Absolving with Faint Criticism: A Media and Real Estate Mogul Defends the Fed

November 29, 2009 2:30 PM by J. Grayson Lilburne (Archive)

This post is one in a series entitled Posthumous Refutations. Previously in this series: Capitalism, Competition, Collaboration, and Kindness.

Media and real estate mogul Mortimer Zuckerman has written an op-ed piece in which he tries to deflect blame from the Fed, and even proposes giving it more power. In what amounts to a double-salvo on behalf of the Fed, the piece has been run in his own U.S News and World Report as well as the Wall Street Journal.

In it, he concedes that:

"(T)he central bank may have fumbled a bit in the evolution of the bubble economy."

Ever heard of "damning with faint praise"? Well saying the Fed "fumbled a bit" is obviously absolving with faint criticism. Mises demonstrated in Human Action, Chapter 20, Section 6 how economic bubbles are the result of credit expansion:

When under the conditions of credit expansion the whole amount of the additional money substitutes is lent to business, production is expanded. The entrepreneurs embark either upon lateral expansion of production (viz., the expansion of production without lengthening the period of production in the individual industry) or upon longitudinal expansion (viz., the lengthening of the period of production). In either case, the additional plants require the investment of additional factors of production. But the amount of capital goods available for investment has not increased. Neither does credit expansion bring about a tendency toward a restriction of consumption. It is true, as has been pointed out above in dealing with forced saving, that in the further progress of the expansion a part of the population will be compelled to restrict its consumption. But it depends on the particular conditions of each instance of credit expansion whether this forced saving of some groups of the people will overcompensate the increase in consumption on the part of other groups and will thus result in a net increase in the total amount of saving in the whole market system. At any rate, the immediate consequence of credit expansion is a rise in consumption on the part of those wage earners whose wages have risen on account of the intensified demand for labor displayed by the expanding entrepreneurs. Let us for the sake of argument assume that the increased consumption of these wage earners favored by the inflation and the forced saving of other groups prejudiced by the inflation are equal in amount and that no change in the total amount of consumption has occurred. Then the situation is this: Production has been altered in such a way that the length of waiting time has been extended. But the demand for consumers' goods has not dropped so as to make the available supply last for a longer period. Of course, this fact results in a rise in the prices of consumers' goods and thus brings about the tendency toward forced saving. However, this rise in the prices of consumers' goods strengthens the tendency of business to expand. The entrepreneurs draw from the fact that demand and prices are rising the inference that it will pay to invest and to produce more. They go on and their intensified activities bring about a further rise in the prices of producers' goods, in wage rates, and thereby again in the prices of consumers' goods. Business booms as long as the banks are expanding credit more and more.

And who is to blame for the credit expansion that caused the bubble? As Mises explained in Human Action, chapter 31, section 5, in modern times, credit expansion is exclusively a government prerogative.

today credit expansion is exclusively a government practice. As far as private banks and bankers are instrumental in issuing fiduciary media, their role is merely ancillary and concerns only technicalities. The governments alone direct the course of affairs. They have attained full supremacy in all matters concerning the size of circulation credit. While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion. Credit expansion is the governments' foremost tool in their struggle against the market economy.

After his mild concession of the Fed's non-divinity, Zuckerman reassures us of Bernanke's super-heroics:

But once the crisis hit, it was the Fed, under Chairman Ben Bernanke, whose innovative, imaginative response to the crisis literally saved the financial world.

Mr. Bernanke's Fed found new ways to pump liquidity into the credit markets that were on the verge of a total freeze-up.

"Pump liquidity" is a euphemism for credit expansion, so Bernanke's "imaginative" remedy for poison, was an even larger dose of the very same poison. Of course, it will only serve to do more harm, as Mises explained in Human Action, chapter 20, section 9 (emphasis added):

Out of the collapse of the boom there is only one way back to a state of affairs in which progressive accumulation of capital safeguards a steady improvement of material well-being: new saving must accumulate the capital goods needed for a harmonious equipment of all branches of production with the capital required. One must provide the capital goods lacking in those branches which were unduly neglected in the boom. Wage rates must drop; people must restrict their consumption temporarily until the capital wasted by malinvestment is restored. Those who dislike these hardships of the readjustment period must abstain in time from credit expansion.

There is no use in interfering by means of a new credit expansion with the process of readjustment. This would at best only interrupt, disturb, and prolong the curative process of the depression, if not bring about a new boom with all its inevitable consequences.

Zuckerman goes on...

This could only have happened because of the Fed's independence, experience in and understanding of the financial world, and its wide-ranging authority. No one could respond better than the Fed if the next crisis is anywhere near as severe as the last one.

...thereby serving as a high-profile enabler for the Fed's rampant "pretense of knowledge". Last December, Doug French applied F.A. Hayek's insight to Bernanke's Fed:

...as F.A. Hayek explained in his 1974 Nobel Prize acceptance speech, entitled "The Pretense of Knowledge," monetary and fiscal policies are the product of what he called the "scientistic" attitude, which is in fact unscientific in that it "involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed."

Just as it was 34 years ago, when Hayek delivered this seminal speech, which is included in the soon-to-be published book A Free-Market Monetary System, there is the belief that there "exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level."

So while Bernanke, Treasury Secretary Hank Paulson, and soon-to-be Treasury Secretary Tim Geithner think they can crunch the data, make a diagnosis, concoct the right monetary witch's brew, and inject lots of it to make us all employed and living happily ever after, the fact is that's impossible. In the physical sciences, that may work; but, as Hayek explains, "such complex phenomena as the market, which depends on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable."

The wise ones at the Fed and Treasury are only looking at factors that can be quantitatively measured and disregard any factors that can't. Thus, "they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant."

No single observer could know all the factors determining prices and wages in a well-functioning marketplace. But because policy makers think they know, "an almost exclusive concentration on quantitative measurable surface phenomena has produced a policy which has made matters worse," said Hayek back in 1974. Nothing has changed.

And Zuckerman's support for the expansionist Fed would have been no surprise to Mises:

As soon as the depression appears, there is a general lament over deflation and people clamor for a continuation of the expansionist policy (Human Action, chapter 20, section 7).

One must presume that Zuckerman, the real estate magnate, is particularly concerned over real estate deflation. And if this billionaire media mogul is making such an "on-stage" endorsement of the Fed in two huge outlets, just imagine what kinds of strings he's pulling behind the scenes.

And any who would dismiss the last paragraph as excessively "conspiracy theorist" should read Murray Rothbard's essay defending "cui bono" analysis and listen to his lecture on The Fed and the Power Elite.