Einhorn on the Fed’s Insane Policy
Editor: Mr. Einhorn recognizes the dangers of the Federal Reserves Zero (manipulative) Interest Rate Policy. Where I take a different view is that the Fed’s Zero interest rate policy hurts savers and thus capital accumulation. Less capital hurts productivity and future economic growth. Regardless, no centrally planned economy has ever worked so why expect the Fed’s manipulated price control of interest rates to not end in tears? I do agree with Einhorn’s assessment of Bernanke’s theory of lowering interest rates to increase the “wealth” effect. Only a Ph.D can lack so much common sense.
Klarman ain’t happy either: http://www.businessinsider.com/seth-klarman-goes-nuts-on-the-fed-2012-10
Those guys have been reading csinvesting or von Mises.
Dr. De Soto on the Cause of the Current Financial Crises
Jesús Huerta de Soto, author of the thought-provoking book on economics ‘Money, Bank Credit and Economic Cycles’ and Professor of Political Economy at Rey Juan Carlos University, Madrid, explains the motivations behind British Prime Minister Robert Peel’s Bank Act of 1844. Prior to this Act, the free issuance of bank notes with claims on gold bullion wasn’t limited by British law, resulting in wild economic cycles that often led to bank runs and large gold flows out of the country as foreigners sought to exchange claims on gold for actual bullion.
He discusses why Robert Peel’s Bank Act of 1844 was a failure, despite its good intentions. Although the Act placed legal limits on banks’ issuance of paper notes, its failure to place the same limits on deposits allowed banks to pyramid deposits, which ultimately led to the fractional reserve banking that we have today.
The professor also explains the problem with the practice of fractional reserve banking, and why it leads to credit expansion that ultimately results in “boom and bust” economic cycles. “Virtual money” that is created easily by banks in the process of credit expansion during the boom contracts just as easily during the bust, resulting in recession.
Furthermore, he discusses the importance of capital theory and the nexus between interest rates, savings and prices. Huerta de Soto argues that Austrian Business Cycle Theory offers the best explanation of how and why economic cycles work, and the best explanation of the pay-offs between present consumption and long-term investment.
Also, he explains how artificial credit expansion leads to a temporary economic boom, and why it inevitably results in recession. Huerta de Soto uses the example of his native Spain, and how European Central Bank credit expansion distributed unevenly around the Eurozone, resulting in housing bubbles in periphery Eurozone countries like Spain, Greece and Ireland.
He lists the six microeconomic effects that result in the crack-up boom. Crucially, credit expansion leads to over-investment in capital goods. The credit expansion leads to first rising prices and then higher interest rates, and thus lower prices for capital goods. There are not enough real savings to support the demand for the increased number of capital goods, leading to recession.
The professor questions why central banks even exist, and why there is no free market in interest rates and money supply. Huerta de Soto wonders why people are happy with socialism for the banking system, and why more people are not correctly blaming central banks and fractional reserve banking for the financial crisis.
Huerta de Soto also explains why recessions are a necessary corrective to the excesses of the boom period. Huerta de Soto argues that in his native Spain, job losses in the construction and housing sector are necessary owing to over-investment in housing during the boom. He also criticises “stupid” politicians who thought that they had abolished boom-and-bust.
He criticises those who argue that currency devaluation is a cure for the recession, and argues that his native Spain is far better off with the euro than the peseta. Huerta de Soto argues that the euro is forcing politicians and the public to make honest choices about spending and is acting, beneficially, as a kind-of gold standard.
Further he argues that the European response to the financial crisis is preferable to the wildly expansionary policies chosen by the United States. Huerta de Soto argues that for this reason, he is more optimistic about the euro than the dollar.
Huerta de Soto wraps up with three key measures needed to improve our financial system. First, Peel’s Bank Act needs to be completed which means a 100% reserve is required for demand deposits. Second, central banks need to be abolished. And lastly, the issuance of money should be privatised, leading to a free gold standard.