05.31.2009 0

The Myth of Bernanke’s Money Helicopter

  • On: 06/05/2009 09:58:39
  • In: Economy
  • By Justin Williams

    When the Federal Reserve Chairman Ben Bernanke spoke at famed economist Milton Friedman’s ninetieth birthday, he praised the Nobel laureate for his work on the “permanent-income theory of consumer spending.” This seemed to demonstrate that he understood consumer spending was not dependant on current income, but instead was influenced by future expectations. But that was then and times change.

    Earlier this year, Chairman Bernanke did a complete about face when he supported Congress’ efforts to plunge the United States into more debt in the name of a fiscal stimulus. Bernanke 2.0 said he believed that because of the strong likelihood that there would be an economic slowdown, “…consideration of a fiscal package by the Congress at this juncture seems appropriate.” So much for the Fed Chair’s monetarist root or at least so it seems. Fortunately, there is more to the story.

    Chairman Bernanke 3.0 has now begun to denounce the massive government spending, doing a highly adept fiscal two-step. Bernanke now states that the United States “…cannot allow ourselves to be in a situation where the debt continues to rise; that means more and more interest payments, which then swell the deficit, which leads to an unsustainable situation.”

    Yet through it all, while Bernanke spends time bouncing back and forth between Keynesianism and Monetarism, he completely misses the real problem, one for which he is directly responsible.

    The Federal Reserve is currently using monetary policy to try to stimulate the economy, while the Congress is trying to use deficit spending, also known as fiscal stimulus, to stimulate the economy. The two now are apparently fighting over which they think would be most effective. What they do not realize is that the real solution is neither.

    As Friedman showed in much of his work, “crowding-out” prevents a fiscal stimulus bill from ever being effective. “Crowding-out” means that since the government can only raise money from debt or taxes, all Congress is doing is uselessly moving money around.

    Raising taxes to fiscally stimulate would just cause private sector spending to decrease, as they have less disposable income. Debt financed stimulus, which is what Congress has been doing, causes interest rates to rise thus making it harder for new private investment to sprout up. In other words, this debt actually causes the banks to be more hesitant to gives out loans, thus exacerbating the current financial problem.

    Where the monetarists, like Friedman and Bernanke, went wrong is supporting monetary policy as a safe alternative. They believed in printing money during a recession in order to prevent a contraction in the money supply, which is what they attribute as the primary cause of the Great Depression. Their reasoning (unsound as it may be) is that, unlike a fiscal stimulus, the newly printed money would be evenly distributed inside the economy.

    This “Helicopter Effect” is supposed to give people the comforting vision of the Federal Reserve flying over the country throwing free money out the window, thus saving us from an economic downturn. This way the money would not discriminately go to special interests and everyone would be health, wealthy, and though certainly not wise enough to know they were being duped.

    Granted it sounds good in touchy-feely theory. Unfortunately, it is poppycock, flapdoodle, and unmitigated balderdash in raw fact.

    The Austrian School of Economics exposes this myth for what it is. Ludwig von Mises and Murray Rothbard both crushed this theory and show that the helicopter ends up being just as discriminatory as other politically mattered hijinks. Rothbard, in The Case Against the Fed, states that the Fed printing money is “…a process of transmitting new money from one pocket to another, and not the result of a magical and equiproportionate expansion of money in everyone’s pocket simultaneously.”

    In the current financial crisis, the Fed caters to a clearly exclusive club that receives the money: mostly the big banks. Now with the threat of nationalization and massive governmental controls on the banks, the bankers will have no choice but to loan the new money out to whomever they are told to by the bureaucrats. And the bureaucrats, in turn, will favor those that are in the good graces of their political paymasters.

    Now with the Fed being responsible for more than $7.76 trillion of financial “rescues” over the past 22 months, the chance of handing out that money indiscriminately is patently absurd. Men, after all, are not angels. Yet, thanks to the many government laws barring auditors from the Fed’s books, the American people (as well as their representatives in Congress) are unable to check and see if these discriminatory practices really do go on.

    The Government Accounting Office cannot audit the Federal Reserve’s transactions with foreign governments and banks, transactions made by the Federal Open Market Committee, and they cannot even look at the discussions of major policy decisions. The Fed’s reserve banks have argued that they are private institutions, beyond the reach of any action including the Freedom of Information Act (FOIA). The Board of Governors simply refuses to comply, stating they are allowed to withhold “internal” memos as well as commercial and trade secrets information

    In short, the Fed’s message to the American people is even worse than “give us your money—or else.” It’s simply “give us your money and there is no else.” Not even an “elsewhere”—since no other agency anywhere else in government has to power to rein in the Federal Reserve autocrats.

    That is why Congress needs now to pass the bill to audit the Federal Reserve, their Board of Governors, and the Reserve Banks that was proposed on February 26th by Congressman Ron Paul. Since then it has gained 190 cosponsors, including 39 Democrats and 151 Republicans, and this number needs to continue to grow to ensure passage.

    Without these audits, Chairman Bernanke and his Board will continue to pretend that they have some magical money helicopter that will indiscriminately hand out these newly printed fiat bills. And the once-respected “permanent income theory of consumer spending” will continue to give rapid way to the “eternal fact of Federal Reserve autocracy.”

    Justin Williams is a Contributing Editor of ALG News Bureau.

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