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It may be one of the greatest and most courageous speeches ever spoken. It is arguably one of the most important speeches ever given in the United States, considering the current fragility of the national economy and the central position that the financial system presently plays in American society. Earlier this month, Robert Wenzel of the Economics Policy Journal spoke to the New York branch of the Federal Reserve. In his speech, he called the central bankers to account for their complete failure to provide the economy with either of their two responsibilities set by the U.S. Congress, price stability and full employment.
Thank you very much for inviting me to speak here at the New York Federal Reserve Bank. Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.
That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System.
My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macro-economy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.
I simply do not understand most of the thinking that goes on here at the Fed, and I do not understand how this thinking can go on when in my view it smacks up against reality.
Part of the reality that Wenzel describes is that there have been 18 economic recessions in the United States since the Federal Reserve was first established in 1913. During those 99 years, prices have not remained stable, but have risen 2,241 percent. It goes without saying that as an institution, the Federal Reserve has been a complete and utter failure.
Wenzel’s speech and his public explication of the failure of the Federal Reserve were fascinating, being analogous to Daniel not only entering the lion’s den voluntarily, but with the intention of converting them to vegetarianism. And what is frightening was not his failure to convert them, but rather the way in which the responses of the Federal Reserve economists to whom he was speaking revealed their fundamental ignorance of basic economic theory and the differences between the various economic schools.
I then asked one economist (a 20-year plus veteran of the Fed) if he was familiar with Austrian economics. He said that in college he had taken two history of economics courses and then said that the Austrian school is part of the classical tradition. This told me that he was not aware of the important differences between the Austrian school and classical economics (and also the neo-classical tradition).
Later on in the Q&A, one economist remarked that he understood the Austrian school and that they were the group that wanted a constant increase in the money supply and developed the equation PV=MT. This, of course, is not the Austrian view, but a view held by the Chicago school. Thus, in one swoop, this economist demonstrated not only his ignorance of Austrian views on monetary policy, but also confusion about Chicago school views.
This glimpse into the inner mindset of the elite economists at the Federal Reserve indicates that not only is there no chance that the Federal Reserve can successfully fix the financial crisis that ails both the national and global economies, but that the organization does not even possess the intellectual tools that are required to begin properly assessing and diagnosing the problem. Because it possesses a hammer, the ability to lend money and influence interest rates, the Federal Reserve is assuming that the problem must be a nail, and so they have followed the lead of the Bank of Japan in driving effective interest rates down to zero and keeping them there for several years now.
But Japan’s interest rates have been 0.5 percent or below for 17 years now, since October 1995, without solving Japan’s economic problems. Can Americans really stand 14 more years of a sluggish economy propped up by nothing more than artificially easy money created by massive government borrowing? Can they stand even four more years?
It is unfortunate, though expected, that the economists of the Federal Reserve refused to accept Wenzel’s invitation to walk out of the building with him, never to return. But perhaps we can hope that some of them will eventually begin to look outside of the little intellectual box they have closed around themselves and realize that their economic models are hopelessly flawed. Until they are able to correctly diagnose the problems that ail the economy, they will not be able to fix them.