We will be posting the video of Gene Epstein’s November 19 presentation soon.
In the meantime, economist Nick Perna wrote an article in the Ridgefield Press about the program. Although a short article could not do justice to Mr. Epstein’s complete presentation, the first third of Mr. Perna’s article does a pretty good job of describing some of the more important points Mr. Epstein made. The rest of Mr. Perna’s article is best characterized as opinion. Some of the opinion portion requires clarification.
At the end of the piece Mr. Perna says, “Mr. Epstein mentioned that Congressman Ron Paul wants the Fed to be audited, i.e. give the Congress a role in the setting of interest rates.” That is an inaccurate description of Dr. Paul’s Bill (H.R. 1207). Here is how Ron Paul describes his bill:
“I was pleased last week when we won a vote in the Financial Services Committee to include language from the Audit the Fed bill HR1207 in the upcoming financial regulatory reform bill. As it stands now, if HR 3996 passes, because of this action, the Federal Reserve’s entire balance sheet will be opened up to a GAO audit. We will at last have a chance to find out what happened to the trillions of dollars the Fed has been giving out.
Finally, the blanket restrictions on GAO audits of the Fed that have existed since 1978 will be removed. All items on the Fed’s balance sheet will be auditable, including all credit facilities, all securities purchase programs, and all agreements with foreign central banks. To calm fears that we might be trying to substitute congressional action for Fed mischief in tinkering with monetary policy, we agreed to a 180 day lag time before details of the Fed’s market actions are released and included language to state explicitly that nothing in the amendment should be construed as interference in or dictation of monetary policy by Congress or the GAO. This left no reasonable objections standing and the amendment passed with a vote of 43 to 26.” (Emphasis added)
Mr. Perna’s suggestion that Congressman Paul advocates giving Congress a role in setting interest rates “just ain’t so.” Nothing could be further from Congressman Paul’s devotion to the Austrian school of economics.
In response to Mr. Epstein’s assertion that FDIC insurance creates “moral hazard” and is counterproductive, Mr. Perna says, “Doing away with deposit insurance is downright dangerous.”
I will ask Mr. Epstein to comment on that in his own words but, until then, here is my reaction.
Mr. Epstein is not the only one who believes that FDIC insurance creates what the insurance world calls “moral hazard.” For example, although FDIC insurance is typically thought of as part of FDR’s New Deal, Dr. Russell Roberts (professor of economics at George Mason University) reports that even FDR had misgivings about the program. According to Roberts, this is what FDR in 1932 wrote on deposit insurance:
“It would lead to laxity in bank management and carelessness on the part of both banker and depositor. I believe that it would be an impossible drain on the Federal Treasury to make good any such guarantee. For a number of reasons of sound government finance, such plan would be quite dangerous.”
As I understand it, that is basically Mr. Epstein’s opinion.
Mr. Epstein did not say consumers of banking services should be without protection. He did say that, absent the government mandated FDIC program, the consumer would have available to him or her a number of tools to protect the consumer’s interests, including publications like Consumer Reports. In addition, private insurance programs and alternative “lenders of last resort” would emerge. For example, in his book, A History of Money and Banking in the United States, Dr. Murray Rothbard includes a description of the Suffolk Bank system which, without the Fed or the FDIC, was able to impose discipline on New England banks shortly before the Civil War. The advent of the Civil War, and the federally mandated banking system that resulted, aborted any possibility that similar systems would develop.
Mr. Perna also commented on Mr. Epstein’s opinion that money should be commodity based and that gold, silver and copper probably would emerge as the commodities of choice. On that Mr. Perna says, “…it is clear that the gold standard made the Depression of the 1930s longer and deeper.”
It may be that the gold standard then in effect (with its fixed exchange rates), together with other factors relating to Fed mismanagement, made matters worse in the 30s. Apparently, there is not much disagreement about that. A commodity based money without fixed exchange rates, however, would be an entirely different thing. Many serious economists (Milton Friedman among them) have suggested that a commodity based system is the only way to impose discipline, prevent inflation and provide stability.
By the way, Dr. Friedman frequently said that we would be better off without the Fed and that the best we could hope for (if we are stuck with the Fed) is a Fed that would manage money as if our money were on a gold standard.
The central point of Mr. Epstein’s presentation was that the recent market meltdown is the result of crony capitalism, which he playfully refers to as “crapitalism”: a combination of federal government programs that encourage banks and their clients to take out-sized risks resulting in enormous profits for insiders while losses are socialized and passed on to the taxpayers via the FDIC and the Fed ultimately in the form of higher taxes, inflation and perpetual enormous debt.
Surprisingly (to me anyway), Mr. Epstein defended the bank bailouts. Although he points the finger of blame at the Fed, with help from Fannie Mae and Freddie Mac, he also said that the infusion of “money” into the system was necessary to make up for the “money” that suddenly disappeared during the meltdown. His analogy: after the addict was hooked by the drug dealer (the Fed), the dealer needed to administer methadone therapy to prevent the addict from dying.
Posted by Richard S. Land
