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The Saint-Simonians in Our Midst: Ben Bernanke and the GFC

Posted by M. C. on March 29, 2025

Bernanke was troubled that the prices of mortgages were rising. But that is exactly what needed to happen. They were way out of whack, and the US economy production structure was distorted. Indeed, in 2005, nearly 1.3 million new houses were sold, fully double the levels seen in the 1990s. Prices must change to reallocate resources; to freeze or further distort them by intervention is to perpetuate the discoordination. Prices are never arbitrary. True, they may be distorted, but even if they are distorted, they remain the best signals of underlying economic realities, especially when the market is attempting to clear the prior distortion in the pricing mechanism by correcting the imbalance in relative prices.

The metaphor highlights the hubris—crises are not “fires” to be extinguished by a heroic state, but symptoms of prior distortions that only the market can unwind. Taking his fatal conceit even further, and into the realm of the political, Bernanke goes so far to say (with much irony) that,

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Mises Wire • James Anderson

Henri de Saint-Simon (1760-1825), a French intellectual, was one of the founding fathers of socialism. Saint-Simon wanted to forge a “scientific understanding of society” which he would use to eliminate poverty and inequality by centrally planning the economy through the Parisian Banking Houses.

In this article, I argue that Ben Bernanke—along with his other two musketeers, Hank Paulson and Timothy Geithner—are Saint-Simonians par excellence, expressed particularly fervently in their views towards the financial system during and after the Great Financial Crisis. In the following article, we shall look at Bernanke’s The Courage to Act and Bernanke, Paulson, and Geithner’s Firefighting. If the conventional prescription to the Great Financial Crisis could be boiled down to a single word, it would be control.

The case of the shadow banks is paradigmatic. It is true that shadow banks were less regulated than commercial banks. And it is this very reason as to why they were so easily blamed for the crisis. They were just acting more freely than those financial institutions that were heavily regulated and under guarantee by the government. When the freer market (the shadow banks) functioned by stopping the supply of money—or liquidity—to firms that had taken heavy losses on their subprime positions, hence had very high credit risk, they went bankrupt, and the crisis began.

But we are being myopic if we so quickly blame the pulling of credit by the shadow banking system as the cause for the panic. Nevertheless, as Johnson and Santor write, the conventional view, then, is that,

…it is clear that central banks need to continue to ensure that core funding markets remain functional at all times. This means that central banks should…assume a key role in core funding markets in times of severe financial stress.

This is a classic case of Mises’s and Hayek’s insight that prior intervention makes necessary more intervention, unless the intervener is willing to give up the initial intervention. In other words, shadow banks had to come under tighter regulation and join the commercial banks under the watchful yoke of the state. Indeed, they did.

The trio start by claiming the crisis was caused because the government let businesses do things, as they write: “the government let major financial institutions take on too much risky leverage without insisting that they retain enough capital” (Firefighting, ch. 1). The trio are not wrong that the financial system was over-leveraged, but there are simple reasons as to why this was the case (e.g., excessively cheap credit and faulty “scientific,” “quantitative” risk models, etc.). The trio claims that the government, if it just increased its control, could have avoided the crisis entirely. Moreover, the use of the phrase “let” is particularly concerning. It reduces entrepreneurs to children that need to be ordered around. This is a quintessential Saint-Simonian reversal of the truth: the natural order of free exchange is supposedly disorderly, and the solution to such disorder is found in the iron—as opposed to the “invisible”—hand of the enlightened state.

During the crisis, Bernanke recalls how he was dismayed with prices on the markets. He asserts that the “fire-sale price (of assets) may be much less than the hold-to-maturity price,” (Courage, p. 315) suggesting, as he continues elsewhere, that prices fell to “artificially low levels” (p. 264). To posit, as Bernanke does, that prices were “artificial” because “financial institutions … were actively dumping MBS on the market—pushing up mortgage rates,” (p. 372) and to decry this as a problem requiring intervention, is to misunderstand the market’s corrective mechanism.

Bernanke was troubled that the prices of mortgages were rising. But that is exactly what needed to happen. They were way out of whack, and the US economy production structure was distorted. Indeed, in 2005, nearly 1.3 million new houses were sold, fully double the levels seen in the 1990s. Prices must change to reallocate resources; to freeze or further distort them by intervention is to perpetuate the discoordination. Prices are never arbitrary. True, they may be distorted, but even if they are distorted, they remain the best signals of underlying economic realities, especially when the market is attempting to clear the prior distortion in the pricing mechanism by correcting the imbalance in relative prices. Prices during the GFC merely reflected the dispersed knowledge and judgments of countless actors, and their violent and erratic reversals were merely the market undergoing the Misesian counter-movements to clear the distortion in relative prices.

Indeed, as Norbert Michel shows in his book, the credit markets never entirely “froze.” Those firms who could raise liquidity and capital did do so. Those who couldn’t—because they had taken so many losses—couldn’t, they therefore failed (or were bailed out). Those assets that had positive risk-adjusted value continued to trade. Those that didn’t, didn’t.

The trio contend (Firefighting, ch. 3) that “the U.S. government still had no way to inject capital into a struggling firm, buy its assets, or guarantee its liabilities,” and that “if we had started the crisis with that authority…we could have acted more forcefully, more swiftly, and more comprehensively” (Firefighting, conclusion). Again, we see the implicit point: if we had just had more power earlier, we could have prevented the crisis. But a musing of the evidence finds that, even in 2007 and 2008, when the crisis had already begun and the chaos of late 2008 was staring at them in the face, Bernanke declared—and believed—that “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained” (Courage, p. 135). Indeed, the Bernanke Fed even thought about raising interest rates in 2008 to quell inflation! They had no idea what was going on. Nevertheless, taking Bernanke’s revisionist history at face value, we find the Saint-Simonian ideal in full bloom: the belief that problems can be pre-empted and/or ironed out only if the state had more power over the economy.

Bernanke’s justification for his approach is telling: “It was in everyone’s interest, whether or not they realized it, (for the Fed) to protect the economy from the consequences of a catastrophic failure of the financial system” (Courage, p. 261). Like Saint-Simon, who presumed to know what was good for all the people better than they knew it themselves, the trio dismissed the market’s decentralized wisdom in favor of their own. He writes that “the Fed had pushed the limits of its powers, and the ad hoc rescue had exposed the inadequacy of those powers,” (Firefighting, ch. 3), yet, rather than question the premise of intervention, the trio plead for more: “the next time a financial fire breaks out, America may well wish it had a better-prepared firehouse with better-equipped firefighters” (Firefighting, conclusion).

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Central Banks and Socialism Are Forever Linked Together | Mises Wire

Posted by M. C. on October 24, 2021

This momentous fact has not escaped the attention of socialist theorists. The Saint-Simonians in France had already grasped it at the beginning of the nineteenth century. They understood that the economy of a country could be controlled particularly easily and safely with the help of the printing press. A few years later, the demand for the “centralization of credit in the hands of the state through a national bank with state capital and an exclusive monopoly” soon also held center stage in the 1848 Communist Manifesto by Marx and Engels.

https://mises.org/wire/central-banks-and-socialism-are-forever-linked-together

Jörg Guido Hülsmann

It is well known that socialism is a shortage economy. It is the economy of inefficiency and corruption, of indifferent workers and of bigwigs, of lacking spare parts, of lacking funds, of failure, of permanent reform needs and of constantly unsuccessful reforms. This concerns in particular total socialism, as it was realized in the Soviet Union or under National Socialism. But it is no less evident in the numerous partial socialisms that are featured in the real existing welfare state, in its numerous state “systems.” Budget deficits year in, year out despite high contributions—that is the reality in the state pension system and in the state health system. The state education system is similar: declining student performance and growing illiteracy despite sky-rocketing expenditure. No private entrepreneur could afford to let the costs get out of hand in such a way. Anyone who is in competition has to keep improving. Only those who have a legal monopoly and can make use of taxpayers’ money if necessary do not need it.

Now there is one partial socialism that stands out from the usual array of failures. Here we see gains instead of losses. Here we often find all the other signs of a successfully run company, from the private legal form to the pinstripe-filled boardroom. We are talking about central banking. The term “central bank” actually refers quite clearly to a centrally planned economy. But when people talk about the Fed, the ECB or other central banks today, hardly anyone thinks that they are talking about an offspring of the socialist spirit. On the contrary, central banks are typically viewed as particularly “capitalist.” After all, what would be more capitalist than money? And what would be more closely related to money than a bank?

Upon closer inspection, however, it appears that this connotation may not be entirely correct. In the unbridled market economy, private property and competition prevail. Central banks, on the other hand, are usually state institutions. Even those central banks that are private-law organizations (as in the United States, Japan, and Switzerland) are subject to special laws and their directors are appointed by national governments. In addition, central banks always and everywhere enjoy a legal monopoly. Their banknotes and their deposit money are largely withdrawn from free competition. The market participants are compelled to use the money of the central banks.

This money is one of a kind. Indeed, it can basically be produced in unlimited quantities. The production of money by the private commercial banks is limited by their equity capital and also by the cash deposits of their customers. But central banks do not need equity or cash deposits. It is they who create cash. They can generate cash out of nothing and practically for free. Certain legal limits are set for them, but in times of crisis, as in 2008–09 and in 2020–21, these limits can be relaxed quickly and dramatically. If necessary, they can also be abolished entirely.

Central banks therefore have potentially tremendous power. If only let loose, they can control all of the economy and society. There is almost no limit to the number of new loans they can issue. The can provide these loans to some and deny them to others. And by implication they can also control the use of all available resources. After all, labour usually moves where it is best paid. Raw materials and capital goods are typically sold to those who offer the highest prices. If you control the printing press, you can also let the real resources flow exactly where you think it is right. Whether this use of funds is also profitable plays a rather subordinate role for central banks (unlike commercial banks). You do not have to work hard and invest well to cover losses. One push of a button is enough.

Central banks are therefore made for do-gooders. He who runs a central bank does not need to do painstaking educational work in order to bring about any social change. The humanitarian with the printing press can finance all changes he wishes for at the push of a button. He can just pay other people to do what he wants. He does not need any savings or capital for this. He does not need a democratic majority either. As long as he has the printing press under control, he could by and large give a damn about what other people think or wish.

This momentous fact has not escaped the attention of socialist theorists. The Saint-Simonians in France had already grasped it at the beginning of the nineteenth century. They understood that the economy of a country could be controlled particularly easily and safely with the help of the printing press. A few years later, the demand for the “centralization of credit in the hands of the state through a national bank with state capital and an exclusive monopoly” soon also held center stage in the 1848 Communist Manifesto by Marx and Engels.

Unsurprisingly, the enormous possibilities of creating money from nothing have been used again and again to finance state industrial policy and socialist experiments. In the 1970s, British historian Antony Sutton reported that some of New York’s Wall Street banks had financed the radical transformation of traditional European societies. They supported Lenin and Stalin as well as Adolf Hitler with billions of dollars. That would not have been possible without the refinancing from the American central bank.

In our day, too, the historical connection between the central banking system and political utopias is being brought back to life. This time it appears in the form of a “green” and egalitarian transformation of the economy and society. The directors of the ECB [European Central Bank] and the Fed have already officially committed to this.

The new humanitarians with the printing press are undoubtedly a great danger to humanity. They threaten everyone’s prosperity by channeling scarce resources into unprofitable (and therefore unsustainable) uses. But they also threaten the free social order as a whole, in that they are preparing to disempower the open competition of all social forces. They want to replace this competition with the rule of a nonelected leadership caste.

However, green central bank policy is not to be condemned primarily because it supposedly pursues ecological goals, but because a central bank comes into its own here. Central banks are by their very nature destructive. Even if they are not led by self-proclaimed ecologists and socialists, they favor the cousin, favoritism and the bigwig economy. The economists of the Austrian school have shown, among other things, that central banks always and everywhere weaken economic growth by undermining the propensity to save; that they are destabilizing the economy by fueling a debt economy; that they incite greed and avarice; and that they create blatant inequalities in income and wealth. Central banks cannot be reformed, they must be abolished.

This article is a translation of an article that has appeared in the German edition of the Epoch Times, in October 2021. Author:

Contact Jörg Guido Hülsmann

Jörg Guido Hülsmann is senior fellow of the Mises Institute where he holds the 2018 Peterson-Luddy Chair and was director of research for Mises Fellows in residence 1999-2004.  He is author of Mises: The Last Knight of Liberalism and The Ethics of Money Production. He teaches in France, at Université d’Angers. His full CV is here.

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The First Socialists: The Saint-Simonians and the Utopians | Mises Wire

Posted by M. C. on July 14, 2020

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At the turn of the nineteenth century, classical economics—as represented by Adam Smith in Britain and Jean-Baptiste Say in France—seemed unassailable. The American Revolution, to many people, demonstrated the failures of the old economic order of mercantilism and colonialism. The flourishing trade after the war proved protective tariffs useless, and the rise of industrial production encouraged the expansion of trade networks. Smith and his acolytes seemed proven right in their calls for free trade and economic competition.

Industrialization ushered in rapid increases in national productivity and, with it, the uncomfortable disruption of traditional ways of life. In 1815, English manufacturers had a surplus of stockpiled goods that they could not export during the War of 1812, forcing them to reduce production and lay off workers. The concept of unemployment was effectively unknown at this time, and displaced workers—following the 1811 example of Ned Lud and his Luddites—rioted and destroyed the industrial machines they blamed for their misery. In 1825, following a period of significant credit expansion, the market crashed, leading to the collapse of dozens of provincial banks. People began to question whether there were yet undiscovered flaws in the new economic system of industrialization and free trade.

Among the thinkers who developed an interest in these “commercial crises,” as he called them, was Simonde de Sismondi, a follower of Smith and Say. After observing the early economic crises in Europe, Sismondi began to question the prevailing economic doctrine. Although he did not become a socialist, strictly speaking, his critiques of laissez-faire laid the foundation for various socialist doctrines that would be developed later.

Sismondi began with a critique of the classical method. He offered the earliest criticism of David Ricardo’s abstract deductive method. Anticipating the German historical school, Sismondi argued that economics should be studied in historical and political context, that the consequences of government policies may vary according to time and place. Rejecting Ricardo’s use of Robinson Crusoe to derive the laws of human nature (a theoretical and pedagogical tool that survives today exclusively in Austrian economics), Sismondi believed that the study of isolated man was inadequate for understanding a complex industrial society.

With his new methodological approach, Sismondi took shots at two sacred concepts of classical theory: individual self-interest and free competition. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,” Adam Smith famously wrote, “but from their regard to their own interest.” Sismondi agreed, but he believed Smith erred in only applying the concept of self-interest to production, without considering the distribution of property. Industrialization produced new economic classes, the proletariat (those who work) and the capitalist (those who possess). Free competition compelled capitalists to produce cheaper goods, but it also required workers to compete with each other for employment. Because lower labor costs meant cheaper goods, the interests of the capitalist and the wage worker were in conflict.

The classical economists celebrated the increase in production that self-interest and competition engendered, but Sismondi argued that the conflict between individual interests and the “general interest” of society yielded overproduction, which was the cause of economic crises. Free competition encouraged constant downward pressure on wages, as workers underbid each other for employment and producers constantly worked to lower the cost of production. As some capitalists drove their competitors out of business, former capitalists would join the ranks of the nonpropertied proletariat, and capital would concentrate in the hands of a dwindling number of property owners. To cure these ills, Sismondi called for state intervention—anathema to advocates of laissez-faire—to constrain competition and regulate labor.

Although Sismondi did not call for the abolition of private property, and therefore was not a socialist, his ideas offer the first expression of several concepts that would prove integral to socialist thinkers later in the century. The first is his notion that society had a collective, or “general,” interest that differed from the individual interests of its members. Second, he is the first expositor of the fallacy eventually named the “iron law of wages”—the idea that free competition will suppress wages to subsistence levels. He also formulated a class theory of the proletariat and the capitalist. Related to this was the “law of concentration” that would prove so integral to Marxism. Finally, Sismondi introduced the idea of labor legislation, which was the first modern reaction against laissez-faire absolutism. Although Sismondi’s proposed interventions were modest by modern standards, he opened the door for new ideas about the state’s function and duties that could logically be extended ad infinitum.

In addition to Sismondi, another thinker working at roughly the same time gave birth to other key elements of socialist theory. Henri de Saint-Simon is often considered the father of socialism, though it was his followers who truly produced the first formal socialist doctrine. One of them, Pierre Leroux, apparently even coined the term “socialism” to describe their system.

Saint-Simon had something of a messiah complex, and what he founded was less of an economic theory than a religious cult. A child of the Enlightenment, he was fascinated by Newton’s law of gravity, which Saint-Simon held as the single “universal law” from which all truths—material and spiritual—could be deduced. If God is the center of the universe, gravity was the “law of God,” that governed all phenomena. Saint-Simon believed that the purpose of religion was to direct the masses toward the improvement of society. Christian leadership had served this function before industrialization, but Saint-Simon—after God spoke to him in a vision—called for replacing the antiquated Christian clergy with a “Council of Newton,” consisting of experts from various fields of science.

If Newton was God’s prophet for physics, Saint-Simon was the prophet for the social sciences. Anticipating the positivists, he thought that the empirical method of physics should be adopted for the study of man. By observing the past, social scientists should be able to anticipate the future, thus allowing them to scientifically derive the best political policies. Saint-Simon also theorized that society would progress through specific stages of development. Although a predictive philosophy of history was nothing new—the Christian philosophy of history had long held such a view in anticipation of the return of Christ—Marx, among other socialists, would adopt a similar stages doctrine of history to argue the inevitability of socialism.

Unlike Sismondi, Saint-Simon was an apologist for industrialization. As industrialization expanded, all classes would disappear until society was left with only workers and idlers. Although this seems similar to Sismondi’s proletariat-capitalist distinction, Saint-Simon’s “idlers” were not the capitalists but the landowners of the feudal past. Eventually, they would disappear, and the world would consist only of workers. Related to this, Saint-Simon criticized property, by which he specifically meant landed property. Society under the new system should be modeled after the factory, operating as a “national association,” and the state’s function should be limited to protecting workers from the indolent and securing the freedom of producers.

The genuine socialism of Saint-Simonianism came from the modified doctrine espoused by his acolytes. Saint-Simon criticized the privilege of feudal landlords—his idlers—but his followers extended this logic to the owners of capital. Private property in capital, even more than land, privileged capitalists at the expense of the workers. Land and capital are both tools of production, so there was no need to distinguish between the landlord and the capitalist; both were idlers, the Saint-Simonians said: the capitalist earned interest just as the landlord earned rent. Thus, the new worker-idler dichotomy more closely resembled the proletariat-capitalist model of Sismondi. With industrialization, workers were exploited by the capitalists just as serfs were exploited by landlords.

The Saint-Simonians thus established the first formal doctrine of socialism (though socialistic ideas have existed since at least the ancient Greeks).

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