In case you needed any more evidence that top policymakers are divorced both from reality and from understanding the consequences of their actions, witness Federal Reserve Board Vice Chairman Stanley Fischer’s interview today, in which he stated that “we had a financial crisis which was caused by behavior in the banking and other parts of the financial system and it did enormous damage to this economy.” Sorry, but it wasn’t bad actors in the banking system that caused the financial crisis. The Federal Reserve System was pumping money into the economy as fast as it could, pushing interest rates too low for too long and encouraging excessive risk-taking. Government housing policies were pushing for higher and higher homeownership rates, spurring lenders to reduce their lending standards to meet the government’s targets. And then once the crisis hit the Fed and the federal government tried to wipe their hands of the whole mess and blame everything on a few bad actors. That’s why Dodd-Frank and the whole mess of post-crisis regulations that have come down the pike completely missed the mark. Not only WILL they do nothing to stop a future crisis, they CAN do nothing to stop a future crisis because they misdiagnosed the cause. Dodd-Frank was just an attempt to use the crisis to force through a bevy of legislation that otherwise would have floundered in Congress for years. The worst part of it is that even after everyone will have realized that the bill was a complete flop, it will remain on the books for decades.
Fed Vice Chairman Stanley Fischer today said that weak growth in the US economy in the first quarter is likely only temporary, and that the Fed could continue on with its planned rate hikes. Time will tell whether he’s right or wrong, but there is so much evidence out there that the economy is dependent on central bank money printing for its continued health that we can’t help but think that Fischer really isn’t in tune with what’s going on. Once the central bank stock and bond purchases wind down, stock markets will lose their luster, markets will begin to panic, and in the absence of any further quantitative easing the malinvestments that have been propagated through a decade of easy money will eventually be brought to light. Fischer, like most economists of the past few decades, doesn’t understand the consequences of his actions because of his failure to believe the teachings of Austrian Business Cycle Theory. That disbelief is irrelevant, however, and the consequences of the Fed’s decisions will occur regardless. When they do, let this post be a reminder that the Vice Chairman of the most powerful central bank in the world didn’t see the crisis coming.
With Janet Yellen not attending the Kansas City Fed’s annual Jackson Hole economic symposium, interest among the media in the symposium had waned in comparison with previous years. However, this week’s market events have renewed interest in the event, raising questions about whether the symposium’s speakers will address the recent market volatility. Even though Chairman Yellen will not be speaking, that probably isn’t that important, as Fed Chairmen watch their words carefully to avoid roiling markets. Fed Vice Chairman Stanley Fischer’s speech will probably be a better and more important indicator of the Fed’s direction than anything Yellen might have said.
The bank bailout of 2008, in which banks received $700 billion in emergency loans to keep them afloat, touched a nerve among the American people. Never in my time working for Dr. Paul had I seen such vehement resistance to a bill. At the time, our email system still operated by printing out individual emails…