Thursday, April 26, 2012

My Fed Speech, The Details

Here are the details surrounding my speech at the New York Federal Reserve Bank. First, I am surprised it actually occurred. Someone at the NY Fed tried to kill my speaking there as soon as he heard about my invitation.

Reaction inside the New York Fed to news of the invitation for me to speak was, indeed, fast and furious, once it became public inside the bank.

I am not going to go into specifics of who invited me, I believe that economist had a true curiosity about my views, but when he put out a formal invitation via email within the NY Fed (I received a copy), it was cancelled within 15 minutes of being put out (I also have a copy of the cancellation). So much for overall curiosity at the Fed about true differing views.,

The economist who invited me assured me that he was still arranging the speech. Yet, as the day grew closer, I feared that I would get word that my speech time would be cancelled.

When I arrived at the bank, the economist who originally invited me told me that there was a "schedule conflict" with a seminar and that the group meeting would be smaller than originally planned. That really didn't bother me, I was in the Fed and those wanting to hear my speech would.

However, I did detect tension in faces while I gave my speech, and perhaps some anger. But the anger soon dissipated.

As soon as I finished my speech and to defuse the tension, I asked an immediate question as to whether the economists present believed that Austrian Theory had a legitimate case to make. The eventual response came down to the statement by a Fed economist that there had been worse crashes in the economy before the start of the Fed. (Side note, this is a regular argument used by those supporting the Fed, they will claim that crises were worse before the Fed. I have seen fragmented work demolishing this view, but I think there is the opportunity for some economics student to delve into the pre-Fed period in America and delve into the crashes from an Austrian business cycle viewpoint and point out clearly how government was involved in such crises, if they were--which I suspect they were. Such a study would be extremely valuable in knocking a peg out from under the Fed supporters who attempt to justify the Fed by this argument)

I then asked one economist ( a 20 year plus veteran of the Fed) if he was familiar with Austrian economics. He said that in college he had taken two history of economics courses and then said that the Austrian school is part of the classical tradition. This told me that he was not aware of the important differences between the Austrian school and classical economics (and also the neo-classical tradition).

Later on in the Q&A, one economist remarked that he understood the Austrian school and that they were the group that wanted a constant increase in the money supply and developed the equation PV=MT. This, of course, is not the Austrian view, but a view held by the Chicago school. Thus, in one swoop, this economist demonstrated not only his ignorance of Austrian views on monetary policy, but also confusion about Chicago school views.

To diffuse the tension a bit more, when one economist made a particularly Keynesian statement, I said, "It does not sound like you are going to be walking out of here with me after lunch like I recommend." That brought laughter.

At another point, I told the story of how in a phone conversation with Lew Rockwell, Lew and I were discussing why I had received an invitation by the Fed and Lew said, "They are probably sick and tired of all those boring speeches that they have to listen to." That really brought laughter.

A good deal of the Q&A was about my Rothbardian view that prices should be allowed to decline. They were really fascinated by this view and clearly had never heard it before. One economist raised the question of how falling prices would impact assets. The answer is, of course, that an asset is valued based on its discounted value stream and that falling prices would be taken into account in the discounted present value models. However, I do not believe this view has yet been developed fully, and it is another good project for a budding economist.

Overall, I was simply amazed at the lack of knowledge of these economists about the Austrian school. It was very close to non-existent. This points out the extremely important work being done by the Mises Institute and also Ron Paul. The number of students with an understanding of Austrian economics is increasing at an exponential rate. I can't imagine that future economists, even those who work for the Fed, won't have some acquaintance with Austrian economics thanks to MI and Ron Paul.

My experience at the Fed points out the importance of intellectual debate and study. Clearly, the economists that I met at the Fed were brought up in an intellectual tunnel, where they had no exposure to Austrian economic theory. They read and study within a limited range of writers. But they were very curious about my view.

One economist asked me how I knew the housing market was going to crash. I responded that because of Austrian theory, I understood that money created by the Fed enters the economy at specific points and that it was obvious the housing market was one of the those points. I told him that I also knew that this would eventually result in price inflation (as the money spread through the economy) and that at that point the Fed would slow printing and the housing market would collapse, which is just what occurred.

I suspect that at the top of the Fed, there are some very evil types who understand the game is to protect the banksters, but I don't think that is the view held by the outer ring. They have been brought up in the system and they don't ask questions that threaten their pay checks (It was most difficult impossible to get the economists to discuss any of the erratic moves made by Bernanke) and work developing models within the twisted Keynesian model.

If you set a firecracker under them, like with the speech I gave and then treat them with respect while discussing their opposing views and lighten things up a bit after the firecracker has gone off, perhaps some impact will be made to the tunnel thinking that they have been exposed to their entire professional life. Even more important, hopefully my speech will help budding students to understand that the Fed propaganda machine claims lots of justifications for their money printing machines that when looked at closely can not be justified,. The greater the number that understand the failures of Fed thinking and operations, the closer we will be to ending the Fed.

46 comments:

  1. Rothbard already wrote the historical analysis of pre-Fed crashes:

    "Rothbard traces inflations, banking panics, and money meltdowns from the Colonial Period through the mid-20th century to show how government's systematic war on sound money is the hidden force behind nearly all major economic calamities in American history."

    https://mises.org/store/History-of-Money-and-Banking-in-the-United-States-The-Colonial-Era-to-World-War-II-A-P191.aspx

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    1. I believe this was a compilation of some papers, both published and unpublished that were put together after Rothbard's death.

      I wasn't aware that it was as extensive as the blurb promises, but I will take a look.

      Thanks.

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    2. I read it, and did not realize that it was a mere compilation. It was most informative, and certainly convinced me that we have had few -- if any -- periods in which money was entirely free of Federal or state interference/manipulation.

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  2. "I suspect that at the top of the Fed, there are some very evil types who understand the game is to protect the banksters, but I don't think that is the view held by the outer ring."

    Federal reserve economists who circle the Fed's owners today are very much like the cross carrying priests who circled Kings in the middle ages. The priests were deliberately put there by the King to act as an intellectual protection, to project an image of intellectual legitimacy, and to be the primary defense against anyone who opposed the King's violent rule.

    It made it look as if opposing the King's violent rule was the same thing as opposing the priests, and opposing the priests was sufficient to brand the enemies as heretics in the court of public opinion.

    Today, the Fed has PhD economists to protect it against its enemies.

    How often are those who want to abolish the Fed redirected by the Fed's apologists towards the priests of the Fed? Wenzel could only address the Fed's priests, not the Fed's owners. If the Fed's priests can nip heretical ideas in the bud as soon as possible, then the court of public opinion will remain enamoured with the Fed, and hence with the Fed's owners. After all, most people do not want to be portrayed as going against PhDs from Ivy League institutions, and so they will believe the Fed's enemies to be spiritual heretics.

    Instead of mantras and chants being spoken out of the state religion's text, there are mantras and chants spoken out of the Fed controlled academic journals.

    The rather amusing thing about this is that the quality of the intellectual arguments haven't improved much.

    Wenzel is like a knight who walked into the King's court to address the priests, and told them that their emperor is not wearing any clothes.

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    1. Yes, brilliant. What would Nietzsche say about the Fed today...?

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    2. The paid for priests are everywhere. Though this is somewhat dated, it was an eye opener to me. "Priceless. How the Federal Reserve Bought the Economics Profession." http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html

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    3. If you want to know what Nietzsche would have thought, just read Max Stirner, whom he plagiarized.

      Stirner would definitely have rejected the Fed, since it is based on ruling the individual ego under abstract concepts, be it "state level regulation", "price or employment stability" (haha!).

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    4. Pete you nailed it. Run for President.

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    5. Mr. Wenzel is economics' Martin Luther nailing his 96 Theses on the Wittenburg church door. Being on the right side of an argument makes it much easier to be bold and challenge the powers that be.

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  3. Robert,

    I second Nick's assertion.

    Rothbard's work does a good job detailing the moral hazard built up post panic of 1819. The limits placed on specie redemption was a form of "bailout" that caused future moral hazard. He also talked about the flaws of bi-metallism that was the brainchild of Hamilton and the flaws of the National Banking system. Each of these are examples of government interference in the banking system.

    I do not recollect Rothbard talking about anti-branch banking laws. But I think that was a huge factor too.

    Aaron

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    1. In "Money and Banking" Rothbard does address the difficulty banks had redeeming notes of other banks for specie due to anti-branch banking laws. I'd copy and paste the passage, but I can only find it in pdf format and I'm clueless how to copy text from those documents.

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  4. Great job you have done. Perhaps there will be some doubters in the Keynesian ranks

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  5. "I suspect that at the top of the Fed, there are some very evil types who understand the game is to protect the banksters, but I don't think that is the view held by the outer ring. They have been brought up in the system and they don't ask questions that threaten their pay checks (It was most difficult impossible to get the economists to discuss any of the erratic moves made by Bernanke) and work developing models within the twisted Keynesian model."

    As a student learning economics at the Georgia Institute of Technology, I completely agree with this. It in no way seems any of the teachers are trying to "indoctrinate" us with Keynesian views. Rather, it seems they believe much of what they are teaching, and really are only passing on what they were taught back when they were students.

    This being considered, there is a huge gap in knowledge and truth in current mainstream economics for Austrian economics to fill. I sometimes get annoyed by people who are hasty to call every neo-Keynesian or monetarist [insert statist economic theory here] or even banker (or central banker) "evil" when they simply know no better or adopted such views because that is what they were taught. By this, I don't mean there isn't the possibility of higher-ups being genuinely evil, but the large majority certainly is not.

    It won't be easy to convince people to change their entire outlook on economics, but the truth is powerful and correct reason will eventually prevail. Kudos to you, Dr. Wenzel, for treating the members of the New York Federal Reserve Bank with respect while making your case for the Austrian school powerfully.

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    1. So - you are claiming ignorance as a defense for destroying a currency, an economy, and a nation, and then claiming this is not evil? The Austrian school content is available for anyone who seeks it. Just as information about term life instead of whole life insurance is. To claim ignorance while committing and perpetuating/supporting evil (especially as extreme as the Fed does) in this age of easy access to knowledge is somewhat pedantic. Where is the seeking, inquisitive minds of all these so-called learned people? They serve their masters well in perpetuating evil and providing cover for the leaders of this travesty. They are no less evil than the priests that protected the owners as noted in an earlier post.

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    2. I think it's a separate argument whether ignorant people committing evil acts are still evil, and I think I might actually agree with you. I think the reason I worded my post as I did was in attempt to convince Austrians/libertarians to persuade others with logic rather than flat out calling them evil and leaving it at that. Even of the most open minded people, fairly few will be open minded enough to be called evil and accept it.

      But to say the Austrian content is available for anyone to seek it is missing the point. Blame for the indoctrination is not to be levied on the indoctrinated, but on those who did the indoctrinating. It has been a century since Austrian ideas have held mainstream relevance. To say that the ignorant should magically cease being ignorant simply because the information is available isn't a path forward.

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  6. The real firecracker would be to point out that Fed is nothing more than a huge band of thieves.

    Printing money and distributing it to connected accomplices results in transfer of real wealth from population to these accomplices, which happens during the periods of "boom" when that new money is used to buy the assets and obligations of real producers. Then the bust and contraction are needed to let the robbed population to create and accumulate some wealth, and to let the thieves to launder their gains. And then the cycle repeats.

    Presenting this as a kind of intellectual disagreement between Austrians and Keynesians is just silly. I think the top guys in the Fed/banking cartel know quite well what they are doing; I would have a really hard time believing a thief defending himself by claiming that he is practicing an economic theory in which his taking from the victims somehow benefits them.

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    1. The U.S. Federal Reserve Central Bank System is the biggest, most destructive fraud ever perpetrated upon mankind.

      And note to Bharat, yes, they are "Evil" all of them, for what they have done, and do.

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  7. So a professional economist thought than Austrians call for a constant increase in the money supply based on an equation? YIKES!

    I wonder if complete ignorance of Austrian economics is a job requirement and not just "part of the culture." What a joke.

    However, if even one Fed employee checks out some work by an Austrian then the speech was a success. Congrats again.

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  8. Fascinating recap, thank you.

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  9. Robert Wenzel, you are a very sharp individual and played your role masterfully. Perhaps you have lit the fuse that will eventually blow up the dyke. We can only hope that your speech results in raising the curiosity level of these economists and that they will go home and burn the midnight oil as they study outside their Keynesian circle of influence and start to use their atrophied brain cells.

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  10. "When all you have is a hammer, everything looks like a nail."

    You introduced those Fed economists to wrenches, screwdrivers and many other useful tools. Let's hope they learn to use them.

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  11. Why didn't these economists have enough interest in the subject of economics to have read Mises and Rothbard? Do they completely lack intellectual curiosity?

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  12. A theme that will be difficult, though by no means impossible, to articulate to collective-minded debaters about pre-fed US market cycles is that though there were ups and downs, the recoveries were faster, more localized, and market-driven. Additionally, fed collectivists omit entirely from their imaginary historical what-ifs the presence of sophisticated modern market instruments for mitigating and transferring risk. If there had been a free market cotton futures contract, fairly traded on a market exchange, the Panic of 1837 would certainly have been smoothed considerably, without recourse to a Central Committee. Similarly, crop insurance, for that matter all forms of casualty insurance; the ability to hedge wealth, investment and real property in free finance markets via short selling, the sanctity of the contract as a legally binding obligation; all these instruments function quite effectively without the need for a FOMC price controlling the wealth of its nation. In many ways the argument against the FED involves the value of many of the risk techniques that have grown up since the birth of the FED, often to protect citizens against the vagaries and venalities of that very agency. Even the credit default swap and credit default option, born of FED-fed excess, now serve to smooth the traumas of even sovereign-scale central banking failure. Place the efficient function of the Greek CDS against the wholesale conflagration wrought by Central Banking against the citizens themselves - the "credit event" barely registered a hiccup, but the whole of Europe has yet to realize the depth of despair central banking has birthed. Again and again, markets find a better way, until governments screw them up.

    Well done, btw. Most excellent conclusion.

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  13. Some of the animosity is malicious, but I believe most are just ignorant. They simply have never been exposed to Austrian ideas. The Internet is spreading them like wildfire though.

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  14. Don't forget his dissertation "The Panic of 1819:Reactions and Policies"


    http://mises.org/document/695

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  15. Carter the examinerApril 26, 2012 at 7:49 PM

    I worked at the Fed for 20 years, and knew a lot of economists there. Yes, they do tend to have a conventional world view, but they are highly intellectually curious and the best of them are willing to explore all ideas. I can honestly say I knew at least two folks at the NY Fed that we're aware of, and sympathetic to, the Austrian view, even if they weren't hard core believers.

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  16. "...one economist remarked that he understood the Austrian school and that they were the group that wanted a constant increase in the money supply and developed the equation PV=MT."

    OMG.

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  17. George Selgin has some great insight into banking crises before the Fed.

    The content doesn't entirely fill the niche you've pointed out, but it is very enlightening as to the main cause of the "currency panics" following the Civil War.

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  18. Lesson learned is when FED or Keynesian economist starts to discuss the Austrian school, have them cite their references.

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  19. I'm no economic historian, but I'm sure that you would have no difficulty showing where the government interfered frequently even in monetary policy in the 19th Century. Greenbacks is an obvious case, but Congress also voted to expand the money supply by minting silver. And even Andrew Jackson, sometimes lionized by Austrians for ending the second bank, put federal money into his cronies state banks where they proceeded to use it to back paper money which financed the purchase of land that Jackson stole from the Cherokee. The subsequent collapse of that bubble made Van Buren a one-term president.Even during the period of "free" banking which followed, states often made bank notes from state-chartered banks acceptable for paying taxes thus making them almost as good as legal tender.

    The Fed is hardly the only tool available for crony capitalists.

    In discussions I've had with people with conventional economic training, one of the most common criticisms I've heard is that Austrianism is "anti-empirical." It seems to be one thing they learn about the Austrian school if they don't learn anything else. I have to point out to them that empirical methodology and empirical evidence are not the same thing. Inevitably they seem to think that the Austrian school is bent on denying facts.

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  20. One blogger I read called this the greatest economic speech ever given. I think I agree. Would that you would become treasury secretary with a night job of shutting down the Fed. That would be a great day. I have saved this speech and have every intention of using it in referral for anyone trying to tell me the government is doing a good economic job.
    Your whole speech just sweeps over one like a huge wave.

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  21. The reason, of course, that mainstream economists, (i.e., those who work for the government, or those who hope to via ye olde revolving door) are blissfully unaware of the Austrian School is that it opposes government involvement in the economy, and hence is a complete non-starter for them. Should any in your audience wake up and subscribe to the Austrian School, they will do so at the risk of their careers. Strong incentive indeed to remain ignorant.

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  22. Wenzel as Morpheus, the NY Fed as the Matrix.

    I second the sentiment that if even one Fed economist finds himself in a darkened room going to Mises.org, the speech was a rousing success.

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  23. The obvious question is: where is the audio? I would love to hear it, especially the Q&A. If you have it, this would make for a great resumption to your podcast.

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  24. The Creature from Jeckyll Island also has a lot of information on central banking before the Fed and their role in booms and busts.

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  25. Bob, you are a hero over at Zero Hedge. Nicely done, as you already know.

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  26. If It is correct and I believe it is, Wilson after the Fed was enacted into law said , " What have I done to my country". The Federal Reserve is a private firm with government oversight. They pay the printing costs for our currency, and then loan it back to our government at interest. What a gig if you can get it. They supposedly control the up and downs by controlling the money supply by controlling the interest rates. What I would like to know is, who owns the majority interest in the Fed? The Fed is very secretive and not very transparent. Supposedly there was two trillion dollars lent to a foreign identity and when questioned about it Bernanke would not disclose who got the loan or loans . The Federal Reserve needs one good house cleaning. Who ever controls the money controls everything. Jefferson , Jackson, and others opposed the central bank or national bank and some say the real reason Lincoln was assassinated was because of his plans for the banks. When you have had congressmen and Senators call for audits of the Fed and not be able to get it done , you know you are fighting something very powerful. And they will not give up that power very easily.

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  27. Lot's of comment on the two schools Austrian vs Keynes. We can create sophisticated computer programs to simulate real life speeded up (DNA and biological research), so why not have financial models of the two schools with inputs we can all look at?

    Is Economics really so difficult? Why not create a simple real life system in a computer model - for instance start it off with two humans bartering and how money (with credit and Govt(Fed) interferance, being the critical variables) impact.

    I trade silver contracts on the Comex. I have yet to see who trades and why prices are what they are. Comex generated paper silver prices dictate the physical price - insane as paper traded in one day can equal an entire year's physical mine production of silver. How can we remove the smoke screens? Are we so challenged that the 3 card monty operators (the Fed/Big Banks/Politicians) can move us as they choose? It must be heaven for the TBTF operators and their political co conspriators as they fleece the people.

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    1. I think your answer lies near the end of this speech.

      http://www.presidency.ucsb.edu/ws/?pid=27108

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  28. On your requests for research:

    1. Tom Woods (Meltdown) has already done a good (though not excellent) job refuting the argument that, pre-Fed, crises were worse. Bottom line: Banking panics were more frequent, but had a "shallower" effect because fewer people we in debt to the banks. Remember Rothbard's comment that banking crises are good and the longer we delay a banking crises the worse off the economy because of the malinvestments FRB produces.

    2. The Austrian solution to the crisis is "Do an Iceland". Let the private banks fail, don't put private debt into the hands of the taxing authority that will just tax our children to death. Wipe the debt, cancel the debt, kill the banks that created the problem and start afresh. That's what happened in Iceland (and in Sweden 20 years ago).

    NOTE: You will never hear Krugman EVER talk of the "Iceland solution." He screams for more government spending to put off the recession, but never addresses the long term debt consequences of doing so, other than to say "who cares about the future, leave that to our kids to sort out."

    Iceland sits there as evidence that there is another way.

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  29. This old book details the first Government intervention in the original system the Founding Fathers set up. You have to get how the original system worked by inference (when it comes to the banking system). It was a very different system and I think most people today don't understand how it worked. It was brilliant. I think a lot of what has happened is due to ignorance.

    http://archive.org/details/coinsfinancialsc00harvrich

    Also recommend you read Jefferson's Opinion on a National Bank

    http://avalon.law.yale.edu/18th_century/bank-tj.asp

    and Jackson's veto of the Bank.

    http://avalon.law.yale.edu/19th_century/ajveto01.asp

    Also Google 'Mcfadden, 1932' and read a copy of his speech. It helps to find a Series 1914 Fed Note and look at the Fine Print on the back before reading his speech. This will let you put the pieces together. It is an amazing story when you understand what has happened.

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  30. I learned the equation as
    PV = nRT
    the ideal gas law.

    The fundamental problem with economics is that it is not a science. In science, one develops a theoretical model of how a physical system should function based on an understanding of so called first-principles. One then does empirical studies to validate or invalidate the model.
    In economics, most practitioners dispense with the first part (constructing a theoretical model) and jump head first into the empirical studies.

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  31. Thank you for this follow up to your initial "speech at the Fed" story.

    It's disturbing, if not frightening, that you notice such a lack of well-rounded familiarity with different schools of economic theory within the Fed. I surmise this results in a degree of bias in the research & reporting that is funneled up the pyramid to decision makers at the top.

    It's little wonder that Fed decisions and actions trend in certain directions if the analysis, reports and recommendations come from a 'Keynesian yes men' environment.

    I do find some positives in your noting of interest & curiosity in that which their formal education lacked. These are presumably intelligent people & it can't escape them that the world - as the Fed likes to perceive it - isn't functioning well. Neither are the Fed's actions producing good results. Whether they're prepared to admit that publicly or not is another question. However, if you've managed to open any minds to alternative perspectives perhaps you've set something worthwhile in motion.

    Time will tell.

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  32. If the minions at the Fed are afraid of expressing a non-Keynesian view for fear that it would be a career killer, wait until the system collapses and their policies excoriated. They'll be like the lookout on the Titanic trying to get a job on another ship.

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