Economic insanity from former Bush adviser

OMG. This is absolute economic lunacy from an ex-Bush economic adviser. A 3rd grader could tell you this is nuts. Somebody tell me again how Bush was something other than a Democrat. Somebody tell me why we continue to vote for these same to anti-American parties. From the original:

Recessions result from an insufficient demand for goods and services — and so, the thinking goes, our central bank can remedy this deficiency by cutting interest rates. Lower interest rates encourage households and businesses to borrow and spend…

The problem today … is that the Federal Reserve has done just about as much interest rate cutting as it can. Its target for the federal funds rate is about zero…

So why shouldn't the Fed just keep cutting interest rates? Why not lower the target interest rate to, say, negative 3 percent?

At that interest rate, you could borrow and spend $100 and repay $97 next year. This opportunity would surely generate more borrowing and aggregate demand.

The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less.

Unless, that is, we figure out a way to make holding money less attractive.

At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that…. Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10. …

If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Unbelievable. What his argument shows is the absolute insanity of an inflationary monetary policy, and this so-called expert doesn't even get it. Nobody in their right mind would save money under a policy like this. Everybody would take all their money out of the bank and spend it in hopes of breaking even. Inflating the money supply destroys savings which destroys investment which destroys capital which destroys everything. Our roads, buildings and everything else would collapse around our ears. Our clothes would disintegrate. Crops would never be planted. The Keynesians don't get it. Nobody in power gets it because they don't want to get it. They get power from inflation. We lose. They win. And we keep sending them back to power to destroy us.

Fortunately a Mises scholar explains the consequences of this insanity:

Mankiw doesn't explain why we just so happen to be in "the worst recession since World War II." His article gives the impression that golly gee, consumers just decided to stop spending money, and so the Federal Reserve has to hit Ctrl-Alt-Delete.

In reality, what happened is that the Federal Reserve — under the leadership of the "maestro" Alan Greenspan — slashed the Fed's target rate down to 1% and held it there for a year from June 2003 to June 2004. More and more analysts are realizing that this caused or at least exacerbated the unsustainable boom in housing.

Now why in the world would Greenspan have done something so reckless? Well, he was operating under the belief that the way to get out of a recession — caused by the dot-com crash at the time — was to slash interest rates to get businesses and consumers to spend more. In other words, we are in our current mess because of the very same "medicine" that Mankiw proposes.

Because the Federal Reserve pushed down interest rates below their free-market levels, the complex capital structure of the economy was steered into an unsustainable configuration.

And this is why everything the Fed is doing is wrong:

Even though it flies in the face of everything you will hear from Nobel laureates, Harvard professors, and CNBC commentators, in the onset of a financial panic — where liquidity is at a premium — short-term interest rates need to rise dramatically. It is analogous to the prices of flashlights and canned food during a hurricane that knocks down power lines. The price needs to shoot up in order to ration the available units to those who need them the most.

By the very same token, when investment banks realize that their assets aren't worth nearly as much as they had thought, and the supply of "loanable funds" shifts way to the left, then market interest rates need to rise. The price of renting a generator goes up during a hurricane, and the price of renting cash ought to go up during a financial panic.

Unfortunately, liberals and people who think FEMA is the answer to disasters don't understand that the price of flashlights and generators should go up in a disaster. They think God waves a magic wand and instantly creates enough flashlights and generators for everybody who wants to buy one. Sorry, dropping money from helicopters, either in a natural disaster or financial crisis, doesn't create more resources for people to use to solve their problems.

And this says it all:

It is no coincidence that Mankiw's worldview leads him to literally propose destroying the currency in order to fix the economy. That alone should have set off warning bells. As a general rule, if your economic model pops out the result "Randomly burn a tenth of the cash every year," then you should think some more about the model rather than fire off an article to the New York Times.

Or ask a third grader first. This is what Harvard produces and teaches. And people spend outrageous money to become lobotomized at Harvard and start saying things a third grader knows is wrong.

Wikipedia says of Mankiw: His publications are ranked as the 22nd most influential of the over 18,000 economists registered with RePEc.

Another response.