The Fatal Conceit and the Federal Reserve’s Operation Twist; Healthcare Explained

The Fatal Conceit of the Fed’s central planning:

Gary Brinson, CFA, discusses the impact that the Federal Reserve’s prolonged low-rate environment is having on plan sponsors. He argues that we are observing Hayek’s fatal conceit in which a handful of people in the government imagine they can redesign markets and do better than markets themselves can.

Editor: Obviously an analyst who studies a company with a large pension will be looking hard at the plan sponsor’s assumptions regarding future returns. Perhaps assumptions are much too rosy and a hit to future earnings (normalized earnings should be lowered) will be coming.

The Fed is Twisted

More on the failure of the Fed’s operation twist. The Fed’s suppression of rates through purchasing government debt and adding reserves to the banking system hurts savers–Grandma receives $0 on her retirement savings–and savings is what is needed to increase production and services to increase wealth.

A fall in interest rates cannot grow the economy. All that it can produce is a misallocation of real savings. As a rule, an artificial lowering of interest rates (which is accompanied by the central bank’s monetary pumping — increasing commercial banks’ reserves) boosts the demand for lending; and this, as a rule, causes banks to expand credit “out of thin air.”

This in turn sets in motion the diversion of real savings, or real funding, from wealth-generating activities to non-wealth-generating activities.

……For those commentators who hold that an artificial lowering of interest rates could grow the economy, we must reiterate that an interest rate is just an indicator, as it were. In a free market, it would mirror consumer preferences regarding the consumption of present goods versus future goods. For instance, when consumers raise their preferences toward future goods relative to present goods, this is manifested by a decline in interest rates.

Conversely, an increase in the relative preference toward present goods leads to the increase in interest rates.

As a rule, all other things being equal, an increase in the pool of real funding tends to be associated with an increase in the preference toward future goods — i.e., a decline in interest rates. Note, however, that movement in interest rates has nothing to do with the generation of real wealth as such. The key for that is the increase in the capital goods. What makes this increase in turn possible is the expanding pool of real savings.

In a market economy, interest rates instruct entrepreneurs (in accordance with consumer time preferences) where to channel their capital. A policy that artificially lowers interest rates only sends misleading signals to businesses, thereby resulting in the misallocation of real funding.

If a lowering of interest rates could have created economic growth, as the popular thinking has it, then it makes sense to keep interest rates at zero for a long time.

The fact that we have already had such an experiment, which so far failed, should alert various supporters of low-interest-rate policies that something is completely wrong with the idea that a central bank can grow an economy.

By now it should be realized that the artificial lowering of interest rates can only divert real funding from wealth-generating activities toward unproductive activities, thereby diminishing the ability of wealth generators to grow the economy.

We can conclude that the latest policy of the Fed not only is not going to help the economy but, on the contrary, is going to make things much worse. What is needed now is the curtailment of the Fed’s ability to pursue loose monetary policies. The less the Fed does, the better it is going to be for the economy.

….So far, in June, banks excess cash reserves stood at $1.49 trillion against $1.461 trillion in May. This means that if the pool of real savings is in trouble (which is quite likely), the Fed will have difficulty stimulating economic activity — i.e., generating illusory economic growth.

Even establishment economist see the futility of the Fed’s money manipulation, though they do not call for its shut-down.

What if the Fed throws a QE3 and nobody comes:

Yes, a fractional reserve banking system that allows Ponzi finance whereby a bank can lend out your Demand Deposit many times over–how can a bank and YOU have title to the same property at the same time?–helps cause booms and busts. (All detailed here: And The cartelization of the banking system and manipulation of the money supply further exacerbates the misallocation of capital. Note that the booms and busts have been longer and more severe than the pre-20th Century Panics before the Fed was born in 1913 (  The argument against the classical gold standard and the lack of central planning was the chaos of the bank panics of the 1800s, the Panics of 1819, 1837, 1857, 1876, etc. However, those panics were caused by banks not having to back each loan with 100% of their own capital. Banks pyramid off of their deposit base, speculating with their depositor’s capital.

Healthcare Explained

But the real cause of our economic pain is the continued growth in government coercion to prop up America’s growing entitlements. The Healthcare mandate (tax) is one of our biggest disasters. View a seven-minute cartoon explaining why our healthcare system will collapse economically. Healthcare explained:

The best way to understand the problems of ObamaCare is through purchasing bananas. When you go to buy a bunch of bananas do you ask how much they cost? Of course. But when you go to the Doctor’s office, do you ask how much the medical procedure costs? No. Therein lies the problem with exploding healthcare costs. The consumer spends more time considering the purchase of a $2 bunch of bananas than they do a $2,000 medical procedure because the insurance company (third-party) payer is in between the patient and the Doctor. The consumer does not bargain to lower costs, thus costs explode.

…….My rant has ended.

12 responses to “The Fatal Conceit and the Federal Reserve’s Operation Twist; Healthcare Explained

  1. 1. It should be a right of every person to receive full health insurance/care from the state, to the best of the state’s ability. Quality of life of its citizens is one of the main reasons for the existence of the state.

    2. Health insurance can only really exist and be “maintainable” of it’s applied to all.

    3. The rising costs in the USA is because the system itself, including its incentives is messed up (the post’s example is just one of many). There are plenty of examples around the world where the cost per person are much lower than in the state while the service given is much better. This seem to be a well known fact yet discussion in the USA seems to always revolve on the bottom line cost and not on the real reason why. It’s almost as if it’s a social conditioning not to question it over there… a national bias of a sort.

    4. On a relater/unrelated note. Regarding all these posts about the “market”
    and “government” intervention in the market, could someone please define this “market” where are its boundaries and who are the participants?

    • Dear Roy:

      Regarding the right of every person to receive full HC from the state–realize that the State can’t produce only people can. If people are coerced or forced then look at countries with “free” healthcare. Go to and scroll down to watch the videos, click on links to healthcare.

      Read the following reagding HC:
      Socialism fails in economic calculation:

      A free market is a condition in which transactions as controlled by supply and demand, are exempt from bondage. Better–a free market is a system of cooperation bewtween two sentient, non-coerced individuals within a system of property rights/contracts and a rule of law. The US operates with a severely hampered market with heavy central planning (the FED) and fascist policies—the government ruling through the EPA, FDA, etc. The US lacks a free market because of massive government interference.

      ASK YOURSELF: If the people who produce have to take orders from politicians and those who produce nothing then isn’t surprising that economic growth is sub 1% (real non-fiat money growth) is perhaps negative? Why is HC so expensive? Why is a college education practically worthless and overpriced?

      ObamaCare a corporatist mess.

      To have affordable care for all you need to vastly increase the supply of healthcare. Why do food prices fall over time relative to incomes or personal computers? Why doesn’t an office visit cost $2 or a major operation less than $100?

      I worked for the government–there is no link between results and incentives so how can the government be the solution? Think individuals and social cooperation.

      Keep up the good questions.

  2. The government can and should regulate the health insurance market. Just like it should the banks. It should not be left to the “”free market””. Insurance simply cannot work in this way.

    I live and have lived in countries where there was a health insurance for all, and it is far superior and costs less for all compared to what there is in the USA. It is regulated by the government. Is it perfect? Sure ain’t.

    I do not understand what’s the point about the CUBA link.

    No one is saying that something that will be done by a government will necessarily succeed or will be done in a good way. It’s up to regulation and incentives.

    Life is not black and white. This whole “zero market intervention and efficient market will take care of its own” rings to me just like “communism”, that somehow there will be this state of existence to all, and it will then fall into place. That all people can and will comply. That there are no evil system that will try to break the system. That a system so complex can be built to perfection without government intervention over time. That if we educate the masses, a glorious light of enlightenment will flood the land and they will see our true way to freedom and success!

    Will never happen. We need to get practical here and choose the lesser evil, if you wish.

    You are going to abolish religion? Think about the decisions people make due to religious beliefs. It’s a “market” of its own.

    Never gonna happen.

    People live and die, they get sick. They get hit by a car. They are born with health problems. A volcano explodes. The ocean rises on them. Massive food poisoning. They travel to other countries and get sick. Imported items from other markets bring disease with them.

    And that’s the connection to the first point. Life is a compromise and reality has its own constraints.

    Again, I ask for a definition of and borders of this “market”. I did not ask what is “free market”. I first ask, lets define this “market”, before we even consider if it can be free or not.

    The USA is not a market on its own. It’s a hybrid of other local markets, it’s all intertwined. It’s connected to markets with even far more “government intervention”. It’s connected to markets which are quite different. It’s connected to markest which might challenge it to war, and markets which are fluid like the oceans. ALL of these make “the market”.
    And THIS can become a “free market”?

    Lets get practical here and stop with the slogans. People’s lives and health are at the stake. It’s not a game.

  3. Roy did you read the book Socialism by Mises? It’s free on

    I don’t think you understand the definition of a “free Market.”

    What is a free market?

    What does religion have to do with your argument. Religious freedom is always sacred. A free market means free exchange within a society of protected contracts and property rights.

    Any coersion beyond that by government is immoral unless men are Gods. All people are born with natural rights

    Go read Aristotle, Plato, and Locke. Start there.

  4. John,

    Please tell me what is “The Market”, before we discuss “Free Market”, lets define “The Market”. Where does it start and where does it end. You have not replied to this yet.

    I will explain about the religion part after this is clarified.

    My point is that such society does not and cannot exist in current reality of mixed societies and markets and countries and external costs and religions… It’s just not practical. Wont happen. Cant happen.

    Instead of sending me off on vague ideas and reading all sort of books, please define the market for which you want free market for.


  5. Just to clarify, I’m not saying anything about this “free market” if it’s good or bad or better or worse, just that it cannot really exist in reality.

    • Nothing exists in a “perfect” theoretical state. We are not talking absolutes but relative.

      Sure we want healthcare for all who want it just like we want rolls- royces for all who want it, but how are the goods and services created? You can’t do it by fiat but by freedom.

      Cuba has FREE medicare just no doctors and medicines available for the patients. WHY?

      Why is Singapore or Costa Rica more prosperous than Cuba, yet Cuba has $trillions more in Natural resources?

      Why is Liberty Good? Why is more Government intervention bad?

  6. “Any coersion beyond that by government is immoral unless men are Gods”

    So you’re saying that if Gods intervene it’s automatically “moral”?

    What if it’s not your God? What if you do not believe in this god but someone else does? Whose reality is real? By whose contract law shall it be decided? Shall we war it out kill the other side and resolve the problem? Been there done that. Still doing it now…

    Some would say moral is only a secular notion as it is applies to ALL men and women regardless of religion.

    What if in the make belief society there are plenty of people that believe in some rules of their ever moral God/s that contradict “free exchange within a society of protected contracts and property rights”?

    What, if for the sake of discussion, such a situation exist in the USA. Would you than try to make the best system you can, try to achieve the lesser evil, or would you chase after the rainbow in the cloud?

    • Dear Roy:

      Why regulation can correct “market Failure.”

      An incorrect sentence on my part. What I meant to say is that Men are not Gods, they are imperfect but ALL men (women) are born with natural rights. You are NOT GIVEN rights by the government the government only exists to protect those rights.

      We have that in the US (if we onoy followed it) It is called the Bill of Rights.

      The more LIBERTY that man has to produce and exchange within a system of property rights and contracts then the more WEALTH (healthcare, ipods, education, services) are available for all. You can’t forcably redistribute that Man is not allowed to produce (failure of socialism plus the system’s inablility to use the market pricing system) What that implies is that the government can’t tell a person not to use drugs, for example, unless it infringes on another person’s rights. People can’t be forced to fight in a war unless they agree to it. The one person (The President) can’t decide.

      The government can’t print money or set interest rates–only the people can through their choices. Again, our US Constitution is violated. Why do you think the US is in a perpetual depression now?

      We have the best system of government–under the US Constitution–HAVE YOU READ IT?

      My argument is that the US is more of a fascist state ignoring the Constitution. Can you name the last War that was declared under the rules of the Constitution?

      We don’t need regulators if contracts are respected and enforced. Look at the SEC; it aids and abets corruption. The SeC legitimzed Madoff. Asking regulators to protect consumers is like having Hannibal Lechter babysit your kids. Regulators become corrupted by the very big businesses they regulate. Corporate statism is not a Free Market. Again, don’t interfere in people’s right to exchange. WHY is it illegal for me to go to my neighbor who is NOT a lic. MD and get treatment if I DECIDE to go for medical help. I am not blaming the government, I blame Medical associations with their restrictive lic. laws, etc.

      Why can’t anyone run a cab without a lic. in NYC. Let people FREELY decide. Unless you think people can’t decide for themselves, but then you are violating their rights.

      Obviously since Men are not Gods; they are imperfect, the best system of Government so far in Human History has been the Republic. As Franklin said; The US has a Reoublic but only if we can keep it.

      Let’s try.

      The government is a group of people who have the legal right to use force. The less forced used, the more prosperous the society. Why is Singapore more properous than resource rich Cuba or North Korea?

      Read Socialism by Mises and let me know what you think. It can be read in a day.

      I will reply again after your thoughts on that book.

  7. Again and again you are avoiding replying to the main question to define the market and its borders before discussing what “the market is”.

    Some of your arguments are complete demagoguery at best, like the rolls royce (seriously, john?).

    I am not going to ask that you again define the market which you are referring to. It’s very obvious you have many biases concerning this issue and a whole agenda.

    Sending me to “read books” without knowing me, while avoiding replying to my question, is condescending at best.

    And to follow your meaningless quote, here’s another: “to a man with a hammer, everything looks like a nail”. I think you need to drop the hammer for a moment and think about why I’m asking that question which you refuse to reply to.

    I think that your way of thought is similar to all those economists, which is why they are wrong like half the time and the other half it’s probably by luck. They keep confusing theory on paper and the complexity and constraints of the reality of man kind. It’s all colors out there, not just black and white.

  8. ROY: A Market is where exchange takes place. DEFINITION of a free market:

    EVERY PERSON would benefit from reading Mises and Rothbard’s works. Go here

    A free market means free exchange within a society of protected contracts and property rights.

    Rights belong to individuals, not groups; they derive from our nature and can neither be granted nor taken away by government.

    All peaceful, voluntary economic and social associatns are permitted;
    Consent is the basis of the social and economic order.
    Government may not redistribute private wealth or grant special privileges to any indiviudal or group.
    Government must not be involved in the monopoly of money.
    Aggressive wars are forbidden.
    Jury nullification is a right.
    Government must obey the SAME laws as all other people.

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