My Belated Response to David Bahnsen's Attacks on Some Unnamed Austrian School Gold Bug Theologian
March 3, 2009
Senior Vice President
Newport Beach, CA
Dear Mr. Bahnsen:
I am writing this in response to your article, published on
December 12, 2005, "Greenspan on the Free Market," which was critical of Austrian School
economics. You said at the time, correctly, that Austrian School
economists were highly skeptical of the American stock market,
given Alan Greenspan's policies as Chairman of the Federal
Reserve System. You then quoted several paragraphs by Mr.
Greenspan proving that Greenspan was an advocate of free markets.
This article was a follow-up to your article of October 24, "The
Streak Goes On," in which you had kind words for President
Bush's appointees, most notably Ben Bernanke. You wrote:
His choice of Christopher Cox to director of the Securities &
Exchange Commissions, Paul Wolfowitz to head the World Bank, and
John Bolton to serve as Ambassador to the United Nations all
represent the selection of deeply principled men, committed to
reform where it is needed, and progress where it is possible. . .
Now, this morning, President Bush has pushed his streak yet
another notch further with the apparent appointment of Ben
Bernanke to serve as the next Federal Reserve Chairman ... The
Wall Street Journal and NBC News have confirmed that President
Bush will be make this announcement this morning, and
supply-siders like myself can barely contain their excitement ...
Dr. Bernanke will have big shoes to fill (Alan Greenspan has
served as chairman since 1987, covering all or part of six
presidential terms along the way), though he surely is up for the
task. A much more reliable deficit hawk than our own President,
and his predecessor, Dr. Bernanke is a Chicago-school economist
through and through, carrying on the tradition of the great
Reagan team of the 1980's (think Laffer, Kudlow, Bartley, etc.).
A graduate of Harvard College, and MIT (Ph.D), he has served a
professor at Princeton University, a federal reserve governor,
and recently the chairman of President Bush's Council of Economic
First, Dr. Bernanke is, was, and always has been a Keynesian. He
made a positive reference to Friedman with respect to Friedman's
almost universally accepted thesis that the cause of the Great
Depression was the Federal Reserve System's refusal to inflate
the money supply, 1930-33. Keynesians have long applauded this
Dr. Bernanke's recent decisions as Chairman prove his commitment
to Keynesianism. There is no Friedmanian 3% per annum constant
growth in the money supply. There was a 100% increase in the
monetary base in the last three months of 2008 -- the highest and
fastest in history.
Second, the performance of the American stock market since
October 2007 offers evidence that the Austrian School economists,
myself included, who predicted this recession in 2006, had the
story right. No other school of economics did.
I advised my GaryNorth.com subscribers to sell all stocks
and short the S&P 500 on November 5, 2007. It closed at 1502. Those who took my
advice have done quite well. You and your firm did not offer
similar advice to your clients.
I suggest that the problem you had in understanding what was
about to overwhelm your clients was your hostility to Austrian
School economics, which blames booms and busts on central bank
policy. Let me explain by referring to your article,
"Greenspan on the Free Market."
The invisible hand rears its beautiful head again ...
Sorry to mix bodily metaphors, but Adam Smith, Alan Greenspan,
and other true believers in the wonders of flexible markets
serving as a beautiful economic stabilizer are right on, and all
the naysayers, doomsdayers, and other various [fill in the
blanks] are dead wrong ... I find this delightful excerpt from
departing Fed chairman, Alan Greenspan, to [ironically] pinpoint
the exact reason why [supposed] free market advocates in
Reconstructionism and Austrianism have been so deadly wrong in
all their predictions for over an entire generation now
I sense that you had a particular target in mind: someone who
promotes Austrian School economics and Christian
Reconstructionism. But since you mentioned no names, I will do
I have known many people in my past life (professing
Christians) that fell into the hysterical pit of
"crisis du jour". Nowadays, I even see more mainstream
pundits from the media guilty of it. Whether it be Y2K,
9/11, SARS, oil prices, or Katrina (modern examples),
OR, monetary inflation, the nuclear threat, the cold
war, a banking collapse, etc. (yesteryear's "crisis du
jours"), my hope and encouragement to you is that you
(a) Ignore, and run like the plague from, all the false
prophets who have ruined their reputations and made
fools of you in times past ...
(b) Study the masters of free market thinking (Smith,
Friedman) that have so persusasively decimated the "sky
is falling" folks for generations ... A true
understanding of flexible market forces fully backs up
exactly what the maestro says below ...
The term, "false prophets," refers to an Old Covenant office that
ended with the fall of Jerusalem in A.D. 70. It was a capital
crime to be a false prophet under the Mosaic law. To say that it
is a pejorative phrase is not an exaggeration. The phrase "poor
forecasters" would have been more accurate.
You then quoted Mr. Greenspan, "the maestro" as you called him,
as a supporter of the free market. As you re-read this, bear in
mind that on February 18, 2009, he told reporters at London's
Financial Times that the Obama administration may have to
nationalize some U.S. banks. The report is here.
"It may be necessary to temporarily nationalise some
banks in order to facilitate a swift and orderly restructuring,"
he said. "I understand that once in a hundred years this is what
you do." . . .
Speaking to the FT ahead of a speech to the Economic Club of New
York on Tuesday, Mr Greenspan said that "in some cases, the least
bad solution is for the government to take temporary control" of
troubled banks either through the Federal Deposit Insurance
Corporation or some other mechanism.
The former Fed chairman said temporary government ownership would
"allow the government to transfer toxic assets to a bad bank
without the problem of how to price them."
This statement was quoted in the financial press all over the
Let me refresh your memory of the passages you cited from Mr.
Greenspan in 2005.
"Whether by intention or
happenstance, many, if not most,
governments in recent decades have
been relying more and more on the
forces of the marketplace and
reducing their intervention in
market outcomes. We appear to be
revisiting Adam Smith's notion that
the more flexible an economy, the
greater its ability to self-correct
after inevitable, often
unanticipated distrubances. That
greater tendency towards
self-correction has made the
cyclical stability of an economy
less dependent on the actions of
macroeconomic policymakers, whose
responses have often come too late
or have been misguided.
Being able to rely on markets to do the heavy lifting
of adjustment is an exceptionally valuable policy
asset. The impressive performance of the U.S. economy
over the past couple of decades, despite shocks that in
the past would surely have produced market economic
disruption, offers the clearest evidence of the
benefits of increased market flexbility.
Now Mr. Greenspan wants the U.S. government to do the heavy
lifting. That means you and I will do it.
Greenspan continued, praising his career as Chairman. He came
into office in the month of the 1987 stock market crash.
We weathered a decline on October 19, 1987, of a
fifth of the market value of U.S. equities with little evidence
of subsequent macroeconomic stress -- an episode that hinted at a
change in adjustment dynamics. The credit crunch of the early
1990's and the bursting of the stock market bubble in 2000 were
absorbed with the shallowest recessions in the post-World War II
period. And the economic fallout from the tragic events of
September 11, 2001, was moderated by market forces, with severe
economic weakness evident for only a few weeks. More recently,
the flexibility of our market-driven economy has allowed us, thus
far, to weather reasonably well the steep rise in spot and
futures prices for oil and natural gas that we have experienced
over the past two years. The consequence of this flexibility has
been a far more stable economy."
I do not perceive that we are living in a stable economy. I
think it is safe to say that Mr. Greenspan was a poor forecaster,
though not a false prophet.
Your 2005 article was really an extension of one you wrote in
August 2002 for the Chalcedon Report. You were adamant
that Christians you had met had missed out on the great stock
market boom of the 1980's and 1990's.
This was courageous timing, indeed. The stock market was down
50% from its high point in March 2000. As you may recall, it was
in the week of the NASDAQ's peak close at 5048 that I warned my
Remnant Review subscribers that its 200 to 1
price/earnings ratio was insane and would not survive long. I
warned that the end of the stock market mania was at hand. It
was. The NASDAQ fell by 80% by the time you wrote your first attack: 1100. Yesterday, it closed at 1322.
The S&P 500 peaked at 1527 (close) in March 2000. Yesterday it closed at 700.
Meanwhile, price inflation has raised prices by 22% since 2000. Factoring this in, the stock market has never reached its peak of 2000. Its recovery under Greenspan was a bear market rebound fueled by Federal Reserve monetary inflation. It was a trap for stock market investors. That was when you became a stock salesman. Bad timing.
Your article is not on the web, but you can read the highlights
here. You began with a lesson in
Most adults who were alive during the 1980s and 1990s
saw a period of economic expansion and financial
prosperity that may possibly be the largest of its kind
in human history. Sadly, most Christian investors took
no part in the gains and growth that the period
produced. This is not just sad, however: it is
intriguing. In this article, I want to explore why that
is the case, and what attitude a Christian individual
or investor ought to have towards his financial
The readers of your article were told that you were a "Financial Advisor" (capitalized). A "financial advisor" is a phrase for "stock salesman." You were a brand-new stock salesman. In
the 1990's, you were a manager of a local Christian rock band.
You offered this assessment of Christians' skills at investing.
Several brilliant individuals have written about
economics, investing, proper planning, etc. from a
Christian perspective. -- The large majority of
Christians I have met throughout my life have not been
successful in this endeavor especially in the Reformed
circles I have grown up in. I firmly believe that this
is largely due to a "head in the ground" mentality that
has ignored the equity markets, prioritized survivalist
nonsense over intelligent investing, and replaced
rational concerns about certain economic fears with
irrational concerns about the future of our nation and
"Economic fears with irrational concerns about the future of
our nation and economy." This has a quaint ring to it, don't you
think? Today, the entire industry known as investment banking is
gone. It committed suicide in October 2008. Lehman Brothers
Holdings went bust after 160 years. Goldman Sachs and Morgan
Stanley became commercial banks over one weekend and then got
bailed out by the government for $10 billion each. Equity losses
worldwide have been huge: from about $63 trillion on October 31,
2007 to $28 trillion today.
Let me preface my next comments with this statement: We
worship an awesome God, and He is certainly free in His
own covenantal love and wisdom to do with our nation as
He wills. However, if God wanted to destroy the
American culture for its disobedience by causing a
collapse of our banking system, or through any type of
"sky is falling" scenario, I do not believe that our
biggest concern should be whether or not we have gold
coins in our sock drawers, as opposed to stock holdings
in our portfolios.
By most economic standards, the sky is now falling, all over the
You were writing an anti-gold polemic in the magazine started in 1965 by
R. J. Rushdoony, my father-in-law. He had died the year before.
He was a gold standard advocate, and from 1965 on encouraged his
followers to buy legal gold coins. He wrote a booklet on this, Preparation for the Future. Yet you were saying, loud and clear, that such advice was ill-founded.
God is an awesome God, and He will deal with His people
as He sees fit. Our responsibility, in the meantime, is
to be "wise as serpents, and gentle as doves," as the
Messiah taught. It is not to tout the "nightmare of the
month" every time we feel that an economic collapse is
coming, render irrational panic in the hearts and minds
of Christian investors, and keep our churches' and
Christian families' capital forever on the sidelines.
The pastors and authors who are guilty of this have
done so to the detriment of many people and many
churches. I do not want to depress those of you who
have held savings bonds or gold/silver positions for
the last twenty years, instead of participating
actively in the American stock market, by showing a
comparison of investment performance. The results would
be unbelievable to you, and would probably only force
you to commit various violations of the 10th
commandment. I do, however, hope and pray that our next
generation will not make the same mistakes.
When you wrote, "The pastors and authors who are guilty of this have
done so to the detriment of many people and many churches," you knew that the most prominent pastor who did this was Rushdoony. You knew because he had employed your father and had published his writings during the time he recommended gold. You were calling his followers deceived.
It might be helpful at this point to see what the price of
gold was in August 2002, just for curiosity's sake.
It closed yesterday at $930.
It is my opinion that active participation in the
equity markets through dollar-cost averaging is the
greatest means of obtaining wealth available to an
investor. Running one's own business with success can
be a greater means (as can finding success as a
professional actor or athlete). But for those in a bit
more realistic place in life, an intelligent, safe,
diversified, proper participation in the equity markets
can be the greatest wealth-building habit in the
history of America, especially in the twenty-first
What is "dollar-cost averaging"? It is calling your stock
salesman, who put you into losing stocks, and telling him to buy
more. With what? Whatever money you have left. Not much.
Compared to the market from 1945 to 2007, the losses
sustained since October 2007 indicate that the sky is falling.
Tens of millions of Americans have lost half of their retirement
portfolios. They must now gain 100% after inflation just to get
even. At 7% per annum, that will take ten years. They will have
no retirement. The dream of a lifetime is smashed. One out of
nine homes in America is empty, open to squatters and vandals. Government
spending around the world is truly out of control. Monetary
inflation (the monetary base) is out of control.
You left UBS in June 2007. That was good timing.
By 2004, UBS no longer referred to Paine Webber. UBS buried the name. In 2008, UBS lost $17 billion -- the largest corporate loss in
Swiss history. The Swiss government had to bail it out in 2008: $59 billion
You joined Morgan Stanley in June 2007. I hope for your sake you did not
accept a stock option plan instead of commissions-only. I say this
because of the stock price chart for Morgan Stanley. In June 2007, the share price was $75. That was the month you joined the firm. In October 2008, it was around $7.50. As I calculate it, the shares lost 90% of their value. Frankly, I would not call this evidence of wise investing on the part of Morgan
Stanley. It seems that the firm's planners did not know what they
were doing. In one weekend, the company's 75-year business model was scrapped by the company, when it became an investment bank. Only then did its share price recover, to 25% of what it was when you signed on. It closed yesterday at $18.
Especially interesting to what happened in October 2008. That was the month
when, over a weekend, the company had its lawyers restructure the
firm from an investment bank to a commercial bank. That let the
company have access to the $700 billion September bailout money.
It then took the government's $10 billion. Then there was a share price turnaround. Isn't it great what a government handout can do for the bottom line? (The New York Times has run a story on
which companies got how much. Access it here.)
Here was a company that had operated as an investment bank
since its founding in 1935. Yet it was standing at the edge of
bankruptcy in October 2008. Only the combined efforts of Henry
"Goldman Sachs" Paulson, Nancy Pelosi, and Barney Frank saved the
firm. They saved Goldman Sachs the same weekend, which also had
its lawyers turn it into a commercial bank, thereby making it legally eligible for the $10
This was not the free market in action. It was raw political
power. It was salvation by coercion.
You can tell your clients to take any money they still have left and buy stocks: "dollar cost averaging." You can tell them the market will recover. But if they had shorted the S&P 500 in November 2007, they would have four times as much money as they had then. They could buy four times as much stock today. And that doesn't count the losses they suffered through dollar cost averaging.
These were real losses. It will take years to get even . . . with March, 2000.
On your corporate Web page, we read:
In today's market, it's essential to have a Financial
Advisor who can provide insight and guidance based on
an understanding of your unique situation. As your
Financial Advisor, my goal is to provide a high level
of personal service to help you meet your financial
goals, along with the breadth of services and expertise
that Morgan Stanley offers.
I will leverage the strength and resources of the firm
to help address your investment goals, time horizon,
risk profile and personal preferences.
A suggestion: in today's market, don't use the word "leverage."
Leverage is a two-way street. Consider housing, especially in
Newport Beach, where the Web says you live. In 2007, when you
moved to Morgan Stanley, the median price for a house in Newport
Beach, where you now live, was $1.6 million. Today, it is $800,000. I hope you were not one of those
people who kept their homes, let alone someone who actually
bought that year.
Losing $800,000 is painful. Losing it if you bought in 2007 means that you are $800,000 in debt, a lifetime condition of servitude for all but the highest-income owners. I hope you have been renting, or else you bought in 2002. If you bought in 2002, you missed out on $800,000 of easy money in 2007, but at least you could sell today without bringing money to closing.
You may not be able to sell at break-even next month. One specialist in California real estate expects a further
decline of $150,000 to $200,000 for the median price in the Los Angeles area. But,
given the high prices in Newport Beach, the decline there is
likely to be worse.
For comparison's sake, here is what I wrote in
November 2005 about California real estate.
If you remember the S&L crisis of the mid-1980s, you
have some indication of what is coming. The S&L crisis
in Texas put a squeeze on the economy in Texas. Banks
got nasty. They stopped making new loans. Yet the S&Ls
were legally not banks. They were a second capital
market. Today, the banks have become S&Ls. They have
tied their loan portfolios to the housing market.
I think a squeeze is coming that will affect the entire
banking system. The madness of bankers has become
unprecedented. They have forgotten about loan
diversification. They have been caught up in
Greenspan's counter-cyclical policy of lowering the
federal funds rate. Now this policy is being reversed.
Rates are climbing. This will contract the loan market.
Banks will wind up sitting on top of bad loans of all
kinds because the American economy is now housing-sale
How did I know? Because I had read and understood Austrian
School monetary theory. I had read and did not believe Milton
Friedman's monetary theory. I also recognized that Greenspan was a
I realize that you are the resident financial expert for World
Magazine, the widely read evangelical Protestant journal of
opinion. On January 31, 2009, you recommended a reading list of
economics books to World readers. It is a good list. It
included Mises' Human Action.
If you had only read and believed Chapters 19 and 20 in 2001, you
would not have been sucked in by Greenspan, and your clients
would own no stocks and a lot of gold.
You got into the stock sales business at the bottom of the first phase of a bear market rally: 2002. It rose until October 2007, but not in terms of purchasing power. Then it crashed. That was the bear market I called in March 2000. It sucked you in. It sucked in your bosses. You in turn sucked in your clients. Dollar cost averaging, if they did it after October 2007, has ruined them.
You have been a very naive young man. You trusted Greenspan. He has betrayed you: "Nationalize the banks that my policies wiped out!" You trusted his stock market bubble. It has popped. You trusted his real estate bubble. It has popped. You trusted the investment banking industry. Its business model blew up last October. It's gone. You trusted Wall Street. It's busted.
You have spent your entire stock selling career in a bear market, but you thought it was a bull market. So did your clients. It is not going to change back into a bull anytime soon. You have wasted a decade. Don't waste another.
Can stocks go up? Yes; there are bear market rallies. We had one: 2002-2007. Can they go up because the value of the dollar falls? Yes. But a bull market, where investors are going to achieve comfortable retirements? That world died in mid-March 2000.
Now you are older. I hope you are less naive now. I'll know you have reached a new level of maturity when you leave Morgan Stanley and find a good Christian rock band to manage. Just don't manage the members' money for them.