Thursday, November 18, 2010

Amazing: Another Kochanack Backs-Up Bernanke Money Printing

Lawrence White, who teaches at  Koch-controlled, George Mason University, posed as an Austrian economist, for an article at Economist magazine, to endorse Federal Reserve money printing.

Not surprising as a Kochanack, in his comments for Economist magazine, White completely ignored the teaching of  Ludwig von Mises and focused on what appears to be a  twisted interpretation of Friedrich Hayek, who was certainly never as consistent as Mises, but would hardly seem to be an endorser of Ben Bernanke monetary antics. Yet, incredibly, White uses Hayek to endorse round one of Ben Bernanke's money printing and, by this entrance way, implies that this is the Austrian view. Here's Economist magazine:

The Austrians may have said smart things about the boom, but what about the bust? One criticism is that the Austrians offered a “counsel of despair”, suggesting that the authorities do nothing while a crisis blows itself out. At least the monetarists propose cutting rates and expanding the money supply and the Keynesians promote deficit spending.

Lawrence White, an economist at George Mason University in Washington, DC, argues that this is an unfair characterisation. “Hayek was not a liquidationist,” he says, referring to the philosophy of Andrew Mellon, President Herbert Hoover’s Depression-era treasury secretary, who wanted to “purge the rottenness out of the system”. Hayek believed the central bank should aim to stabilise nominal incomes. On that basis Mr White thinks the Fed was right to pursue the first round of quantitative easing, since nominal GDP was falling, but wrong to pursue a second round with activity recovering.
White should know better than to take and twist some Hayek comment and use it to paint the Austrian view as one in favor of Ben Bernanke money printing.

Here's Joesph Salerno with a much better presentation of Hayek's thought:

The alternative to this, Hayek argues, is to eschew monetary inflation and permit the prices of the unemployed resources to naturally readjust downward to levels that are sustainable at the current level of money income. In this case, unemployed labor and other resources will be guided by the price system into production processes that are sustainable at the current level of monetary expenditure. Permitting the market adjustment of relative prices and wage rates thus ensures a structure of resource employment that is coordinated with the structure of resource demands. In contrast, inflating aggregate money expenditure leads to a short-run increase in employment that causes an inappropriate distribution of resources whose inevitable correction ensures another depression. Such a correction can be postponed, but never obviated, only by repeatedly neutralizing relative price changes through accelerating inflation.
The appropriate response to the charge that Austrians only offer a "counsel of despair" during the down phase of the business cycle is that the Austrians do no such thing. You don't go into despair when the war with money manipulators is over. You cheer.

The Austrian view is that the downside of the business cycle is the necessary response to stop the price inflation threat that ultimatley results from central bank money printing. The alternative is eventual hyper-inflation. The downside should not be viewed as despair. The money printing period, such as we witnessed during the Federal Reserve goosing of the housing market, should be viewed with despair,  given how people are decieved by the Fed money printing in the boom period. In the last boom, millions of  people were fooled into buying houses they couldn't afford based on the false expectation created by Fed money printing that they could, in a year, "flip" the house into an even bigger house. To anyone who understands the business cycle that's when the despair hits

The downside of the business cycle is the return to sanity, where inflation ends and people can make business decisions based on a real non-distorted economy. The Austrian view is that the economy is being restructured in a much more stable fashion during the downturn. It shouldn't be a period of despair. It's a period of hope and relief. Relief that the inflation threat is removed and hope that with entrepreneurs, not facing distorted interest rate signals, they will be able to make sounder business decisions. Cutting rates and expanding the money supply just puts the economy back in a  tiger by the tail situation that ultimately results in hyper-inflation or a greater crash. Keynesian deficit spending only takes money from the productive private sector and gives it to the government bureaucracy, that's never going to grow the economy.

That's what White should have said, if he was an Austrian. I'm not sure what paragraphs White is thinking of that causes him to claim that Hayek would have been in favor of QE1, which did nothing but prop up Goldman Sachs, JPMorgan Chase and the like. But it would take an awful lot for White to convince me that Hayek would have been in favor of any of Bernanke's money printing moves.

White's interpretation is out there. It really is ignoring basic fundamental Austrian tenets and mixing in outliers that reach conclusions opposite to mainstream Austrian views and then promoting them as somehow Austrian mainstream. It's not the first time for this Kochanack, though. In fact, his mix and match distortions seem to echo the type of analysis he has done in the past.

Here's Murray Rothbard on White's book, Free Banking in Britain :

Professor White's Free Banking in Britain has already had a substantial impact on the economics profession...The influence of White's thesis is remarkable considering the paucity of his research and the thinness of his discussion...

I conclude that the Scottish banks, in the eighteenth and first half of the nineteenth centuries, were neither free nor superior, and that the thesis to the contrary, recently revived by Professor White, is but a snare and a delusion...Miss Smith saw that for both schools of thought, free banking and central banking were contrasting means to arrive at their different goals. As a result, she analyzes her monetary writers according to an illuminating 2x2 grid, with "currency school" and "banking school" on one side and "free banking" and"central banking" on the other. In Free Banking in Britain, on the other hand, Professor White retreats from this important insight, misconceiving and distorting the entire analysis...


  1. I met professor White at FEE Advanced Austrian Seminar last summer and was amazed about his statements about 'Hayekian' monetary policy. Before the seminar I have already read 'Prices and Production' and some others Hayek's works and his claims just did not fit my view on FAH. I asked, where exactly did Hayek write in favour of such policy and he suggested 'Prices and Production'. He also said he presented his views in a paper
    I later spotted a critique of White's paper in QJAE
    Recently I'm thinking of writing my PhD thesis about what has Hayek really written about monetary policy and business cycles. I hope if I read enough I will be able to see more clearly who is right (although I have all my bets on Salerno :) ). Greetings, Mateusz from Poland

  2. To my knowledge, Rothbard's criticism was answered in the 2nd edition of White's book. (I could be wrong about this, however.)

    White has some very good things to say about free banking and money in general. For him to make an error like this is a bit disappointing.

  3. characteristic of anything koch funds. "GOP first," and that means fed first.

    one can only be disappointed by this if in a state of ignorance.