This was delivered. I am not sure I could have contained myself!

Weds April 25th, 2012

My Speech Delivered at the New York Federal Reserve Bank

the invitation of the New York Federal Reserve Bank, I spoke and had lunch in
the bank's Liberty Room. Below are my prepared

you very much for inviting me to speak here at the New York Federal Reserve

discourse is, of course, extraordinarily valuable in reaching truth. In this
sense, I welcome the opportunity to discuss my views on the economy and monetary
policy and how they may differ with those of you here at the

said, I suspect my views are so different from those of you here today that my
comments will be a complete failure in convincing you to do what I believe
should be done, which is to close down the entire Federal Reserve

views, I suspect, differ from beginning to end. From the proper methodology to
be used in the science of economics, to the manner in which the macro-economy
functions, to the role of the Federal Reserve, and to the accomplishments of the
Federal Reserve, I stand here confused as to how you see the world so
differently than I do.

simply do not understand most of the thinking that goes on here at the Fed and I
do not understand how this thinking can go on when in my view it smacks up
against reality.

allow me to begin with methodology, I hold the view developed by such great
economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that
there are no constants in the science of economics similar to those in the
physical sciences.

the science of physics, we know that ice freezes at 32 degrees. We can predict
with immense accuracy exactly how far a rocket ship will travel filled with 500
gallons of fuel. There is preciseness because there are constants, which do not
change and upon which equations can be constructed..

are no such constants in the field of economics since the science of economics
deals with human action, which can change at any time. If potato prices remain
the same for 10 weeks, it does not mean they will be the same the following day.
I defy anyone in this room to provide me with a constant in the field of
economics that has the same unchanging constancy that exists in the fields of
physics or chemistry.

yet, in paper after paper here at the Federal Reserve, I see equations built as
though constants do exist. It is as if one were to assume a constant
relationship existed between interest rates here and in Russia and throughout
the world, and create equations based on this belief and then attempt to trade
based on these equations. That was tried and the result was the blow up of the
fund Long Term Capital Management, a blow up that resulted in high level
meetings in this very building.

is as if traders assumed a given default rate was constant for subprime mortgage
paper and traded on that belief. Only to see it blow up in their faces, as it
did, again, with intense meetings being held in this very building.

the equations, assuming constants, continue to be published in papers throughout
the Fed system. I scratch my head.

also find curious the general belief in the Keynesian model of the economy that
somehow results in the belief that demand drives the economy, rather than
production. I look out at the world and see iPhones, iPads, microwave ovens,
flat screen televisions, which suggest to me that it is production that boosts
an economy. Without production of these things and millions of other items,
where would we be? Yet, the Keynesians in this room will reply, “But you need
demand to buy these products.” And I will reply, “Do you not believe in supply
and demand? Do you not believe that products once made will adjust to a market
clearing price?”

, I will argue that the price of the factors of production will adjust to prices
at the consumer level and that thus the markets at all levels will clear. Again
do you believe in supply and demand or not?

scratch my head that somehow most of you on some academic level believe in the
theory of supply and demand and how market setting prices result, but yet you
deny them in your macro thinking about the economy.

will argue with me that prices are sticky on the downside, especially labor
prices and therefore that you must pump money to get the economy going. And, I
will look on in amazement as your fellow Keynesian brethren in the government
create an environment of sticky non-downward bending wages.

economist Robert Murphy reports that President Herbert Hoover continually
pressured businessmen to not lower wages.[1]

quoted Hoover in a speech delivered to a group of businessmen:

this country there has been a concerted and determined effort on the part of
government and business... to prevent any reduction in wages.

then reports that FDR actually outdid Hoover by seeking to “raise wages rates
rather than merely put a floor under them.”

ask you, with presidents actively conducting policies that attempt to defy
supply and demand and prop up wages, are you really surprised that wages were
sticky downward during the Great Depression?

present day America, the government focus has changed a bit. In the new focus,
the government attempts much more to prop up the unemployed by extended
payments for not working. Is it really a surprise that unemployment is so high
when you pay people not to work.? The 2010 Nobel Prize was awarded to economists
for their studies which showed that, and I quote from the Noble press release
announcing the award:

conclusion is that more generous unemployment benefits give rise to higher
unemployment and longer search times.

you think it would make more sense to stop these policies which are a direct
factor in causing unemployment, than to add to the mess and devalue the currency
by printing more money?

scratch my head that somehow your conclusions about unemployment are so
different than mine and that you call for the printing of money to boost
“demand”. A call, I add, that since the founding of the Federal Reserve has
resulted in an increase of the money supply by 12,230%.

also must scratch my head at the view that the Federal Reserve should maintain a
stable price level. What is wrong with having falling prices across the economy,
like we now have in the computer sector, the flat screen television sector and
the cell phone sector? Why, I ask, do you want stable prices? And, oh by the
way, how’s that stable price thing going for you here at the

the start of the Fed, prices have increased at the consumer level by 2,241% [3].
that’s not me misspeaking, I will repeat, since the start of the Fed, prices
have increased at the consumer level by 2,241%.

you then might tell me that stable prices are only a secondary goal of the
Federal Reserve and that your real goal is to prevent serious declines in the
economy but, since the start of the Fed, there have been 18 recessions including
the Great Depression and the most recent Great Recession. These downturns have
resulted in stock market crashes, tens of millions of unemployed and untold
business bankruptcies.

scratch my head and wonder how you think the Fed is any type of success when all
this has occurred.

am especially confused, since Austrian business cycle theory (ABCT), developed
by Mises, Hayek and Rothbard, has warned about all these things. According to
ABCT, it is central bank money printing that causes the business cycle and,
again you here at the Fed have certainly done that by increasing the money
supply. Can you imagine the distortions in the economy caused by the Fed by this
massive money printing?

to ABCT, if you print money those sectors where the money goes will boom, stop
printing and those sectors will crash. Fed printing tends to find its way to
Wall Street and other capital goods sectors first, thus it is no surprise to
Austrian school economists that the crashes are most dramatic in these sectors,
such as the stock market and real estate sectors. The economist Murray Rothbard
in his book
Great Depression

[4] went into painstaking detail outlining how the changes in money supply
growth resulted in the Great Depression.

a more personal level, as the recent crisis was developing here, I warned
throughout the summer of 2008 of the impending crisis. On July 11, 2008 at, I wrote[5]:

ALERT: Dramatic Slowdown In Money Supply Growth

growing at near double digit rates for months, money growth has slowed
dramatically. Annualized money growth over the last 3 months is only 5.2%. Over
the last two months, there has been zero growth in the M2NSA money

is something that must be watched carefully. If such a dramatic slowdown
continues, a severe recession is inevitable.

have never seen such a dramatic change in money supply growth from a double
digit climb to 5% growth. Does Bernanke have any clue as to what the hell he is

July 20, 2008, I wrote [6]:

have previously noted that over the last two months money supply has been
collapsing. M2NSA has gone from double digit growth to nearly zero growth

review of the credit situation appears worse. According to recent Fed data, for
the 13 weeks ended June 25, bank credit (securities and loans) contracted at an
annual rate of 7.9%.

has been a minor blip up since June 25 in both credit growth and M2NSA, but the
growth rates remain extremely slow.

a dramatic turnaround in these numbers doesn't happen within the next few weeks,
we are going to have to warn of a possible Great Depression style

just weeks before these warnings from me, Chairman Bernanke, while the money
supply growth was crashing, had a decidedly much more optimistic outlook, In a
speech on June 9, 200
the Federal Reserve Bank of Boston’s 53rd Annual Economic Conference [7], he

would like to provide a brief update on the outlook for the economy and policy,
beginning with the prospects for growth. Despite the unwelcome rise in the
unemployment rate that was reported last week, the recent incoming data, taken
as a whole, have affected the outlook for economic activity and employment only
modestly. Indeed, although activity during the current quarter is likely to be
weak, the risk that the economy has entered a substantial downturn appears to
have diminished over the past month or so. Over the remainder of 2008, the
effects of monetary and fiscal stimulus, a gradual ebbing of the drag from
residential construction, further progress in the repair of financial and credit
markets, and still-solid demand from abroad should provide some offset to the
headwinds that still face the economy.

believe the Great Recession that followed is still fresh enough in our minds so
it is not necessary to recount in detail as to whose forecast, mine or the
chairman’s, was more accurate.

am also confused by many other policy making steps here at the Federal Reserve.
There have been more changes in monetary policy direction during the Bernanke
era then at any other time in the modern era of the Fed. Not under Arthur Burns,
not under G. William Miller, not under Paul Volcker, not under Alan Greenspan
have there been so many dramatically shifting Fed monetary policy moves. Under
Chairman Bernanke there have been significant changes in direction of the money
supply growth FIVE different times. Thus, for me, I am not at all surprised at
the current stop and go economy. The current erratic monetary policy makes it
exceedingly difficult for businessmen to make any long term plans. Indeed, in
my own Daily Alert on the economy [8] I find it extremely difficult to give long
term advice, when in short periods I have seen three month annualized M2 money
growth go from near 20% to near zero, and then in another period see it go from
25% to 6% . [9]

am also confused by many of the monetary programs instituted by Chairman
Bernanke. For example, Operation Twist.

is not the first time an Operation Twist was tried. an Operation Twist was tried
in 1961, at the start of the Kennedy Administration [10] A paper [11] was
written by

three Federal Reserve economists in 2004 that, in part, examined the 1960's
Operation Twist

conclusion (My bold):

second well-known historical episode involving the attempted manipulation of the
term structure was so-called Operation Twist. Launched in early 1961 by the
incoming Kennedy Administration, Operation Twist was intended to raise
short-term rates (thereby promoting capital inflows and supporting the dollar)
while lowering, or at least not raising, long-term rates. (Modigliani and Sutch
1966).... The two main actions of Operation Twist were the use of Federal
Reserve open market operations and Treasury debt management
Twist is widely viewed today as having been a failure, largely due to classic
work by Modigliani and Sutch....

Modigliani and Sutch also noted that Operation Twist was a relatively small
operation, and, indeed, that over a slightly longer period the maturity of
outstanding government debt rose significantly, rather than falling...Thus,
Twist does not seem to provide strong evidence in either direction as to the
possible effects of changes in the composition of the central bank’s balance

believe that our findings go some way to refuting the strong hypothesis that
nonstandard policy actions, including quantitative easing and targeted asset
purchases, cannot be successful in a modern industrial economy.
the effects of such policies remain quantitatively quite uncertain.

of the authors of this 2004 paper was Federal Reserve Chairman Bernanke. Thus, I
have to ask, what the hell is Chairman Bernanke doing implementing such a
program, since it is his paper that states it was a failure according to
Modigliani, and his paper implies that a larger test would be required to
determine true performance.

ask, is the Chairman using the United States economy as a lab with Americans as
the lab rats to test his intellectual curiosity about such things as Operation

I am very confused by the response of Chairman Bernanke to questioning by
Congressman Ron Paul. To a seemingly near off the cuff question by Congressman
Paul on Federal Reserve money provided to the Watergate burglars, Chairman
Bernanke contacted the Inspector General’s Office of the Federal Reserve and
requested an investigation [12]. Yet, the congressman has regularly asked about
the gold certificates held by the Federal Reserve [13] and whether the gold at
Fort Knox backing up the certificates will be audited. Yet there have been no
requests by the Chairman to the Treasury for an audit of the gold.This I find
very odd. The Chairman calls for a major investigation of what can only be an
historical point of interest but fails to seek out any confirmation on a point
that would be of vital interest to many present day Americans.

this very building, deep in the underground vaults, sits billions of dollars of
gold, held by the Federal Reserve for foreign governments. The Federal Reserve
gives regular tours of these vaults, even to school children. [14] Yet,
America’s gold is off limits to seemingly everyone and has never been properly
audited. Doesn’t that seem odd to you? If nothing else, does anyone at the Fed
know the quality and fineness of the gold at Fort Knox?

conclusion, it is my belief that from start to finish the Fed is a failure. I
believe faulty methodology is used, I believe that the justification for the
Fed, to bring price and economic stability, has never been a success. I repeat,
prices since the start of the Fed have climbed by 2,241% and there have been
over the same period 18 recessions. No one seems to care at the Fed about the
gold supposedly backing up the gold certificates on the Fed balance sheet. The
emperor has no clothes. Austrian Business cycle theorists are regularly ignored
by the Fed, yet they have the best records with regard to spotting overall
downturns, and further they specifically recognized the developing housing
bubble. Let it not be forgotten that in 2004, two economists here at the New
York Fed wrote a paper [15] denying there was a housing bubble. I responded to
the paper [16] and wrote:

faulty analysis by [these] Federal Reserve economists... may go down in
financial history as the greatest forecasting error since Irving Fisher declared
in 1929, just prior to the stock market crash, that stocks prices looked to be
at a permanently high plateau.

released just yesterday, now show housing prices have crashed to 2002 levels.

will now give you more warnings about the economy.

noose is tightening on your organization, vast amounts of money printing are now
required to keep your manipulated economy afloat. It will ultimately result in
huge price inflation, or, if you stop printing, another massive economic crash
will occur. There is no other way out.

thank you for inviting me. You have prepared food, so I will not be rude, I will
stay and eat.

have one good meal here. Let’s make it a feast. Then I ask you, I plead with
you, I beg you all, walk out of here with me, never to come back. It’s the moral
and ethical thing to do. Nothing good goes on in this place. Let’s lock the
doors and leave the building to the spiders, moths and four-legged



















thanks to the following, who helped me research and collect data for this paper:
Stephen Davis, Bob English, Jon Lyons, Ash Na
Joseph Nelson,
Nero, Antony Zegers