 Good morning ladies and gentlemen, or maybe good afternoon. My name is Patek Ushemaha and the topic of my speech is how to and how not to criticize the central bank. I would like to thank Professor Hoppen, Ms. Gurdjian, our host for giving me this opportunity to speak here. In my speech I want to tell you about two possible ways to criticize the central bank. And in recent years, since 2007, perhaps 2008, we had a lot of big criticism raised against the central banks. And those criticism, all those criticism, they differ in nature, but you can group those criticism into two distinctive categories. And the first category would be the category of complete anti-free banking system. So it would be the category of economists who are in principle against any sort of central banking. And the second type of category would be a category of being historically against the central banking. That is being against a particular chairman or particular type of policy that was purged by the central bank in recent years, for example. So even though the title of my speech sounds very normative, how to and how not to criticize the central bank, of course you can criticize the central bank in any way you want. Just remember that if you fall into the other group you might not be allowed to bother them in next years. So the first group that is against the central banking, in principle against the central banking, is of course the group of the Austrian economists and fellow travelers of the Austrian school. As Professor Hoppens in his lecture demonstrated, the basic problem with the central banking system is that it has a fiat money creation underneath it. So money as a commodity, it's not really a commodity anymore under the central banking system. It is a form of decree. It is even named like this. It's fiat money, which means that it is just created by pure decision. And since the Austrian school criticized the socialist systems for many years, it is also criticizing the central banking system. The problems of socialism, all the problems of socialism, the source of them is nationalization of all the resources. So the abolition of capital markets and factor markets. If you abolish capital and factor markets you don't have competitive economizing of all the factors of production and economy. And the problem with the socialist order is actually that you substitute the property order, competitive private property order for fiat property. Under socialism you still have a form of property, but the property is not placed within the nexus of voluntary contracts. Under socialism you have just fiat property, meaning that the state just decides, I own this, I own that, I allocate the resources in that way and in that way. So as you see at the very essence, the central banking system is quite similar to socialism. We could even use the same name, fiat property. You just create property out of thin air under socialism. And in capitalism with the central banking system, even though you still have a form of property, so half of the economy is privately owned, the most important commodity is being created by pure decision. So instead of just issuing a decree, I own this resource, the state is issuing money, but in essence it's the same thing as just nationalizing resources, it's just indirect. It's again just putting forward a law saying I own this amount of money and now I can buy whatever I want in the market. So at the very core those two institutions, socialism and the central banking are very similar and that's why Austrian economists, since they are against the socialist systems, they are also against the central banking system. Now many different critiques have been raised from the Austrian camp. I do not want to go into details, I want to just generalize them in order to group them into this first group, the group that is in principle against the central banking. And in the most general possible way I could summarize the arguments, if I could summarize the arguments in the most general possible way, I would summarize them in the following way. So under the central banking system you have fiat money creation and you can create money in two different ways. One way is just pure creation of money and spending it in the market, which leads to inflation and redistribution effects from the holders of old money to the holders of new money for spending it in the market. Then the second possible type of fiat money creation is also creation of credit. So the central bank or the banking system, the banking public-private cartel, creates money and not only creates money but creates also credit. So it lends the money in the credit market. The necessary result of this is a sort of what we could call schumpeterization of capital markets. Joseph Schumpeter an Austrian economist unfortunately only by nationality. Joseph Schumpeter argued that the capitalist system will naturally evolve into a socialist order. Some of the things he got correct, some of the things he got incorrect, but he is certainly right in stating that the corporate form of capitalism will evolve into a form of financial socialism. And in the capital markets we are actually observing the schumpeterization of capital markets. Why? Well because in capital markets the private investors, the holders of money, they don't really decide about the investment processes. They don't really decide about the investment decisions. So in the capital markets, which is the essential market in any market economy, in capital markets we don't have private owners of capital investors deciding about what to produce. We have just creators of money deciding what to produce. So you have a sort of crowding out effect and this crowding out effect leads to inefficiencies and wrong economic decision making. You have a sort of debt driven system in which issuing money is just issuing a decision, this is profitable, this is not profitable. Under the free market gold standard the production of money and also the production of capital, if you can use this term, is dependent upon private owners of capital and money. So you have the cost of production which are dependent on the free market system. The cost of production decides about how much money should be produced. And under the fiat money standard, under the central banking system, this is just being produced by pure decision making. So no economizing at all in production of money and this leads to crowding out effect. This crowding out effect is of course different from the mainstream understanding of crowding out because in mainstream you also have the term, in mainstream economics you also have the term crowding out. But crowding out refers to government investments when the government spends the money, crowds out private investors. Now this is also true but right now when I speak about crowding out effect I mean crowding out in more general sense that the banking system by creating money, by creating purchasing power out of the air, crowds out private investors from the market. And the natural result of this is that the competitive pricing system is being curtailed by this institutional arrangement. To give you just an example, I was recently writing a popular article about rating agencies. The whole market structure and financial market is being changed by this system, by the existence of this system. Rating agencies when they first developed 100 years ago, they were focused on private investors who owned the money. So whenever you wanted to invest your money you had to actually buy information from the credit rating agency, from rating agency. You paid for information and the person who gave capital for the production process was deciding in a way to give the money to rating agency. Now right now 100 years have passed and the whole system changed because in the beginning of 20th century and in the 90th century more investment processes were financed through private investing, through private savings. So it was wealthy capitalists and wealthy owners of money who decided, okay, I'm going to start this investment process, I'm going to start perhaps some other investment process. And nowadays most of the processes are being financed by just banking money creation. So under this debt driven system rating agencies are not really focusing on owners of money, they are focusing on the system which is debt driven. So nowadays it is the creditors who pay for rating and this is also supported by regulatory laws. Securities and Exchange Commission created the cartel of rating agencies to officially recognize them and recognize their rating. So those two factors definitely led to a situation in which it is no longer the owners of capital who pay for rating but the receivers, the creditors who are based on their activities are based on credit and money creation, they pay for ratings. It is of course debatable, you can debate whether what is the cause of this, but I think that the driving force was definitely the change in the monetary system. And this crowding out effect not only crowds out private investors from capital markets because as owners of money you had something to say a hundred years ago in the framework of price deflation, steadily falling prices when you were holding the money, you had something to say. Nowadays you don't really have much to say. You can jump on the inflation bandwagon with the banks. So to generalize this criticism of the first group, the problem of the central banking is that the competitive price assessments that are based on private production of all the factors of production and also of private production of money, that system is being curtailed and it's being weakened by the existence of the central bank. You can crowd out those private decisions in favor of a form of financial socialism, in favor of bureaucratic management where it is this pure decision making that is the source of profits and losses and credit creation. So this would be the first group and of course different, as I said, you have different economists within this group. The Austrian school mostly concentrates on the interest rate manipulation and the so-called Austrian business cycle theory when they demonstrate that the lowering of the interest rate leads to artificial bombs that will be soon brought to an end. But there are also other criticism that can be directed against the central bank. So that's why I want this group to be a bit bigger than just focusing on this particular theory. Now the second group, the group that we usually hear in the media, is a group which directs criticism against particular chairman or particular policy that was pursued by the chairman or by the board of the central bank. The best example I think you probably heard about this economist John Taylor, a very, very good mainstream economist who wrote few articles about the central banking policy in the beginning of the 21st century in the United States and he argued that because Alan Greenspan lowered the interest rate and kept the interest rates very low, this led to artificial real estate boom and this was the source of the problems. Well not all of the problems but mostly this was the source of the problems. So he is correct in his analysis that the interest rates definitely played a role in the real estate boom but then at the same time in writing his papers he's arguing so the problem was low interest rates but if you had listened to me and said the interest rates as I said, the things would have been different. Well he's not really saying this but he's writing that there is the so-called Taylor rule which he invented that you needed to follow and if you follow that rule then the problems would not develop. So in effect he's basically saying you should have listened to me and said the interest rates as I said they should be set and then the problems would not develop. In a way there is always a problem when a journalist from the paper wants to ask the Austrian economist about the recent central bank's board decision about the interest rates. So every month we have interest rates set by the board within all the central banks around the world and then the journalist always shows up and asks the Austrian economist, so is this decision correct or not should the interest rates be higher or lower? And most economists always give answers okay so price increases are external to our economy I would keep the interest rates at the same level. Other economists are saying unemployment is rising so perhaps we should lower the interest rate. Price inflation is rising so we should perhaps raise the interest rates whereas the Austrian economist is always saying the same thing and always the same thing. Just forget about setting the interest rates so the journalist is just tired and doesn't ask him anymore. In responding to how can we respond to Taylor and criticism about against particular type of policy where first of all there is the problem of hitting the right target itself whether the central bank can really hit the price or is it the correct price that the central bank can hit. And the so called Taylor rule depends on two very very macroeconomic magnitudes aggregates. One is the so called output gap and the other one is rate of inflation okay and depending on those two variables and different parameters used in the equation Taylor rule gives you advices whether you should increase the interest rates or whether you should decrease the interest rates. So first of all there are problems with the measurement of those two magnitudes. In case of price level as you know we have CPIs, we have harmonized indexes, we have core rates we can use different goods, we can use CPI less food and energy so depending on which magnitude we use or which particular index we use we might arrive at totally different results. The same thing with even more ambiguous variable which is called output gap. Output gap what is an output gap like if people are not working during the night is it output gap because they could produce more? So the output gap is the second problem it is even more ambiguous to measure the output gap so there are different ways to measure the output gap and besides all that there is a problem of measurement of data whether you should use so called real time data that you gather right now or maybe you should use I don't know revised data but it's hard to use revised data before it is being revised but should you use predicted data as small central banks use nowadays so you have all those problems and it was even recognized in the mainstream literature by a very good economist Orfanides. I'm not sure I pronounced it correctly so he pointed out that those rules those Taylor rules you have different rules so if you have different rules you actually don't know which rules you should choose which rule you should choose and then Orfanides ended up being hired by the central bank so you see this is the path to failure you criticize the central bank there are problems with pursuing monetary policy and then there you go since there are problems we need somebody to solve the problem right? So one problem is can the central bank really set the interest rate at the correct level if the interest rate is a market price as any other price it should be regulated by the market so can the central bank really hit the target of the interest rate can it really hit the target to create a sort of very bad economic equilibrium in the market so this would be one problem but the other problem is also that the problem within the modern banking system it's not only the problem of correct or incorrect interest rate that you just set the interest rate on this level lower or higher or whether you hit the target or not the problem is broader as the first group demonstrates the problem lies within the fact that it is a form of bureaucratic banking bureaucratic management that crowds out private investors in their economic assessments under inflationary framework under socialism of course when you notice all the misallocations of resources and all the shortages and circumstances you could of course enter the store the socialist store and argue there is a problem with price setting so you set the prices wrong it might be a part of the problem but it's only a part of the problem the big part of the problem in the market is not only how high is the price set so how high the interest rate is set it's also the problem of demand and supply in this market in particular so who is supplying goods and services under what conditions do we have competitors supplying all the goods and services and do we have competition within the factor pricing factor markets where you have also demand and supply and you have competitive entrepreneurs assessing the usefulness of those factors so the problem is not only pricing itself but it's also who sits the price so who sits the price who accumulates capital and who decides about the investment process and how he is constrained within the economic system and in the central banking system even if the interest rate is not very low even if it's just around the price that would have been in the market somehow then still under this system you have a crowding out effect that I told you about when I grouped Austrian economists and fellow travelers into this group against the central banking in principle so the problem is not only setting the interest rate correctly the problem also lies in the fact that you have a... in the credit market you have bureaucratic management, financial socialism pushing out the private investors and savers that could decide about the production process and competitive assessments so the second group is a group of economists who are suspicious of previous policies but in principle they are using the arguments that okay we should change the chairman or we should change the policy we should set the prices using different models so in a way they are similar in criticizing... they are similar to economists who criticized the socialist economy not in principle but they said okay so we should change the planner the planner is wrong or we should set the prices using some other accounting rule perhaps in order to achieve better results it reminds me of... it was not really a debate but it reminds me that when the bailout program was started in the United States so the bailout program was based on buying the toxic assets that banks were holding actually two bailout programs one from the fiscal budget and one from the central bank so nobody noticed that the central bank was actually bailing out and was using two times more money than Paulson was but everybody focused on the fiscal side nobody really cared about the monetary side so during that time I remember that when the government was buying those assets in different forms I remember I read two different opinions by Anna Schwartz and Paul Krugman and Anna Schwartz, the author of Monetary History of Newton Friedman Anna Schwartz says now it's better to buy the toxic assets rather than just buy banks themselves recapitalize the banks themselves rather than buy the bank stocks because that would favor banks unfairly so this would be unfair to banks in such a way to buy their stocks rather than buy the toxic assets and then a few days after that I read Krugman's article where he argued now it is unfair to buy the toxic assets because that favors the banks unfairly we should buy the stocks of the banks and recapitalize them so that was really strange I read the same argument being used against opposing policies in like radically open manner so in a way people criticizing the central bank and the central banking system from the second group they are directing their criticism only on particular policies not towards the system itself and I think that the problems lie much deeper than in just a particular type of policy or a particular chairman that is the chief of the central bank ok so to summarize these are the two groups and now you know how to criticize I adhere to the view that you should be in the first group rather than in the second group but again it's your choice remember be careful so I'm going to finish here thank you and leave it to failure