Gold & Silver, STAFF NEWS & ANALYSIS
The Fed in the Cross Hairs?
By Staff News & Analysis - November 16, 2009

Among the cherished prerogatives of members of Congress is the right to second-guess. That ritual is playing itself out with a vengeance as the solons of Capitol Hill attack the Federal Reserve for its role in last year's financial crisis. The Fed made its share of mistakes in creating the bubble economy. But once the crisis hit, it was the Fed's innovative, try-anything response that saved the country from what might have been another Great Depression. Fed Chairman Ben Bernanke deserves a public "attaboy" for finding ways to pump liquidity into credit markets that were on the verge of freezing up tight. Instead, he's getting a congressional raspberry. Bernanke's creative policies in 2008 were possible because of the Fed's political independence and its wide-ranging authority. Those broad powers are now under attack: Congress is proposing new limits on the Fed's role as financial supervisor and "lender of last resort" that could prevent it from responding as aggressively to the next crisis as it did to the last one. – Washington Post

Dominant Social Theme: Central banking is misunderstood.

Free-Market Analysis: We used to admire the mainstream media in our youth and various editors of the Daily Bell have met some of the West's sharpest journalists in younger years. What was it like? Well, the top guys and girls for the top media are all razor sharp. Imagine the "braniac" who sat in your class during grade school. Now imagine he is all grown up and a pretty tough fellow. That's the kind of individual who works at the top levels of major media in the West, at least in Britain and the US. The author of the story described above, "The Fed in the Cross Hairs," is doubtless the same sort of individual – and even moreso – the journalistic equivalent of a top gun, the brightest of the brightest, perhaps the best of the best. Here is some of his bio from Wikipedia:

David R. Ignatius (May 26, 1950), is an American journalist and novelist. He is an associate editor and columnist for The Washington Post. He also co-hosts PostGlobal, an online discussion of international issues at Washingtonpost.com, with Newsweek 's Fareed Zakaria.

Ignatius's father, Paul Robert Ignatius, is a former Secretary of the Navy and president of The Washington Post.

Ignatius was raised in Washington, D.C., where he attended St. Albans School. He then attended Harvard College, where he was an editor of the Harvard Crimson and from which he graduated magna cum laude in 1973. After college, he was awarded a Frank Knox Fellowship by Harvard and studied at King's College, Cambridge, where he received a diploma in economics. He is married to Dr. Eve Thornberg Ignatius, with whom he has three daughters.

After completing his education, Ignatius was an editor at the Washington Monthly before moving to the Wall Street Journal, where he spent 10 years as a reporter. At the Journal, Ignatius first covered the steel industry in Pittsburgh. He then moved to Washington where he covered the Justice Department, the CIA, and the Senate. Ignatius was the Journal's Middle East correspondent between 1980 and 1983, during which time he covered the wars in Lebanon and Iraq. He returned to Washington in 1984, becoming the Journal´s chief diplomatic correspondent. In 1985 he received the Edward Weintal Prize for Diplomatic Reporting.

In 1986, Ignatius left the Journal for the Washington Post, from 1986 to 1990, he was the editor of the Post's "Outlook" section. From 1990 to 1992 he was the paper's foreign editor, and oversaw the paper´s Pulitzer Prize-winning coverage of Iraq's invasion of Kuwait. From 1993 to 1999, he served as the Post's assistant managing editor in charge of business news. In 1999, he began writing a twice-weekly column in the Post on global politics, economics and international affairs.

In 2000, he became the executive editor of the International Herald Tribune in Paris. He returned to the Post in 2002 when the Post sold its interest in the Herald Tribune. Ignatius continued to write his column once a week during his tenure at the Herald Tribune, resuming twice-weekly columns after his return to the Post. His column is syndicated worldwide by The Washington Post Writers Group. The column won the 2000 Gerald Loeb Award for Commentary and a 2004 Edward Weintal Prize. In writing his column, Ignatius frequently travels to the Middle East and interviews leaders such as Syrian President Bashar al-Assad and Hassan Nasrallah, the head of the Lebanese military organization Hezbollah.

Such a bio is itself a stirring accomplishment, given the maelstrom of professional media competition. But even given all this, and more (he is a novelist as well), we have to wonder how such a brilliant individual can write about the Federal Reserve without ever wondering out loud (in print) what it actually does.

What exactly? Why what central banks always do. It FIXES the price and quantity of money. There is no getting around it. How can anyone with an intellect of the caliber of Ignatius treat the Federal Reserve's activities as a net positive? Price fixing NEVER works.

Ask almost any economist if price fixing works, even one with socialist sympathies and they will likely tell you as a rule that price fixing is distortive and fails miserably at its objectives. Only the market can set prices. That is the job of Adam Smith's Invisible Hand. We're positive that Ignatius believes in the redemptive competence of the Invisible Hand (competition) so how can he set this all-encompassing economic rule aside when it comes to monetary policy?

Here is a superb mind, a man of terrific accomplishments, a fabulous writer, likely close to a genius in certain aspects of his intellectual life, who, nonetheless, despite all of his erudite qualities, is apparently comfortable penning an article in fairly fervent defense of central banking.

It would be easier to understand in the 20th century, but go on the Internet and type in central bank and see what you get. Devastatingly cogent criticisms have been leveled at central banking by wonderfully educated individuals, not all of them hard-core free-market ideologists, by the way. Logically speaking, central banking does not work because it CANNOT work. Price fixing never works. It always leads to calamitous results because eventually the market itself adjusts, often devastatingly so. Here's some more from the article:

The political challenge to the central bank's authority comes at an especially delicate moment — as the economy begins to rebound and the Fed considers future tightening of monetary policy. It will need public support to combat inflation. But as the New York Times noted in a front-page article last week, the Fed is "under more intense attack than at any time in decades," from both left and right. …

Fed-bashers have an unlikely new champion in Sen. Chris Dodd, who introduced a bill last week that would

strip the central bank of most of its supervisory functions. The Connecticut Democrat said that the Fed had been "an abysmal failure" as a regulator and that its powers should be given to a new supervisory agency that, presumably, would be subject to greater congressional oversight.

How did Dodd, the gentlemanly chairman of the Banking Committee, suddenly become a neo-populist after five terms in the Senate? The answer is that in the era of anti- government indignation, Fed-bashing seems to be good politics. Dodd faces reelection next year, and he's already being attacked for supporting policies that contributed to financial bailouts. …

Dodd's newfound skepticism about the Fed is symptomatic of the central bank's larger problem. With unemployment above 10 percent, the public is angry about last year's financial crunch — and looking for people to blame. The Fed is just elitist enough, and Bernanke is just enough of a professorial egghead, to make them targets for popular anger.

Bernanke's supporters offer a simple argument for maintaining the Fed's current role in supervising banks. Without it, they say, the Fed would lack the information — and the "feel" for the markets — to intervene effectively in a crisis. Countries that tried to separate central banks from financial regulation, such as Britain, are now regretting it, the Bernanke camp argues. To act effectively as lender of last resort, the Fed's proponents say, it must know its customers — which will be much harder if it's stripped of its current regulatory role. …

Perhaps it's a harbinger of good times that Congress now wants to reassert its authority. But it would be stupid, even by congressional standards, to enfeeble the Fed — one of the few institutions that actually rose to the challenge in last year's crisis.

There is so much here that someone could respectfully take issue with from a free-market perspective. Yes, Ignatius magnificently summarizes a complex intellectual debate in broad and decisive strokes – and we would expect no less. But we have to wonder at some of the assumptions.

• Is "bashing the Fed" just a neo-populist occupation?

• Is the public angry at the Fed just because it is an easy target in economic hard times?

• Is Ben Bernanke a special target of wrath because he comes across as an egghead?

• Is the Fed in danger of losing its "feel" for its customers if it ceases to supervise banks?

• Is bashing the Fed a bad idea because the institution has risen to the challenge of salvaging the markets?

What may be the single most important breakthrough in modern economics is Carl Mengers' elucidation and subsequent elaboration on the concept he spawned "marginal utility" – the idea that prices fluctuate at the margins and that only the market can determine prices day-to-day, hour-to-hour or even minute-to-minute. From Mengers' inspiring observations, elaborated on by a host of economic geniuses thereafter including FA Hayek and Ludwig von Mises, we have come to realize that central planning cannot work, that econometric forecasting (still the basis for much economics today) is not feasible and that only the market can determine value.

It was, within this context, that Ludwig von Mises composed Human Action, a virtually Shakespearean paean to the glories of the human spirit and its ability to adapt to vicissitudes without the help of central planning or authority figures. In fact, human action and marginal utility are the reasons that central planning doesn't work. Taken together, the human spirit and the Invisible Hand are eternally resistant to top-down Western-style planning or its exaggerated counterpart, tyranny.

Government simply cannot tell people what to do. Over the long term an elaborate and overly controlling government lapses into authoritarianism and thence into decay. So, we ask … is the intellectual landscape as described above a "populist" one? Is the Fed merely the recipient of wrath because Ben Bernanke is not a sufficiently dynamic speaker? Is bashing the Fed a bad idea because it is a worthwhile though misunderstood, institution? We are only asking these questions rhetorically. The answer to all of them is "no."

Central banking was a bad idea 300 years ago and it is a worse idea today because generations of brilliant free-market economists have laid an unimpeachable intellectual foundation for its demise. These arguments, long suppressed, have found their way to the Internet where they have inspired millions, especially young people. These are not populist arguments and they are not simplistic, and they are not to be dismissed without proper counter-arguments.

But there are none. We invite anyone to an open and fair ‘Net-style debate on these issues.

If people with Ignatius' intelligence and accomplishments would only examine their assumptions a little more clearly before they take pen to paper, we think the Western world would be a good deal better off. People such as Ignatius are seemingly the rarest of the rare (one needs only read his bio to see this). They are virtually born to inspire others. It is very sad, in our opinion that such leading thinkers and doers do not seem to grasp the inadequacy of the West's fundamental institution, the central bank.

Having written all this we want to be clear that while we mourn the lack of enthusiasm for free-markets by the most spectacularly brilliant of the West's current success generation (including Ignatius), we are not dismayed, over-all, with what is occurring. The tide, we believe, is turning, even if the progress in many cases cannot be seen (or even measured).

In the case of central banking, however, the changes are obvious. Here is Ignatius penning an article of which the title is "Fed in the Cross Hairs." Dear readers did you ever think you would see the day? Somewhat immodestly (please forgive us) we want to say we DID.

When we first wrote that the central banking meme as we currently understand in the West, especially in America, was virtually over (because it is virtually impossible to defend the impossible yet this is what must be done thanks to the Internet), there were probably few who agreed with us. Let us repeat: central banking as an institution is in trouble. It is in trouble because it is not defensible. Yet in the 21st century it must be defended openly and aggressively.

We don't think it can be done. We anticipate more erosion of support for central banking – and other memes of the monetary elite as well. Of course, even (especially?) today our optimism is mistaken for naïveté and our perspective on the West's coming freedom is seen merely as cheerleading. But it is not so. The Internet has ALREADY made a difference. The education has ALREADY taken place. Changes are coming.

After Thoughts

We try to end at least one of our articles in the Daily Bell by calling for a private-market gold and silver standard. We know many readers consider this pie-in-the-sky. We do not. Despite the lack of progress for free-market principles among the best and brightest such as Ignatius we predict there are fundamental reconfigurations that will arrive at some point, maybe sooner, maybe later. They will not all be disappointing.

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