Larry Kudlow to Fed Board of Governors?

The Federal Reserve is currently faced with a crisis of sorts: unfilled places on the Board of Governors, the group which makes the monetary policy decisions such as the target for short-term interest rates. Currently two of the seven seats on the board are unfilled, and another will become vacant when Frederick Mishkin departs on August 31st. Because board members must be approved by the Senate, and because Democrats now run the Senate, new board members cannot be appointed because the Senate blocks everything. Typical but a fact of life that no one seems to be able to do anything about.

So even though the chance is minimal that anyone will be appointed to the board anytime soon, this being an election year, it does not stop me from speculating as to who would be a good candidate for the position. Not that I am any sort of banking-world expert, but my choice would go to Larry Kudlow, host of CNBC's Kudlow and Company and prolific economic commentator. Why Kudlow? Because it seems to me that if the Fed had been following his advice over the past few years, it would have done a better job of staving off, or at least cushioning, the credit crisis and the weak dollar.

The credit crisis seems to have been instigated by the Fed's raising of the federal funds target rate from a low of 1% over the entire year 2003 to 5 1/4% by mid-2006. This precipitous increase seriously upset apple carts and could well have sparked the wave of foreclosures in the subprime market. I recall Kudlow arguing during this period that the Fed was overreacting, that it had raised interest rates too far too fast, and it needed to drop them back down if it did not want to kill economic growth. But the Fed held onto this rate, even in the face of an inverted yield curve (long-term rates lower than short-term rates) all the way until September 2007. By this time, of course, the crisis was full-blown.

Federal Funds rate, 2002-2005

But then the Fed's response appears again to have been overdone. From September 2007 until April 2008, it lowered the rate from 5 1/4% to 2%, a drop of 3 1/4%, again precipitous. This cut in interest rates may have helped stave off recession but it exacerbated the problem of the already-weak dollar and thus worsened the already-tight energy market, leading to skyrocketing oil prices.

Federal Funds rate, 2005-early 2008

During this period, Kudlow was arguing against such a precipitous cut in the federal funds target. His main rationale was to defend the dollar. A strong dollar would help ease inflationary pressure, which has become increasingly evident in 2008.

If Kudlow's advice had been followed, the situation regarding the credit crisis, the weak dollar, and high oil prices might not be as bad as it is. And Kudlow has advocated a consistent policy, instead of being tossed by every wind of economic and political doctrine. Therefore, my vote (if I had one) would go to him to be appointed to the Fed Board of Governors.

That being said, there is one weakness in his strong-dollar advocacy. Not that there's anything wrong with it, but it gives the impression that if the dollar were strong these other problems would not be such problems. But here in Europe, from where I am posting, similar problems are being faced. Not a credit crisis per se -- only those banks that got involved in buying up US mortgage-backed securities are having a problem there -- but an inflation crisis and high energy prices crisis. Gasoline prices have gone up in the same proportion as they have in the US, despite the fact that in terms of euros, oil prices have not gone up as much. (What's up with that?) And inflation is becoming a stubborn problem, despite the fact that here the European Central Bank has stuck to higher interest rates (currently 4%). So there seem to be structural pressures at work beyond the level of individual monetary policy. That is the subject for another post, perhaps by someone with more insight than I can muster. But at the least it is food for thought.

Caption the Picture

And now for a change of pace.

We move from high-brow to low-brow fare. To wit, we solicit your input to the following challenge: caption the picture!
And the picture is:

Ominous Developments

Two developments in the last few days have made even more clear the danger to the republic we face in our generation. First, the US Supreme Court decision granting constitutional rights to foreign combatants; second, the sponsorship of homosexual marriage in California. Both of these developments are the long-developing fruit of the doctrine of natural rights, the dogma upon which all Western nations are founded.

The conservative cries, "governments are instituted to protect our God-given rights!", to which the liberal retorts, "yes, human rights are the source of law, which is why homosexuals have a right to marry, which is why foreign nationals captured on the battlefield have the same rights as US citizens, because rights are not the product of parchments and covenants but exist in the very nature of things, prior to the state and law and lawmaking, and must be recognized by the state and enshrined in law."

The doctrine of natural rights was introduced as a surrogate for God's law, in a Faustian agreement to have the church removed from public life. This is the fruit of the Enlightenment, be it French or Scottish, the result is the same. Recourse was had to human nature, not to the Word of God. So instead of saying "So God created man in his own image, in the image of God created he him; male and female created he them.... Therefore shall a man leave his father and his mother, and shall cleave unto his wife: and they shall be one flesh" (Genesis 1:27, 2:24), that therefore it is male and female that are to be one flesh, not male and male, not female and female; no, instead of this, we are to stammer, "Why, it's just not right! It's never been done in the history of mankind that such relationships were recognized as marriage!", to which the liberal replied with a yawn, "what of it? That was then, this is now."

A return to the true source of law, God's Word as revealed in the Old and New Testaments, can save this civilization. But conservatives stand dead-set against such a proposition. When will they come to understand that natural rights, far from being a bulwark against government intervention, in fact form a pretext by which to manufacture new excuses for government intervention? It is the Trojan Horse which must be wheeled back out of the city, ere the city perisheth altogether.

Liberalism in the role of underdog

In understanding the phenomenon of liberal dominance of leadership positions in society, it is helpful to look at things from their point of view. Liberals view the market as an overpowering reality against which they must constantly struggle to save society from the egotism, exploitation, rapine, and devastation caused by uncontrolled economic activity. And, aside from the false moralizing, this viewpoint is accurate. Government in the modern era is angled to form the "opposition" to the baseline capitalist condition inherent in the private-law regime of property and contract. In this context, the market is an overriding reality that a liberal can only view as something monstrous and overbearing. Therefore they view government as the savior from the preponderance of the market economy. In their view, they are the little guys fighting against Goliath. From the conservative point of view, of course, they control all the positions of power over society and the way society views itself.

McIlwain's distinction between gubernaculum and jurisdictio expresses this dual reality in the state (see his Constitutionalism: Ancient and Modern). Gubernaculum is the action of government agency, jurisdictio is the common-law adjudication of disputes. The former is the positive action of command, the latter the negative action of establishing boundaries. Through the former, the state as government acts as one agent among many; through the latter, the state as adjudicator withdraws from active participation to perform its role as umpire and arbiter, through which action it establishes and confirms the institutions of private law.

Supplement this understanding with Hayek's distinction between nomos, the law of liberty, and thesis, the law of organization (cf. Law, Legislation, and Liberty). Nomos is private law, which regulates the relations between associations; thesis is the law regulating relations within associations. The state has a thesis, which is public law, including administrative law. It also is the institution charged with maintaining and upholding nomos. As Hayek vividly brings out, the problem is that thesis turns on nomos and begins to absorb it. This is the problem all republics face, and which citizens must be made aware of if they are to exercise responsible citizenship.

Liberals therefore view nomos as the enemy and thesis as the means to overcoming it. Conservatives must not fall into the trap of reversing the relationship, viewing thesis as the enemy and nomos as a weapon to defeat it. That leads to radical contractualism and undermines all internal distributive relationships. Public law and administrative law have proper roles, the point is to delimit those roles, establish proper boundaries, and maintain them.

The Politicians' True Constituency

Just to complete the thought of the earlier post on politics and politicians (The Sovereign, the Elite, and the Machinery of Manipulation), ask yourself this question: what is a politician's true constituency? Ostensibly, in a representative democracy a politician represents those who voted for him or her; therefore, his constituency is his voters. But recall the discussion of the machinery of manipulation. There is a machine that exercises such influence over the voters and how they vote that this concept of constituency becomes baseless. For if those voters in turn are in the hands of a powerful machine, then the politician's constituency is no longer the voters per se but those who control the voters -- thus, the machine. This machine, which is manned by what we call "the elite," is what politicians tailor their remarks, speeches, positions, strategy to -- not to the voters. For the voters can be won over by the powers, and the politicians have therefore learned that it is the powers, the elite, that must be appeased. Which explains the maddening behavior of so-called conservatives once they get to Washington (or wherever the capital might be). As I said in the above-mentioned post, politicians are there to represent government to you, not to represent you to the government. And the manipulation machine ensures their continued obedience to Central Planning.

The Sovereign, the Elite, and the Machinery of Manipulation

American conservatives are looking around rather glumly these days, as their political fortunes appear to have dwindled to near-nothingness. Among the leading presidential candidates, none inspires any hope in the kind of change conservatives could appreciate. John McCain, the candidate who comes closest to a conservative viewpoint, is not a conservative despite his protestations to the contrary. It is a sign of the times that he could even become the Republican presidential candidate, given his record of less-than-conservative legislative achievements and his penchant for appealing to the news media precisely by bashing conservatism. In fact, the biggest news in this presidential cycle may be the rupture between the conservative movement and the Republican party.

That this has been accompanied by a decline in the fortunes of the Republican party does not seem to have fazed the party leadership, which, it appears, would rather cut deals with its Democrat opposition the better to apportion power in Washington, as a loyal part of the Washington establishment, than stand up to that Washington establishment and demand government accountability.

Apart from conservative alternative media sources, there is no attempt at government accountability. What government does is good, what the private sector does is tolerated in the best case and demonized in the worst.

Of course, the things government is supposed to do are bashed along with the private sector. Law enforcement is frowned upon; punishment of criminals is an evil to be averted; respect for property and contract is an old-fashioned concept to be superseded. Only progressive implementations of government are favored, with the latest fad being the use of the courts to foist counter-customary social values onto the people (e.g., judge-made homosexual marriage).

This is in-your-face liberalism at its haughtiest and most frightening level. It shows government elites not only not in touch with the people they are supposed to represent, but conscious of the divide and acting in flagrant opposition to it.

The question arises over and over: how do they get away with it? If the people ultimately are the sovereign, then how do the elites continue to shove their agenda down the people's throats?

To answer that, one must understand the phenomenon of the elite and the character of the elite structure.

The elite is essentially a structure of manipulation.

Human societies create authority structures which in turn generate legitimating visions or stories so as to maintain that authority. They thus project an image of reality onto the populace aimed at cementing their position of power. This is not a bad thing in itself. Authority is necessary and must be obeyed. "Let every soul be subject unto the higher powers. For there is no power but of God: the powers that be are ordained of God. Whosoever therefore resisteth the power, resisteth the ordinance of God: and they that resist shall receive to themselves damnation" (Romans 13:1-2, KJV). The church has always taught obedience to civil authority, except at extreme levels of tyranny; and even then, the debate for and against has been fierce.

Be that as it may, an entire machinery of legitimation is built up which is geared to keeping the people under control and obedient. This machinery serves the ruling authority, whoever it may be.

There is another form of machinery as well, geared not to maintaining subjection to authority but manipulating authority. This is clearly to be seen in history in the the courts which have surrounded monarchs. Courtiers have always sought to flatter and debauch the prince, the better to manipulate him to their own ends. That this was a dangerous game was understood as "coming with the territory." All efforts were geared to positioning oneself most favorably with the sovereign, gaining his or her ear, leading him or her in the desired direction, the better to establish control over the power of the state.

Hence, in addition to the machinery which was established to legitimate government authority to the subjects, another set of machinery was built to represent reality to the sovereign, in order to steer him. A whole apparatus slowly took shape, geared to manipulating, flattering, steering the sovereign in the direction the "happy few" wished to take it. This machinery, as I said, was complementary to the machinery by which the populace was manipulated. With the growth of parliamentary representation, these two machines began to be meshed together: the power of the machine over the prince was used to manipulate the people, and the power of the machine over the people was used to manipulate the prince.

This third power thus began its enormous career of influence which it has carried into the modern world -- the power of the manipulator, between sovereign and subject, beholden to both, beholden to neither, master of the universe.

This is the power of the modern elite, once characterized by C. Wright Mills as "The Power Elite" (although his military-industrial complex was more of a left-wing fantasy, indeed itself a weapon in the elite's arsenal of manipulative imageries), composed of the higher ranges of academia, politics, the entertainment industry, and the news media. These form an interlocking directorate which manipulates all possible information in all possible ways in order to steer the sovereign.

Who is the sovereign in modern democracies? The people. And the people are also the subjects. So the two machines, which are now one, operate in full synchronization, on the one hand to flatter and debauch the people, and on the other hand to put the fear of raw power into them.

What about the political parties? They have an important role to play in this, for they are the instruments through which a good portion of debauchment is channeled to the citizenry, through programs of economic dependency. In this manner they attach the citizens to the fortunes of government and then turn around and make very clear to them that their fortunes do depend on government, and any attack on government is an attack on them. The problems this dependency racket creates in society is then blamed on non-government agents in the private sector. This model is extended not only to problems created by dependency but to problems ginned up by the manipulation machine itself: gay rights, animal rights, environmental catastrophe, global warming, etc. Government is the solution, submit to government, give up your freedom. The role of the political parties within the manipulation machine is to act as a transmission belt for this message to the constituents. Their role is representative, absolutely; but it is representative in only one direction. The political parties do not represent your interests to government; they represent government's interest to you. The quicker you understand that, the quicker you will acquiesce to the "six in one, half a dozen in the other" range of choices the political establishment provides you.

Or perhaps the people may in fact wake up to the machinery of manipulation? A sovereign who realizes he's been deceived is a dangerous proposition.