09 Feb 2012, Broadway, Manhattan, New York City, New York State, USA --- New York , american flag on the federal reserve bank building / drapeau americain sur l'immeuble de la banque de la reserve Federale --- Image by © Michel Setboun/Corbis09 Feb 2012, Broadway, Manhattan, New York City, New York State, USA --- New York , american flag on the federal reserve bank building / drapeau americain sur l'immeuble de la banque de la reserve Federale --- Image by © Michel Setboun/Corbis

The Federal Reserve’s “Exit Strategy” is Just More Monetary Manipulation

Eine Analyse von Professor Dr. Richard Ebeling:

He is professor of Economics at Northwood University. He was formerly president of The Foundation for Economic Education, was the Ludwig von Mises Professor of Economics at Hillsdale College in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation.

The recent media reports that the Federal Reserve has devised an “exit strategy” to reverse their nearly $3 trillion increase of the money supply over the last several years shows that the monetary central planners remain wedded to the philosophy of “fine-tuning.” The “Fed” leadership still retains the hubris that they can manipulate the economy into sustainable “soft landings” following their own monetary “irrational exuberance.” Having created the bubbles that burst in 2008-2009, the Fed has since then bought up historically huge amounts of U.S. securities and mortgages in a relatively short period of time.

In the process, the Fed has undermined any rational functioning of the financial markets by basically establishing a maximum price control on (especially short-term) nominal interest rates not much above zero. (And when adjusted for CPI-measured price inflation, according to the St. Louis Federal Reserve Bank, the “real” interest rates on Federal Funds and one-year Treasuries are more than 1.5 percent in the negative range.)

It is not surprising that businesses and individuals have sometimes found it difficult to obtain loans when banks must use to a greater degree than normally the case various credit rationing standards other than market-generated intertemporal prices (market-based interest rates), since these hardly exist.

Who knows what may be the prospective profitability of an business investment, or a construction project, or even a home loan when the necessary market-based rates of interest used to estimate the present value of future-oriented and time-consuming activities have been manipulated out of existence by Fed monetary policy?

This makes financial institutions both excessively cautious and unreasonably reckless. Fearful of over extending themselves, again, banks and other lending institutions have increased their standards of credit-worthiness in evaluating various loan applications. But, at the same time, without market-generated interest rates to inform lenders about the real opportunity costs of lending as an important benchmark in judging the prospective profitability of loan applications, funds are too easily extended to borrowers for investment and other projects that may be found to be unprofitable in the future, if and when interest rates start to rise again and are more reflective of their real market-clearing levels.

Ben Bernanke and company assure us that they will carefully read the monthly price inflation and unemployment statistics and decide by how much to increase or decrease their buying or selling of U.S. Treasuries and mortgages, to start to nudge interest rates up (or down, again) to assure that “soft-landing” in a post-quantitative easing environment.

The Fed’s monetary manipulations in the name of easing out of “monetary easing,” however, will guarantee that interest rates will continue to not tell the truth about the real amount of savings in the economy to support potentially profitable investments and with what sustainable time horizons. Thus, the Fed is and will be setting the stage for future market corrections, which they will, no doubt, once again blame on “imperfections” in the financial sector rather than their own monetary policy.

The Federal Reserve monetary central planners are caught in the time warp of the heady days of 1960s Keynesian thinking when discretionary monetary and fiscal policy was considered the “keys to the kingdom” to economy-wide economic stability and growth. All the talk by Bernanke about aiming at a general “inflation-target” of about two percent average price increases per year, merely states the “bulls-eye” their discretionary policies are shooting at.

The confusion is exacerbated when it is remembered that the price inflation “target” is not something objectively “out there,” confronting the Federal Reserve authorities as something to be battled with.  It is a statistical construct that averages the prices of a selected “basket” of goods and services, the value of which is heavily influenced by the very monetary policies that are meant to “control” it. It is like the dog chasing his own tail.

The mind-set of those at the helm of the Federal Reserve is one that reflects a belief that having control over the tools of monetary policy-making assures the power to effectively and successfully control an entire economy. Instead, we are, no doubt, heading for the bad consequences of another example of what F.A. Hayek called “the pretense of knowledge” on the part of the social engineers.

In Defense of Capitalism & Human Progress

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Biographie:

Dr. Richard M. Ebeling is professor of economics at Northwood University.  Recognized as one of the leading members of the Austrian School of Economics, Dr. Ebeling writes and lectures widely in the United States and around the world on monetary theory and policy; government regulation of business and the welfare state; the economics of growth, stability, and international trade; fiscal policy, taxation and government debt; and the political and economic principles of the free society.

 His most recent book, Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition, was published by Routledge in February 2010. He is also the author of Austrian Economics and the Political Economy of Freedom (Edward Elgar, 2003).

 Prior to his appointment at Northwood University, he was the Shelby C. Davis Visiting Professor in American Economic History and Entrepreneurship at Trinity College in Hartford, Connecticut (2008-2009), and a senior fellow at the American Institute for Economic Research in Great Barrington, Massachusetts (2008-2009). He also served as the president of the Foundation for Economic Education in Irvington, New York in 2003-2008, and was the Ludwig von Mises Professor of Economics at Hillsdale College in Hillsdale, Michigan in 1988-2003. He was also vice-president of the Future of Freedom Foundation from 1990 to 2003. Dr. Ebeling also taught economics at the University of Dallas in Dallas, Texas (1984-1988), and at the National University of Ireland at Cork (1981-1983).

 In 1990-1991, Richard Ebeling frequently travelled to the former Soviet Union consulting with the government of Lithuania and with members of the Russian Parliament and the city of Moscow on free market reform and privatization of the socialist economy. In January 1991 he witnessed first-hand the Soviet military crackdown in Vilnius, Lithuania, during which 13 people were killed. While in Moscow in August 1991 he joined the defenders of freedom and democracy at the barricades surrounding the Russian Parliament during the failed Soviet hard line Communist coup-attempt.

 In October 1996, Richard Ebeling travelled to Moscow, Russia, once again, this time uncovering the „lost papers“ of the famous Austrian economist and leading advocate of free enterprise, Ludwig von Mises. Looted by the Nazis from his Vienna apartment in 1938, Mises‘ papers were captured by the Soviet Army at the end of the Second World War. Dr. Ebeling was able to obtain photocopies of virtually the entire collection of documents numbering about 10,000 items, which had been kept in a formerly secret KGB archive in Moscow for 50 years.

 Richard Ebeling has supervised the translation and edited of a large number of these papers for a three-volume Selected Writings of Ludwig von Mises published by Liberty Fund of Indianapolis.

 The author of hundreds of articles, his writings have appeared in the Washington Times, the Boston Globe, Investor’s Business Daily, Detroit News, National Review Online, Reason, The Freeman: Ideas on Liberty, American Journal of Economics and Sociology, Political Studies, International Journal of World Peace, Advances in Austrian Economics, and numerous other publications. His articles received wide international recognition and have been published in Argentina, Austria, Brazil, China, Czech Republic, Germany, Great Britain, Guatemala, Hungary, Lithuania, Mexico, Panama, Poland, Russia, Spain, Sweden, Switzerland and Ukraine.

 Dr. Ebeling appears frequently on radio talk shows around the United States, discussing government policy and the American economy. He is regularly interviewed by Radio Liberty on American and Russian political and economic affairs, which are then translated and broadcast into Russia. Recently he has appeared on Fox News, CNBC, and on Fox Business News with Neil Cavuto.

 Richard Ebeling received his PhD in Economics from Middlesex University in London, England, his M.A. in Economics from Rutgers University, and his B.A. in Economics from California State University, Sacramento.

He received the “Franz Cuhel Award for Excellence in Free Market Education,” presented by the Liberalni Institute at the annual Prague Conference on Political Economy (Prague, April 2007) and the “Liberty in Theory: Lifetime Award” for contributions advancing the case for classical liberalism, presented by Libertarian Alliance/Libertarian International (London, November 2005).  He has also twice been a Hayek Fellow at the Institute for Humane Studies.

 Richard Ebeling and his wife, Anna, live in Midland, Michigan with their Royal Standard Poodle.  They have a daughter and three grandchildren.

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