 Our next speaker is Dr. Peter Klein. Peter, why don't you come up here. Peter is a professor of economics that, excuse me, teaches economics at the University of Missouri, also taught at the University of Georgia, teaches in Copenhagen, the author or the editor of five books. But I want to mention one new thing about Peter and make an announcement that he's going to be joining the institute as our executive director and looking forward to having him come to Auburn. I'll just tell a couple of stories. I always remember this was in 1988 when Peter was leaving Chapel Hill and going to get his PhD at Berkeley and wrote to the institute for some help. And I read his letter, and Judy Thomason is our publications editor, reminded me the other day of just how a gog I was when I saw this letter, and I immediately called Murray Rothbard. And I said, Murray, I've just gotten the most extraordinary letter from a student I've ever seen. And may I fax it to you? And if you agree with me, would you talk to Peter? So Murray was very excited, he did indeed talk to Peter. And Peter was very close to Murray, to the late Bert Blomert, who was our chairman at that time. And I could tell many other stories about Peter, I'll just mention one other. As a postdoc, you spent a year internship with Bill Clinton's Council of Economic Advisors. So about four or five months after he finished his year in Washington, I get a visit from a local FBI agent. He's wanting to check out Peter's bona fides and see if he's a security risk because he's going to have this internship. And I said, but he's already had his internship, it's already over. And this guy said, you know the government. So I said, yes, I do know the government. But before Peter talks to us about the inner workings of the Fed, I want to mention our donor societies. These are societies for our best donors. And we have, I heard from Doug French and his wife Deanna Forbush, they're both members of the Haslitt Society, Dr. Don Prince, member of the Hayek Society. We're going to induct two new members today, if I can call up Dr. Richard Cosman first. Dick? Peter's going to put your pin on you. Well, thank you. Dr. Cosman is a neuro-ophthalmologist in New Jersey. And I must say, like all the significant Mises Institute donors, I know of very scholarly and learned man. So we're very grateful for his, for all his help. Dick, thank you. I don't want to stab him as... Dick, thank you. Thank you, Lou. And let me take a moment to thank Lou and the Mises Institute and the extended Mises family for their contributions to the intellectual growth and development of this nation and the world at large. And I feel very privileged to have been able to have my own intellectual development sponsored through the Institute. I thank the good Lord for that. Thank you. Steve? We've heard a lot of slurs against Princeton today, but I want to mention that Steve is a graduate of Princeton. And so not everybody is bad that comes out of there. Especially in economics, Steve could go on about his many achievements in the financial realm, especially since he co-founded Adamus Partners in Boston. I mentioned that Ken Garshina was a very successful Ostrow hedge fund manager. This is the other very successful Ostrow hedge fund manager in our country. And he's being inducted into the Rothbard Society. And we're very grateful, Steve, that you're sharing your success with us. So come up there and Peter put his pen on. All right. Thanks. We needed my wife here to fit me with the pen. The good news is that I only took one economics course at Princeton. It was the introductory economics course. So I had very little to unlearn when I got out of college. The lasting damage was quite slight. But I would also like to thank Lou and the Mises Institute, Walter Block, who I've grown close to over the years. I feel like he's my older brother and mentor. I wish I could see him more often. But the Mises Institute is a guiding light in my life. It keeps me sane during these turbulent, chaotic market times. And the only other thing I'd like to say is that I'm a little bit leery about this public recognition, because now I will clearly be on the enemy's list of Obama and Romney. Probably was already on the enemy's list of both anyways, but this will kind of cement my place on that list. Thank you, Steve. I might just mention that Steve is on our investment committee, and the institute has been the benefactor in that sense, too, of his generosity. So Peter, come ahead. Thank you so much, Lou. Thanks to all of you for being here. It's been my privilege and honor to be associated with the Mises Institute for many years since my graduate school days, and I'm delighted for the opportunity to join the staff and to continue to work with all of you to move the Mises Institute forward. My remarks today on the inner workings of the Fed are based on testimony that I gave in May of this year to the Domestic Monetary Policy and Technology Subcommittee of the House Financial Services Committee. That's the subcommittee, of course, headed by Ron Paul. It was a very interesting day to spend with the congressman on the committee. There were a number of distinguished panelists, including Professor Jeff Herbner, who's a professor at Grove City College and also a senior fellow of the Mises Institute, John Taylor, very famous monetary theorist from Stanford University. Some of you have heard of the so-called Taylor Rule for monetary policy associated with Professor Taylor. Alice Rivlin, who's a longtime Brookings Institute scholar, former vice chair of the Board of Governors of the Federal Reserve System, somewhat less sympathetic to the views that Professor Herbner and I purported. And the fifth, the member of the expert panel, was the liberal polemicist James Galbraith, son of the well-known polemicist John Kenneth Galbraith. So you can imagine that a variety of views were presented on this panel on the nature of the Federal Reserve System and possible improvements to the Fed and to the institution of central banking more generally. Now, as you know, under Representative Paul's leadership, the House Financial Services Committee and this subcommittee in particular has been somewhat more aggressive in addressing fundamental issues of monetary theory and policy than had been the case before. So a number of distinguished scholars have testified before that committee, including Professor Celerno on an earlier occasion. Professor Herbner was with me as well, both discussing some of the technical details of monetary theory and policy. And so when I appeared before the committee, I thought rather than repeat what my fellow, previous and one of my fellow panelists was saying, I would focus on a slightly different aspect of the Federal Reserve System and central banking more generally, not only how it works in theory and what actions the Fed has recently taken and the harm that these actions have done to the economy, but a little bit about how the Fed operates in practice. The Fed, of course, is an institution filled with staffers from the chairman on down. It's like all other human institutions. It has its foibles and its quirks and its peculiarities. So what is it that the Fed actually does? How does the Fed actually work? Or from the perspective of organization theory, management theory, the principles of organizational governance, how is the Fed operated? Right, how is the Fed organized? How is it managed? How is it governed? What are its objectives? What are the formal objectives? What are its informal de facto objectives? How is it structured? What kinds of incentives do people working at the Fed from the chairman all the way down have? How are they evaluated, monitored, governed, disciplined? Do they face any competition? Do they have any external check and balance? Well, of course, you know the answers to most of these questions already. Central banks are, the Federal Reserve, like other central banks, is an economic planning agency. Central banks are government or what they call quasi-government entities with a legal monopoly on monetary policy. In some cases, fiscal policy, de facto, working hand in hand with the fiscal authority, the Treasury in the US case. In many countries, the Fed also has a legal monopoly on bank regulation. These organizations are headed by political appointees and usually staffed with civil servants. You know, technocrats from prestigious universities like Princeton, I'm sorry, Steve, to bring that up again. They are nominally independent of the political process. So imagine that you have an agency, an organization with vast discretionary authority, headed by smart and ambitious people with almost zero oversight, governance, no checks and balances. You know, what would you expect an organization like that to do to be very sort of conservative, keeping its activities very limited, intervening only when absolutely necessary, performing up to the task exactly as mandated. Well, of course, you wouldn't expect that at all. Right, even well-intentioned, well-educated, nominally competent individuals placed in a situation like that would have the temptation, the ability to engage in whatever kinds of interventions they desired. And of course, that's exactly what we have seen throughout the history of central banking, particularly the Federal Reserve System in the United States. I mean, if nothing else, the Fed under Chairman Bernanke's leadership has been particularly innovative. Now, when we talk about, you know, in the private sector, we have a big Apple store just a block or so down the street on 5th. We like it when Apple is innovative, right? We like it when research organizations like the Mises Institute are innovative. Do we want government entities with their vast authority and without any external check to be innovative? Well, I mean, I think that question sort of answers itself if you think about monetary policy in particular. So remember that organizations like the Fed, what are the things that the Fed is authorized to do that the Fed is a task that the Fed has to perform? Well, the Fed controls the monetary base, sets the discount rate, sets reserve requirements, acts as a lender of last resort, regulates bank lending and other bank activities. And in the United States, since the 1980s, you have the so-called dual mandate where the Fed is charged with maintaining stable prices and maintaining full employment. Now, these are of course impossible tasks for any central planning agency to perform. And there are certainly tasks that we would not want a central planning agency even to attempt. But remember that the way the mandate has been interpreted and the way these tasks have been enumerated is in a way that de facto gives the Federal Reserve system the authority to do almost anything that it wants. So when you look at the Fed's balance sheet, David Stockman talked about the sheer magnitude of the Fed's balance sheet. But also if you look at the composition of the balance sheet, the Fed by custom until Chairman Bernanke invested exclusively in U.S. Treasury bills and there's language in the Federal Reserve Act requiring the Fed to invest in these particular safe quote-unquote assets. But there's an emergency escape clause. There's a clause in the legislation that allows the Fed to own other assets under extreme emergencies. Under special circumstances, the Fed may trade in other kinds of securities. Well, of course, that's a loophole wide enough to drive a Manhattan-sized city bus through, right? So of course, the Fed has taken advantage of this loophole to invest in the so-called toxic assets and to purchase any kind of securities that it wants. So essentially, Bernanke can intervene in financial markets in any way that he wants, in any way that he wants. Now, I needn't belabor this audience with details of the financial crisis, the Greenspan-Bernanke credit bubble, the relaxation of underwriting standards that Walter Block already discussed, TARP and the bailouts and so on, the injection of trillions of dollars into the U.S. economy by Chairman Bernanke and of course his predecessor, the zero interest rates and so on. You know, quantitative easing now, quantitative easing tomorrow, quantitative easing forever, as David Stockman reminded us. And of course, the effect of virtually every action the Fed has taken since 2008 has been to perpetuate exactly those structural imbalances that constitute the financial crisis and the recession to begin with. Of course, what the Fed has done is precisely the opposite of what the Austrian school economists would prescribe for such an emergency. When malinvestments are revealed, the most effective course, the course that is best for the economy in the short to medium run and certainly in the long run, is to liquidate these malinvestments to free up these resources and get them reallocated to higher-valued uses as quickly as possible. And of course every action taken by the Fed, of course the U.S. Treasury and other agencies since 2008, has been to perpetuate the malinvestments to make sure that the structural imbalances remain as long as possible indeed forever. But I don't want to talk to you now about these specific policy moves because most of you are familiar with them and they have been addressed and will be addressed by other speakers too. Really what I want to talk about is sort of the Fed as a central planning agency more generally, right? Now most economists, most decent economists, understand that central planning is not an effective way of organizing the economic system. So whether they be from the Chicago school or sort of modern technocrats trained at MIT, all but a few hardened socialist economists understand that markets are better ways of allocating resources than government planners. But for some reason, with the exception of the Austrian school, most economists believe that money and the monetary system constitute exceptions to this general principle. They argue that for the monetary system, for money and for the banking system, it's essential to have a single decision-making body with vast discretionary authority, with no competition, of course, for its own services, limited oversight, effectively no oversight whatsoever to what this planning agency will do, almost unlimited authority within its sphere, and that this agency should be run by an elite core of apolitical technocrats, like distinguished professors from Princeton University. And of course, Ben Bernanke was a very distinguished mainstream monetary scholar before his appointment at the Federal Reserve System. Now, of course, to an Austrian economist, this is a recipe for disaster. This is a recipe for disaster. Everything that we know about economic planning, about centralized economic planning, tells us that planners, if they have the wrong theoretical model in mind, they lack the information to be effective within their assigned sphere, they have no incentives to make decisions that are in the interest of the economy as a whole, there's no market test for their services, no matter how well-intentioned a central planner may be, and I'm not claiming that our current monetary central planners are well-intentioned, but even if they were, such a setup cannot possibly be an effective way of allocating resources in an economy. If anything, if the collapse of central planning in the Soviet Union and the Eastern Bloc and Communist China has taught us anything, it's the lessons of Mises and Hayek and Rothbard have been vindicated by history. I was speaking to one of our participants here during the break, what can we do? Is there a way that we could demonstrate to our fellow citizens and to policymakers the superiority of free markets of our central planning? With a small colony or with some sort of enterprise zone kind of experiment, well, I mean, I think that would be terrific, but anyone who cannot see already that central planning has failed in every instance that it's been tried will not be convinced by any experiment that we've performed tomorrow. The lessons of history are glaringly obvious, and of course we have the theories of Mises and his followers to explain to us exactly why central planning does not work. For some reason, people think that money economists, many economists think that money and the monetary system is an exception to this rule. Now, those who favor central banking, some of those who favor central banking, of course, have been critical of specific moves by this chairman or that chairman. There's a lot of debate in the technical literature and the policy literature about things like so-called inflation targeting versus nominal income targeting. My old professor and Obama advisor, Christina Romer, is a proponent of nominal income targeting by the Fed instead of inflation targeting. Should the Fed's dual mandate be repealed and with the Fed tasked only with maintaining stable prices and not responsible for full employment? These are nibbling around the edges. These are trivial issues relative to the central issue of whether we should have the Federal Reserve System at all. Walter Block mentioned Milton Friedman's fixed money growth rule. So Friedman, of course, thought that the government should control money, we should have fiat paper money but the government should be restricted in its ability to print money effectively. The money supply, the fiat government money supply should grow at a fixed rate, 3% per year, 2.5% per year. Professor Taylor has come up with a version of this argument where instead of a fixed rate, there should be a formula, a mathematical formula that is public and transparent according to, you take the employment rate and some other macroeconomic aggregates and you plug them into a formula and that tells you how fast the money supply should increase. The point of these sorts of reforms is to constrain the ability of the Fed to intervene actively in the economy. The debate is usually framed about rules versus discretion. That discretionary monetary policy creates uncertainties. It gives the Fed the authority to intervene in ways that are harmful. Why not tie the Fed's hands by asking it to abide by fixed rules? Well, if you like fixed rules, I have one that's even better than a legislative, a statutory mandated growth rate of a fiat currency and that's to have commodity money, right? Such as the gold standard to take the monetary system completely out of the hands of central planners. Right, it's like Doug French's example with the nuclear power plant. You don't build the nuclear power plant and then try to constrain the actions of the nuclear power plant's operators. Well, don't do this and don't do this. We're gonna give you a policies and procedures manual to try to make sure you don't blow us all to kingdom come. Well, a better solution if you're worried about that is not to build the plant in the first place. You don't get a bomb ready and then tell people please don't set it off, right? It's better not to have the bomb in place at all. If you like fixed rules over discretion in the conduct of monetary policy, well, why not have a monetary system that is completely outside political and technocratic interference whatsoever? And that's exactly what proponents of the gold standard would favor and that's why it's favored. What about guys like the chairman, right? I mean, I don't know Ben Bernanke personally. For all I know he is well-intentioned. He certainly has the technical training that give you all the plaudits in the academy. The problem is not Ben himself. Let me give you an example. Back in 2008 when the troubled assets relief program or the tarp was being discussed, there were to their credit a number of economists, mainstream economists and Austrian economists who were critical of the tarp. So that well, maybe bailing out these failing financial institutions is not exactly setting up the right system of incentives, we're worried about moral hazard and so on. It's a very interesting essay written by Greg Mankiw who was a former chair of George W. Bush's Council of Economic Advisers, very well-respected economist, professor at Harvard, and a pretty good economist on most microeconomic issues. Ben Bernanke had the following to say about the economists who were critical of the tarp. A group of economists had circulated an open letter critical of the chairman and saying that the tarp didn't sound like a good idea. Here's what Greg Mankiw said. I know Ben Bernanke well. Ben is at least as smart as any of the economists who signed that letter or are complaining on editorial pages about the proposed policy. Moreover, Ben is better informed than the critics. The Fed staff includes some of the best policy economists around. In his capacity as Fed chair, Ben understands the situation. If I were a member of Congress, Mankiw goes on, I would sit down with Ben privately to get his candid view. If he thinks the bailout is the right thing to do, I would put my qualms aside and follow his advice. So just imagine Representative Paul going into Bernanke's office and saying, Ben, what should we do? I put my qualms aside and go with you, Ben. I mean, this is sort of, it almost boggles the mind that any thoughtful person would think this is the right way to handle economy-wide central planning. You make sure the guy in charge is smart and has a good staff. You ask him what he thinks we should do and that's what we do, okay? There was a paper by another, by the economist Lawrence Ball recently, an NBER working paper, all about the psychology of the chairman, the psychology of Bernanke. Ball was trying to understand why some policies pursued by the Bernanke Fed are a little different from what Bernanke espoused as a Princeton professor. Why hasn't he done the things that he said the Fed should do when he was writing as an academic? And the Ball's proposed explanation is that, well, Bernanke is kind of shy and withdrawn in meetings and he lets others dominate the discussion and he sort of fell victim to group think at some of the meetings of the open market committee and so on. I mean, look, why on earth would you want a monetary system? Why would you want a system in which the most important markets in the economy, the financial markets, are subject, their control and manipulation is subject to the personality of one guy, right? I mean, we want a monetary system where we could care less what Bernanke's personality is, right? He's stuck in his office at Princeton teaching and he can be shy or aggressive and nobody cares. Putting that much authority in the hands of one guy where the outcome depends on his personality, I mean, that's not an economic system that I want to live in. I discussed in my testimony some of the controversy over the so-called independence of the Fed. A lot of economists have said, well, Ron Paul's pushed to audit the Fed and calls to make the Fed more transparent are problematic because then you'll have Congress in charge of monetary policy and that's worse than having Ben Bernanke in charge of monetary policy. I mean, I'm not so sure. Of course, what the defenders of independence mean by independence is lack of any external constraint. And of course, I certainly do not want the average congressman deciding the value of my money but asking sort of an elite core of technocrats to decide the value of my money is not much of an improvement in my view. Again, as I said before, what we want is a monetary system in which the value of my money is independent, both of the whim of Congress and the whim of the technocrats. Now, as an intermediate step could we, my view is that the bill to audit the Fed or moves to make the Fed more transparent would certainly be substantial improvements. The fear of congressional interference is highly overblown I think relative to the value that would come from opening up the secret books and finding out what the Fed is actually doing. The popular outrage could likely be enough to constrain the Fed in ways that it is not constrained now. You know, the whole idea of the Fed as a lender of last resort is of course another problem with government monetary systems that have that kind of policy over their banking system. The theory of moral hazard, what economists call moral hazard explains how all of us, when protected from any harmful consequences of our actions will take different actions than we otherwise would. We'll be less cautious, more reckless. We won't think through the potential consequences of our decisions if the consequences fall on somebody else. I discussed in my testimony the improvements that would follow from eliminating the Fed's role as a lender of last resort, which prompted the statement from Dr. Rivlin that a banking system without a lender of last resort would be bizarre. So she thought this was a bizarre idea that was not even worthy of discussion among serious people. You know, the usual argument that you hear is that, well, but unlike other kinds of businesses, banks and financial institutions are closely linked to each other through derivatives and other kinds of complex financial transactions. And the failure of one bank could bring down the entire system. To which I would point out, in a complex modern economy, almost all industrial firms are closely linked to other industrial firms through complex networks of transactions, contracts, partnerships, alliances, and so on. I mean, if you ask people, well, do you think that, you know, say that the Nike corporation is really in financial distress, if Nike were to go bankrupt, well, I mean, that could pose a problem for some of Nike's suppliers, for some of Nike's customers, for other apparel manufacturers with whom Nike has contractual relations, right? But we don't think this would somehow bring down the entire shoe industry or bring down the retail clothing industry such that we need a shoemaker of last resort to step in and supply the shoe liquidity that the market, you know, clearly needs. So in conclusion, if you design a government planning agency, even within not an economy-wide planning agency, but one that is tasked specifically with the conduct of monetary policy and bank regulation and so forth, you make this a government agency without any competition, immune from any sort of oversight, without any kind of external governance, governance or constraint, and you give it effectively an unlimited mandate to manage the system as it sees fit. The results, predictably, will be the kind of catastrophe that we have seen in the last several years that we're seeing now and even more so with yesterday's announcement. The kind of monetary system that we do want is one in which the value of money, the characteristics of money, what goods and services constitute money, the form in which monetary exchange takes place, the monetary calculations of entrepreneurs, where all of these are independent not only of political interference, but independent of technocratic interference as well. So I say to Professor Bernanke, thank you for your service. Please return to your office at Princeton University where you can espouse your doctrines to an audience of undergraduates rather than having your hand on the controls of the entire US economy. Thank you very much. Thank you. Thank you. Thank you.