Robert Wenzel: An Austrian Speaks to and Criticizes the New York Federal Reserve

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3 MIN READ - From the Desk of the Cautious Optimism Correspondent For Economic Affairs and other Egghead Stuff

With Jerome “Jay” Powell, President Trump’s nominee to chair the Federal Reserve, having cleared Senate Banking Committee testimony and expected to pass the full Senate confirmation vote it looks as though monetary policy won’t change very much with his term starting in early February. Powell is expected to continue his predecessor Janet Yellen’s easy money policy of very low interest rates, gradual hikes in the Fed Funds rate (expected at one quarter-point, three times a year) and a slow unwinding of the Fed’s massive $4+ trillion balance sheet. 

Stanford economist John B. Taylor, who proposed placing the Fed on a rules-based interest rate policy and ending discretionary overreach, drew eleventh hour praise from Trump for a possible nomination nod, but in the end the president embraced the status quo of easier money.

So now that we know no major change is coming to the Federal Reserve for at least four years, maybe we should take a look at what’s been wrong historically with the central bank for decades—that’s also not about to change. Austrian economist Robert Wenzel did precisely that a few years ago… at a speech within the Fed itself! 

(to read Wenzel's wonderful speech go to...

https://mises.org/library/new-york-fed-leave-building)

Wenzel was invited to speak at the New York Fed by accident, his inviting host unaware of Wenzel’s anti-Fed positions, but by the time the mistake was realized it was too late and Wenzel was allowed to make his appearance. Wenzel’s policy criticisms were many and quite entertaining (perhaps not for the employees who attended) and included:

-Mathematical methodology: Treating the literally billions of daily economic decisions made by American consumers and businesses like variables and constants that can be plugged into a scientific equation, as if the capricious and constantly-changing preferences of consumers share the predictability of mathematical constants in physics or astronomy.

-Dogma that demand is the primary driver of economic activity/growth and not production.

-The inability of Fed economists to differentiate between “price and wage stickiness,” which they consider a market phenomenon, and government-induced price stickiness such as unemployment benefits, pro-union legislation, and historically the wage-rigidity policies enacted by both the Hoover and Roosevelt administrations during the Great Depression.

-Obsession with maintaining stable or rising prices and apoplithorismosphobia (aka. deflationphobia). If, according to Fed policymakers, deflation creates depressions, how on earth did the American economy grow at its fastest rates ever during the Gilded Age when prices were falling on average one percent per year? How do the computer, cell phone, and flatscreen TV industries not only survive, but actually thrive when both their nominal and inflation-adjusted prices plummet year after year?

-Spawning asset bubbles, financial crises, and major business cycles with a misguided monetary policy that creates vast amounts of credit from thin air, unbacked by voluntary saving (ie. deferred consumption) from the public.

Wenzel also had some interesting notes on the Q&A at the end of his speech. In fairness, many of the attendees were good sports about the critique although many of their questions revealed they had absolutely no knowledge whatsoever of economic theories outside the mainstream Keynesian and Monetarist schools that dominate today’s academic and policy landscapes.