Federal Debt and Deficit

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Government Employment

The era of big government has returned with a vengeance, in the form of the largest federal work force in modern history.

The Obama administration says the government will grow to 2.15 million employees this year, topping 2 million for the first time since President Clinton declared that "the era of big government is over" and joined forces with a Republican-led Congress in the 1990s to pare back the federal work force...

Including both the civilian and defense sectors, the federal government will employ 2.15 million people in 2010 and 2.11 million in 2011, excluding Postal Service workers.

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Budgets Projections: 2010 v 2011

A $2 Trillion Increase

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Obama's Unemployment Forecast

For GDP, they are forecasting real GDP growth of 2.7% in 2010, followed by 3.8%, 4.3% and 4.2% in 2013.

For unemployment, the forecast is for an average of 10% in 2010, with a decline to 9.2% in 2011, 8.2% in 2012 and 7.3% in 2013


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Federal Deficits: Real v Projected

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Ben Bernanke Confirmed to 2nd Term

Ben S. Bernanke won Senate approval for a second term as Federal Reserve chairman, as supporters who credited his actions to stem the financial crisis and recession overcame opponents saying he failed to prevent them.

The Senate voted 70 to 30 to confirm the 56-year-old former Princeton University professor, the most opposition since the chamber started confirming Fed chiefs in 1978.

4th Quarter GDP 5.7%

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Restaurant Performance

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Comparing Recessions

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Recovering?

Larry Summers on the Economy

President Barack Obama's top economic adviser says the United States is experiencing an economic recovery on paper, but a "human recession" because of job losses.

Lawrence Summers, director of the White House National Economic Council, told a panel at the World Economic Forum Saturday that the latest figures showing strong U.S. economic growth suggest Obama's policies to prevent economic collapse are working.

But the level of unemployment in the U.S. is disturbing, with one in five men between the ages of 25-54 not working.

"What we see in the United States and some other economies is a statistical recovery and a human recession."

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Bank Failures

183 in the current period.

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Paul Volcker on Financial Reform

We have after all a system that broke down in the most serious crisis in 75 years. The cost has been enormous in terms of unemployment and lost production. The repercussions have been international.

Aggressive action by governments and central banks — really unprecedented in both magnitude and scope — has been necessary to revive and maintain market functions. Some of that support has continued to this day. Here in the United States as elsewhere, some of the largest and proudest financial institutions — including both investment and commercial banks — have been rescued or merged with the help of massive official funds. Those actions were taken out of well-justified concern that their outright failure would irreparably impair market functioning and further damage the real economy already in recession...

read the essay

Government Mortgage Support

To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

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Cartoon: Wall Street

Cartoon: Underwater Mortgages

Job Loss

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Entitlements

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Cartoon: Spending Freeze

Keynes v Hayek

Budget Freeze (Sorta)

President Barack Obama intends to propose a three-year freeze in spending that accounts for one-sixth of the federal budget—a move meant to quell rising concern over the deficit but whose practical impact will be muted.

To attack the $1.4 trillion deficit, the White House will propose limits on discretionary spending unrelated to the military, veterans, homeland security and international affairs, according to senior administration officials. Also untouched are big entitlement programs such as Social Security and Medicare.

The freeze would affect $447 billion in spending, or 17% of the total federal budget, and would likely be overtaken by growth in the untouched areas of discretionary spending. It's designed to save $250 billion over the coming decade, compared with what would have been spent had this area been allowed to rise along with inflation.

read the WSJ article

Peter Schiff on Banking Reform

Once again, President Obama completely missed the mark on the causes of and solutions to the financial crisis. In his speech this morning, the President outlined a major initiative to increase regulation of banks. He claims the financial crisis was caused by reckless speculation by greedy bankers in search of quick profits. What he fails to acknowledge is that this behavior was the direct result of the cheap credit supplied by the Federal Reserve and the moral hazard supplied by government regulations and subsidies.

In his efforts to prevent the next financial crisis, the President is focused on the symptoms rather than the disease. Therefore, his attempt to prevent future financial crises is doomed to failure, as the misguided policies that led to the last crisis are preserved while even more damaging policies are added. Current Fed policy is more reckless than before; continued subsidies to the mortgage market and the bailouts for banks are creating even bigger moral hazards; and, as a result, the economy is even more leveraged and more vulnerable to rising interest rates than ever.

The only way to prevent another financial crisis would be to reverse the fiscal and monetary policies that lead to the last crisis, and which now threaten to bring on an ever larger one. However, this Administration seems to lack the brains or the guts to do it.

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Consumer Debt

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Saving Jobs

And the White House came right out and with a straight face said it had saved 2 million jobs. How do you like that? More than 7 million jobs have disappeared in the correction so far. But the total would have been more than 9 million, had it not been for the feds.

Let’s see, $700 billion worth of stimulus spending…hey, that’s $350,000 per job. But every dollar of deficit is actually ‘stimulus spending.’ At that rate, each job cost about $800,000. And what about all the Fed’s pump priming? What about all the loan guarantees and toxic asset purchases…and bailouts of the auto industry, AIG, the banks, mortgage holders, Fannie and Freddie…etc. etc? That’s all stimulating too, isn’t it? The total is said to be around $13 trillion, putting the cost at $65 million for each job saved.

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The Housing Bust is Not Over

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Cartoon: Accounting

Cartoon: Choices

The Economic Debate

The domestic debate, which I and many other libertarians have addressed several times in the past, involves the question of what has caused America’s economic woes.

One side — the statist side — claims that the problem lies in freedom and free enterprise.
The other side — the libertarian side — contends that our nation’s economic woes lies in the failure of the welfare-state, regulated-economy way of life that America has embraced since at least the 1930s.

The different diagnoses lead to two completely different solutions.

The statists say that since the problem is rooted in too much economic freedom and not enough regulation, the solution is to establish more government control over economic activity.

The libertarians say that since the problem is rooted in socialism and interventionism, the solution is to dismantle the welfare-state and regulatory programs (and the taxation funding them) and let genuine economic liberty reign...

What is that motivates U.S. statists to blame America’s economic woes on “freedom and free enterprise” rather than on America’s 70-year experiment with welfare-statism and regulation.

read the entire essay

Cartoon: Job Market

December 2009 Unemployment: 10%

The Labor Department reported that the unemployment rate held steady at 10.0 percent in December and nonfarm payrolls declined by 85,000, much worse than analysts' estimates.

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Cartoon: Incentives

Cartoon: New Revenue Idea

Bad Economic Times

Recession is Over...Depression Continues

If you read the papers you’re likely to think that the recession is over…we’re in full recovery mode…with rising sales, rising production, and rising prices. This year is going to be a good one for stocks…and the US economy is coming back stronger than expected.

Is it true?

Well, it’s sort of true. The recession is over…the depression continues. As we keep saying, if you’re going to make a royal mess of things, you need taxpayer support. And with the unwitting and unwilling support of millions of American taxpayers, the federal authorities are busily making a bad situation worse.

read the essay

Economic Recovery???

We’re in a depression. It won’t end until it has done its work. And, with the feds trying to block it, prevent it, hold it off, deflect it and retard it, it could take years before this depression has finished its job.

Martin Feldstein, an expert on business cycles:

“The recession isn’t over.” In a Bloomberg Radio interview on December 17th.

David Rosenberg explains that 90% of the ‘growth’ in the third quarter came from stimulus measures. And that still only produced a 2.2% annualized GDP increase, far below the rates typical at the end of a recession.

“What is normal is that the first quarter of post-recession growth is that real GDP expands at a 7.3% annual rate; 2.2% is really nothing to get excited about – it’s actually quite worrisome...

The US is fast becoming the worst kind of banana republic…one with ice storms and no bananas.

read the entire essay

John Taylor v. Ben Bernanke

John Taylor, creator of the so-called Taylor Rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta...

Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006.

“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.

Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

read the article

Keynesianism and the Lost Decade

The Austrian free-market economists use common sense principles. You cannot spend your way out of a recession. You cannot regulate the economy into oblivion and expect it to function. You cannot tax people and businesses to the point of near slavery and expect them to keep producing. You cannot create an abundance of money out of thin air without making all that paper worthless. The government cannot make up for rising unemployment by just hiring all the out-of-work people to be bureaucrats or send them unemployment checks forever. You cannot live beyond your means indefinitely. The economy must actually produce something others are willing to buy. Government growth is the opposite of all these things...

It is time to be honest about our problems.

The tragic reality is that this fatally flawed, but widely accepted, economic school of thought called Keynesianism has made our country more socialist than capitalist. While the private sector in the last ten years has experienced a roller coaster of booms and busts and ended up, nominally, about where we started in 2000, government has been steadily growing, because Keynesians told politicians they could get away with a tax, spend and inflate policy. They even encouraged it! But we cannot survive much longer if government is our only growth industry...

but if we continue to listen to Keynesians in the next decade instead of those who tell us the truth, zero will start to look pretty good. The end result of destroying the currency is the wiping out of the middle class. Preventing that from happening should be our top economic priority.

read the entire essay

Ben Bernanke's Speech

“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment.”
-Chairman Ben S. Bernanke, Federal Reserve

read the entire speech

Barry Ritholtz responds:

An honest assessment of the crisis’ causation (and timeline) would look something like the following:

1. Ultra low interest rates led to a scramble for yield by fund managers;

2. Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers;

3. Since they were writing mortgages for resale (and held them only briefly) these non-bank lenders collapsed their lending standards; this allowed them to write many more mortgages;

4. These poorly underwritten loans — essentially junk paper — was sold to Wall Street for securitization in huge numbers.

5. Massive ratings fraud of these securities by Fitch, Moody’s and S&P led to a rating of this junk as TripleAAA.

6. That investment grade rating of junk paper allowed those scrambling bond managers (see #1) to purchase higher yield paper that they would not otherwise have been able to.

7. Increased leverage of investment houses allowed a huge securitization manufacturing process; Some iBanks also purchased this paper in enormous numbers;

8. More leverage took place in the shadow derivatives market. That allowed firms like AIG to write $3 trillion in derivative exposure, much of it in mortgage and credit related areas.

9. Compensation packages in the financial sector were asymmetrical, where employees had huge upside but shareholders (and eventually taxpayers) had huge downside. This (logically) led to increasingly aggressive and risky activity.

10. Once home prices began to fall, all of the above fell apart.

It became readily clear to me once I dug into the data, legislative history, market activities, etc, that there was no one single factor that caused the collapse. Rather, an honest reading of events was that there were many, many failures occurring in a very specific order that contributed to what occurred.

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The Lost Decade

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Mark Thornton on the Economy

It would seem that under "normal" conditions that most of the economic crisis would have been over by now and that prospects for the future would be brightening. However, the world wide stimulus and bailouts have significantly slowed and distorted the normal correction process and may have set us up for the possibility of more stock market volatility and crashes, foreclosures, and unemployment in 2010.

If you take all the reporting about the economy and you delete everyone but those who actually study the real workings of the economy, rather than just statistics and government reports, the common themes are that government programs have failed to address the problems of the real economy and that things are actually getting worse, not better.

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Who is to Blame fo the FY 2009 Deficit?

Some Republicans, for instance, complain that Obama tripled the budget deficit in his first year. This assertion is understandable, since the deficit jumped from about $450 billion in 2008 to $1.4 trillion in 2009. As this chart illustrates, with the Bush years in green, it appears as if Obama's policies have led to an explosion of debt. But there is one rather important detail that makes a big difference. The chart is based on the assumption that the current administration should be blamed for the 2009 fiscal year.




While this might make sense to a casual observer, it is largely untrue. The 2009 fiscal year began Oct. 1, 2008, nearly four months before Obama took office. The budget for the entire fiscal year was largely set in place while President Bush was in the White House.

So if we update the chart to show the Bush fiscal years in green, we can see that Obama is mostly right in claiming that he inherited a mess.

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Stock Market: Good Year, Bad Decade

For the year:

Dow 18%
S&P500 23.5%
Nasdaq Comp 44%

For the Decade:

Dow -8.34%
S&P500 -0.9%
Nasdaq Comp -44.2%

“It’s been a decade of delusion,” said Richard Tedlow, professor of business administration of Harvard Business School in Cambridge, Massachusetts. “In many ways, we’re worse off than the 1930s, we’ve created problems of moral hazard and we’re faced with an astounding public debt.”

source and source and source

Cartoon: Mission Accomplished

Cartoon: Banking Regulations

The Economy 2010 and Beyond

Is it a bounce or a bull market? We’ll stick with the bounce hypothesis a while longer; until we’re proven right…or people start laughing at us, whichever comes first.

Meanwhile, the man on the street is not taking chances. While he probably believes the claptrap from Washington and Wall Street, he also knows that his house has lost 30% of its value and that if he loses his job he’ll have a hard time finding another one. So, he’s cutting back – just like he should...

The economy can’t go back to the Bubble Epoque. That period was irreproducible. Consumers were able to live beyond their means by borrowing against their houses (or, ‘taking out equity,’ as they liked to say.) Those days are gone forever...

Depressions take time to express themselves. Remember, they are not pauses in the life of an otherwise healthy trend. They are what happens after the trend drops dead. Then, the economy needs to reinvent itself. At first, people don’t want to believe it. They try to revive the old business model. They bet that the old companies will quickly return to robust health; they buy their stocks. They demand that the government do something to save the poor, ailing economy.

But it’s not that simple… You can’t revive a dead economy. And when you realize the old economic model is, in fact, a corpse…it’s depressing.

The US economy (and much of the rest of the world economy) can no longer depend on increasing consumer debt. We need a new model…a new business plan… The sooner we find one, the better off we all will be.

read the entire essay

Bush: Big Spender

Figure 1 shows the average increase in total spending under recent presidents. Bush II was the biggest spender since LBJ. His spending increases were far larger than the three prior presidents.

Of course, presidents share spending power with Congress and it is easier for presidents to control discretionary spending than entitlement spending. Nonetheless, the results in these charts reflect the general spending approach taken by the presidents quite well. For example, Bush II was instrumental in adding the Medicare drug benefit, which by 2009 was adding more than $60 billion a year to federal spending.

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FY 2009 Totals

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US Manufacturing

If the U.S. manufacturing sector were a separate country, it would be tied with Germany as the world's third largest economy. It would also be larger than the entire economies of India and Russia combined. As much as we hear about the "demise of U.S. manufacturing," and how we are a country that "doesn't produce anything anymore," and how we have "outsourced our production to China," the U.S. manufacturing sector is alive and well, and the U.S. is still the largest manufacturer in the world.

Workers today produce twice as much manufacturing output as their counterparts did in the early 1990s, and three times as much as in the early 1980s, thanks to innovation and advances in technology that have made today’s workers the most productive in history.

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Dark Chocolate Bacon

Financial Meltdown Article

Lost Trust: The Real Cause of the Financial Meltdown
by Bruce Yandle

Accounting standards, credit ratings, and credit-default swaps were created to help facilitate financial transactions by fostering trust. In the run-up to the credit-market freeze of 2008 those assurance mechanisms collapsed under the weight of political and regulatory pressures to aggressively expand homeownership and other policies.

read the article

Cartoon: Capitalism and Bailouts

The Problem is Central Banking

PRESIDENT BARACK OBAMA HEADS the list of Americans who believe that the continuing financial crisis should be blamed on excessive risk-taking by bankers who had an unbridled desire to make money in mortgages. These would-be reformers want stronger government regulation of the bankers to make sure that nothing like this ever happens again...

A deeper examination, however, reveals that this is neither a housing crisis nor a Wall Street banking crisis. This is a monetary crisis, rooted in the lending of money created out of thin air. This is what leads to economic booms and busts.

The current crisis goes back to the Asian Contagion of 1997 and the meltdown of the Long Term Capital Management hedge fund in 1998. In response to each of these situations, the Federal Reserve cut interest rates and rapidly expanded the money supply...

Healthy economic growth is supported by savings, rather than newly created money. People and businesses save and invest the money they don't need to consume right away. They make loans and investments that create computer equipment, copper mines, retail stores, and new homes...

How many more crises must we endure until we realize the common denominator is the creation of money and credit by the Fed? Wall Street bankers and speculators, who try to game the system and make profits during each boom, are mere bit players in these crises. By fostering the booms and triggering the busts, the real villain is the institution of central banking itself. Thus, instead of providing stability to the economy, central banking has created great instability. Until this is understood, we will make little progress in preventing future crises or easing the current one.

Lurching from crisis to crisis in boom-bust fashion is unacceptable and unnecessary. The Federal Reserve must stop juicing the economy with massive amounts of newly created money and move to a monetary system free of government-caused booms and busts.

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Gold: The Trade of the Decade

“A $100 investment in gold would now be more than $380,” Bloomberg calculates, “while the same sum in commodities would have grown to about $357, according to the Standard & Poor’s GSCI Enhanced Total Return Index.”

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The Debt Bubble

We also highlighted some of the disturbing New Math that this chart implied. Specifically, we reported, “The government will have to cough up $1.6 trillion just by the end of March. Ten years from now, the mere cost of servicing the debt is expected to reach $700 billion annually, more than three times the current burden.”...

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Cartoon: Underemployment

Cartoon: Stock

Keynes v. Hayek: A Rap

2009 3rd Quarter GDP Declines to 2.2%

Estimates of the growth rate for the U.S. economy are starting to sound more and more like earnings estimates - you hear everyone talking about much larger numbers for months and months and then, when the final figures are reported, they prove to be a bit disappointing, in this case revised down from 3.5 percent, to 2.8 percent, to a final reading of 2.2 percent.

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Central Banking and Central Planning

What is being ignored is the more fundamental question of whether the Fed should be attempting to set or influence interest rates in the market. The presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending. The only disagreements among the analysts and commentators are over whether the central banks should keep interest rates low or nudge them up and if so by how much...

At the heart of the problem is that fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources – land, labor, capital – are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures?

Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.

read the entire essay

My thoughts: An outstanding essay explaining why the Fed is doing more harm than good.

The Housing Crisis is Far From Over

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Cartoon: Central Planning

Consumer Price Index

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My thoughts: So much for deflation, here comes double digit inflation.

Peter Schiff on the Economy

Although Barack Obama has refrained, at least for now, from delivering triumphant speeches in a naval flight suit, there is nevertheless a strong tone of accomplishment emanating from the President and his deputies. Over the weekend, top White House economic adviser Lawrence Summers even pronounced that the recession is now over. Without hedging his bets, Summers declared that thanks to the Obama Administration's wise stewardship, economic stimuli, and emergency bailouts, another Great Depression, set up by the prior Administration, had been narrowly averted. Summers saw no impediments to the return of sustainable growth. He may as well have delivered these remarks from the deck of an aircraft carrier.

I hate to shoot down these high-flying expectations, but the economy is not improving. All that has changed is that we are now more indebted to foreign creditors, with even less to show for it. Washington's current policies have once again deferred the fundamental, market-driven reforms needed to redirect us onto a sustainable path. Instead, through aggressive monetary and fiscal stimuli, we are trying to re-inflate a balloon that is full of holes. This was the Bush Administration's exact response to the 2002 recession. It's shocking how few observers note the repeating pattern, especially the fact that each crash is worse than the last...

First, a closer look at the jobs numbers shows that employment improved in sectors that benefited most directly from monetary or fiscal stimulus: government, healthcare, financial services, education and retail sales...

Second, major investment and commercial banks are not back on their feet, but remain fundamentally insolvent...

Third, while it is true that home prices have stopped falling, this represents failure, not victory...

Finally, it is true that the GDP yardstick shows an economy returning to growth. However, as I have often repeated, this measure has deep flaws that render it almost useless for judging the soundness of an economy...

But for now, the chattering classes believe strong government action has delivered us from calamity. For them, at least, it's “mission accomplished!”

read the entire essay

National Debt Held by Foreign Nations

Who Owns America's Debt - A Dynamic Perspective on Major Foreign Holders of Treasury Securities (2002-Present) from Michael J Bommarito II on Vimeo.

Bank Failures

Visualizing Bank Failures ( 2008-2009 ) from Michael J Bommarito II on Vimeo.

Cartoon: GDP

Paul Samuelson Dies

Mr. Samuelson, the first American to win the Nobel Prize in economics and the author of a ubiquitous college textbook, was "one of the greatest teachers that economics has ever known" and "a titan of economics," said Federal Reserve Chairman Ben Bernanke, a former student of Mr. Samuelson's at the Massachusetts Institute of Technology...

In 1970, Mr. Samuelson was the first American to win the Nobel Prize in economics, the second year the prize was offered. "Samuelson's contribution has been that, more than any other contemporary economist, he has contributed to raising the general analytical and methodological level in economic science," wrote the Nobel prize committee. "He has in fact simply rewritten considerable parts of economic theory."

from the Wall Street Journal


Samuelson was fully aware of his world-wide influence. He declared that "I don't care who writes a nation's laws -- or crafts its advanced treatises -- if I can write its economics textbooks".

In his textbook he praised central planning and predicted the future higher standard of living in the communist world...

Unfortunately for all of us, almost everything that this truly gifted and talented man said, wrote and believed in resulted in less freedom, bigger government and widespread poverty here and around the world.

Requiem for Samuelson


An evil man who should be remembered along with Stalin and Hitler. May he be rotting in Hell now.

S.M. Olivia

Obama's Economic Policy: A Critique

As the government runs from one whimsical plan to another, all that market participants can be sure of is that there will be more regulation and intervention, and that the people will be soaked by taxes either direct or indirect. Since businesses are unsure of the economic environment, but rightfully anticipating (though, in my opinion, underestimating) an increase in outright socialism, this uncertainty will surely quell economic growth.

Thus, we see that Obama's policies are not only misguided but also incredibly destructive. If instead of letting the economy liquidate, painful as it may be, we try to continue the illusory boom, we will be doomed to years of unemployment, stagnation, and ultimately the "crack-up boom" of the economy. And this isn't even to mention the threats posed to our economy by national healthcare, cap-and-tax, and, even scarier, Mr. Obama's foreign policy.

Each and every one of these policies retards the necessary adjustment, depriving businesses of valuable assets that can be put to more profitable lines of work and depriving consumers of the products they seek at true fair-market value. The only way to create jobs and fix a broken economic model is to release the entrepreneurial forces of America. Unfortunately, it appears that President Obama does not care for this solution, preferring to ensure a prolonged depression to serve his political ends.

read the entire essay

Cartoon: Fed "Leadership"

The Fed: Academics v. Populist

A group of academic economists — including several Nobel Prize winners, leaders of respected economic journals and former Fed officials — is dialing up its call for lawmakers to drop plans to subject the Federal Reserve to more scrutiny by the Government Accountability Office, an investigative arm of Congress.

In a letter to leaders on the Senate Banking Committee and House Financial Services Committee, the economists say a bill proposed by Rep. Ron Paul (R., Tex.) and Alan Grayson (D., Fla.) to let the GAO review Fed monetary policy would do “serious harm to the economy.” They warn increased congressional oversight would harm the Fed’s independence and ability to fight inflation.

Mr. Paul has built a popular movement in part on his attacks against the Fed and won large support in the House for his bill. Ben Bernanke, Fed chairman, has a growing body of academics on his side. Some 270 economists have signed the letter, including Edward Prescott, Myron Scholes, Daniel McFadden, Fynn Kydland, Roger Myerson and Robert Engel, all Nobel winners.

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My thoughts: The Fed has two major goals: promote economic growth and price stability.
They have failed on both counts. The first failure is obvious as we are mired in one of the deepest and longest post WWII recessions. The second should be obvious, but unfortunately it is not. The dollar has lost roughly 95% of its value since the creation of the Fed. This is not price stability. We have been conditioned to think in nominal terms. Too many people believe that 2-3% annual is normal or desirble; it is neither. Auditing the Fed is the first step toward ultimately killing the creature from Jekyll Island.

Falling Dollar: Winners and Losers

Since 2002, the dollar has lost about a third of its value compared with other currencies. That doesn't sound good — and it's not, if you're a Japanese exporter or an American tourist. But it is potentially great news for American workers.

Experts argue about the many effects of the dollar's fall and what it says about confidence in the American economy, with its decades-old trade deficit and mounting national debt. But there are also more predictable effects replayed in each decline.

Last week, as President Obama convened a summit meeting on unemployment, the devalued dollar was already doing its part to create jobs by making American goods cheaper abroad.
"I don't think anything they can come up with is as powerful as the dollar declining," said Kenneth S. Rogoff, a Harvard economist. "It's a good short-term boost. Every country's manufacturing sector loves it when the currency has a moderate depreciation."

But the benefit to American exporters goes only so far. Some economists say it hurts industry in the long run: companies can reap the rewards of the falling dollar without improving products or productivity. When the dollar rebounds, they falter anew.

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Book Review: Where Keynes Went Wrong

Where Keynes Went Wrong by Hunter Lewis

reviewed by David Gordon

Defenders of Keynes, such as the recent convert Bruce Bartlett, often claim that he supported capitalism. (Bartlett's The New American Economy has this as a primary theme.) His interventionist measures had as their aim not the replacement of capitalism by socialism or fascism. Rather, it is alleged, Keynes aimed to save the existing order.

The unhampered market cannot by itself recover from a severe depression or at best can do so after long years of privation and unemployment. Keynes discovered a way by which the government, through an increase in spending, can restore the economy to prosperity. Only diehard purists could spurn Keynes's gift to capitalism. Without it, would not revolutionary pressure mount in a severe depression to overturn capitalism and replace it with socialism or fascism?

Hunter Lewis convincingly shows the error of this often-heard line of thought. Keynes, far from being the savior of capitalism, aimed to replace free enterprise with a state-controlled economy run by "experts" like him. His prescriptions for recovery from depression do not save capitalism: they derail the price system by which it functions. As one would expect, Keynes lacks sound arguments to support his revolutionary proposals. Quite the contrary, Keynes defied common sense and willfully resorted to paradox.

Indeed, as Lewis points out, the entire Keynesian edifice rests on a central paradox: impeding the central mechanism of the free market will restore prosperity. The free market works by price adjustments. If, e.g., consumers demand more of a product than is currently available, suppliers will raise their prices so that no imbalance exists. As consumers shift their demand from product to product, businesses must adjust their production schedules to meet changing preferences. If firms fail to do so, they face extinction...

Lewis's book is an ideal guide to Keynes's dangerous and destructive economics.

read the full review