Bernanke and BOJ: All consumption units report to your posts and inflate aggregate demand!

In last Sunday's NYT, David Stockman published an op-ed summarizing the basic theses of his new book, The Great Deformation: The Corruption of Capitalism in America:

The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid. ... Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too. Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); ... With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy. As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

As if on cue, we were informed today of massive new quantitative easing by the Bank of Japan:

"The Bank of Japan unleashed the world's most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows. New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014 in a shock therapy to end two decades of stagnation. ... Kuroda said the BOJ wanted to push down bond yields enough so that investors will start buying riskier assets, such as property and stocks, and to prompt households and companies to spend now rather than later on expectations of rising prices."

In sum, we now live in a world where the only economic fact that matters is central bank policy. There is no such thing anymore as an inherently good or bad investment. Good or bad investments are now defined as investments that are either aligned or not aligned with current central bank policy. Our central bankers operate on the premise that a single bureaucrat (the central bank governor) can know what is good or bad for the economy and can use this knowledge to press down or let up on the monetary accelerator, thereby stimulating or discouraging all of us "consumption units" (humans) to increase or decrease "aggregate demand." It is Keynesianism run amok. It is yet another example of Hayek's "synoptic delusion ..., the fiction that all relevant facts are known to some one mind, and that it is possible to construct from this knowledge of the particulars a desirable social [in this case, economic] order." We are asked to believe that control of our economies should be entrusted to a handful of individuals who could not even recognize the oncoming subprime disaster of 2008. All common sense seems to have been lost. Officials at the highest levels of government do not seem to be able to understand that flooding markets with money only distorts (in Stockman's words, "deforms") genuine economic activity. A kind of Keynesian Ate has infected their minds and clouded their thinking. They are like old King Oedipus, who thought he was the most intelligent man in Thebes and that he was the only person who could save the city (remember Alan Greenspan, Bob Rubin, and Larry Summers on the cover of Time magazine as "The Committee to Save the World?"), when in reality he was the very fons et origo of the plague that was destroying it.

The wild, and, in the end, futile machinations of our central bankers cannot end well. As Stockman writes:

The future is bleak. ... These policies have brought America [and presumably will bring Japan] to an end-stage metastasis. The way out would be so radical it can’t happen. ... It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism. That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,” artificially propped up by the Fed’s interest-rate repression. The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse.

Additional note: This evening on CNBC Mohammed El-Erian, the Co-CIO of PIMCO, described the BOJ's action as follows:

It puts us deeper in unprecedented and highly experimental territory. … This is the most experimental that we've ever seen central banking. They are venturing deeper and deeper, using imperfect tools. And they are not getting the response they expect. … But rather than step back and ask why, they just go deeper and deeper. So the question is: Will they finally succeed in transitioning from assisted growth to real growth or will it end in tears? And I think that this is a major uncertainty that the market doesn't quite understand, how binary this outcome is. … The ECB will become even more like a fiscal agency, just like our Fed and the BOJ are becoming fiscal agencies.

By saying that the the Fed is becoming a fiscal agency, El-Erian means that the Fed is acting more and more like a central planner micromanaging the economy and less and less is fulfilling its original role of being the lender of last resort. This drift is a direct result of the impossible bipolar, dual mandate given to the Fed by the Humphrey Hawkins Act, which instructs the Fed not only to strive to ensure stable prices, but at the same time to promote full employment. Never were two more diametrically opposed goals given to a government agency. It was through the Humphrey Hawkins Act that liberal Keynesian Democrats (Hubert Humphrey, Augustus Hawkins, and Jimmy Carter) captured the Federal Reserve and redirected it towards fulfilling their social planning purposes. This is precisely the kind of deformation/perversion of public institutions that Stockman describes in his book.