Emperor Ben Has No Clothes

According to the author of the article, the continuation of Operation Twist by the Fed demonstrates the intellectual bankruptcy of Ben Bernanke. Promiscuous money printing since 2008 and interest rate manipulation has failed to boost our economy and Ben Bernanke seems to be blind to this fact.

Steve Forbes
06.27.12, 06:00 PM EDT
Forbes

The Federal Reserve’s announcement last month that it would continue Operation Twist--selling short-term Treasury securities and using the money to buy longer-term bonds--vividly demonstrates the intellectual bankruptcy of Ben Bernanke. The idea behind Operation Twist was that it would lower the rates of mortgages and corporate bonds, which would, in turn, rev up the economy. The failure since 2008 of promiscuous money printing and interest rate manipulation to reboot our stagnant economy has made no impression on Bernanke and the institution he heads. That such continuous failure has not led to soul-searching at the Fed, the White House, the Treasury Department, the mainstream media, Congress and the economics profession is astounding.

Are Governor Romney and his economic advisors studying the Fed’s failure--and, if so, what conclusions are they drawing?

Everlasting Euro

The euro is going to survive despite all the crises and the growing punditry consensus that this experiment is doomed to fail. The currency will live on for political reasons--Germany and France want it to.

From the fall of the Roman Empire in the 5th century through the mid-20th century Europe was continually wracked by warfare. The rivalry between the Teutons and Gauls was a staple for over a millennium. But today a major European war is utterly inconceivable. There was murderous fighting in the Balkans in the early 1990s, thanks to inept U.S. and European diplomacy. But the conflicts in the former Yugo­slavia never remotely came close to triggering a continental or global conflict, as they would have just a few decades earlier.

The economic and political integration of Europe, which has been a core U.S. diplomatic goal since 1945, has been an astonishing success. True, it’s very easy--and often justified--to criticize and poke fun at many facets of the post-World War II “European” project. The regulatory nature of the EU is a travesty of pettifogging rulemaking. The wasteful spending and corruption in Brussels is gargantuan. The countless summits of various cabinet ministers seem almost designed to subsidize luxury hotels and limousine services. But the big thing to keep in mind is that Europe is peaceful. In no other part of the world--except for the Americas, and that’s only because it is virtually subject to a pax Americana--can this be said. There is no U.S. equivalent in Europe, not even Germany.

Post-WWII German leaders have been in the forefront in supporting projects to tie the con­tinent together in peaceful ways that leave ­Germany in the position of a passive, good citizen. The euro was a pet project of German Chancellor Helmut Kohl (1982–98).

The stresses of the current economic troubles threaten all that’s been achieved since the early 1950s. France, despite its pretensions, knows it is no match for Germany in terms of power. So Paris, for all its huffing and puffing, will do everything it can to keep the EU together--which means keeping the euro alive. Berlin will do the same. The ­unraveling of the euro would have incalculable consequences, mostly bad, for the concept of a united Europe. Germany and France are the two most consequential countries in western and central Europe.

The current crisis is not a result of a lack of fiscal union or deeper political integration. Major fiscal and monetary errors based on bad economic ideas are to blame. The problems of Greece and Spain are credit problems. Imagine, for instance, if the state of Illinois were to default on its bonds. Would that mean Illinois would leave the U.S. dollar zone and adopt a new currency? Remember, for much of the 19th century--with the exception of the Civil War--individual states had far more power than the federal government. The states’ fiscal policies ranged all over the proverbial parking lot, yet none of them felt the need to adopt an independent currency.

Germany, the IMF, et al. are making the same mistake today as the U.S. and Europe did in the early 1930s: advocating crushing burdens for the private sector. Eighty years ago the weapons of destruction were taxes and tariffs. Today they are taxes, crushing regulation--especially with regard to the ­hiring and firing of workers--and loose money. Two years ago Britain’s capital gains tax--a particularly destructive levy--went from 18% to 28%. At the same time the government kicked the top personal tax rate up to 50% (which may be reduced next year to 45%). Italy is raising its VAT and applying a new levy on homeowners. And not long ago Spain raised both its corporate and income tax rates.

The weak euro is also hurting Europe. Currency instability guarantees subpar economic performance.

Next year the Romney Administration will likely work on pro-growth tax changes, which will serve as a much needed example for Europe.

The bottom line is that out of desperation Europe will move from today’s Hobson’s choice of anti-private-sector austerity or even more excessive money creation to policies that it pursued in the 1950s and 1960s (and Britain during the Thatcher era) of low taxes and sound money.

Freedom Will Outfox Control Freaks

One great virtue of free markets is that they undermine efforts to stifle competition--even those of the government.

Technology made money market funds possible in the early 1970s. Back then the interest rates that small savers could earn were set by government decree. If Washington said that banks could pay no more than 5% on long-term CDs, that was that, which is why savings institutions were always offering such gifts as free toasters to get you to open up an account. With the rise of money market funds individuals could get market rates, and Depression-era interest rate controls collapsed.

During the Depression states passed numerous so-called fair-trade laws to prevent “murderous” price discounting by merchants. After World War II Eugene Ferkauf opened the E.J. Korvette chain of stores, which discounted the prices of appliances. People loved the low prices, and fair-trade laws fell by the wayside.

Today the Internet is undermining anticompetitive practices in education and health care, something Rich Karlgaard touches on in his column (see Innovation Rules, p. 42).

In the aftermath of the ObamaCare fiasco you’ll see challenges to the Soviet-style regulations that inhibit competition in health care. Most states, for example, won’t let you open a hospital or clinic without some regulatory commissar giving you a “certificate of need.” As University of Chicago professor John Cochrane put it recently, “Americans will know there’s a healthy market when hospitals post prices on their websites.”

The legal profession is also starting to get hit by the whirlwinds of what Joseph Schumpeter called creative ­destruction. There’s a proliferation of legal apps that show you how to write wills and take care of other such tasks without the bother and expense of an attorney. There will soon be numerous businesses with low-paid lawyers manning call centers to answer any questions. Entrepreneurs in India will also train individuals to handle routine legal matters in the U.S., via the Web and phone. State bar associations will howl, but strictures preventing individuals from taking bar exams without first completing law school will be undermined by the Web. Honest lawyers will tell you that the last year or year and a half of law school is a waste of time. The old system of apprenticing in a law office and taking the exam will see a revival.

No wonder law school applications are plummeting as graduates have a more difficult time finding legal work. In fact, there’s a class action against certain law schools for allegedly guaranteeing that students would get jobs when they finished their studies.

Anticompetition forces, of course, will still fight free enterprise. For ­example, the Academy of Nutrition & Dietetics is working hard on the state level to restrict who can give advice in nutrition counseling (see Forbes.com contributor Michael Ellsberg).

Thankfully, the forces of innovation--which are alive and well in this country, despite the Obama Administration’s best efforts to quash them--are becoming even more formidable.

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