Our central bankers are intellectually bankrupt

The best article we’ve seen in the FT for a long time, courtesy of Ron Paul …

The financial crisis has fully exposed the intellectual bankruptcy of the world’s central bankers.

Why? Central bankers neglect the fact that interest rates are prices. Manipulating those prices through credit expansion or contraction has real and deleterious effects on the economy. Yet while socialism and centralised economic planning have largely been rejected by free-market economists, the myth persists that central banks are a necessary component of market economies.

Continue reading …

6 Comments

  • I agree with some of Paul’s points and not others.

    His claim that central bankers have “confused money with wealth” is nonsense. Everyone from Keynsians to Marxists to Monster Raving Lunies has worked out that a fiat represents wealth for the holders of the currency, but from the view of society as a whole, fiat currency is worthless.

    His claim that “financial panics” have got worse since governments / central banks started trying to manage economies is not born out by this chart:

    http://ralphanomics.blogspot.co.uk/2011_08_01_archive.html

    I quite agree with his attack on manipulating interest rates. We’ve just had a credit crunch caused by excessive and irresponsible borrowing and what do the authorities do? They cut interest rates so as to encourage more borrowing. You just couldn’t make it up.

    In fact that’s an example of what Joseph Goebbles called the “big lie”. That is if you say something not quite correct, your critics will point out the mistake. But if you say something totally and completely one hundred percent absurd, it’s quite likely the sheeple will believe you.

    I set out a whole string of other reasons for thinking that interest rate manipulation is not a good idea here:

    http://ralphanomics.blogspot.co.uk/2012/03/sixteen-reasons-why-mmt-is-right-on.html

  • Paul Marks says:

    The chart is almost unreadable Ralph.

    However, (chart or no chart) the boom-busts are made worse by government intervention. For example the credit money boom caused by the monetary policies of the Civil War and the inveitable bust afterwards.

    As for directly before and after the introduction of the Federal Reserve – well the crises of 1920-21 (let alone 1929) was worse than the crises of 1907 (the excuse given for the creation of the Federal Reserve.

    But even that misses the point as even the pre 1913 system had massive governmnent distortions in it.

    For example the National Banking Acts (passed during th Civil War) were a demented system. Although not as demented as the Federal Reserve system that replaced them.

    Before the Civil War there were two efforts to create a American “National Bank” (both government efforts caused chaos) and various terrible interventions at State level – for example Andrew Jackson did not support a National Bank, but he put government money into State level “pet banks” (which was at least as bad).

    Only Martin Van Buren (with his strict policy of taking tax money in and paying it out as the government spent it – strict pay-as-you-go) seems to have understood the need to keep government and banking strictly separate.

    Bankers hate just being money lenders (lending out real savings) – in the short run pyramid (“credit expansion”) schemes are much more profitable.

    And the long run?

    Not so much “in the long run we are all dead” – more “when the bust happens the government will help us – with suspension-of-cash-payments and so on”.

  • Paul Marks says:

    Of course I agree with Ralph Musgrave about the terrible idea of government manipulation of interest rate (i.e. backing credit money expansion – which is what this is really about, the dream of “cheap money”).

    Yet nothing has been learned – neither Alan Greenspan or Mr King of the Bank of England has admitted what they did (indeed Mr King words of a few days ago were straight from fantasy land).

    And Mr Cameron and Mr Osbourne continue to go about “getting the banks lending” and the wonders of “low interest rates” (“monetary stimulus”).

    • mrg says:

      “neither Alan Greenspan or Mr King of the Bank of England has admitted what they did”

      It’s odd, because both men are aware of the evils of our current system.

      Greenspan was an associate of Ayn Rand, and once wrote:

      In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

      This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

      Gold and Economic Freedom, 1966
      http://www.constitution.org/mon/greenspan_gold.htm

      King declared in October 2010 that “Of all the many ways of organising banking, the worst is the one we have today”

      http://www.cobdencentre.org/2010/10/liam-halligan-mervyn-king-makes-a-stand-for-reform-as-banks-seem-intent-on-forgetting/

  • Paul Marks says:

    mrg – Ayn Rand was right to throw that dinner plate in Alan Greenspan’s face. He was a phony and the lady spotted it.

    Those who thought Ronald Reagan had appointed a hard money (borrowing must be from real savings) person to be Chairman of the Fed simply had not researched Greenspan’s record. If he really been anti credit bubble he would never have been suggested to President Reagan in the first place.

    By the way Reagan was not alone in not being a expert on monetary expert – the last President who, at least argueably, had some knowlege of the subject was Grover Cleveland (that is right neither Harding or Coolidge understood monetary policy – see Ben Anderson’s “Economics and the Public Welfare”, “what about the other Presidents Paul?” errr they are not worth considering).

    On the Mr King….

    Too vague. I have seen no evidence (in either word or deed) that Mr King has a decent knowledge of money and banking.

    • John says:

      I haven’t seen any solid references to validate the Ayn Rand-Greenspan story. Apocryphal stories should not be quoted as fact.

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