Princeton Abuses Volcker's Trust

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at www.AuContrarian.com.

Former Federal Reserve Chairman Paul Volcker (Princeton '49) returned to campus on May 30, 2014. He was treading in the devil's den and has been treated accordingly. It is the homeport of Alan Blinder, Paul Krugman, Ben Bernanke and an arsenal of other pint-sized sophists.

The Daily Princetonian, the campus newspaper, put words in Volcker's mouth that betray his trust and align him with the sorry characters whose contortions he despises. In a dialogue quoted by the Daily Princetonian. [All bold throughout is mine - FJS] the paper claims Volcker said: "The responsibility of any central bank is price stability. I was at the helm at that time. Price stability is two percent inflation, which we can't closely control anyway. They ought to make sure that they are making policies that are convincing to the public and to the markets that they're not going to tolerate inflation.

Price stability is zero percent and Paul Volcker has consistently made this clear.

Quoting from "Transparency has Landed":

"At the spring 2006 Grant's Interest Rate Observer Conference, Volcker told the audience the upstarts were a puzzle to him: 'A great mantra of central bankers these days is 'inflation targeting.' I don't understand that nomenclature. I didn't think central bankers were in the business of targeting inflation. I thought we were supposed to be targeting stability. We all say we are in favor of stability. You hear these speeches, Bernanke saying 'We are in favor of stability. That is why we are targeting inflation.' There is a certain semantic problem for me in that connection.

"Volcker went on to say he had returned from a central bankers' synod in Frankfurt, Germany. On the topic of inflation targeting, he believes he was the only dissenter in the room: 'The debate was me on one side and all of the central bankers on the other side.' It was explained to Volcker 'the importance of inflation targeting was to never go above that. There was an ironclad agreement to keep the inflation rate below that or below the target.'

"Volcker also told his audience: "I can remember my old professors at Harvard, in 1951 or so, saying a little inflation is a good thing. 'We don't want very much, but 2% is good.'"

Paul Volcker continues to punish "inflation targeting." On April 19, 2009, the Wall Street Journal published: "Kohn, Volcker Go Toe-to-Toe on Inflation Target." Donald Kohn was Vice Chairman of the Federal Reserve Board at the time.

From the Journal:

"Federal Reserve Vice Chairman Donald Kohn's question-and-answer session at a Vanderbilt University conference Saturday was going as countless others surely have in his years as a top policy maker. Until Paul Volcker raised his hand. Then, Kohn was grilled over the Fed's apparent effort to convey that it considers a roughly 2% inflation rate to be appropriate for the economy in the long term...  

 "I don't get it," Volcker said, leading to a lively back and forth between the two central-bank heavyweights.  

"By setting 2% as an inflation objective, the Fed is 'telling people in a generation they're going to be losing half their purchasing power,' Volcker said. And if 2% is the best inflation rate, and the economic recovery lags, does that mean that 3% becomes the ideal rate, he asked.

[Interrupting the Journal's account - from Federal Reserve Chairman William McChesney Martin half a century earlier, speaking to the Senate: "[Two] percent in a year may not seem startling, in fact, during the past year average prices have increased by more than 2 percent - but this concept of creeping inflation implies that a price rise of this kind would be expected to continue indefinitely. According to those who espouse this view, rising prices would then be the normal expectation and the Federal Reserve accordingly would no longer strive to keep the value of money stable but would simply try to temper the rate of depreciation. Business and business decisions would be made in light of this prospect." Our so-called economists can not argue against this point, so, they ignore it. This is simple mathematics.]  

"Kohn responded that by aiming at 2%, 'you have a little more room in nominal interest rates ... to react to an adverse shock to the economy.'" 

Not able to argue against simple math, the so-called economists have conjured this entirely specious bogeyman, the wiggle room to fight "adverse shock," that Federal Reserve Chairmen Martin and Volcker, who ran the shop through such horrors, knew was and is a fiction conjured by Inflationists.  

At Princeton, Paul Volcker directed his attention to the so-called economic professors:

Daily Princetonian: "And does high inflation matter as long as it's expected?"

Paul Volcker: "It sure does, if the market's stable. And if it is expected, then everyone adjusts, and it doesn't do you any good. The responsibility of the government is to have a stable currency. This kind of stuff that you're being taught at Princeton disturbs me. Your teachers must be telling you that if you've got expected inflation, then everybody adjusts and then it's OK. Is that what they're telling you? Where did the question come from?"

Paul Volcker will now be cited in economic papers as stating: "Price stability is two percent inflation."

To see how this works, we have the hot-off-the-press IMF Working Paper: "The Case for a Long-Run Inflation Target of Four Percent," by Lawrence Ball, June 2014. Whoever Lawrence Ball might be, this paper is the instrument of Olivier Blanchard, Chief Economist of the IMF, who has sought a 4% "inflation target" to produce "stable ..." for years.  

Following is the sequence of Ball's contrivance:

"Once inflation reached 4%, Volcker and his colleagues did not try to reduce it further."

Later in the paper, Ball drew on that sentence to claim the following: "Why do today's central bankers oppose 4% inflation when Paul Volcker did not?"

Then, by way of those two claims, Ball writes: "It was only around 1990 that central banks began to target inflation rates of 2% or less." In other words, 4% was OK with Volcker in the 1980s; it was only in the next decade central bankers decided they should target a lower rate.

Then, of course, Ball (Blanchard) makes the contrafactual claim: "In the United States, a four percent inflation target would have dampened the Great Recession of 2008-9."

This entire paper is anti-factual, from the very start.

In place of Ball's (really Blanchard's) sweeping claims, the following is from the FOMC transcript, at Paul Volcker's final meeting as Fed chairman, on July 7, 1987. The staff forecast (at the beginning of the meeting) was of a 4.0% to 4.5% inflation rate, with worries the rate was trending higher.

Federal Reserve Governor Wayne Angell mentioned "one can have very modest inflation - less than 4 percent; that's very plausible.". Chairman Volcker grumbled: "Barely less than 4 percent." Volcker went on to say, "the recent evidence is not very good in terms of what is happening in prices...And a lot of hard work will come unwound."

Paul Volcker opposed any inflation from 1987 up to the moment. These wicked men in positions of authority are destroying the public's trust. Paul Volcker manned the Fed in 1979 at such a moment and he restored public faith in American institutions. The so-called economists have destroyed the world economy beyond any possibility of such a restoration today. 

Mr. Hyde and Mr. Hyde

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

           Stanley Fischer is in the pipeline for the vice chairmanship of the Federal Reserve Board of Governors. In this capacity, he would bang heads to gather FOMC votes for (Presumptive) Fed Chairman Janet Yellen. According to the New York Times, Fischer would "exert a moderating influence on Ms. Yellen," (" For No. 2 at Fed, White House Favors Central Banker in the Bernanke Mold.")

            This is neither the job of the vice chair nor the inclination of the man.

            First, Fed vice chairmen do the dirty work, clearing the path for the chairman.

            Following are comments by Vice Chairman William McDonough at FOMC meetings in 1998 and 1999. The Chief Whip hectored FOMC members just after Chairman Greenspan told FOMC members how to vote:

August 18, 1998: "Thank you Mr. Chairman. I think your analysis was exactly right in regard to where we should be with the federal funds rate; that is Alternative "B."

September 29, 1998: "Mr. Chairman, I want to agree with your proposal to cut the fed funds rate by 25 basis points."

November 17, 1998: "Thank you, Mr. Chairman. I agree fully and rather enthusiastically with your recommendation."

December 22, 1998: "Mr. Chairman, I interpret that, as I'm sure you intended, as a recommendation for "B," symmetric, which I heartily endorse...."

February 2-3, 1999: "Mr. Chairman, I fully support your recommendation."

March 30, 1999: "Mr. Chairman, I not only support but applaud your recommendation."

May 18, 1999: "Mr. Chairman, I fully support your recommendation."

June 29, 1999: On page 64 of the transcript: "Mr. Chairman, I fully support your conclusions." On page 91 of the transcript: "Mr. Chairman, I fully support your conclusions."

August 30, 1999: "Mr. Chairman, I fully support your recommendation."

November 16, 1999: "Mr. Chairman, I fully agree with both the reasoning behind your recommendations and with the recommendation itself."

            The new vice chair will do the same. Stanley Fischer has midwifed the inflationary endgame for nearly 40 years. He will be sitting just where he belongs to prevent missteps in the grand plan. This does not mean he will succeed, but he understands the Greatest Flood since Noah's Ark must keep rising or we are sunk.

Second, Chairman Yellen will face formidable foes at the FOMC meetings in 2014. There are 12 Federal Reserve districts, 12 Fed district Presidents, but only five votes by Presidents at each meeting. (The seven Governors always vote.) Chairman Bernanke could not suffer dissention in 2013, even if he wished."Dissention is Overrated" on January 10, 2013, made this clear. Fed talk-show banter before FOMC meetings is unnecessary in 2013.

In 2014, Presidents Fisher (Dallas) and Plosser (Philadelphia) will fight the Fed chairman. A (Presumptive) Vice Chairman Fischer will press to gun inflation at a faster clip than even Janet Yellen would dare. Stanley Fischer is the most influential money printer in the world. His former students include Ben Bernanke, Mervyn King, Frederic Mishkin, and Mario Draghi. He is where he belongs.

            Fischer is not a man of half measures. He has received much attention here, such as on October 13, 2011, "The 8% Solution." The more salient comments from that diatribe:

The following sequence is a lesson in how bureaucracies insinuate their failures into accepted policy.

Stanley Fischer, current Governor of the Bank of Israel, doctoral Ph.D. thesis adviser to Ben S. Bernanke and to Greg Mankiw (at MIT), with stops at every institution of impeccable prestige among the anointed (chief economist at the World Bank, Vice Chairman of Citigroup) professed in 1997 that: "The fundamental task of a central bank is to preserve the value of the currency." That is the first sentence in "Maintaining Price Stability," a paper published when Fischer was First Deputy Managing Director of the International Monetary Fund. Five paragraphs later (wasting no time) Fischer wrote: "Barro (1995) and Sarel (1996) do not find clear negative relationship below 8 percent inflation..." [For the incredulous and perplexed reader, Fischer believes price inflation can run at an 8% rate, interest rates can hibernate at zero, and the real economy will be sound. This was back in 1997. Knowing how these creatures work, 16% inflation with no interest is probably the equilibrium rate today. - FJS]

We can be sure the conclusion rested on the result of some computer model. Barro (1995) and Sarel (1996) cited as their authority Fischer (1993), which is noted later in Fischer (1997).

In 2001, IMF economic researchers Mohsin S. Khan and Abdelhak S. Senhadji wrote a staff paper "Threshold Effects in the Relationship between Inflation and Growth." The authors declare "[F]irst identified by Fischer (1993)" [addressing inflation below an 8 percent rate], "inflation does not have a significant effect on growth, or it may even show a slightly positive effect." Note the change since the (1997) Fischer, from whom they quote: from "do not find clear negative relationship below 8 percent inflation," to "it [8% inflation] may even show a slightly positive effect." This sequence was arranged by Sheehan (2011).

The press blurbs that appeared the morning of December 12, 2013, were designed to relieve the wary of concerns that Professor Fischer might be an inflationist. The Washington Post fell in line: "[B]y September 2009 Fischer was raising interest rates." This was as head of the Bank of Israel. What was happening in Israel at that moment has not been investigated, but Israel does not have the ability to print money with abandon. (It has in the past, and suffered.) The United States is the reserve currency of the world that lifts all ships during a storm (so far), including Israel's.

In fact, on March 17, 2008, Bank of Israel headmaster Stanley Fischer offered Ben Bernanke advice in a Bloomberg interview. "You can inject liquidity into the economy and Ben Bernanke is an expert on this issue."

Later: "That the Fed will get on top of this, I don't doubt."

And: "Ben Bernanke is an outstanding economist."

We might surmise Ben Bernanke would only remain a great economist if he conjured a few trillion dollars into existence. (He has.)

The Bloomberg reporter expressed concerns to which the central planner replied in central-banker jive: "Fischer rejected the view that the Fed was orchestrating a bailout that would encourage investors to take greater risk in the future."

There is not a chance Fischer believed this. What else were they going to other than chase bond, stock, and post-human art markets?

           

The theoretician loftily claimed Bernanke would raise interest rates "long before inflation got out of hand." Of course, Fischer had no idea what Bernanke would or could do, since no central banker (nor anyone else) knows how to exit. At first, Dr. Jekyll could change back from Mr. Hyde, but then, could only remain Mr. Hyde.

            The Bloomberg story was published at a dire moment. Bear Stearns had failed. Its carcass was purchased by J.P. Morgan on March 16, 2008. It is not a coincidence the professor who understood the inflationary end game in 1980 reminded his lifelong tenured servant of what to do. (Go forth and multiply.)

            The most celebrated economist MIT ever produced expressed misgivings about Ben Bernanke's scholarship, specifically, the Ph.D. thesis anointed by Stanley Fisher. (It is my understanding that Robert Solow was primarily responsible for Simple Ben's paper.)

Not too long before he died, Paul Samuelson - the man who established MIT as a magnet for economics, was interviewed by The Atlantic (June 17, 2009). Samuelson wrote the best-selling economics textbook in history. In the interview, Samuelson reflected: "The 1980s trained macroeconomics - like... Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had....  I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression." [My italics. - FJS]

Samuelson, having administered a failing grade to the trainees, must have been appalled by the trainers. (Paul Samuelson was among the most intelligent economists of the twentieth century. After Samuelson defending his Ph.D. thesis, one of the professors, Joseph Schumpeter, turned to the other two, and asked: "Well, gentlemen, did we pass?" What happened after might help explain how economics went off the rails around mid-century. The American Keynesianism that Samuelson espoused was beneath him and certifiably incorrect.)

Simple Ben's Essays on the Great Depression ignore all economists who wrote before 1980. In the book, Bernanke mentions 139 names - 135 of whom are economists, mostly macroeconomists, and most having written after 1980. Their papers cross-reference each others. His essays never cite Benjamin Anderson (who was Chase Bank's in-house economist, writing about the mistakes being made a decade before the Depression), Ludwig von Mises (who also predicted a depression), as well as many others who wrote "on-the-spot," analyses in the 1930s.

            If Binyimin Appelbaum's "Young Stanley Fischer and the Keynesian Counterrevolution," is correct, the Vice Chairman Apparent sowed the seed that burned history and economics books written before 1980. Appelbaum, in the December 12, 2013, New York Times, writes that a 1977 paper written by Fischer led to a "counterrevolution." Fischer asserted "[c]entral banks...have the power to stimulate economic activity. Monetary policy can help economies recover from recessions.... [T]he new school [built on Fischer's paper - FJS] came to dominate central banking. Monetary policy makers, embracing its justifications of their powers, use New Keynesian models to plan and assess their campaigns."

            It is natural to ask "why" Fischer has been chosen to join the Fed. Without being there, it is impossible to know. The Obama administration's record of ad lib decisions is such a delightful packet of whimsy.

            "What" is more important. Fischer has no better idea how to "taper" (i.e.: extract the central banks from shoveling larger quantities of speculating, leveraged, uncollateralized credit across the globe). The Bernanke Fed cares most about stock market levitation. We can be sure Stanley Fischer knows this. He allocated 10% of the Bank of Israel's balance sheet to U.S. equities in 2012.  "Central Banks, Faced With Paltry Bond Returns Buy More Stocks" The new vice chairman will not be shy to introduce imaginative asset implosion prevention measures at the FOMC.

A Quarrel in a Far-Away Country between People of Whom We Know Nothing

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            Even for those living on a distant continent, the confiscation of state-guaranteed bank deposits in Cyprus is a reminder. (At this stage, it is not clear the Eurocrats will succeed.) Governments and central-banks blew their capital to save a financial Ouija board - not system - in 2008. Former Federal Reserve Chairman Paul Volcker reminded an audience last week there is no financial system: "And what I'm talking about is the international monetary system.  Of course you know it's hard to call it a system. A system concerns itself with some interrelated parts and a mechanism that are working together to produce some stability and progress.  That's hardly a description of the international monetary system.  And as many people have said, 'international non-system.'"

            The arbitrary decisions made by Americrats and Eurocrats in 2008, of what to save and what to sink, must veer towards sinking more and saving less in 2013. It has been noted the decision to confiscate bank deposits in Cyprus was a stupid move instituted by the acronyms (ECB, EU, IMF, G-somethings). This should remind residents in other countries that, first, what is theirs isn't, and second, relying on logic (e.g., "the government wouldn't do that, it would be shooting itself in the foot") is not a wise path to self-preservation.

            First, and foremost, the capital on which the bureaucrats can draw is low. That is financial, political, and psychological capital. In 2008, the central banks and governments stood behind the public's bank deposits and panic subsided. The veneer is much thinner now. Again, logic is not the path to estimating when the public recognizes its exposure, since that should have happened so long ago. These are states whose authority only exists as long as their paper-currency bills are trusted. (Yes, buy gold and silver).

All that is left is central-bank, money-printing and assurances of future money-printing - sometimes in the form of guarantees. The guarantees have been recklessly awarded. Revenues are harder to come by. Apparently - at least this is the current story - there was no other source of funds to back the failing Cypriot banks. The Eurocrats had drawn a line in the sand. They would only award X euros to save the banks. Cyprus had to supply the rest. The Euros would not accept debt issued by the Cypriot government as good collateral. (This is farce, given what is permitted.) Where to turn? The bond holdings in the banks were insufficient to make up the difference. Tax receipts are also insufficient, but the arbitrariness of what can be taxed and what constitutes a tax is constantly redefined in the western so-called democracies. So, the Cypriot government announced that bank deposits are hereby taxed - confiscated - to fund the deficiency. What value should bank customers place on deposit insurance in other countries?

Resourceful is spreading - reading a new interpretation by the minister of finance and administration in Spain. From El Pais, on March 19, 2013: bank deposits can be taxed since this would standardize taxes across regions. I have no idea what that means, not speaking Spanish only being one problem. Its importance though, should it be imposed, to the average Spaniard, is not the clumsy legal route to confiscation, but: "the government is taking my money."

Looking to the day of reckoning in the U.S., there are two other potential sources: private or public investment. Cyprus and Russia are negotiating now; Russia potentially supplying the missing capital. Foreign investors made the mistake of supplying U.S. financial institutions with capital in 2008. For the most part, that did not work out well for the investors. Cyprus is much smaller, though. Could Cyprus and Greece join a new ruble block?

Those with assets in the U.S. are well aware of resourceful money grabs by the government in recent years. Theft from General Motors bondholders is an example. When the Federal Reserve is buying 100% of the U.S. Treasury issues and bond yields are rising, the U.S. government will probably apply new confiscatory taxes on savings, investments, and assets. (U.S. Treasury gold holdings will become a point of contention, to express this vaguely, at some point.)

To look optimistically, the discrediting of the power brokers can not come too soon. These awful people are now so bereft of tolerable choices they write the script for their original sin when they speak. On March 19, 2013, German Finance Minister Wolfgang Schaeuble told "lawmakers" the current problem is the result of "a failed business model over decades." Schaeuble is acknowledging the euro was always a façade, a means to a different end than a functioning currency. If those who launched the euro wanted to establish a currency, a currency that required trust across borders in an experiment never before attempted, they would not have plagued it with bubonic pathologies.

Their intention was command and control, as the most prescient critic, Bernard Connolly wrote in his 1995 book, The Rotten Heart of Europe (a new edition was published in 2012): "My central thesis is that the ERM [Exchange Rate Mechanism] and EMU [Economic and Monetary Unit] are not only inefficient but undemocratic: a danger not only to our wealth but also our freedoms, and ultimately, our peace. The villains of the story... are bureaucrats and self-aggrandizing politicians." Monetary union "is a mechanism for subordinating the economic welfare, democratic rights, and national freedom of the European countries to the political and bureaucratic elites whose power-lust, cynicism, and delusions underlie the actions of the vast majority of those who now strive to create a European superstate. The ERM has been their chosen instrument and they have used it cleverly."