Ridgefield Liberty Cooperative

Background:

On November 19, Gene Epstein, economics editor of Barron’s magazine, made a presentation at the Ridgefield (Connecticut) Playhouse on the Federal Reserve System and the recent meltdown of our economy.  You can see video of the presentation here (Video Long Version) or here (Video Short Version).

Nick Perna, economist and member of Connecticut Governor Rell’s council of economic advisors, attended the presentation and published his comments and analysis of the event in the Ridgefield Press here (Nick Perna Ridgefield Press article).

We offered our response to Mr. Perna’s article here (Response by Ridgefield Liberty Cooperative).

Gene Epstein responds below and invites Mr. Perna to debate.

“Nick, Let’s Talk—In Public”

From: Gene Epstein

My Nov. 19th speaking engagement at the Ridgefield Playhouse started with the hope that a debate between Nicholas Perna and me might be arranged. After Richard Land of the Ridgefield Liberty Cooperative failed in his attempt to set that up, it became a solo appearance by me.

We were pleased that Nick agreed to participate as one of the panel of judges for the event. He was well within his rights to attend that evening and then publish the critique run in the Ridgefield Press. But I hope that in the near future, he will agree to a public debate to help clarify the complex issues he raises. (Nick seems to be a very nice guy, and so am I, so be assured our debate would avoid the acrimony that often mars such confrontations.)

Meanwhile, Land has posted a comment on Perna’s op-ed that I basically endorse at http://ridgefieldlibertycoop.org/?p=213. Also, let me briefly clarify a few points of my own.

I trust Perna joins me in at least feeling uncomfortable with what left-wing critics fairly condemn as our system of socialized losses, privatized gains. A case in point is FDIC-run deposit insurance, which now effectively covers deposits running in the tens of millions, thus enabling the very rich to pocket the interest on their money, while relying on the rest of us to foot the bill on any losses.

When FDR opposed such insurance, there was something called the Postal Saving System, which provided secure accounts for poor people, but would, if re-instituted, leave the better-off to buy their own insurance or to seek guidance from financial advisors or to invest in money market funds that hold Treasury bills. Or perhaps to consult Consumer Reports.

Perna might at least consider going back to the spirit of FDR on the deposit insurance issue. What would also help make banks far less risky to their depositors is preventing gunslingers like Alan Greenspan from making loans at negative interest rates–lending at rates lower than the rate of inflation, which no banker in her right mind would engage in without the support of a central bank. The Taylor Rule would have prevented that form of casino capitalism, which incidentally lead to disastrous results.

Of course the Taylor Rule can, as Perna points out, provide the “wrong answer.” But it would have been more often right than Greenspan’s discretionary practices proved to be, and would have avoided disaster. If it can beat the reputed “maestro” of Fed policy, it might even best his successors. (On the abysmal record of the Fed in forecasting economic growth and inflation, see my column in Barron’s of Oct. 26th; see my column of Nov. 9th for why the Taylor Rule, for all its imperfections, would probably work better.)

But of course my radical proposal is that the Fed be abolished. Perna cites “scholarly research” blaming the gold standard for the Great Depression of the 1930s, but since, as he points out, the Fed was created in 1913, he might consider the scholarly research that directly implicates the Fed in that debacle.

Without the Fed, the market would determine interest rates, and bank deposits consisting of commodity money would have 100% backing imposed by law. Since, as happened in the late 19th century, prices would tend to fall year-by-year, money would appreciate in value even if left in the mattress. Under that regime, even the Postal Saving System would probably not be necessary….

Nick, let’s talk–in public.

Sincerely,

Gene Epstein

Economics Editor

Barron’s

On November 19 the Ridgefield Liberty Cooperative produced a program featuring Gene Epstein, economics editor of Barron’s magazine, as the speaker.  The program was sponsored by People’s United Bank among others mentioned in previous posts.  The video of Mr Epstein’s presentation is below in five parts (Part I to Part V).  In addition, the student (Jesse Nadel of Quinnipiac University) who submitted the most thoughtful question to Mr. Epstein won a $1,000 prize.  The presentation of the $1,000 prize and Mr. Epstein’s answer to the question also can be seen below at Part VI.

Part I

Part II

Part III

Part IV

Part V

Part VI (Most Thoughtful Question and Answer)

On November 19 the Ridgefield Liberty Cooperative produced a program featuring Gene Epstein, economics editor of Barron’s magazine, as the speaker.  The program was sponsored by People’s United Bank among others mentioned in previous posts.  We hope to have the whole presentation available on video soon.  Until then, here is Video Part I.  In addition, the student who submitted the most thoughtful question to Mr. Epstein won a $1,000 prize.  The presentation of the $1,000 prize and Mr. Epstein’s answer to the question can be seen below in Video Part II.

And here is Video Part II, the winning question and Mr. Epstein’s answer:

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

Jesse Nadel of Quinnipiac University Wins Most Thoughtful Question Award

On Thursday night (11/19) Gene Epstein, economics editor at Barron’s magazine, was the featured speaker at the Ridgefield Playhouse in Ridgefield, Connecticut.   His topic:  The Meltdown of 2008—Market Failure or Government Failure?  The program was produced by the Ridgefield Liberty Cooperative and sponsored by People’s United Bank Wealth Management & Trust  and others who are identified below.

The program was unique in a number of ways.  You can see pre-program publicity and a description of the program’s features here:  general description; flyer for students; and the panel of judges. 

To promote school participation, we offered a $1,000 prize to the student who submitted the most thoughtful question (as determined by the panel of judges).  In addition, the student-authors of  the five most thoughtful questions  presented their questions to Mr. Epstein at the program and had the opportunity to ask follow-up questions.  The program included a pre-determined “Interrogator,”  economist John Scarbrough of Ridgefield, to jump in and ask follow-up questions when the Interrogator determined a need to clarify or challenge a point. 

The question and answer period was moderated by Dr. Dan Joynt, Professor of Mediation and Arbitration at Western Connecticut State University.

When we have had a chance to edit the video of the event we plan to post it here.

You can see the top five student questions here.  The winning question was Question 1006 by Jesse Nadel of Quinnipiac University.

Other sponsors of the program were Raymond James Financial Services (Frank J. Gavel Jr. and Charlie D. Meade); Bernstein Global Wealth Management (Daniel Romanow);  Chipman, Mazzucco, Land & Pennarola, LLC;  Actis-Grande Ronan & Company LLC, Certified Public Accountants; Fairfield County Bank Insurance Services(formerly Carnall Insurance); Morgan Stanley Smith Barney (Charles Salup); J.L. Pierson, ASA, Business Valuation; and David Streit.