The Fatal Conceit of Central Planners Dies Hard


by Peter Schiff, Schiff Gold:

Peter Schmidt has written extensively about the “Confederacy of Dunces” that helped bring about the financial collapse of 2008 and their “fatal conceit.” By fatal conceit, he means the arrogant belief that because of their superior intellect and education, they have the wherewithal to micromanage the economy.

One of the members of Schmidt’s “confederacy of dunces” is Lawrence Summers. He served as a senior Treasury Department official during the Clinton Administration and was at the center of enormous and easily discernible blunders in judgment that directly led to the crisis. But he has never taken ownership for the role he played and he continues to pontificate about economic issues.

In the following article, Schmidt uses Summers recent comments about one of Pres. Trump’s potential Federal Reserve Board nominees to highlight the fatal conceit of central planners.

The following was written by Peter Schmidt. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

There are two important points to remember when it comes to the financial crisis of 2008.

  1. The root cause of the financial crisis was a “purely human factor. This human factor is the completely false sense of omnipotence, self-importance and entitlement among the country’s elite, as well as the nurturing of these beliefs at Ivy League colleges and other elite universities.”
  2. Unless this purely human factor is addressed, “the US will be doomed to suffer other calamities every bit the equal of the financial crisis.”

Recently, Lawrence Summers proved – beyond a shadow of a doubt – the veracity of these two conclusions.

The Financial Times published an article profiling President Trump’s latest candidate for a position on the Federal Reserve, Judy Shelton,(1). Among the most conspicuous differences between Shelton and her potential future Fed colleagues is she is completely dubious of the Fed’s ability to accurately set interest rates. In fact, she likens the entire notion of the Fed being as actively involved in the economy as it currently is, as being little different than Soviet-style central planning – a position I both wholeheartedly agree with and endorse!

However, in response to the Financial Times article, Summers tweeted:

“Judy Shelton does what I would have not thought possible. She falls well below Cain or Moore as a potential Federal Reserve governor. Hers would be a dangerous appointment.”

In this tweet, Summers captures the enormous psychological defects that nearly all of the Confederacy of Dunces have. Summers speaks as if he had nothing to do with what has been happening in the country for the past 30 years, or as if the Fed has some sort of unblemished record of success, and was thus beyond reproach. As the bursting of two enormous bubbles, and the apparent bursting of a third – even larger bubble now – clearly show, all sorts of economic assumptions and central banking practices need to be revisited. See the chart, which has been published on the site several times before, for visual evidence of the obvious economic defects the country has suffered through for decades.

Summers is both completely blind to the obvious need to redress some clearly faulty economic assumptions and his massive role in the promulgation of these incorrect assumptions. Moreover, if Summers had any academic or intellectual integrity – which he most certainly does not – he would realize that Judy Shelton is hardly alone in her criticism of today’s Federal Reserve, and its fatal, post-1971, infatuation with central planning via its Open Market Committee.

Here is just a brief sampling of some of the well-respect economists and financiers who were deeply skeptical of a central bank assuming even a small fraction of the power the Fed currently has:

  • Walter Bagehot, “In a crisis, a central bank can lend freely, but only against good collateral and only at high rates of interest.”
  • Dr. Benjamin Anderson, “The first four sources of capital – direct capitalization, (consumer saving), business thrift and, finally, taxation for capital purposes, are all wholesome, sound and safe. They have never been overdone; no country has ever gone wrong in creating capital these ways. The great troubles of the 1920s grew out of a fifth source of capital, namely new bank credit for capital purposes.”(1) (i.e. a central bank creating bank reserves out of thin air)
  • Wilhelm Roepke, “If in the production of goods the most important pedal is the accelerator, in the production of money it is the brake. To ensure that this break works automatically and independently of the whims of government and the pressure of parties and groups seeking ‘easy money’ has been one of the main functions of the gold standard. That the liberal should prefer the automatic brake of gold to the whims of government in its role of trustee of a managed currency is understandable.”(2)
  • Fischer Black (of Black-Scholes option pricing fame), “I believe that in a country like the US, with a smoothly working fianncial system, the government does not, cannot, and should not control the money stock in any significant way. The government does, can only, and should simply respond passively to shifts in the private sector’s demand for money. Monetary policy is passive, can only be passive and should be passive. The pronouncements of the Federal Reserve Board on monetary policy are a charade.”(3)

All the people quoted here are completely sympathetic to Judy Shelton’s skepticism of not just the ability of the Fed to set interest rates, but the enormous dangers inherent with the Fed attempting to do so. Moreover, the dust still hasn’t finished settling from the collapse of the housing bubble! Yet Summers can still haughtily claim it is Judy Shelton that is dangerous and the Fed isn’t some sort of menace?

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