"I assure this committee that, if I am confirmed, I will be strictly independent of all political influences and will be guided solely by the Federal Reserve's mandate from Congress and by the public interest."
-Prospective Federal Reserve Board Chairman Ben Bernanke, confirmation hearing, 2005
"The last duty of a central banker is to tell the public the truth."
-Federal Reserve Board Vice Chairman Alan Blinder, Nightly Business Report, 1994
"If we exerted our 'independence' we'd certainly lose our independence."
-Former Federal Reserve Board Chairman Arthur Burns, 1981 (possibly paraphrased)
Federal Reserve Chairman Ben S. Bernanke has talked about the 1970s, the decade associated with "stagflation." This word (originally applied to the United Kingdom in 1965) fuses recession with price inflation. He brushes off comparisons between then and now, as he should, but not for the reasons he gives.
The 1970s were a relative paradise. Prices rose, but so did wages. The 1970s did not open with an unserviceable level of debt. (It was during that decade when Americans unbalanced their balance sheets.) In 2010, real wages are falling and real estate, both residential and commercial, is not close to a bottom. Central bankers will do what they can to restore wages and asset prices, no matter the cost. One cost will be much higher prices.
Exploiting Bernanke is a chronology of how Chairman Bernanke remained baffled, and baffled his camp followers, during the food- and energy-price boom from 2006 through 2008. Those were his first three years of his Fed chairmanship. Simple Ben will continue to pretend our cost-of-living is not rising, even when prices are increasing at double- and triple-digit rates. Some already are. Courses of protection include buying farms (including machinery companies, grain commodity funds, water rights, and desalinization companies), as well as precious metals, mining and drilling companies, and freeze-dried food.
As discussed in Exploiting Bernanke, the degree to which asset prices (stocks, bonds, currencies, commodities) are influenced by the Federal Reserve's public opinion of inflation confirms our degraded mental state. Bernanke has been consistently wrong. He might be ignored, but that is difficult given the influence of a speech by any Fed governor in the media and in the markets.
To help remain aloof from the noise, and to possibly preserve one's living standard along the way, what follows is a look at how Federal Reserve Chairman Arthur Burns fibbed his way through the 1970s. In that decade, as will probably be the case in the years ahead, money was made by those who sold what the central bank destroyed: the dollar.
Like Bernanke, Burns was an academic. He co-authored a significant economic tract, Measuring Business Cycles, in the mid-1940s. He taught at Columbia University. One of his students was Alan Greenspan. The latter is not germane to the current discussion other than as a receptacle of learning. On the first day of Greenspan's doctoral training, the professor asked his students, "What causes inflation?" Silence followed. Burns enlightened the class: "Excess government spending causes inflation." According to one of Greenspan's colleagues, this statement made a powerful impression on the students.
Burns was not persuaded by the then-current Keynesian fashion. "Burns was an empiricist; Keynes a theorist." It might be closer to the truth that Burns wanted to protect his turf, not his beliefs. As it turned out, he did what he was told. This is the standard course of academics placed in a position of responsibility. They follow orders and rationalize their betrayal as a means to acquire more influence on policy.
Inflation was a problem by the mid-1960s. Burns' stated culprit, excess government spending - as expressed in the federal deficit - had risen from $3.7 billion in 1965 to $25.2 billion in 1967. He stated his prognosis to a Joint Economic Committee hearing in 1967: "Once an inflationary spiral gets underway, I am afraid there isn't a great deal that can be done constructively."
President Nixon awarded Burns the chairmanship of the Federal Reserve in 1970. At his confirmation hearing in December 1969, Burns created the template copied by Ben Bernanke that was quoted at the top of the article. Burns' prototype: "We must rely on sound fiscal policy and not leave it to the monetary authorities to do it all themselves." Burns went on: "I fully believe the Federal Reserve should not become the handmaiden of the Treasury. We may have to go to war with Treasury, but hope it will not happen."
After Arthur Burns was sworn in as chairman, President Nixon told the assembled: "I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed." After the crowd cheered, Nixon added: "You see, Dr. Burns, that is a standing vote for lower interest rates and more money."
Understanding his position, Arthur Burns displayed the characteristic most noteworthy of intellectuals in public life. That is, he was a coward.
Blame for state interference did not lie entirely with Nixon. On August 6, 1971, a congressional report by the Reuss Commission ("Action Now to Strengthen the U.S. Dollar") concluded, "The dollar is overvalued." Ergo, it was time to weaken it. Nine days later, Nixon announced the United States was defaulting on its promise to redeem dollars under the Bretton Woods gold exchange standard.
The wheels were off, and economists, to retain their high-grade government rating, made preposterous claims. Arthur Burns fell easily into the role of state apparatchik. Before the Joint Economic Committee in February 1972, Burns intoned that unbalancing the budget by $40 billion only "gives me some pause." At his December 1969 confirmation hearing, Burns had been asked what he would recommend if the budget could not be balanced: "We must raise taxes, as unpopular as they may be." The Consumer Price Index rose by 3.3% in 1972, 6.2% in 1973, 11.0% in 1974 and 9.1% in 1975.
It is often said that when a novitiate to Washington succumbs to its allures, he "has grown." Burns was now a giant among trimmers. His acrobatics grew more offensive to common logic. After his chairmanship, Burns wrote: "When the government runs a budget deficit, it pumps more money into the pocketbooks of the people than it withdraws from their pocketbooks...This is the way the inflation... first got started and later kept getting nourished."(Published in Federal Reserve Bulletin, September 1979.)
Burns was disingenuous. The U.S. Treasury "prints" money but Burns' Fed bought deficit-funding Treasury securities at a price convenient to the national purse. This is the chief mechanism available to a Federal Reserve chairman that fulfills Burns' warning to his students: "Excess government spending causes inflation."
Fed officials, including Bernanke, have taken to blaming the federal deficit for our ills, but the same holds true today. Bernanke has bought over a trillion dollars of mortgages and continues his "quantitative easing". This is a deceptive name to fulfill the Fed's role as waste dump for discredited securities and euthanasist of the People's currency. These are crimes against humanity.
As inflation rose, Burns applied tactics then current among Stasi counterintelligence colonels. After oil prices quadrupled in 1973, Burns told his staff to remove energy costs from the Consumer Price Index. Burns' rationale was the Yom Kippur War, over which the Fed had no control. A few months later, with food prices raging, Burns told his staff to remove them from the CPI calculation. Burns claimed the disappearance of anchovies off the coast of Peru was the cause of food inflation, and beyond the Fed's jurisdiction. In time, Burns discarded used cars, children's toys, jewelry and housing - about half the costs consumers battled in their daily struggle with rising prices.
The corruption of the consumer price index today is far worse and is only worth watching to record the deprivation it causes to social security recipients and those who own Treasury Inflation Indexed Securities.
To put an end to this, Arthur Burns resigned on March 31, 1978. The dollar was the most hated currency in the world. It was on its way to annihilation, but, just as we see today, no other country wanted a strong currency. The Consumer Price Index rose from 5% in 1970 to 9% in 1978 and to 13% in 1979. Given Burns' malicious manipulation of the CPI, consumer prices were probably rising by 50% in 1979.
Arthur Burns was named ambassador to West Germany by President Ronald Reagan in 1981. This was a prestigious position during the Cold War and is an example of how so-called policy makers who operate within the academic-political cocoon are never held responsible for their words or actions.
Frederick Sheehan writes a blog at www.aucontrarian.com