An Excerpt from Conquer the Crash by Robert Prechter
Yes, that’s a provocative question. Think of all the people who would squirm if they had to answer it.
For example, you’d see lots of squirming on Wall Street and in the media. They told stock market investors to trust the central bank in early 2001, by endlessly repeating the phrase “Don’t Fight the Fed!” That was the conventional wisdom then, even though you don’t hear it anymore now. The Fed did not stop the stock market from falling. Investors lost money.
The headline asks a question with “No” as the obvious answer. The notion that you “Don’t fight the Fed” has been a costly myth.
True investment wisdom usually packs a myth-busting punch, and Robert Prechter’s best-selling Conquer the Crash explodes dozens of costly financial and economic myths that the media repeats every day. Conquer the Crash has plenty to say about the Fed — here’s an excerpt.
Excerpted from Conquer the Crash, pp 123-124
“Potent Directors”
The primary basis for today’s belief in perpetual prosperity and inflation with perhaps an occasional recession is what I call the “potent directors” fallacy. It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses immense power to manipulate the stock market.
The very idea that it can do these things is false. Last October, before the House and Senate Joint Economic committee, Chairman Alan Greenspan himself called the idea that the Fed could prevent recessions a “puzzling” notion, chalking up such events to exactly what causes them: “human psychology.” In August 1999, he even more specifically described the stock market as being driven by “waves of optimism and pessimism.” He’s right on this point, but no one is listening.
The Chairman also expresses the view that the Fed has the power to temper economic swings for the better. Is that what it does? Politicians and most economists assert that a central bank is necessary for maximum growth. Is that the case?
This is not the place for a treatise on the subject, but a brief dose of reality should serve. Real economic growth in the U.S. was greater in the nineteenth century without a central bank than it has been in the twentieth century with one. Real economic growth in Hong Kong during the latter half of the twentieth century outstripped that of every other country in the entire world, and it had no central bank. Anyone who advocates a causal connection between central banking and economic performance must conclude that a central bank is harmful to economic growth.
For recent examples of the failure of the idea of efficacious economic directors, just look around. Since Japan’s boom ended in 1990, its regulators have been using every presumed macroeconomic “tool” to get the Land of the Sinking Sun rising again, as yet to no avail. The World Bank, the IMF, local central banks and government officials were “wisely managing” Southeast Asia’s boom until it collapsed spectacularly in 1997. Prevent the bust? They expressed profound dismay that it even happened. As I write this paragraph, Argentina’s economy has just crashed despite the machinations of its own presumed “potent directors.” I say “despite,” but the truth is that directors, whether they are Argentina’s, Japan’s or America’s, cannot make things better and have always made things worse. It is a principle that meddling in the free market can only disable it.
People think that the Fed has “managed” the economy brilliantly in the 1980s and 1990s. Most financial professionals believe that the only potential culprit of a deviation from the path to ever greater prosperity would be current-time central bank actions so flagrantly stupid as to be beyond the realm of possibility. But the deep flaws in the Fed’s manipulation of the banking system to induce and facilitate the extension of credit will bear bitter fruit in the next depression. Economists who do not believe that a prolonged expansionary credit policy has consequences will soon be blasting the Fed for “mistakes” in the present, whereas the errors that matter most reside in the past. Regardless of whether this truth comes to light, the populace will disrespect the Fed and other central banks mightily by the time the depression is over. For many people, the single biggest financial shock and surprise over the next decade will be the revelation that the Fed has never really known what on earth it was doing.
The spectacle of U.S. officials in recent weeks lecturing Japan on how to contain deflation will be revealed as the grossest hubris. Make sure that you avoid the disillusion and financial devastation that will afflict those who harbor a misguided faith in the world’s central bankers and the idea that they can manage our money, our credit or our economy.
This sort of myth-busting fills the pages of Conquer the Crash. It explains in detail how you can protect yourself from the disastrous effects of the approaching economic and financial upheaval.
Bob’s book has two parts. The first shows you why a massive deflation is inevitable. The second part is practical. It explains, step by step, how you can protect yourself from financial loss during this crisis. And now Conquer the Crash is available at all major bookstores.
Order Conquer the Crash Online Now! Excerpted with permission of the publisher John Wiley & Sons,Ltd. from
Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression.
Copyright 2002 by Robert R. Prechter, Jr.
