I had heard lots of people praising her, but until Robert Wenzel posted the below video on his site, I hadn’t actually watched Michele Bachmann asking Treasury Secretary Geithner and then Fed Chair Ben Bernanke a simple question: “Can you point to me where in the Constitution it gives you the authority to do these things?” (Perhaps not exact quote.)
What’s really hilarious is that I’m open to the possibility that Geithner truly didn’t understand her question. He tells her, “Congress gave us that authority.” She repeats, “But where in the Constitution?” and check out his furrowed brow. It is a riot.
Bernanke, in contrast, was a cool cat as usual and I think he fully understood the question. Now here’s something that’s very interesting: I didn’t watch the whole thing, but in the few minutes I did watch, Bernanke did NOT say, “Well I’m just an economist, and I don’t presume as you do that I know more about the Constitution than the Supreme Court.” In other words, that would have been a perfectly smooth handling of the issue as far as the general viewing public, and it’s also what the “right” answer is.
Yet the closest thing I heard to that defense was Bernanke talking about the “laws of the land.” I think it’s indicative of how little the people in DC think about abstract limits on their power. Everything is pure political expediency. If something gives you more power and makes it more likely you will be reappointed or re-elected, then it’s “good.” If it gets the citizens mad at you, then it is “bad.” Period.
I tease him a lot, but Robert Wenzel is right when he gloats that he has been blogging about the real reason the Fed wants to issue debt. (I recall much more pedigreed economists being baffled by the Fed’s request.)
So anyway, SF Fed Bank President Janet Yellen confirms Wenzel’s theory: The Fed wants to issue debt in order to suck reserves out of the system without having to wreck the mortgage-backed securities or Treasury markets. I didn’t see the connection with the Fed issuing debt, but–if you’ll permit some horn-tooting–I have been saying for quite some time that Bernanke has painted himself into a corner. Once price inflation really kicks in, he will have to suck reserves out of the system. But if the CPI starts blowing through the roof while the banks are still crippled and unemployment is still high, Bernanke will be reluctant to unwind all the life-support propping up MBS and keeping Treasury yields low.
So the “solution”? The Fed can sell its own IOUs to the public. So if you buy a note from the Fed promising you $10,000 in 2015, you write them a check today for it (for less than that, of course, to give you interest) and when the Fed processes the check it drains reserves from your bank.
I hope no one thinks this is a solution to the problem. Almost literally, what it does is shift (say) 10% inflation this year to (say) 15% inflation in two years. Unless of course the Fed just allows its debt to grow exponentially, which it probably will do.
The only way this can even work in theory, is if it buys the Fed enough time for the markets to recover so that selling off the MBS and Treasury bonds when the Fed notes come due, is more feasible. But if things continue to deteriorate–and if you don’t believe they will, I would like you to tell me what else the government would need to do and promise to do, in order to make you pessimistic–then we will be in the same spot in two years, except the Fed will now have an additional trillion dollars in new reserves it is supposed to pay out to its noteholders. Oops.
I have another cute and cuddly piece at the Daily Reckoning today. Some excerpts:
[T]he country is currently headed straight into a period of very rapid price hikes and a very bad recession. It would not surprise me at all if the national unemployment rate and the annualized rate of consumer price inflation both broke through into double digits by the end of 2009. Moreover, regardless of when it actually starts, I predict that things will get much worse before they get better, and that the United States will be mired in a malfunctioning economy for at least a decade, with price inflation in the double-digits (possibly higher) the entire time. We can call this condition “hyper-depression.”
All of the financial analysts are aware of this threat, but they foolishly reassure us, “Bernanke will unwind the Fed’s holdings once the economy improves.” But this commits the same mistake as the Keynesians during the 1970s: What happens when the CPI begins rising several percentage points per month, and unemployment is still in the double digits? What would Bernanke do at that point? Expecting the Fed chief to relinquish his new role of buying hundreds of billions in assets at whim, in the midst of a severe recession, would be akin to hoping that a dictator would end his declaration of “emergency” martial law in the middle of a civil war.
I don’t think the U.S. government is actually going to significantly cut greenhouse gas emissions. Rather, I think it is going to raise trillions of dollars that it then doles back out to industry. So the identities of carbon emitters will certainly shift from the political out groups to the connected people, but I don’t think we will return to the Stone Age. Of course, that’s almost worse than if we really did wreck the economy on the off-chance that it would avert global catastrophe. But nope, instead we will make the economy a lot less efficient, and if James Hansen is right then we will still be screwed.
Here’s Donald Hertzmark in a comment at MasterResource:
With regard to trade agreements and carbon restrictions, we are on thin ice in WTO terms if we slap countervailing duties on countries without carbon restrictions. Just such a tariff was promised by the Secretary of Energy last week, but I suspect it was not thought through, since the primary target would be the country that holds the biggest share of US treasuries, China.
In addition, the initial allocations would hit many industries that are already ailing, including autos. The temptation to tinker with the carbon allocation, perhaps even giving, say, GM, assistance in the purchase of its carbon permits, would likely prove irresistible to and earmark-addicted Congress.
In Europe they solved the allocation problem by handing out excess permits, so that the trades took place with non-existent carbon reduction. That is a neat solution, but it does nothing to change carbon consumption and sooner or later, like any market in non-existent commodities, it crashes, as indeed occurred.
So my challenge to the Obama Administration is: Man up, make your case for a carbon tax and accept the up or down decision.
Tyler Cowen tips us off to this:
Mr. Yamaguchi was in Hiroshima on a business trip on Aug. 6, 1945, when an American B-29 dropped an atomic bomb on the city. He returned to Nagasaki, his hometown, before the second attack, officials said.
I can’t decide how I want to crack a joke about this. I’m thinking I could say something like, “Whoa, I bet he doesn’t love America,” or maybe, “Huh, looks like the government can’t even make a lethal A-bomb,” or perhaps some sort of Watchmen reference, like calling this guy Dr. Nagasaki.
That’s the actual headline of this CNBC story. I think if European leaders* are telling your government it’s spending too much, people should sit up and take notice.
* And I realize Czechoslovakia has an interesting political landscape…
This is a tough one. On the one hand, I don’t want my son (our only child) thinking he has to lead a libertarian revolution, but on the other hand, I expect him to do great things with his life. But I think I would be just as pleased to see him become a (great) poet as a (great) mathematician or even a (great) restaurant owner.
I have high hopes for my son, but not big plans.
Because I have a new book coming that (I hope) will appeal to conservative fans of Rush Limbaugh and Glenn Beck, I reviewed my LvMI talk about my first book. I was worried that the speech–entitled (not by me) “How I Bamboozled Thousands of Conservatives Into Thinking Like Anarchists”–would turn these people off once I was “outed.”
Now it’s true, I am very radical in this talk. (Another hidden gem: My discussion of Jonah Goldberg’s infamous mugging of Gene Callahan. This was back when Gene wanted to be associated with the Institute of Ludwig von Mises.*) Even so, I must plead to being Ralphie when he reads his essay on what he wants for Christmas: “Wow that’s great.”
Go ahead and listen, conservatives. Prove me wrong, kids, prove me wrong.
* This is where I stir up controversy in order to increase Google ad revenues. I may discuss the libertarian approach to abortion in a future post.