Address to the Spring Dinner of the Committee for Monetary Research and Education (cmre.org) May 22, 2014
In bowing to the powers of political correctness, I would like to apologize for the title of this address. To some, "Educating the Fed" could be as brazen as trying to direct traffic in Manhattan with your middle finger.
It is getting to be very scary out there. Authoritarians have been using central banking and, more lately global warming, to bypass constitutional norms. "They" have corrupted finance and banking with money created out of thin air. "They" have corrupted science with climate theories based upon a trace gas. Throughout political history, every experiment in authoritarian government has had two underlying motivations - control and money. Lately, climate controllers have become increasingly vicious in their condemnation of skeptics.
On the positive side, both promotions have become so reckless as to suggest "ending action".
The First Law of Thermodynamics states, roughly, "It is going to get a whole lot worse before it gets any better". The Second Law simply stated is "Who says it is going to get any better?".
The First Law of Policymaking assumes that under any condition astute manipulation of interest rates and currency depreciation will make things better, while always preventing bad things. The Second Law of Policymaking has a lot to do with Mother Nature and Mister Margin laughing at the pretensions of central bankers.
A little more from physics can add to the theme and that is the old saying that "If you keep your data base short enough it will fit your theory".
Intuition rather than financial history was behind the formation of the Federal Reserve System. First of all, financial crashes do two things. They surprise and then offend intellectuals. That would be OK, except that since the early 1600s there have too many intellectuals who insisted in getting their personal revelations about financial markets into government agencies.
Names include Edward Misselden, John Law, Walter Bagehot and John Keynes. More recent fellow travellers range from Paul Samuelson to Paul Krugman.
Keynes did not know that his "brilliant" revelations had been discovered by mercantilists in the early 1600s. As the saying went, he was able to put the ancient plea for inflation in arithmetical terms.
On the climate-side there is Al Gore and legions of academic grant seekers.
Going along with this has been the always prevalent drive by governments to expand their power and revenues.
The combination of central banking, macro-economic theories, ambitious bureaucracies and gullible politicians has created a century of chronic and massive currency depreciation. The consequence has been a series of dislocating asset inflations. Initially, the Fed's job definition was to prevent financial convulsions that precipitated recessions. There have been 18 bear markets and recessions since the Fed opened its doors in 1914.
Despite the sorry record, the establishment has never doubted the perfection of the Federal Reserve System. On the inevitable Classic Crashes such as in 1929, the Fed was not criticized but those running it got the blame. Blame the guy, not the system.
In order to understand the intellectual and practical failure it is best to go back to the start.
The 1907 Crash, as usual, upset the intellectuals and the notion that J.P. Morgan personally ended the crash was highly offensive. If those quick to knee-jerk had reviewed Morgan's schedule they would have known that he was unable to act until the "Rich Man's Panic" had effectively run its course.
He did not end that panic. Mister Margin did when all of the offside accounts were sold out.
Besides that, a man with Morgan's experience and reputation would not have moved to end a crash until it was almost over.
If economic activists had taken the time to review the history of financial disasters they would have known that since at least the 14th Century, they have been the consequence of speculative credit expansions.
As a prominent London banker in the 1840s observed:
"No warning can save people determined to grow suddenly rich."
A thorough researcher would also have known that since at least the 1340s most of the severe panics occurred in the fall and ended naturally.
Great speculations end when buyers become exhausted and great crashes have ended when forced selling exhausts, both naturally.
The senior central bank has had little influence upon the timing of significant reversals.
Back in the 1800s when a central bank was charged with maintaining the gold reserve backing the currency it was a practical concept.
Over the past one hundred years, central banking has becoming increasingly ambitious. On one side, there are dearly-held beliefs. The most naive is the assumption that there is a national economy isolated from the rest of the the world. Equally naive is that it can be managed such that bad things won't happen. Actually and sadly, the Fed has been corrupted to finance another long experiment in authoritarian government.
Every experiment in unlimited government has required unlimited finance, and today's earnest central bankers believe they can provide it. This attempt has run for a hundred years and is close to ending.
The highlights of intervention provide a comedy of errors. Newspaper accounts have preserved some clangers that textbooks gloss over. In 1965 these were full of boasts that macro-economists had ended the business cycle. In reality, "they" had put the ancient plea for inflation into Fourier equations.
At the peak of the 1873 Bubble the official tout was that because the U.S. did not have a central bank - nothing could go wrong. In 1929 nothing could go wrong because of the new and "scientific" Federal Reserve System. In 2007 the tout that "nothing can go wrong" was that the Fed now had a "Dream Team" of economists.
In so many words, the boast was that government agencies could keep another classic financial mania going forever.
Then only two years later, the boast was that they had prevented the panic, that was impossible, from lasting forever.
A convenient shift of focus, that shows that interventionists do not understand that markets clear - on their own.
But there is even greater folly.
Ambition to manage a national economy is nothing compared to the ambition to manage the "health of the planet".
The audacity is amazing and involves the corruption of how ice ages really work.
I completed a degree in Geophysics in 1962 when there were essentially two explanations. One was that ice ages and their interglacials were random. The other view was that climate history was periodic. And it is periodic. Periodic means that even socialists can't change it.
At the time, the data base was too limited to support conclusions either way. Since then the data base has expanded from sparse to lengthy. Personally, it has been fascinating to watch it build.
Ice ages and their interglacials represent the highlights of climate history. What's more, based upon millions of years of data climate change, in the proper sense of the word, has been around for a long time. And it is periodic.
If one looks at the history of temperature and the evil carbon dioxide in onethousand- year spans, the record has been that increases in temps have led subsequent increases in CO2. That's by some 400 to 600 years.
There have been cooler times when there was more CO2 than now and there were times when the climate was warmer than now with less CO2.
Carbon dioxide is innocent of all charges excepting its key role in a liberal guilt trip.
Fortunately, Mother Nature, rather than arbitrary political passion, is still running the solar system and science is still based upon predictability. In the 1990s, solar physicists Penn and Livingston determined the sun's output would diminish significantly and it has.
This is perplexing the global warming faction, which is re-labeling the movement to "Climate Dislocation". Some are regretting that they chose to promote only one influence upon global warming - modern industrial life.
An elegant theory but just plain wrong.
What about all the scientists that are concerned about serial problems such as "Global Warming", "Climate Change" and now "Climate Disruption"?
Well, John Holdren and James Hansen back in the early 1970s were both publically worrying about "Global Cooling". And showing remarkable versatility, both have been on the "Warming" band wagon for many years. Holdren is Obama's senior science advisor.
Hansen's focus has been on particles of carbon suspended in the atmosphere.
This elemental form is just as versatile as Hansen, himself. In the early 1970s, particulate carbon would screen energy from the sun, causing cooling. More recently, Hansen assures us is that carbon particles in the atmosphere trap the heat, causing warming.
The great Isaac Newton who discovered the laws of gravity and developed calculus spent a lot of time and effort writing about metaphysics and alchemy. Quite likely the latter was to enhance his income. Sadly, all that messing around with lead and mercury ruined his health.
In today's times, how is it possible that anyone would believe that floods or droughts are caused by allegedly "sinful" behaviour by "deniers"?
Unusually high temperatures in the 1930s and 40s were associated with the highest solar activity in over a thousand years. That temps have flat-lined over the past 17 years and nine months is associated with the lowest solar minimum since 1913. That was cycle 23. The upside on number 24 is the weakest in over a hundred years and it is rolling over now.
Mother Nature also dominates financial history and along with Mister Margin she has been confounding central banking ambition.
The 2007 boom was a Classic Bubble, and in running for 16 months against an inverted curve it was followed by a Classic Crash. Even the establishment describes the financial collapse as the worst since the 1930s and admits that the recovery has been the weakest since the 1930s. That was after boasting that a contraction was impossible.
Clearly, this was Mother Nature trying to educate the Fed. Fortunately, she continues. When will the Fed learn reality? Probably on the next contraction.
Financial markets have become even more speculative than in 1937 and the weak global recovery is fading.
By exquisite coincidence the unusually weak Solar Cycle 24 is also rolling over.
Both are contrary to government ambition and veteran researchers have known that interventions have been folly. However for the big reform, it is important that the public sees the intrusions as expensive, self-serving and just plain stupid.
On a similar discovery in 1989, a popular uprising took on a murderous police state and brought down the Berlin Wall. In the irony of ironies, the Obama administration is busily building the regulatory equivalent of the Berlin Wall.
On the corruption of science, Goethe wryly observed:
"Most men only care for science so far as they get a living by it, but they will worship error when it affords them a subsistence."
That was made in the early 1800s during an outbreak of authoritarian ambition.
It is uncertain that Goethe knew that Kepler, the great astronomer, cast horoscopes to make some money on the side. This was OK as governments were dedicated to political correctness and astrology was used to promote official dogma. One of Kepler's teachers had to teach geocentrism while privately agreeing with Copernicus.
Despite policymakers' continuous efforts they have been unable to alter the long history of booms and busts. That central bankers are merely rent seekers comes to mind and there are a couple of old quotations that will conclude this address.
Essentially, there are two ways that the state intrudes. War and policymaking. The first big example of the latter was imposed in England in the early 1600s. It was a "make work" scheme that was met by scorn from the street. A merchant called it "tyrannical duncery".
Tyrannical duncery is a cutting description that four hundred years later nicely covers today's notions about "managing" a national economy as well as the global climate. One by Upton Sinclair in the early 1900s is as instructive:
"It is difficult to get a man to understand something when his salary depends on his not understanding it."
I mentioned that it is getting scary out there. Even scarier, there are numbers.
Ninety five percent of all of the reckless central bankers who have ever lived are alive today.
One hundred percent of all the global warmers who have ever lived are alive today.
- Economic "modeling" seems as reliable as climate "modeling".
- In physics when reality does not confirm the theory, the theory is abandoned.
- Climate "modeling" seems as reliable as Macro-econometric "modeling".
Good/Bad Policy Record
The establishment enjoys the apparent prosperity of a financial bubble and believes that it can be managed. It seems that when the mania is "on" any agency will do.
|1873||Central bank on gold||Treasury System Not on Gold|
|1929||"Destablizing" Treasury System||"Scientific" Federal Reserve|
|2007||Fed Blunders in 1929||"Dream Team" would prevent a crash|
|2009||"Fannie and Freddie"||Prevented the crash from continuing|
"True, some great event may prick the commercial bubble suddenly, and create convulsions; but while the Secretary of the Treasury plays the role of banker for the entire United States it is difficult to conceive of any condition of circumstances he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representatives of gold..., and count it as much as the yellow metal itself. And altogether exercise... a greater influence than is possessed by all the banking institutions in New York."
- New York Herald, 1873
"The old breeder of financial panics, the National Banking Law, which had been a menace to American progress for two decades, has now been replaced by a modern, scientific reserve system which embodied an elastic currency and an orderly control of the money market."
- John Moody, 1929
There are many after-the-event explanations of the 1929 Crash and Great Depression. Most, including Friedman and Bernanke, suggest that the Fed was deliberately tight. Economic history seems to be the history of ideas, but a review of market history suggests great financial manias and their consequent contractions are systemic. The 2008 Crash was number six in a series that started with the South Sea Bubble of 1720. All were magnificent abuses of credit and were followed by "deleveraging" that prevailed for a number of business cycles.
One of the clearest explanations of the 1929 collapse was contained in a Barron's editorial. In real time in 1932 it pointed out that the Fed made a valiant attempt to stem the contraction:
"The Federal Reserve policy of cheapening credit through the purchase of government bonds has been unable to make a dent in the conservatism of borrower or bank lender, in short, every anti-deflationary effort has yet to provide positive results. The depression is sucking more and more bonds into its vortex."
Ironically, that was written as the initial collapse ended. It was followed by a five-year business recovery.
Then, there was Bernanke's 2002 address, honoring Milton Friedman where he apologized for the 1929 errors and thanks him and Anna Schwartz:
"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
Despite the "Dream Team" boasts, the establishment recognizes that the 2008 collapse was the worst since the 1930s and that the subsequent recovery has been the weakest since the 1930s.
An overview of all of the great financial events since the advent of modern central banking in 1694, suggests policymakers have been reactionary rather than "pro-active". The "Bubble Act" of 1720 was intended to keep the South Sea Bubble going. The Fed was established to replace the dreadful "Treasury System". Glass-Steagall and the SEC were passed to prevent another "1929".
One of the backers of the SEC boasted that it "Would put a cop at the corner of Wall and Broad Streets".
Google Search: Global Warming
- Al Gore's promotion of "Global Warming" seems to have peaked with the financial mania that climaxed in 2007.
- The "Spike" in late 2009 was in response to email revelations of bad dealings, otherwise known as "Climategate".
- With the latest IPCC report the CAGW industry has become highly energized - again.
- The latest speculative surge in financial markets has been accompanied by only a modest rise in Google climate inquiry.
Solar Activity Since 1600
- Links between solar activity, cosmic rays, cloud formation and climate trends are clearly understood.
- The "Modern Maximum" describes the latest long increase in solar activity. The greatest in over a thousand years.
- In the late 1990s solar physicists, Penn and Livingston, called for a significant decline in solar activity.
- Perhaps this latest phase of decline could be called the "Post Modern Minimum".
Warming and CO2 Disconnect
- The regular variation in the curve for CO2 is mainly influenced by the Northern Hemisphere's growing season.
- At 400 pbm, CO2 is still a trace amount and has had little influence upon the significant changes in climate.
- The "models" did not predict the flat-lining of the temperature record over past 17 years.
Antartic Sea Ice Extent: Day 142
- Determined by satellite.
- This measure is widely accepted, but not published widely enough.
- Grave concerns about the Western ice sheet melting or falling off have been in the media since the early 1990s.
- On the latest IPCC promotion of hysteria, it has been convenient to drag it out again.