Friday, September 23, 2011

NY Fed Prez: Financial System is Inherently Unstable

New York Federal Reserve President William Dudley is no proponent of the Austrian Business Cycle Theory, In a speech today before the 2011 Bretton Woods Committee International Council Meeting in
Washington, D.C., Dudley saw no role being played by the Federal Reserve in causing the problem economy. You see it is caused by a naturally recurring cycle and not by the manipulations of the Fed:
Policymakers and market participants must acknowledge that the financial system is inherently unstable—that it is prone to booms and busts, and that these episodes can destabilize the real economy. As a consequence, at times, we must be willing to intervene to restrain financial booms in order to temper the busts...Throughout history we have seen numerous sizable booms and damaging busts. The notion that financial markets are dynamically unstable is also supported by controlled experiments conducted by behavioral economists.
Experiments conducted by behavioral economists? Are these the same guys that advised the Fed that there was no housing bubble?

So what could possibly be causing this cycle? Dudley says:
Although it is impossible to attribute the instability of financial markets to any one single driving force, recent experience suggests that in many cases innovation plays an important role. ...innovations that initially create real value generate feedback mechanisms that often fuel the development of excessive expectations—a boom that eventually reverses when the basic belief system that sustained it is contradicted by events...Such innovations can occur in the real economy—consider the Internet—or in the financial sector—think of subprime lending and structured finance products.
Got that? Alan Greenspan's period as Federal Reserve chairman, when he kept interest rates artificially low, had nothing to do with the boom-bust cycle. Ben Bernanke's current money supply growth bronco ride has nothing to do with the current erratic performance of economy. It's all about innovation, financial and otherwise, but nothing about the Fed money printing that fueled the financial innovation.


  1. I hear the Model T had nothing to do with the boom in automobile sales either......
    I still don't understand how people can be so consistently wrong and still be believed to know what they are talking about.

  2. We need to accept that our opponents are intellectually and (especially) emotionally unprepared to even minimally address Austrian School and libertarian concerns. These people do not want to face the ugly truth that their beloved statist belief system is the CAUSE of our misery. The ugly truth about our opponents’ inability to confront us goes much much deeper than just them protecting their positions of financial and political power.

    Our opponents are simply pathetic and we should tell them so. Was Fox News’ treatment of Ron Paul last night funny or pathetic?

    Total time:

    Romney 12:09
    Perry 11:10
    Huntsman 07:41
    Santorum 07:06
    Cain 06:23
    Bachmann 06:13
    Gingrich 05:44
    Paul 04:33
    Johnson 04:10

    % of Total Talk Time

    Romney 18.65%
    Perry 17.14%
    Huntsman 11.79%
    Santorum 10.90%
    Cain 9.80%
    Bachmann 9.54%
    Gingrich 8.80%
    Ron Paul 6.98%
    Johnson 6.40%

    Turns Talking

    Romney 15
    Perry 13
    Santorum 9
    Huntsman 9
    Bachmann 8
    Gingrich 7
    Cain 7
    Ron Paul 6
    Johnson 5

    If anything, this gives libertarian newbies a glimpse of media truth and the type of people who oppose us.

  3. "As a consequence, at times, we must be willing to intervene to restrain financial booms"

    Right, so Greenspan slashing rates to record lows and George Bush dishing out stimulus checks is "restraining" the boom? Har har.

    And here I thought Keynesian theory was all about trying to get the boom to last forever....

  4. Taking this discourse seriously is very hard, and I think most people would agree that overall it makes no sense (we can draw a logical conclusion that the government should stifle innovation as a solution to economic busts based on his premises).