PrintNovember 16, 2010
Why Isn't Peter Schiff Head of the Fed?
One of the most instructive and eye-opening YouTube videos out there is called "Peter Schiff Was Right." It is a compilation of appearances by Schiff -- president of Euro Pacific Capital -- on TV and cable shows predicting the burst of the housing bubble and the subsequent economic meltdown. (For the original compilation go here, for the second edition here.)
Schiff's appearances cover the period between 2002 and 2007. To most observers, things looked bright then, given that real estate and equities were enjoying an impressive bull run. Americans were becoming millionaires by the thousands as the paper value of their holdings kept mushrooming.
Even though there would be occasional snag now and then, our economic future loomed rich and shiny. It was a time when the pundits kept telling us that we had entered on an era of sustained growth, cheap imports, and endlessly climbing asset prices. They all but asked us to join hands and celebrate the economic and financial panacea we supposedly inhabited.
This is, for example, how Arthur Laffer -- the economic guru of the Laffer curve fame -- saw things in the middle of 2006:
The United States economy has never been in better shape. There is no tax increase coming in the next couple of years. Monetary policy is spectacular. We have freer trade than ever before.
It was in the midst of those happy times that Peter Schiff went around warning of impending doom. In August of 2006, he said this on MSNBC:
[I]t is going to be pretty bad and whether it starts in '07 or '08, I think is immaterial and I also think it is going to last not just for quarters but for years. See, the basic problem with the US economy is we have too much consumption and borrowing and not enough production and savings... it is not wealth that has increased in the last few years; we haven't increased our productive capacity. All that has increased is the paper values of our stocks and real estate, but that's not real wealth no more than the Nasdaq was wealth. If you see the stock market come down and the real estate bubble burst, all that phony wealth is going to evaporate and all that is going to be left is all the debt we accumulated to foreigners.
The experts and analysts who debated Schiff were incredulous at his claims, and many thought he was a crank. Schiff was mocked, derided, and laughed at. Arthur Laffer had this to say in response: "Oh my goodness! I have never heard so many mistakes made in series in my life ... I just don't know where he is getting his stuff."
Another "pundit" mockingly asked Schiff what he was smoking. In their minds, things could never get really bad in America, a country with the best economy ever known. The experts' sniggers notwithstanding, Peter Schiff turned out to be right, and almost uncannily so. Things unfolded just the way he said they would.
Then there is Ben Bernanke, who also left behind a revealing video footprint of predictions from the period when the real estate market was headed for collapse. Unlike Schiff, however, Bernanke did not see anything seriously wrong. Even as the economy was hurtling toward the crash, Bernanke thought things were just fine. In July of 2005, for example, he was asked by CNBC whether there was a housing bubble, to which he replied:
Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth ... I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.
When the interviewer asked what would happen if housing prices were to come down, Bernanke completely rejected such a scenario out of hand:
It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though.
Here are a few more of Bernanke's pronouncements in the period prior to the meltdown as collected by Source Watch:
In February of 2006, the Council of Economic Advisers, of which Bernanke was Chairman, issued a report which stated the following: "The economy has shifted from recovery to sustained expansion. ... The U.S. economy continues to be well positioned for long-term growth." The report projected an unemployment rate of 5% from 2008 through 2011.
On July 20, 2006, Bernanke opined that the American economy was "robust" and "strong."
On February 15, 2007, Bernanke stated, "Overall economic prospects for households remain good. The labor market is expected to stay healthy. And real incomes should continue to rise. The business sector remains in excellent financial condition."
On July 18, 2007, he claimed, "Employment should continue to expand. ... The global economy continues to be strong ... financial markets have remained supportive of economic growth."
On June 9, 2008, Bernanke said, "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
The above should make amply clear that Ben Bernanke just does not have a clue. He has been consistently wrong; he could not, in fact, have been more wrong had he tried.
On February 1, 2006, Bernanke was appointed Chairman of the Federal Reserve despite his extensive record of failed prognostication and mistaken economic assessments. Since he is also Chairman of the Federal Open Market Committee (FOMC), his word carries decisive weight in matters of monetary policy. The size of the money supply, interest rates, and monetization of government debt all fall under his purview. Because of this, Bernanke personally exercises more control over the U.S. economy than any other person or institution. His powers in this regard far exceed even those of the president or Congress.
The Fed Chairman can regulate economic activity to the extent most people can hardly fathom. He has the power to unleash inflation, determine the value of our currency, and influence interest rates on loans and mortgages in this country. It is no exaggeration to say that his decisions can wreck the economy or destroy the worth of the money we use in everyday transactions.
This should be a reason for worry, given that Bernanke obviously does not know what he is doing. The normally soft-spoken and polite Jim Rogers -- one of the world's most successful and articulate investors -- summed up matters when he said, "Mr. Bernanke has never been right about anything ... Please go back and look up his record. The man just doesn't understand economics." When asked earlier this year what he thought Bernanke would do, Rogers said that he would do the only thing he knows how to do, which is to buy more government bonds.
Fast-forward a few months, and voilà: the Fed is doing exactly that: It is buying government bonds to the tune of $600 billion, thus further undermining the already tanking dollar. Bernanke believes that pumping more money will turn the economy around by stimulating business activity and lowering unemployment. The Chairman of the Federal Reserve does not seem to understand what even a schoolboy can grasp: That printing dollars and buying bonds of our bankrupt federal government just cannot lead to long-term prosperity.
But such common sense is apparently too simplistic for Mr. Bernanke, who was a Princeton professor until shortly before he took up his present position. Lest you may still be tempted to think he is some kind of wizard who possesses esoteric economic knowledge -- which is what Time Magazine would like you to believe -- I urge you to review again the video compilation of his statements leading up to the crisis. You will then see just how accurate Jim Rogers' appraisal of the man was. You will also realize that with him in charge, things cannot work out well. You can bet your last (soon worthless) dollar on it.
And this brings us back to Peter Schiff. Why, one wonders, isn't he the Chairman of the Federal Reserve? After all, he accurately predicted what would happen to the housing market, the American economy, the dollar, and gold. His judgment proved far superior to those illustrious experts, pundits, and government officials who had no idea what was coming down. Would it not be logical to put Schiff in charge? Not only does he have the necessary credentials, but -- unlike Bernanke -- he obviously knows what he is talking about.
Alas, this is too much to hope for. In today's America, the more wrong you are, the better your chances of impressing the establishment. To wit, Ben Bernanke's track record of never being right earned him the top job at the Federal Reserve. Likewise, the mind-boggling inanities of another Princeton professor, Paul Krugman -- who thinks we are not spending nearly enough -- won him the Nobel Prize in economics as well as the position of economic guru at the New York Times.
The so-called experts and pundits who laughed in Schiff's face are still experts and pundits today. If anything, it would appear that their being wrong only enhanced their standing. Art Laffer, for one, is still merrily selling his books on economics.
But this is how it works nowadays. Being wrong or misguided puts you on a fast track to becoming a high government official, a sought-after media expert, or an Ivy league professor. If you happen to be very wrong and very misguided, you may even become all three. And with a bit of luck, you may even walk away with a Nobel Prize.
Is it any wonder that our economy and our country are in such a rut these days?
