Ben Bernanke's Judy Garland Impersonation by Gary North

 "Somewhere, over the rainbow, way up high."
Federal Reserve Board chairman Ben Bernanke delivered a speech on April 13 on "Rethinking Finance." It certainly needs to be rethought at the highest levels. Unfortunately, Dr. Bernanke has not yet begun the process. Thinking, yes. Not rethinking.
He ended his speech with this:

The financial crisis of 2007-09 was difficult to anticipate for two reasons: First, financial panics, being to a significant extent self-fulfilling crises of confidence, are inherently difficult to foresee.

This is wrong on two counts. First, in a free market, there are no self-fulfilling prophecies. That is because of the widespread distribution of knowledge. A self-fulfilling prophecy is said to take place because lots of people expect it to happen. But why would lots of people expect it to happen? Because (1) there is something fundamental taking place and (2) people share the same economic theory.
Then why is there ever a panic? The free market pits buyers against buyers and sellers against sellers. Why wouldn't those with the best information sell the assets over time, as accurate information spreads? Why is there a panic? Why don't prices come down in a more steady, orderly way? If someone issues a prophecy, it is not widely believed at first. It takes time for people to believe.
They believe it because it explains events in terms of a framework. They draw conclusions. They slowly come to the same conclusions. A panic takes place when the vast majority of investors put their money in the wrong investments. Overnight, the investments turn out to be ill-conceived. The economist should ask this: Why did almost everyone make the same bad investments? The normal process of competition precludes such widespread, simultaneous errors.
Bernanke asked this. His answer self-fulfilling prophesies. He did not ask the more fundamental question: How is it that these self-fulfilling negative prophesies work their black magic against the interests of the vast number of market participants?
FIAT MONEY PRODUCES BAD INFORMATION
Ludwig von Mises asked this question: Why do so many entrepreneurs make the same mistakes at the same time? His answer: there must have been misinformation conveyed to almost all market participants. But how? Because of central bank tampering with the money supply. Money is the common commodity. It conveys information to most participants. To find why people make the same mistakes at the same time, he said, look at monetary policy of the central bank and fractional reserve commercial banks.
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