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Hyperinflation Or Great Depression II?

June 1, 2011


Western Europe has invented two institutions that have taken over the world: the university and the central bank. Today, both are under fire as never before. At the same time, both are in their respective diver’s seats. The greater the criticism, the better they do for themselves.

We are finally seeing articles on the bubble in higher education. It isn’t a bubble. Government money still flows in by the hundreds of billions a year.

We hear that college isn’t worth the money. Well, if it isn’t, why are parents paying it? Because they are buying a consumer good: social acceptance. They are buying off peer pressure. They are unwilling to say to their friends, “Billy Bob is going to become a plumber.” Yes, Billy Bob will always have a good income, but Billy Bob’s parents are unwilling to accept this. Billy Bob will get his hands dirty . . . with “filthy” lucre. Oh, the horror! Better that he should be an unemployed B.A. in sociology with $23,000 of student debt, and his parents $50,000 to $150,000 poorer.

That is to say, people have priorities that are different from what the journalists (with B.A. degrees in a field with a dismal future) write about in their articles. The parents will not admit to their children what they are really buying: social acceptance. “You have to go to college.” Why? “Because it is the pathway to success.” Not any more, it isn’t, but it is the pathway to social prestige in the circles in which parents move.

The fact that any student can earn an accredited B.A. in the liberal arts in four years, and maybe three, for under $15,000, is never mentioned in the “college costs too much” articles. The journalists have never looked at the alternatives. They do not report on them. They just write their cookie-cutter articles that few parents will read and most will ignore.

If blindness is this bad in a field where parents have $50,000 to $200,000 on the line — after-tax money — consider the situation with central bankers. If the colleges still get a free ride, totally immune from criticism, think of the sweet deal that central bankers have, where people neither understand what is going on or can do anything about it.

Central banks today are the beneficiaries of a familiar law of government-run economics: failure is regarded with increased budgets. Massive failure is rewarded with budget increases and increased responsibility and power.

When it comes to civil government, nothing succeeds like failure.


Ron Paul writes a book, End the Fed. It sells well. We hear echoes of this on the Web. Yet what was the result of the FED’s disastrous policies, 2001-2007, which caused the recession in 2008-9? An increase in the FED’s supervisory powers over the banking system.

On March 10, 2010, Ben Bernanke testified before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. This was three days after the initial version — later revised — of the Dodd-Frank banking reform bill was released to the media.

Bernanke’s testimony is one of the classic cases of institutional self-puffery. Here is a man who oversaw the big bank bailouts. He engineered the swap of T-bills with toxic debt at face value, bailing out otherwise insolvent banks — had the Financial Accounting Standards Board’s rules not been reversed after the swap. Here are some highlights from his testimony.


The financial crisis has made clear that all financial institutions that are so large and interconnected that their failure could threaten the stability of the financial system and the economy must be subject to strong consolidated supervision. Promoting the safety and soundness of individual banking organizations requires the traditional skills of bank supervisors, such as expertise in examinations of risk-management practices; the Federal Reserve has developed such expertise in its long experience supervising banks of all sizes, including community banks and regional banks.


Here is the Ph.D.-holding expert whose relied on data and analysis supplied by hundreds of other Ph.D.-holding experts. None of them had seen the recession coming. But Austrian School economists had, and said so repeatedly. I was one of them.

What is needed? Why, more of the same!

But the supervision of large, complex financial institutions and the analysis of potential risks to the financial system as a whole require not only traditional examination skills, but also a number of other forms of expertise, including macroeconomic analysis and forecasting; insight into sectoral, regional, and global economic developments; knowledge of a range of domestic and international financial markets, including money markets, capital markets, and foreign exchange and derivatives markets; and a close working knowledge of the financial infrastructure, including payment systems and systems for clearing and settlement of financial instruments.

None of this had helped the FED to foresee the recession. But, have no fear! Tomorrow is a better day. The FED is so much wiser now, so much better informed.

In the course of carrying out its central banking duties, the Federal Reserve has developed extensive knowledge and experience in each of these areas critical for effective consolidated supervision. For example, Federal Reserve staff members have expertise in macroeconomic forecasting for the making of monetary policy, which is important for helping to identify economic risks to institutions and markets. In addition, they acquire in-depth market knowledge through daily participation in financial markets to implement monetary policy and to execute financial transactions on behalf of the U.S. Treasury. Similarly, the Federal Reserve’s extensive knowledge of payment and settlement systems has been developed through its operation of some of the world’s largest such systems, its supervision of key providers of payment and settlement services, and its long-standing leadership in the international Committee on Payment and Settlement Systems. No other agency can, or is likely to be able to, replicate the breadth and depth of relevant expertise that the Federal Reserve brings to the supervision of large, complex banking organizations and the identification and analysis of systemic risks.


What was the proper conclusion? Could anyone doubt it? Extend greater supervisory authority to the FED.

In summary, the Federal Reserve’s wide range of expertise makes it uniquely suited to supervise large, complex financial institutions and to help identify risks to the financial system as a whole. Moreover, the insights provided by our role in supervising a range of banks, includingcommunity banks, significantly increases our effectiveness in making monetary policy and fostering financial stability. While we await enactment of comprehensive financial reform legislation, we have undertaken an intensive self-examination of our regulatory and supervisory performance. We are strengthening regulation and overhauling our supervisory framework to improve consolidated supervision as well as our ability to identify potential threats to the stability of the financial system. And we are taking steps to strengthen the oversight and effectiveness of our supervisory activities.

The final version of Dodd-Frank bill increased the regulatory power of the FED. The FED got new control over the banks. We read in the detailed entry on Wikipedia:


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