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by Christopher Chantrill
May 11, 2010 at 6:12 pm
WHO REALLY was to blame for the bank meltdown in 2008? Economist Robert Mundell, supply-sider-in-chief and Chinas new Confucius, is unequivocal.
In a speech at the Heritage Foundation on April 16, 2010, he blamed the US Federal Reserve (Mundells speech starts at 1:13:30).
Incredibly, in 2008, leading up to the worst economic banking crisis in history, the Fed was deflating the money supply, not, as it thought, supplying lots of lovely money to bail out the banks.
It just goes to show. The Federal Reserve Board, playpen of political hacks for almost a century, really doesnt have a clue what it is doing.
Thats why in 1929 to 1933 the Fed caused the biggest depression in US history. And in 2008 it staged the biggest financial meltdown in world history.
How bad does it have to get before Americans decide that some things are just too important to be left to politicians and their hangers-on?
Mundells argument is fairly straight-forward. When interest rates are low and borrowers are de-leveraging at full speed, you cant rely on a Friedmanite analysis of monetary conditions. (Yes, he gently sticks a knife into Miltons ribs a couple of times). Instead you must use a Mundell approach. And Mundell showed his audience the data that showed why the Fed was slamming on the brakes in 2008 even while it thought it was easing. The gold price was going down through most of 2008, and consumer price inflation went from five percent to zero percent in six months!
In the video, you can see Mundell waving his hands at a chart on the wall and at the display of his laptop which shows gold prices, Euro exchange rates, and consumer prices. Unfortunately, the viewer doesnt get to see any of that. The Heritage camera stays on Bob. So I have prepared a chart with the requisite data from x-rates.com, kitco.com and bls.gov, and normalized the numbers so that they start at January 2007 at 100. You can see that the chart is pretty devastating.
The story starts out pretty well. In August 2007 financial firms all over the world experienced a sudden liquidity crisis (the blue band on the chart). The Fed turned on the monetary faucet and the gold price shot up to about $950 per ounce (150 on the chart). Good Fed. Consumer prices increased too. But then, somewhere in early 2008, things went wrong. After the Bear Stearns bailout in March (gray band), the gold price started actually declining, meaning that monetary policy was tightening. Bad Fed. By the September 2008 meltdown of Fannie, Freddie and Lehman Brothers (pink band), the gold price was in free fall, meaning that monetary policy was bar tight. Very bad Fed. It took till November 2008 before the Fed got a handle on things and got the monetary spigot open again. No wonder President Bush was moved to warn that If money isnt loosened up, this sucker could go down.
You have to say: What is the point of appointing these clowns to operate the central bank, the lender of last resort? They know nothing and they do nothing. Heres Federal Reserve Chairman Ben Bernanke, the worlds foremost deflation expert, and what does he do in the crunch? He runs a bar tight deflationary monetary policy right through the most critical financial crisis in modern history. Whats the point of a government if it cant even do the job of lender of last resort?
Bob Mundell has a very mild-mannered way of making a speech. But he also has a way of modestly slipping Bobs Greatest Hits into his remarks, as in the eight year US expansion from 1982 to 1990, followed by the ten year expansion from 1991 to 2001. In particular, hes rather proud of the 31-year expansion in China.
Given the astonishing economic record in China, you can understand why they have named a university after Bob in Beijing. Its called the Mundell International University of Entrepreneurship.
Now let us get back to the chart. There is something that jumps out at me. The stock market turned and started up in March 2009, which is just about when the Fed got the gold price back to $950 per ounce (150 on the chart). That represents a dollar devaluation of about 30 percent from the gold price of $665 immediately before the August 2007 liquidity crisis.
Lets do a bit of Monday morning quarterbacking and guess that a 30 percent dollar devaluation in 2007-2008 is what it took to get the credit system refloated. But starting in September 2009 the gold price started rising again. That means that the Fed probably started supplying too much money to the credit system. Today, with gold north of $1,100 per ounce, the dollar is effectively worth 40 percent less than it was in August 2007.
Anyone want to guess what that spells? Making a wild guess, Id say it spells I-N-F-L-A-T-I-O-N. Thanks for the tip, Bob.
Buy his Road to the Middle Class.
But I saw a man yesterday who knows a fellow who had it from a chappie
that said that Urquhart had been dipping himself a bit recklessly off the deep end.
Dorothy L. Sayers, Strong Poison
Civil Societya complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churchesbuilds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.
Francis Fukuyama, Trust
Tear down theory, poetic systems... No more rules, no more models... Genius conjures up
rather than learns... Victor Hugo
César Graña, Bohemian versus Bourgeois
We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.
E. G. West, Education and the State
When we began first to preach these things, the people appeared as awakened from the sleep of agesthey seemed to see for the first time that they were responsible beings, and that a refusal to use the means appointed was a damning sin.
Finke, Stark, The Churching of America, 1776-1990
When we received Christ, Phil added, all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.
James M. Ault, Jr., Spirit and Flesh
A writer who says that there are no truths, or that all truth is merely relative, is asking you not to believe him. So dont.
Roger Scruton, Modern Philosophy
As far as the Catholic Church is concerned, the principal focus of her interventions in the public arena is the protection and promotion of the dignity of the person, and she is thereby consciously drawing particular attention to principles which are not negotiable...
[1.] protection of life in all its stages, from the first moment of conception until natural death; [2.] recognition and promotion of the natural structure of the family... [3.] the protection of the right of parents to educate their children.
Pope Benedict XVI, Speech to European Peoples Party, 2006
At first, we thought [the power of the West] was because you had more powerful guns than we had. Then we thought it was because you had the best political system. Next we focused on your economic system. But in the past twenty years, we have realized that the heart of your culture is your religion: Christianity.
David Aikman, Jesus in Beijing
But the only religions that have survived are those which support property and the family.
Thus the outlook for communism, which is both anti-property and anti-family, (and also anti-religion), is not promising.
F.A. Hayek, The Fatal Conceit
Conservatism is the philosophy of society. Its ethic is fraternity and its characteristic is authority the non-coercive social persuasion which operates in a family or a community. It says we should....
Danny Kruger, On Fraternity
Families helped each other putting up homes and barns. Together, they built churches, schools, and common civic buildings. They collaborated to build roads and bridges. They took pride in being free persons, independent, and self-reliant; but the texture of their lives was cooperative and fraternal.
Michael Novak, The Spirit of Democratic Capitalism