Wolves Guarding the Bankhouse

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise” – Ben Bernanke, 15 February 2006

I caught a few articles recently about Federal Reserve chairman Ben Bernanke and comments about the current state of the markets and Fed policy. The first is from Reuters: “Bernanke says Fed stimulus benefits clear, downplays risk“. The second is commentary from a Seeking Alpha author, which references a Bloomberg article here. The Bloomberg article contains the following fabulous quote (I spliced it together, removing the writer’s notation):

“There’s a lot of disagreement about what role monetary policy plays in creating asset bubbles. It is not a settled issue … Our attitude is that we need to be open-minded about it and to pay close attention to what’s happening … And to the extent that we can identify problems, you know we need to address that.”

Well that just about does it, right? I mean, here’s the Fed chairman saying (a) there is “disagreement” about whether monetary policy creates asset bubbles, which is apparently (b) “not a settled issue” and (c) we need to address bubbles to the extent that we can identify them. And a fox might say that there is disagreement as to whether foxes make for bad hen-house guards … it’s not a settled issue. Furthermore, if we can identify areas where foxes might be causing problems, we should address them. Of course, we never actually identify those problems until the hens have been eaten. (“What? you think that fox is going to eat the hens? That’s silly – he’s the hen-house guard! It’s his job to protect the hens, of course he won’t eat them. If he wanted to eat the hens, he wouldn’t have taken a job where he had to guard them!”)

I’m sure there is disagreement. In Soviet Russia there was probably plenty of disagreement with claims that central planning was less efficient than the free market. I’m sure there was plenty of disagreement in Mao’s China (or Idi Amin’s Uganda) with the notion that rule by a strong-man actually made the people worse off.

Folks in power tend to dislike criticism, particularly when things aren’t going well. They tend to bristle at the notion that their use of power is actually bad or harmful. They concoct all manner of explanations as to why all the serfs are better off because the power wielded by themselves – the benevolent champions.

Are there asset bubbles? Maybe. Time will tell, of course. Financial writers like to point to rising farmland prices and falling yields on speculative grade bonds as cases of bubbles either forming or fully formed. What we have more confidence in though is central bankers as a contrary indicator. When the Fed (or the ECB or any of the others) start facing policy criticism regarding asset bubbles and brush it off with either impressive mental gymnastics about why it’s not really a bubble, or worse yet dismissals using vague “disagreement” arguments – it’s time to keep your eyes open. (Mish has a nice discussion of the Greenspan contrary indicator here.)

While we’re on the subject, I feel compelled to remind everyone that central banking, and fiat currencies in general, is a form of unjust weights and measures. It is a “false balance” whereby the wealthy extort the production of the poor. It is Old Testament style evil (consider Prov 11:1, Prov 20:10, Lev 19:35-36, Micah 6:10-12, or one of my favorites Malachi 3:5). When bubbles get blown, it is those with “first access” to the new money that benefit; and they happen to be the wealthy and politically connected.

Furthermore, I want to remind everyone here in America that we live in a democracy (sort of). The policies of the government are the policies of the people. The unjust standards of the central bank are policies accepted by we the people. In a nation that self-identifies as Christian to the tune of nearly 80%, we really ought to be able to do better.

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