Thursday, December 18, 2008

Extraordinary Arrogance From Central Bankers

I think Minyanville's Jeff Macke put it best yesterday when he said that Tuesday's Fed statement made Bernanke look more terrified than Matt Damon out of ammo at the end of Saving Private Ryan.

But not to be outdone, Bank of Canada Chief Mark Carney stepped up to the plate and specifically told banks to start lending more and to stop hoarding cash. Never mind that Canadians' job security is waning. Never mind that home prices in most major Canadian cities have started falling dramatically with still more supply coming on line. Never mind that our natural resource sector is contracting faster than anytime in recent memory. Forget about all of that. “What is clear to me is that there is unfilled demand for credit," said Carney.

I read this bit of news first thing in the morning. I had awoken from a strange dream where I was on a safari in Namibia - only the Jeep was being driven by a Lion and navigated by a Zebra. I wanted to go back to the dream. At least it was entertaining. The real world is disturbing.

What disturbs me the most, is the incredible amount of stupidity being displayed by Mr. Carney. Here is the man who holds more sway over the Canadian economy than anyone else. And he is advising more of exactly the same policies that got us into this mess in the first place. Perhaps it's not just stupidity. Perhaps it's arrogance. What Mr. Carney has essentially done is label the collective knowledge of every Canadian mortgage professional as worthless. That is stupid and arrogant.

Look at it this way. There are thousands of mortgage brokers around the country. They are all making individual decisions (more or less) about whether a certain credit applicant, be it consumer or corporate, is capable of paying back their loans. They all take in their knowledge about the applicant, their knowledge about the underlying economy, the amount the bank can make with interest rates at current levels and they make a decision. Currently their answer is no.

Maybe if Carney hadn't gone on a slash and burn campaign with interest rates, the banks may have found it more worthwhile to lend. Maybe not. We'll never know. But that's the point. No one person can ever know. Nor can some shadowy committee. It is the market that needs to be in charge of what interest rates are, whether banks lend, whether corporations borrow, etc. Only then can we expect some semblance of efficiency. When you put an entire economy in the hands of one person, is it any wonder that they will make mistakes?

Isn't that why communism always collapses under it's own weight of poor decisions?

Back to the article:

What Mr. Carney advocates is almost a Keynesian approach to banking, in which a buildup of capital in good times is used to fund lending in bad times. The argument is that it's similar to the government practice of using deficit spending to prime the pump in a recession.

Props to the Globe business journalist who actually knows what Keynesianism is. But I have to correct them. It's not "almost" a Keynesian approach. It is Keynesianism. Full stop.

In a speech to a business audience in Toronto, Mr. Carney warned about the “paradox of thrift,” which economist John Maynard Keynes coined to refer to destructive behaviour of individuals during a recession. At an individual level, people want to save more and invest less in a recession. But collectively, this makes things worse. Banks may decide to stop lending because they fear losses, but their behaviour exacerbates the downturn.

This is where Keynesians lose their marbles. Keynes always mentioned the "paradox of thrift" as the problem, yet never addressed the "paradox of extravagance" that inevitably precedes it. People and businesses can and do get too far into debt. And their paying back of debt - equivalent to saving - is the cure to this problem. To Keynes and his banking buddies, debt is a fantastic thing. The more the better. And the best cure for a debt problem is more debt. The Irish think the same way about drinking.

Keynesians have a problem distinguishing cause and effect. To them, history begins this morning. Nothing done in the past could possibly have any effect on today, and by extension, nothing done today can possibly have any effect on the future.

This kind of backward thinking is subscribed to by every central banker on the planet, every finance minister, and most economics professors. The credit crisis is not just about some bad loans. It is a reflection of the biggest ideological experiment the world has ever seen in economics. And it has failed miserably. One by one, these people need to be removed from public office and replaced with people of competence. There are thousands of Austrian economists waiting in the wings to clean up the mess the Keynesians have created. is a collection of many of the brightest.

It's time people started listening to them.

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