at the Fed?
Since the start
of the Fed, prices have increased at the consumer level by 2,241%.
Thats not me misspeaking, I will repeat, since the start of
the Fed, prices have increased at the consumer level by 2,241%.
So you then
might tell me that stable prices are only a secondary goal of the
Federal Reserve and that your real goal is to prevent serious declines
in the economy but, 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.
I scratch my
head and wonder how you think the Fed is any type of success when
all this has occurred.
I am especially
confused, since Austrian business cycle theory (ABCT), developed
by Mises, Hayek and Rothbard, has warned about all these things.
According to ABCT, it is central bank money printing that causes
the business cycle and, again you here at the Fed have certainly
done that by increasing the money supply. Can you imagine the distortions
in the economy caused by the Fed by this massive money printing?
ABCT, if you print money those sectors where the money goes will
boom, stop printing and those sectors will crash. Fed printing tends
to find its way to Wall Street and other capital goods sectors first,
thus it is no surprise to Austrian school economists that the crashes
are most dramatic in these sectors, such as the stock market and
real estate sectors. The economist Murray Rothbard in his book Americas
Great Depression went into painstaking detail outlining
how the changes in money supply growth resulted in the Great Depression.
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