This post is an experiment.? Don’t hold me to high standards here.? I want to explore the area where governments extract value out of their citizens via inflation.

With stagflation, we have high inflation and high unemployment.? Financial Repression has inflation higher than safe interest rates.

In the current situation, we have a lot of discouraged workers.? We also have a government sucking value out of savers because short interest rates are so low.

The main thing to understand here is that the government is not here to help you, but to milk you.? The government does not care about you.? It cares about its survival.? If it can’t get sufficient taxes out of the populace, it will use its financing arm, the central bank, to lend to it at preferential rates, while passing on losses to the populace via inflation.? Also note that inflation tends to hit the poor more than the rich.? Food and energy, two things that can’t be printed, have prices that rise more rapidly.? Food and energy price rises affect the poor more than the rich.? As such, the current Fed policy that tends to raise commodity and asset prices discriminates against the poor and in favor of the rich.? From unelected bureaucrats, it’s hard to think of a more unaccountable policy.

Both policies, stagflation and financial repression, come about because the government and central bank are trying to force the economy to do more than it can do, leading to greater poverty on the low end of society, leaving aside the fine-sounding words of the liberals.? You have to get this: there is no constituency for small business and poor people in Washington, DC.? The policies align with big business and rich individuals.? The purple party reigns, sucking in donations from both sides.? Significant donations only come from big business and rich individuals.? (Purple is significant of Monarchy, aside from being the mix of red and blue.)

My main point is this: it will be difficult for most developed country governments to fulfill all the promises they have made.? The results of this may involve stagflation, financial repression, and/or defaults.

What a world we bequeath to our children and grandchildren.

What I wrote in the prior six pieces were the thoughts of the speakers, mostly.? Now for what I think.

There were a number of free banking advocates at the session today.? I do not favor their views.? Though I am ordinarily libertarian, with finance I believe that depositary institutions must be required to match assets and liabilities, because the losses to society as a whole from financial panics are big, and they can be easily avoided with modest regulation.? This is true whether we are under a gold standard or a fiat money standard, or anything inbetween.

I personally favor a gold standard because it leads to fewer problems than a fiat currency standard.? If you don’t agree with this, wait a few years for the current monetary policy approach to blow up, and you might agree with me.

Does the gold standard burn in my heart?? No, I just think it is a better idea — we could have a fiat currency standard, and constrain the slope of the Treasury yield curve, and that would work also, just not as well.

I agree with most at the meeting today that the Fed was a bad idea, but it will not be easy to eliminate the Fed.? That said, if we have a significant crisis because of Fed policy, it will be time to bring out the long knives and eliminate it — replace it with a gold standard, a commodity standard, or a constrained central bank not allowed to do bailouts, and constrained by yield curve slope.

One thing that most agreed on is the need for a single mandate, not a dual mandate.? Inflation should be the only target of the Fed.? I agree, largely because the ability of monetary policy to affect employment is weak.

Allison’s talk was a highlight of the conference.? His experience with BB&T gives him unique insights into how banking regulation works, really, how it doesn’t work.? is characterization of how bank regulators worked was spot-on.? They exacerbate crises.

The conference had a strong sense that the Fed is creating asset bubbles via QE, and that it discriminated against the poor in favor of the rich.? I agree, as did Ron Paul two years ago at the conference.

As with many at the conference, I agree that the Fed has created most of our problems. Central banks are the problem, not the solution.? Their actions tend to be pro-cyclical, not anti-cyclical.

Finally, Scott Sumner, the most controversial guy of the day.? If I didn’t much care for NGDP targeting before, I care less for it now.? If he can’t see that monetary policy was too loose 2001-7, then to me, he is like Keynes, a man for whom monetary policy could never be too loose.

Final notes:

I care more that we constrain the banks such that they match assets and liabilities, than over the medium of exchange.? Crises happen because illiquid, long-dated assets are financed by short liquid liabilities.? This allows for run on the bank scenarios, which occurred through the repo markets, and portfolio margining in the last crisis.? This was not focused on at today’s meeting, and was an intellectual weakness of the meeting today.

All that said, it was a really good meeting, and I am glad that I went, mostly for the people I met.

CLOSING ADDRESS

Lewis E. Lehrman
Chairman, The Lehrman Institute

Whither the Fed?? (DM: Wither the Fed? 😉 )

Monetizing debt often used to fund wars.

Keynes’ book on India — informal gold exchange standard in India.? Felt it would be a step toward a better currency in the future.? Rueff felt it would lead to greater instability.? Bretton Woods was much the same, and thus collapsed in 1971.? Rueff criticized it in advance.

Rueff restored convertibility after both wars.

The Fed cannot determine the total amount of money on its own. Keynes disagreed and thought it could be centrally planned.? Neoclassical economists still think they can do it, whether Keynesian, Chicago school, etc.? Velocity has dropped like a stone.

Don’t target interest rates, money supply, price levels — proposes targeting excess cash balances.? Rueff reformulated Say’s Law — supply creates it’s own demand.

Argues that a gold standard (not a gold exchange standard) is not costly.? Gold doesn’t manipulate us.? Competitive devaluations don’t add anything — they just create deferred inflation, and enable the government to run larger deficits.

Free trade without a gold standard will fail, in his opinion.? Speculation would be reduced.? Global rebalancing might ensue.

The Federal Reserve has not served us well, even with the good intentions of those who ran it.? We need Congress to revisit the Fed, and give us a better medium of exchange.

He says he will never give up, and neither should we.

Q&A

Q1 — Don’t all gold standards fail?? All human institutions fail.? Don’t we want the least imperfect monetary standard?

Q2 — Article 1 section 10 — Gold and Silver should be the only currency? Constitutionally he thinks so.? Coinage Act of 1792.

Q3 — No inflation now?? There is asset inflation, and QE is pushing it.? QE benefits the rich and hurts the poor.

Panel

Rep. Kevin P. Brady
Chairman, Joint Economic Committee

Gerald P. O?Driscoll Jr.
Senior Fellow, Cato Institute

R. David Ranson
President and Director of Research, Wainwright Economics

Quaint idea that savers should get a return on their money by the moderator, Judy Shelton.

Kevin Brady

Talks about punk GDP growth and employment.? If not now to re-examine the Fed, then when?? The Centennial Monetary Commission might find ways improve matters.

Gerald P. O?Driscoll Jr.

Can we get rid of the Fed?? Politically not possible in the short-run, but in the long run, it is possible.? Thus propose it now, and when the time is right, the knowledge will be there to execute the idea.

The Fed does what is best for the Fed, not necessarily what is best for the country.? There have been eras that had rules.

• ’20s — modified gold standard
• ’50s — era of balanced budgets, Fed never tested (DM: note that even Martin gave in to LBJ at the end)
• early ’80s — Volcker made the rule — control the money supply
• ’90s-’00s — modified Taylor rule

Argues that Fed should follow a rule.? Rules allow the Fed to have independence on a good basis.

How do we get for discussions to action?? More frequent meetings, with a greater focus on action.

R. David Ranson

Is monetary policy helping or hurting us?? “Last call at the bar”? Raising fed funds rates shift growth into the present, and lowers future growth.? Falling fed funds rates shift growth into the future, and lowers present growth.? Volatility of Fed policy is negatively correlated with growth.

Fed policy has gotten weaker over the last 50 years, as the economy has learned to anticipate it.

Compares QE with debt monetization — QE is more explicit and planned.

Easy monetary policy lowers employment, GDP growth, stock prices, raises gold, CPI, PPI

Q&A

Q1 — which is more important to GDP growth, regulation or monetary policy?? Brady says both are important, and monetary policy adds to uncertainty.

Q2 — should the Fed try to manage interest rates? Ranson — they don’t do it well.

Q3 — shouldn’t monetary policy be governed by the Constitution? Brady: Don’t tinker with the Constitution, but hold your congressmen accountable.

Q4 — Selgin suggests Ranson’s work is just correlations.? We need the fed funds rate vs the natural rate to know whether policy is tight or loose.

Q5 — To Brady: Interest on Reserves? No real answer…

Panel:

Rep. Jeb Hensarling
Chairman, House Financial Services Committee

John A. Allison
President and CEO, Cato Institute, and retired Chairman and CEO, BB&T

Kevin Dowd
Professor of Finance and Economics, Durham University

Hensarling is going to have to run back to Congress.? Somewhat obsequious to the Cato Institute.

“When Democrats put ‘affordable’ in front of something, it somehow doesn’t work that way.”

Not a lack of regulatory ability, but timidity to use powers that they did have.

Fed had the ability to prevent the crisis and did little in the midst of the boom.? Toto has pulled back the curtain on the Fed; they are but mere men.? (DM: if that)

Dodd-Frank gives the Fed more powers that they will also not use.

Not a dual mandate, but multiple — add in market stability, low long-term rates, landlord for the CFPB.? Argues for auditing the Fed.? Also argues for cost-benefit analysis in gauging regulation.? Wants a lower attorney-to-economist ratio… Argues that Volcker rule harms corporate bonds — I find that unlikely.

He wants to regulate the Fed more tightly.? Where does the Fed deserve independence, and where not?

Seniors and savers punished.? Why is the Taylor Rule not followed?

Q&A

Disses CFPB, argues that people should be free to have more options in financing.

Q2 — gold & silver in the constitution, why is fiat money Constitutional?? Says that will be reviewed by the House.

Q3 — virtual currencies, and what should the Fed role on those.

Q4 — Asked about EPA.? Says it not his area.

Q5 — asked about Fannie & Freddie now that they have paid back… argues that have not paid it back.? They crowd out the private market.? Argues that monetary & fiscal policy is generally procyclical.

John A. Allison

Regulatory discipline will always trump market discipline.? Regulators are always late, even after failure, they tend to make matters worse.

Regulators regulate for regulatory good.? During booms, even if they find something fishy, if they speak up, it will be deemed speculative, and will lose politically.? So they say nothing during booms.

Regulators driven by politics — until Clinton, fair lending.? Bush, Jr. — Patriot Act, Sarbox, etc.? Bush did not deregulate.? Fed creates negative real rates and inflates the housing bubble.? Obama loves ALL regulation.

During bad times, regulators overdo it, which constrains credit.? Rule of law suspended, couldn’t predict what policy would be during the bailout.? Failure of mathematical modeling at banks and Fed.? Led to irrational risk taking.

Criticizes mathematical modeling because the tails are too small.? People become too complacent, because of the false precision of mathematics.

Small business lending is an art and a science.? When it is only a science, errors get made,and valid loans don’t get made.

Qualified lenders test — standards below subprime, with a lot of paperwork.? Can’t make the consumer loans on a decentralized basis because of the paperwork.

Fed is making it difficult to make loans. He would:

• End deposit insurance
• End the Fed
• Go back to gold

He would end most regulations, and raise capital standards to 15-20% of assets.

Kevin Dowd (free banking advocate)

Pre-Fed bailouts were done by a coalition of the willing.? When the Fed came, many things that were self correcting were lost.

Easy money ’20s –> depression.? Easy money ’60s –> inflation. Easy money ’00s –> recession.? Now we try to inflate our way out.? Bigger bubble being created in government debt.

Will we finally let badly run banks fail?? Politics does not favor it.? Deposit insurance incentivizes moral hazard.? People stopped checking the solvency of banks.? Dodd-Frank 848 pages, and empowers regulators to create a lot of regulations off of committee studies.? (DM: not concerned with type II errors)

Securitizations, hidden hypothecations, SPV hide-and-seek, hidden rehypothecations — many ways to fuddle game-able regulations.? Also regulatory capture.? Volcker Rule was simple, but banks complexified it, and then argued that it was too complex to follow.

Regulation follows failure, and fights the last war.? Suggests double liability for bankers should be restored.

Q&A

Q1 — Allison for President?

Q2 — Comment on penalties on acquisition of failed banks?? Scare tactics.

Q3 — Where is the gold?? On the books of the Federal Reserve.

Q4 — How encouraged should we be on the economy, as much as Janet Yellen?? Allison worries, so does Dowd.? The Fed is creating the next crisis.

Q5 — Businesses are afraid of politics.? What can we do?? Allison: we need to encourage freedom, and avoid crony capitalism.? Big business has been aided by the crisis.

Post-luncheon address from Leszek Balcerowicz, Former Chairman, National Bank of Poland

Going to talk about the euro, problems and solutions.? Eurozone masks a lot of variation in growth and productivity.

Baltics, Ireland may have suffered boom/bust but have on the whole grown well.

Sometimes fiscal crises lead to financial crises.? Sometimes financial crises lead to fiscal crises.

Not, what can central banks do to constrain credit booms, but what can be done to constrain central banks?? Also, how to de-politicize central banks.

Why were credit spreads so similar during the boom years of the Eurozone?? (No clear answer given — I view it as naive speculation.)

Should not be trying European solutions to what are essentially national problems.

Economic models are flawed and do not consider the effects of unconventional monetary policy.? Also neglect the effects of financial markets.

Fed is dictating monetary policy across the world.? Any nation trying to tighten will see its export sector suffer.? Asset bubbles will pop.

Finally, argues that bold policies must be tried if other policies have no chance of success.