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Alex Pollock, Resident Fellow at American Enterprise Institute Interviewed (Part II)
November 24, 2010
Part II of the interview with Alex Pollock on the boom and bust cycle of the economy.
Transcript:
Siegel: Alex Pollock of the American Enterprise Institute is with us. Nice to have him here. Again, the book is called "Boom or Bust." It would seem to me, Mr. Pollock, that the implication of the book and what you are talking about is that you have got to have an economy in place that doesn't go through these dramatic highs and lows. It is almost as if it is bipolar or schizophrenic or something. I don't know whether a psychiatrist might help the economy, but certainly, we go back to the point about small business, small business cannot function…matter of fact, let's make one other point about this. I know many small business people who I meet regularly who tell me regularly that even though they have the ability to do more investing, they are not going to do it. The reason they are not going to do it is because they do not know where the economy is going, they are not going to put money into an economy that might cause they harm. They want to sit back and wait and see what happens.
Pollock: Well, that is certainly the case and it is very logical, not only for small business but big business. You want to have pro-economic growth policies in the country not anti-growth, not anti-business, not anti-entrepreneurial policy, so that the confidence, not that you will necessarily succeed but that your investment has a fair chance of succeeding, is there and then you start to employ the money. That is both employ the money as a company investing and also employ the money as a bank being able to make loans.
Siegel: Alright. So, if we have that situation, one of the things I think everyone would like to see….let me ask it another way. Can we put together an economic system that would be more predictable so that any business, big or small, but big business as we have seen can make it through because the government is going to bail them out, but with small business for the benefit of that sector to operate effectively, can we create an economic system that doesn't go through these category 5 hurricanes or category 8 on a Richter scale?
Pollock: Well, let me say this. I do not think it is possible to have an economy, which is an enterprising, free economy, that does not have cycles. The cycles come along with people having the chance to take a risk and to innovate and the future is inherently unknowable and the idea that the federal reserve or the government can know what the future is going to be and therefore do away with cycles is mistaken. However, it seems to be quite plausible that with right ideas and actions you have cycles that didn't get away into huge inflationary bubbles followed by hugely destructive busts. So, you would moderate the cycles and, of course, in an enterprising or capitalistic economy you have to have failure, because you have to have the freedom to take a chance, and out of taking the chances come some fantastic successes but also cone some failures. So, that ability to take a chance on a new idea, a new product, a new process, is what causes the growth. Now, ask yourself, what are the factors, however, which cause this natural cyclicality to get away into the destructive bubbles and busts. Some of them are psychological, and I talk about this in the book, and what lures people into over borrowing and over speculating, but others of them are actually created by the government including the Fed. So, there is no doubt in my mind that one of the causes of our housing and real estate bubble, which was so destructive, was the Federal Reserve intentionally setting out to create a housing boom and they succeeded. They didn't want to create a bubble, but they did try intentionally to create a boom.
If I can just tell a little story on this point. So, now people say, well the Fed should be the regulator of the so-called systemic risk of the whole economy, but as Senator Bunning asked the German Bernacki a couple of years ago, and I thought it was a wonderful question. He said, "How can you be the systemic risk regulator when you are the systemic risk?" When your own actions as the government's central bank are among the most important things causing this ultimately destructive, excessive boom and bust behavior. That is a deeply important point.
Siegel: What about what Congressman Paul is talking about. He is going to chair a subcommittee with the now majority of republicans in the Senate. When he talks about maybe….starting with the premise of 600 billion going into treasury notes that the Fed has approved in the last week to 10 days, that was a big deal. Again, more propping up of the economy artificially by the government and then reducing the value of the dollar, I presume, because the more of these you print, the less the value is going to be. I mean, if there are more in circulation.
Pollock: That is certainly the conclusion that the foreign exchange market drew.
Siegel: So, that is where you have the market place determining that. So, would it be advisable to do two things: (1) audit the fed, as Congressman Paul has been saying for probably a couple of decades, and (2) to have perhaps a gold option? In other words, getting some hard metal, gold or silver, but let's say gold, as a competing force with the dollar internationally?
Pollock: Well, of course, Congressman Paul is a very interesting thinker and he has been a very big skeptic of the Federal Reserve for a long time. You get a lot of debates around the Fed. The gold standard as it was had its problems. The Fed pure paper money standard has obvious problems. You probably cannot design the perfect system, but we also should never think that a committee called the Board of Governors of the Federal Reserve, which is, if thought about in one way, a national price fixing committee for interest rates to try to manipulate the market. We should never think that that is necessarily be successful and, indeed, the history of the Federal Reserve is quite filled with huge mistakes, most recently in this last decade.
Siegel: Well, given that fact then, should we…the other way to look at this, and to maybe make it more predictable, and I think business of all kind, and again particularly small business, would probably benefit from this, if it were to work this way, shouldn't we have a central bank that basically owned the money and not have a federal reserve system where the private banks own the money and lend it to the government. Then, the government ends up paying the interest. What that does, as you know, is to take the money out of t he private sector, because people are investing in treasury notes and interest is being repaid by the government. All of that money gets taken away from the private sector, doesn't it?
Pollock: Well, central banks are a conundrum, because it is hard to live with them but you cannot live without them. I don't know….it is easier to see the problem than it is to see the solution, as so often in life.
Siegel: Well, we have to do something, because clearly what we have done here… it was even to the point, I thought, when this whole thing came down and the Fed did what it did, they weren't sure if any of this was going to work.
Pollock: That is absolutely true. To my own amusement over the years, I have developed a set of things I call "Pollock Laws," and Pollock's 7th Law is in any extremely complex situation you never know what you are really doing. That absolutely applies to this kind of experimental action by the central bank. They are trying this, but they nor any body else know what will actually happen as a result of all of that.
Siegel: Let's go to the key point here. Should there be a change at the Fed, particularly at the FDIC, where small community banks are allowed to loosen up instead of some of them just being put out of business, but loosen up and being able to make loans that look like productive loans? Because the biggest field in this country is real estate at all levels, whether it is commercial, industrial, office, residential. We are in the tank and there is no construction t o speak of going on.
Pollock: A different way to say that is you would like regulatory behavior to be counter cyclical not pro cyclical, to use big words. That is to say, you are trying to help moderate the room, but in the bust you are trying to help recover from the bust not make it worse by constricting credit further.
Siegel: Well, it has been a delight to talk to you, Sir, I appreciate it. Alex Pollock. It is called "Boom or Bust" and I thank you for your time on the program today.
Pollock: Thanks very much.
Transcript:
Siegel: Alex Pollock of the American Enterprise Institute is with us. Nice to have him here. Again, the book is called "Boom or Bust." It would seem to me, Mr. Pollock, that the implication of the book and what you are talking about is that you have got to have an economy in place that doesn't go through these dramatic highs and lows. It is almost as if it is bipolar or schizophrenic or something. I don't know whether a psychiatrist might help the economy, but certainly, we go back to the point about small business, small business cannot function…matter of fact, let's make one other point about this. I know many small business people who I meet regularly who tell me regularly that even though they have the ability to do more investing, they are not going to do it. The reason they are not going to do it is because they do not know where the economy is going, they are not going to put money into an economy that might cause they harm. They want to sit back and wait and see what happens.
Pollock: Well, that is certainly the case and it is very logical, not only for small business but big business. You want to have pro-economic growth policies in the country not anti-growth, not anti-business, not anti-entrepreneurial policy, so that the confidence, not that you will necessarily succeed but that your investment has a fair chance of succeeding, is there and then you start to employ the money. That is both employ the money as a company investing and also employ the money as a bank being able to make loans.
Siegel: Alright. So, if we have that situation, one of the things I think everyone would like to see….let me ask it another way. Can we put together an economic system that would be more predictable so that any business, big or small, but big business as we have seen can make it through because the government is going to bail them out, but with small business for the benefit of that sector to operate effectively, can we create an economic system that doesn't go through these category 5 hurricanes or category 8 on a Richter scale?
Pollock: Well, let me say this. I do not think it is possible to have an economy, which is an enterprising, free economy, that does not have cycles. The cycles come along with people having the chance to take a risk and to innovate and the future is inherently unknowable and the idea that the federal reserve or the government can know what the future is going to be and therefore do away with cycles is mistaken. However, it seems to be quite plausible that with right ideas and actions you have cycles that didn't get away into huge inflationary bubbles followed by hugely destructive busts. So, you would moderate the cycles and, of course, in an enterprising or capitalistic economy you have to have failure, because you have to have the freedom to take a chance, and out of taking the chances come some fantastic successes but also cone some failures. So, that ability to take a chance on a new idea, a new product, a new process, is what causes the growth. Now, ask yourself, what are the factors, however, which cause this natural cyclicality to get away into the destructive bubbles and busts. Some of them are psychological, and I talk about this in the book, and what lures people into over borrowing and over speculating, but others of them are actually created by the government including the Fed. So, there is no doubt in my mind that one of the causes of our housing and real estate bubble, which was so destructive, was the Federal Reserve intentionally setting out to create a housing boom and they succeeded. They didn't want to create a bubble, but they did try intentionally to create a boom.
If I can just tell a little story on this point. So, now people say, well the Fed should be the regulator of the so-called systemic risk of the whole economy, but as Senator Bunning asked the German Bernacki a couple of years ago, and I thought it was a wonderful question. He said, "How can you be the systemic risk regulator when you are the systemic risk?" When your own actions as the government's central bank are among the most important things causing this ultimately destructive, excessive boom and bust behavior. That is a deeply important point.
Siegel: What about what Congressman Paul is talking about. He is going to chair a subcommittee with the now majority of republicans in the Senate. When he talks about maybe….starting with the premise of 600 billion going into treasury notes that the Fed has approved in the last week to 10 days, that was a big deal. Again, more propping up of the economy artificially by the government and then reducing the value of the dollar, I presume, because the more of these you print, the less the value is going to be. I mean, if there are more in circulation.
Pollock: That is certainly the conclusion that the foreign exchange market drew.
Siegel: So, that is where you have the market place determining that. So, would it be advisable to do two things: (1) audit the fed, as Congressman Paul has been saying for probably a couple of decades, and (2) to have perhaps a gold option? In other words, getting some hard metal, gold or silver, but let's say gold, as a competing force with the dollar internationally?
Pollock: Well, of course, Congressman Paul is a very interesting thinker and he has been a very big skeptic of the Federal Reserve for a long time. You get a lot of debates around the Fed. The gold standard as it was had its problems. The Fed pure paper money standard has obvious problems. You probably cannot design the perfect system, but we also should never think that a committee called the Board of Governors of the Federal Reserve, which is, if thought about in one way, a national price fixing committee for interest rates to try to manipulate the market. We should never think that that is necessarily be successful and, indeed, the history of the Federal Reserve is quite filled with huge mistakes, most recently in this last decade.
Siegel: Well, given that fact then, should we…the other way to look at this, and to maybe make it more predictable, and I think business of all kind, and again particularly small business, would probably benefit from this, if it were to work this way, shouldn't we have a central bank that basically owned the money and not have a federal reserve system where the private banks own the money and lend it to the government. Then, the government ends up paying the interest. What that does, as you know, is to take the money out of t he private sector, because people are investing in treasury notes and interest is being repaid by the government. All of that money gets taken away from the private sector, doesn't it?
Pollock: Well, central banks are a conundrum, because it is hard to live with them but you cannot live without them. I don't know….it is easier to see the problem than it is to see the solution, as so often in life.
Siegel: Well, we have to do something, because clearly what we have done here… it was even to the point, I thought, when this whole thing came down and the Fed did what it did, they weren't sure if any of this was going to work.
Pollock: That is absolutely true. To my own amusement over the years, I have developed a set of things I call "Pollock Laws," and Pollock's 7th Law is in any extremely complex situation you never know what you are really doing. That absolutely applies to this kind of experimental action by the central bank. They are trying this, but they nor any body else know what will actually happen as a result of all of that.
Siegel: Let's go to the key point here. Should there be a change at the Fed, particularly at the FDIC, where small community banks are allowed to loosen up instead of some of them just being put out of business, but loosen up and being able to make loans that look like productive loans? Because the biggest field in this country is real estate at all levels, whether it is commercial, industrial, office, residential. We are in the tank and there is no construction t o speak of going on.
Pollock: A different way to say that is you would like regulatory behavior to be counter cyclical not pro cyclical, to use big words. That is to say, you are trying to help moderate the room, but in the bust you are trying to help recover from the bust not make it worse by constricting credit further.
Siegel: Well, it has been a delight to talk to you, Sir, I appreciate it. Alex Pollock. It is called "Boom or Bust" and I thank you for your time on the program today.
Pollock: Thanks very much.
