…with his eyes closed.
Recently Steve Forbes interviewed John Mauldin on the occasion of Mauldin’s new book, “Code Red.” Mauldin, while getting much better at blaming the Fed, is getting no better at seeing the solution. (All emphasis added to cited passages.)
John Mauldin: Part of the reason we had this very crisis was because of central bank policies and government regulations and the interweaving of large investment banks and politicians and central bankers. I don't want to get into conspiracy theories; I think it's just people's self-interest.
Steve Forbes: How about a stupidity theory?
JM: Some of it was stupid, but some of it was just greed.
Central bank policies and government regulation weren’t “part of the reason we had this very crisis”; these were precisely the reasons behind the crisis.
Mauldin doesn’t want to “get into conspiracy theories,” but without doing so he can never get to the right answers. As he is not a stupid man, I can assume he doesn’t want to get to the right answers…publicly.
No part of it is a “stupidity theory.” Every part of it is doing what was intended – support and bailout the money center banks; finance federal government largesse; be one of the key tools in control by the elite. That, at times, the sausage making becomes visible to the general public does not change the underlying success of the endeavor.
This is the conspiracy – that stuff about controlling inflation and reducing unemployment is only offered for public consumption. Mauldin is looking for the pea under the wrong walnut shell. In any case, the majority are now conspiracy theorists – come on in, John, the water is warm!
JM: Nonetheless, we had a crisis. The banking system froze up. We went to the edge of the abyss. We looked over and it was a long way down. And I believe central banks appropriately provided liquidity. That was their function, and I would argue that almost the sole true function of a central bank is to be there when the stuff hits the fan.
SF: To be what Bagehot called the lender of last resort.
JM: Yes, the lender of last resort.
This isn’t the “sole true function of a central bank.” Central banking is a good job if you can get it – get paid to create a crisis, and get paid more to solve it; all the while, have the wealthiest people in the world as your supporters. Behind those wealthy supporters will be found the “sole true function.”
As to Bagehot, assuming one even buys into the idea of a government-enabled monopolist “lender of last resort” (aka central banks), Forbes and Mauldin whiz by Bagehot’s words – using his name while bastardizing his concept:
First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.
Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm, and nothing therefore should be done to cause alarm. But the way to cause alarm is to refuse some one who has good security to offer...
A high rate of interest, raised early in the panic; a heavy fine; advanced against good securities. None of this applied to the actions taken by the Fed in the period 2007 – 2009. Yet Mauldin cheerleads the Fed’s initial actions – none of which were influenced by Bagehot – as necessary, and then falsely cites Bagehot for credibility.
JM: The problem is, when you want to end that addiction, whether it's alcohol or drugs or quantitative easing, withdrawal is not going to be pretty.
Mauldin rightly sees the Fed as a drug pusher, finding this a more intellectually satisfying perspective than actually peeking behind the curtain – avoiding any possibility of a conspiracy theory.
Next, Mauldin describes how Fed economists could not be wrong more often – even if they actually tried to be wrong all the time on purpose:
JM: Now, as we discuss in several chapters of the new book, Fed economists are particularly bad at predicting the future. It's worse than if you and I just flipped a coin. Okay? It's almost statistically impossible to be as bad as central bankers are at predicting the future.
This is worth considering: the best and brightest economists in the world (such as they are) are either employed by central banks or are advising them. The best and brightest. Nowhere can better be found. Yet they are wrong more often than a coin flip.
What if we allowed the same leeway to aerospace engineers? Structural engineers? Doctors? Automotive engineers? To ask the question makes obvious the fallacy of macro-economics and econometrics – it isn’t a numbers game, despite all of the pretensions to the contrary.
Let’s see if Mauldin allows this to alter his thinking – thinking about central banks predicting problems; central banks taking action to mitigate the consequences of these predictions; and, why not John – at least offer the possibility – even questioning the need for a central bank in the first place.
JM: So it doesn't end well. We have 12 men and women sitting in a room thinking they can manipulate an economy with data they don't truly understand and that they can't actually measure with tools they're making up as they go along. Is that passionate enough, Steve? I get wound up, but their actions have consequences.
“Manipulate an economy.” Mauldin clearly sees the vile nature – what does it mean to “manipulate an economy”? It means to put a central planner in between two otherwise willing market participants from conducting a transaction that they each find beneficial. It means supporting transactions that would not otherwise occur in a free market.
Central bankers don’t know what they are doing, and they are making it up as they go along. This is pure Hayek. Mauldin is on the right track. He is getting passionate. He is wound up. He is trying to sell a book to an audience that knows much more than he does (or that he is willing to state publicly) about the reality of central banking. Will he allow himself to get to the only logical conclusions based on his observations?
SF: Now, that leads into a quick, interesting subject. Why are so many people intimidated by monetary policy? Capitol Hill, for all the stupidity there, people do master, many of them, complex subjects. What's the inhibition about monetary policy?
JM: Steve, it's magic. Okay? Economists would like to think that…
Forbes: So maybe David Copperfield should be Fed?
Mauldin: David Copperfield might do as good a job.
One did master the subject. Those in positions of power mocked him; however, he succeeded in changing the dialogue permanently.
Magic. Voodoo. Witch doctors. At least Ambrose Evans-Pritchard was not too shy to state it publicly:
The question is whether the public welfare is best served by popping the bubble and allowing Austro-liquidation to purge the toxins, or whether this would be ruinously destructive. Many readers think it is past time to dynamite this edifice. I have much sympathy with this view. Yet in the end, I prefer magic.
This takes courage. At least Ambrose confessed his faith, despite the faith being in a false god.
Mauldin then gets close the edge regarding the fallacy of econometrics and macro-economic models…close, but again purposely choosing not to open his eyes:
JM: Economists like to think that we can create models full of equations; we have physics envy. But economics is art as much as it is science. It is not something that is to the level yet – maybe in the future, with new systems and new theories – but we are not yet able to truly model an economy and to understand what the inputs are.
SF: Can't model one person, for cryin' out loud.
JM: Well, I have trouble modeling my seven kids. Just like you – we were talking about your daughters. Life is amazingly complex.
It isn’t “physics envy”; it is power envy. It is difficult to imagine a more powerful (visible) position than that of having control over the one economic good used in every single transaction in a modern division-of-labor economy.
Forbes gets close enough to the truth – modeling the behavior of even one person is not possible. Yes, John, life is tremendously complex. As human life is subject to human action, it cannot be modeled.
JM: And when we try to manage the ups and downs by not allowing the system to correct in minor ways, then we build up the potential for a very large correction.
SF: Sort of like suppressing forest fires?
JM: Like suppressing forest fires. It's a great analogy. In fact, we use it in our book.
Forest fires – another area of life managed by the government, and another failure. But at least the firefighters don’t deliberately cause the majority of fires they must then fight (hey, maybe the police could learn a thing or two from this, but I digress). I wonder if John mentions this in his book….
JM: One of my questions to Janet Yellen – we were talking about this earlier – if I was on the Senate committee, I'd ask, "What's the theoretical limit? Is there a theoretical limit to the Federal Reserve balance sheet?" Now, you and I and most right-thinking human beings and economists would say, "Well, yes, there has to be a theoretical limit." Well, what is that theoretical limit?
John, if Yellen answered your question would her answer even be meaningful? You already said they are wrong far more often than they are right – wrong more times than seems statistically possible. If Bernanke told you in 2007 that the theoretical limit was $4 trillion, you would have thought him a fruitcake – yet we are there today with no significant visible ramifications and no end in sight.
They will keep expanding until either inflation as expressed in the CPI exceeds a politically acceptable threshold of pain, or the reduction in the average standard of living causes the public to rebel. It is possible the second could happen before the first – and either could be years, if not decades, from now.
Unlike the John Mauldin of old, who believed that it was possible that wise policy makers would pull us through, he now believes otherwise:
JM: This just doesn't end well at some point…. The Federal Reserve doesn't have that. They're making it up as they go along.
John, John, John. They are in charge of one side of every single transaction in the division-of-labor economy. If they fail, they run the risk of countless hundreds of millions dead. You know they are making it all up; you know they don’t know what they are doing; you know that they can’t ever know what they are doing. Will this knowledge lead you to the only logical conclusion?
SF: What would you do? How would you try to get us out of this mess?
Here is your chance, John. Open your eyes and look into the abyss.
JM: I would become kind of like Volcker was back in the '80s, when he was burned in effigy. If you remember…
Not quite the right answer. In any case, are you ready for the consequences of this “Volcker” medicine? It will make the late 1970s and early 1980s look like happy days – the dot com boom and real estate bubble all rolled into one.
JM: …I would not immediately end quantitative easing because God knows that could be terrible. But I would begin to taper. I would probably, contrary to some of my more aggressive fellow analysts, I would just say, "Ah, the Fed's got a $4 trillion balance sheet. Leave it alone."
First, let’s deal with a seeming contradiction. Mauldin would not immediately end QE; he would only begin to taper. Then he speaks as if the balance sheet would remain at $4 trillion. My math doesn’t work the same as his, I guess.
Second, how is Mauldin going to know any better than the best-trained economists in the world when the right time is to taper, and how fast? What makes him so smart – after spending so much time describing how terrible the central planners have been at this.
Third, what does he think tapering would do? We saw a taste – and only a taste – of this a few months ago, when there was only a rumor of tapering. Austrians make clear – slow down on spiking the punch and the party will come crashing down (although, given the excess reserves, there could be a different path ahead – at least for a time).
Does he have any better answers than purposely crashing the economy?
JM: And you allow rates to rise to a somewhat more natural rate. We don't have enough time here now, but there is this concept of the natural rate of interest.
Ahhh…another “concept.” I am sure there is some formula used to arrive at this “natural rate of interest.” Another example of economists having “physics envy.”
There is a scene from “My Fair Lady,” in which Eliza Doolittle sings to Freddy, her wanna-be beau:
Words, words, words
I'm so sick of words
I get words all day through
First from him now from you
Is that all you blighters can do?
This is what we get – words, words, words. Every economist and pretend economist (but I repeat myself) has an opinion about what should be done next by the central planning policy makers. They talk on and on, for hours and hours, trying to explain the reasons behind their wisdom – while all-the-while fewer and fewer are paying attention.
John, please say you are going to move beyond such shallow words. To quote Eliza, “If you’re in love, show me!” (Well, not me…wow, that didn’t come out right…well, you know what I mean.)
I’m still waiting, is Mauldin going to move beyond the same old words – just one more centrally planned solution?
JM: We're talking eight years of artificially low, financially repressed interest rates? That is theft. And what it is is a theft of time. Because we have a generation of people who have played the game by the rules. They've saved their money. They've done what they were supposed to do…. What we need is to understand that we have stolen time from people when that was the only thing they had.
John, even you describe it as theft. Doesn’t this lead you to some better conclusion…finally? Even if you cannot conclude the right answer from a pragmatic viewpoint, don’t you see the immorality of the institution?
JM: And when you take it from them, you're taking away their lifestyle. You're taking away their ability to enjoy what should have been a golden time.
The theft isn’t just from those who have saved – it is a theft from the productive to the non-productive; from the independent to the dependent. It is the entire meaning and purpose of government.
SF: Now, well, we'll get to what you recommend in the book.
Finally! Do it John – Forbes is giving you another chance.
JM: The reigning theoretical economic paradigm is one of, let's call it neo-Keynesianism. I don't really think Keynes would be completely on board with it today. And it has a fetish for consumption. They want to drive consumer spending. And the way you drive consumer spending is to make money cheap so that people can buy cars and other stuff at lower prices.
But consumption debt is what leverages what the Keynesian economic guys seem to be wanting to produce. And it does spur income and investment today, just like the housing bubble did.
The state values increased economic activity – it drives increased tax revenue. This is one reason the state desires cheap credit. Then, when default occurs – for example, when a homeowner defaults on his mortgage after the housing bubble – the amount defaulted becomes taxable income! What a scam!
But John, we are still waiting for a solution – and please, not just another version of central planning:
JM: It would be more appropriate, I think, to target income. That's the important part of what an economy should be doing. How can we produce more income? How can we produce more profit?
That’s it. Target income. This is the new-age argument, exemplified by Michael Woodford. My centrally planned solution is better than your centrally planned solution.
Words, words, words; I'm so sick of words….
Mauldin keeps his eyes closed, despite all of the evidence he presents as to the problems of central planning money, credit and the economy. He is walking to the edge, but doesn’t want to open his eyes – at least not publicly.
And Forbes advice?
SF: Well, buy Code Red, damn it.
I guess Forbes is also getting “passionate” and “wound up.” But I guess this is the point. Try to convince those who know better about the roots of the problem that you are one of them, but keep your good name with your mainstream friends by not calling for the only obvious solution.
Central planning has failed everywhere it has been tried. In this, the evidence is overwhelming – far more than a coin flip or a statistical probability. Money and credit cannot be successfully centrally planned any better than any other economic good – if success is to be defined by what is best for the overall health of the economy. There is only one solution to this problem, if John cares to ever open his eyes:
End the Fed.