Monday, September 28, 2009


Bernanke Considers the Biddle Option?

In a fascinating article, Lilburne explained that Nicholas Biddle did what he could to wreck the US economy to prevent Andrew Jackson from de-chartering the Second Bank of the United States. Is Bernanke thinking of something similar? From Bloomberg (HT2LRC):
Federal Reserve General Counsel Scott Alvarez said audits of monetary policy by the U.S. Congress could lead to higher interest rates and reduced confidence in central bank policy.

Congressional audits of monetary policy could “cause the markets and the public to lose confidence in the independence of the judgments of the Federal Reserve,” Alvarez told the House Financial Services Committee today in response to a question from Representative Dennis Moore, a Kansas Democrat. Alvarez said in his prepared remarks the audits would probably “chill” the central bank’s discussions on interest rates.
Now this is interesting. When the "audit the Fed" movement first came on the scene, the Fed apologists warned, "This will cause the Fed to keep interest rates too low for too long. When the Fed decides it needs to raise rates to prevent inflation, Pelosi and Reid will butt their noses in and insist on prolonging the period of easy money."

Well the threat of inflation didn't scare off the villagers, so now the Fed is threatening us with higher interest rates if we don't mind our own beeswax and stop asking how many billions they shoveled out to particular financial institutions, foreign and domestic.

In fairness to the Fed apologists, these two threats aren't mutually exclusive, because nominal interest rates alone do not completely summarize Fed policy. Because of the loss of "independence," the Fed might pump in more money than it otherwise would, leading to higher dollar-prices. At the same time, because of world investors' loss of confidence in the Fed's ability to contain price inflation, long-term interest rates on dollar-denominated assets might be higher than they otherwise would be. So, it's not really a contradictory threat of "we'll have interest rates that are too low and too high simultaneously." Rather, the Fed officials could argue that the tradeoff between interest rates and (price) inflation will shift against the US--meaning the Fed needs to jack up interest rates to ensure a given level of price inflation--while the interference from Pelosi & Co. will force the Fed to err on the side of high inflation, on this new tradeoff.

Even though one could synthesize the two warnings in the above fashion, I think what's really going on is that the Fed officials like the current situation just fine, where they can literally write as many checks as they want, backed up by an infinite amount of money, and they don't even have to tell Congress (let alone CNBC) who got how much money.

Why not tie inflation to Bernanke's salary, i.e. for every percentage point increase in inflation, his salary is reduced by the same rate. That way, as you Americans put it, he would have "skin in the game."
@downunder hahaha good one. But the Fed real objective is to create inflation and make prices rise.
Downunder, I don't think Bernanke is being motivated by his current, official paycheck. After he retires he will have all kinds of consulting opportunities and huge speaking fees, just like Greenspan right now. I think that's the way the system works. Same for Pentagon procurement officers who steer lucrative defense contracts to certain firms, then get taken care of when they retire.

Say, didn't Robert Wenzel have this story back in July?
I know Biddle didn't have the best of intentions when he removed the easy credit from banks and such, but... wasn't it actually the best thing for the economy at that time? I remember reading an article about it in
Anonymous, from my article...

"As is well known to readers familiar with Austrian Business Cycle Theory, Biddle's contraction of money substitutes that were pyramided on top of the specie supply was actually a good thing: it only brought on the necessary correction that, if postponed further, would have eventually been even worse. But obviously his motivations for the action were deplorable, as well as highly telling about the attitude of central bankers."
My suggestion was 'tongue-in-cheek.' Nonetheless, as some economists are fond of saying "incentives matter." If the central bank's role is to prevent inflation, yet creates it, the incentives must be horribly wrong.

Lol thanks, I remember reading it and it was very well written. I've only recently been introduced to Austrian theory, but it's incredible to say the least. Hopefully once I get back to the states and start going to school I combat all the non-sense put out these days because I'll have made a strong foundation or myself out here thanks to ppl like you =]
Congrats on discovering sound economics and good luck with your studies!
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