Inflation Ahead

Adjunct Prof. Easton Confronts Ex-Professor Bernanke, Asks a Key (Dodged) Question. Conclusion? Mass Inflation. Soon.Gary North
Jan. 29, 2009
From time to time, Terry Easton teaches economics at San Jose State University. I spoke to his clasees in the spring of 2008.
Recently, he attended a meeting at the London School of Economics as a representative of Human Events, the conservative newspaper. He is not a Keynesian.
He asked a key question after Dr. Bernanke's speech.
I'm Terry Easton with Human Events newspaper in Washington D.C. The concern that we have is that right now we're dealing with this problem looking at the forest at the tree level, in fact probably down on the ground looking at the blades of grass growing, and you seem to be dealing with it as all people are in all similar institutions worldwide, as a classic Keynesian approach to solving the problem.
And of course here in the London School of Economics, there is some knowledge of another alternative approach to the problem, known of course as the Austrian school. von Mises, Hayek, Rothbard, et cetera, have suggested an alternative to this 90-year edifice that we've built, which now is coming back to roost, and I wonder if it's possible, realizing that your position is the head of the Fed, can you talk a little bit about the underlying system that has now existed for 90 years? Are we going the right way? Can we fix it? Should we look at these alternatives to the problem? I would be interested in your philosophical comments.
Then came Bernanke's dodge. He began, as Keynesians always do, with a defense of the free market. Then they follow with "But...."
Bernanke: Well, the question is related to the former one. It has to do with the value and the benefits of markets. I think economists are often accused of being market fundamentalists, I think in fact economists have done a better job than anybody of figuring out what markets can do well, and what they don't do so well, when there are problems with information or other things.
And economists have also pointed out that government interventions are not benign, perfectly executed interventions, but are also executed by individuals with interests, and so on -- this is the public policy, er, ah, school. And so, the balance between markets and the government is a delicate one.
In particular, those of us who are economists, and I think that accounts for almost everybody in the room, are always amazed by the lack of understanding in the general public about the power of markets, and in particular the Austrian school emphasized the ability of markets to aggregate information and incentives to provide outcomes which a top-down government approach can't provide. So, as an economist I have a lot of faith in markets. I don't think, for example, I completely disagree with the view that what's happened in the last year and a half is a 'crisis of capitalism', per se. I mean, after all, capitalism has done an awful lot for growth and living standards for a long time. But rather it's a crisis that arises in a particular set of situations and conditions that we've faced in the last couple of years.
We saw no headlines: "Bernanke admits that we may be in a crisis of capitalism." But that's what he said, sort of. He used a double negative: "I don't think" and "disagree." Or was this a grammatical error?
Then he went on with the Keynesian party line: the tendency of free markets -- markets rigged by central banks -- to be unstable.
In particular, as I've indicated before, because of the tendency of financial systems to the boom and bust -- which is a very long-standing problem, one that was recognized by virtually every economist who's studied these issues -- and because of the effects of that on the economy, there has been a long-standing tendency to try to find a regulatory balance that reduces the costs of those booms and busts without costing us the benefits of the market forces and the innovation and the information aggregation and so on.
It is the Austrian School's position that there is no such boom-bust tendence apart from (1) central banks, and (2) fractional reserve commercial banking. Bernanke has to know this. But he doesn't let on that he does.
It's a very difficult balance. I think, what we've learned, in this case, is not necessarily that we need to have a lot more regulation, but that we need to think through what went wrong with -- what I described: when I say the financial sector what I mean is the private sector plus the regulatory overlay; that whole complex didn't perform well in this case, and we need to think hard about how to fix it.
What went wrong was Federal Reserve policy under Greenspan.
Now, as I try to say in my speech, we have short-term and long-term considerations. I think it's very important for us to try to put out the fire. I think it's good advice in general, that if there's a fire burning, you try to put it out first, and then you think about the fire code.
Who is "us"? Who is "you"?
So you don't try to do it all at once necessarily. We need to figure out how to solve this problem, how to stop the costs that are being borne all over the world, but going foward we have to look at the fire code: we have to think about what is the right balance of regulation, markets, that will give us a powerful, innovative financial system, but one that would be safer to use in some sense.
The man on whose watch the world's banking system has begun to collapse thinks we should "look at the fire code." Hey, Ben, you were the fire marshall when the blaze broke out. It is now burning down the world.
Here is Easton's assessment of the confrontation. http://www.humanevents.com:80/article.php?id=30296
Here are excerpts.
The result of all this newly-created money is that the Fed's own balance sheet -- which took 90 years to reach the first $800 billion -- is now well on the way to $3 trillion, and that's all money created out of thin air.
Consequently over the next 6 months, look for the Fed to bail out ever more failing financial institutions -- starting with another multi-billion-dollar kick to the near-bankrupt Bank of America. This second round of funny money will be followed by a third and perhaps more, until we'll all be swimming in a sea of dollar bills. . . .
OK. So here's the problem. Keynesian solutions just don't work. Throwing money from helicopters (or more likely C-17's today) might just pull us out of the Great Depression II, but as we stretch the rubber band, eventually the block of deadweight banking system credit will finally spring to life and violently overshoot way before future Fed and Treasury Secretaries can reel in the excess money.
The result? Massive inflation from 2010 onwards. 25-30% would not be surprising through the teens.
He and I agree as to what is coming. Bernanke may, too, but he will not say it in public.