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What She Said

Tags The FedFinancial MarketsMedia and Culture

10/17/2006C.J. Maloney

"Any discussion about the Social Security trust fund would have to include the discomforting fact that there is no Social Security trust fund." – Caroline Baum[1]

Bloomberg columnist Caroline Baum has been writing about financial markets for over twenty years. My discovery of her column made the life of a Wall Street professional of an "Austrian" bent a little bit brighter, hoping that maybe all hope is not lost.[2]Unlike far too many of her contemporaries, Ms. Baum's writings on economic issues cause me to laugh only when she means me to. When last year Bloomberg Press gave us a collection of her columns, entitled Just What I Said, off to Ebay I went.[3]

Why, you might ask, should Mises.org review a book written by someone who has never identified herself with the Austrian School and is, in fact, a strong believer in the desirability of central banking? I owe you an explanation, which comes in several parts, and hope it will make you read on.

First, even if you disagree with Ms. Baum's every opinion you still derive benefit. The first step to refute an intellectual opponent's argument is to read her works. It never hurts to read a book.[4]

Second, it convinces you of the heartfelt good intentions of even those you disagree with. Two completely honest people can look at the same set of facts and come to completely opposite conclusions.[5]Too often we human beings quickly come to the belief that our intellectual opponents are not only mistaken but scoundrels to boot.

Third, if I ever walked into a person's house and saw nothing on their bookshelf but Rothbard, Mises, and Hayek, I would feel rather certain that such a man, while of the same opinion as I, is like the sad character personified by Washington Irving's Master Simon, who "like all men who knew but a few books, he looked upon them with a kind of idolatry, and quoted them on all occasions."

Most important, and the primary reason for this introduction, Ms. Baum has actually studied economics writing: "I read and studied on my own and even went back to school to take some economics courses" (xvi). The proof of this is in her writing. When she claims to own a copy of Henry Hazlitt's Economics in One Lesson I believe her, I would even wager that the spine on Ms. Baum's copy is creased.

My job requires me to read a lot about the financial markets. A good portion of each day is spent reading research reports and articles in the popular press regarding financial matters. Much of the former, while at times flawed in their argument, display on the part of the writer a deep understanding of economics; much of the latter reads as if written by someone who thinks "marginal utility" is a rock band.

What led me to find the Austrians was my puzzlement over inane (to me) columns in the financial press that made no sense, even to a man as poorly educated in economics as I. Some of the "business" columnists were so bad it was exasperating. It got to the point where had I read one more column thanking our Lord for blessing us with Hurricane X — sure to be a "boost to growth" going forward — I was going to go on an intra-state killing spree. Then I read Caroline Baum's "if it's such great news, why sit around waiting for natural disasters to strike? Why not bomb our own cities?" (42).

In a garbage dump world of inane gibberish, she is a fresh breeze of common sense.

Common Sense Ain't Common

"You eloquently and concisely express exactly the sort of fact-based uncommon sense that is absent from nearly all the rest of the media." – Sample of a reader's letter to Caroline Baum

At 286 pages, Just What I Said is a sample of her past work chosen by the author herself, all exclusively from her time with Bloomberg News. The selections, of which there are many choice bits, are divided into nineteen "themes" which strive to match up like essays by subject. Their titles give hint to Ms. Baum's core competencies[6]("Still Nonsense After All These Years" and "The 'Political' Economy") and her style of writing ("Oil Things to Oil People"). Her thought process reminds me at times of Bastiat, Milton Friedman at others, and Henry Hazlitt makes the occasional guest appearance. As for her writing style the closest match, when she is at her best, is Bastiat. She is a well-read wiseass.

You will not be burdened by oodles of Greek symbols, stochastic difference equations, adaptive algorithms and such. Seeing beyond the shroud of mathematics in which our economists like to dress their emperors, Ms. Baum won me over on page forty, where she shrugs at all the hoopla with "much of economics is common sense." Fortunately for her employment outlook common sense is not common, and she makes a note of it, writing "some basic misconceptions never die; they just go into remission, only to flare up at a later date" (39). At times she can be a complete wiseass and a progressive radical in one helping, as when she mocks the Democrats who "are apoplectic about the prospect of returning to the taxpayer what is rightfully his" (224).[7]

For a woman who earned her undergraduate degree in political science and her masters in cinema studies,[8]she has a far better grasp of economics than I see in many of the finance world's leading lights. She lends credence to Mises's statement that "many who are self taught far excel the doctors, masters, and bachelors of the most renowned universities."[9]

For example, she fully understands the cause of price inflation, a hard won nugget of knowledge that is far too rare. In the book she repeatedly, and correctly, points to the Federal Reserve as the root of the problem as she writes "wages don't cause inflation any more than higher oil prices cause inflation. The central bank causes inflation" (49). Not a chance of seeing a column from Ms. Baum warning of oil's inflationary effect.

As with any good journalist, her brain is attuned to catch the blather that passes for truth, justice, and sound economics. While I do not agree with her every opinion, for each time I read what I believe to be a hole in her economic knowledge — for example, when she writes that "asset prices matter … they create wealth" (36)[10]— she rebounds consistently, winning me right back with "profit-maximizing firms won't pay a worker more than his marginal revenue product, which is another way of saying he won't be paid more than his contribution to the business" (48). Not a chance of seeing a column from Ms. Baum demanding that Wal-Mart pay a "living wage."

Principles of Economics

"Forget all the econometric models for a minute and focus on the logic." – Caroline Baum

Ms. Baum, a columnist by trade, was able to put an entire book of her economic writings together because her grasp of the science is strong enough to hold up under repeated viewing. This woman is widely and wisely read. She does not flesh out her columns solely by interviewing college professors; she also references the books she has read. Among those she cites are Jim Powell's FDR's Folly and Henry Hazlitt's Economics In One Lesson.

She also references Henry Hazlitt, Knut Wicksell, Joseph Schumpeter, and Frederic Bastiat. She cites the Cato Institute repeatedly, the Hoover Institute, and the American Enterprise Institute. This did not surprise me; in the book's introduction she writes of her "fundamental belief in free markets" so naturally she'd gravitate to institutions and economists who share it.

The book's best "theme" — because it is the genesis of all the others — is entitled "First Principles." From the first page of the theme, she understands what the anchor of economic science is stating, "a first principle is one that cannot be deduced for any other. It is an irrefutable truth, a proposition that doesn't need to be proven" (83). A Priori reasoning would not strike her as absurd.

One of the reasons for the warm touch of her writing is that she writes about human beings, she sees economics for what it is, approvingly quoting one writer that "investment behavior is just a subcomponent of human behavior" (257). She thinks about everybody, not just whoever appears to directly benefit. "It's important to consider the unseen effects of any economic policy or action" (97).

Just What I Said contains lines that would fit seamlessly into an Austrian text, not always, but often enough to certainly make me sit up and take notice. For just one example, Ms. Baum's castigation of those believers in the NAIRU model who meet its every failure with "the NAIRU-istas moved the goal posts rather than re-examine their theology",[11]stands comfortably hand in hand with Murray Rothbard's "the embarrassing fact that the forecasts of would-be economic soothsayers have always faced an abysmal record … is met in mainstream economics by the determination to fine-tune the model once more and try again."

It is because of her underlying principles, the ground upon which any man builds, that Ms. Baum has a deeper understanding of economics than many journalists I've read, and in my job I read a lot of them. It was a joy to read her step-by-step explanation as to why greater productivity is a boon to all mankind (60) — it's spot on perfect.

"With increased understanding," she writes, "came a fundamental belief in free markets, which infuses all my writings" (xvi). This woman may not be a proponent of the Austrian School, (certainly no Keynesian, either, entitling one of her pieces a mocking "Generally Incorrect") but she's far too well educated (self-educated, no less) and too progressive to ever be seen wearing a Che t-shirt, if you get my drift.

The Central Banker Has No Clothes…

"What if the Fed chairman could be disrobed to reveal an ordinary human being under the sphinx-like façade? What if the emperor has no clothes?" – Caroline Baum

Her primary focus is writing about the American economic scene, and she does it with a sharp eye and vicious wit that at times makes me wonder if Florence King has started writing about economics. She's fun to read and when her blood is up she's an intellectual pugilist with the best of them, a trait admirable to us Austrians.[12]

Her curt dismissal of the powerful and their blathering is laugh-out-loud funny. From Hillary Clinton ("who wants to redistribute everyone's income but her own"), her husband Bill (who "governs on the basis of public opinion polls") to Robert Rubin (whose "grasp of economics appears slim") and Senator Tom Daschle ("the guy is an idiot") you would be hard pressed to find a good word about any public figure in Ms. Baum's writings. She realizes that the press, in order to perform its function, has to have a natural antipathy towards those in power. But above all, her lack of respect for Alan Greenspan, who she goes after with a positive relish, feels almost personal. As Keynes was to Mises, Greenspan is to Baum.[13]

When she skewers Sir Alan (even devoting an entire "theme" to him) is when the book is at its funniest, guaranteeing Ms. Baum will never land a job at the Fed as long as Alan Greenspan has a pulse. She's relentless with the man. When Greenspan tried to pass off responsibility for the NASDAQ bubble with a tepid "bubbles tend to feed on themselves" Ms. Baum retorted with a quick "and where do they get the material to feed on, pray tell? Why, from the friendly central bank" (30).

She curtly dismisses the rotating rationales he held up to Congress during his semiannual Humprey-Hawkins testimonies, and takes gleeful pleasure in listing the ever -changing "great bathtub of 'Greenspan-watches-it' indicators." (She runs off a buffet table of thirteen.) She ends her dismissal by approvingly quoting an economist who states "the one thing you will never hear the Greenspan Fed take credit for is inflation" (142).

Her best moment in the book comes when she — literally — catches Greenspan in a lie. In an August 2002 column, she points out that in the footnotes to a speech he gave to kick off the Jackson Hole shindig he states, "Changes in margin are not an effective tool for reducing stock market volatility." Ms. Baum thinks that's "funny" because in the transcript of the September 1996 Fed meeting Greenspan stated to another Fed governor that "by increasing margin requirements … if you want to get rid of a bubble that will do it" (32). Luckily for Greenspan's spotless reputation, nobody raised a fuss that Ms. Baum, in a 2002 journalistic coup, proved Sir Alan was either dishonest or senile.

…But The Central Bank Wears Prada

"An interest rate is nothing more than the price of credit." – Caroline Baum

Now you knew this part was coming.

Of the few areas where I disagree with Ms. Baum, her take on the subject of money and credit is by far the biggest. I admire this woman and respect her opinions, but on this subject we must agree to disagree.

It is not the tired, discredited assertion that a central bank needs to "stimulate aggregate demand" that leads her to support its existence; she had earlier stated in a section of the book entitled "Pent-Up Nonsense" that "in every business cycle (some things never change), we hear about a lack of pent up demand" (59). Unwittingly or not, she mimics the Austrian assertion that prices — free to adjust, will clear the market. No need for a central bank to artificially lower interest rates (i.e., create money and credit out of thin air) to "stimulate demand," she instead writes how to cure a depression: "If the economy is free to adjust … the process will be short lived" (95), which is a photocopy of Murray Rothbard's "if government wishes to see a depression ended as quickly as possible … don't interfere with the market's adjustment process."[14]

So why does she believe we need a central bank, if not to stimulate demand?

She asserts on page 260 that "central bankers … do one thing, which is to manage aggregate demand," which, taken in the context of her other columns, implied to me her belief that the bank is to manage aggregate demand to manage price inflation. In an August 2002 column, Ms. Baum asserts that the bond market would not respond to higher price inflation, thereby allowing it to get out of control, and she disapprovingly quotes Robert Rubin for saying markets would respond. What Rubin said was, "if the Fed did absolutely nothing for the next two years, and if, in fact, inflationary forces started to assert themselves, then the bond markets would reflect that, and you would have the same constricting effect that you have if the Fed moves" (9).

Ms. Baum disagrees, and comes down in favor of the central bank "managing" the markets alleged propensity to inflate prices generally. In a 1999 column, she used Brazil's historic inflation rates (which tend to get a wee bit out of hand from time to time) to give example of a free market's inability to control inflation. She quotes an economist who wonders why "they never seem to get it right" — implying Brazil's occasional bouts with hyperinflation are a market failure in need of a central bank's guiding hand (3). But in Brazil, starting with SUMOC in 1945, interest rates have been set by a small coterie of PhD-addled Mathletes, not by the free market.

Blaming the free market for Brazil's inflation is akin to blaming a manacled man for failing to beat Jesse Owens in a footrace.[15]Hyper or no, inflation is not a condemnation of the free market; it is a condemnation of humankind's ego-driven fetish with "planning."

Ms. Baum notes that "by adjusting the supply of reserves relative to the banking system's demand, the Fed can pretty much put the funds rate where it wants" (4, italics mine) and how during 2003 Greenspan kept the Fed Funds rate low while hinting it would remain so for some time "dissuading traders from pushing up long rates" (191, italics mine). She separates short-term rates (set by the Fed) into an entire other world, cleaved off from the "market" rates on the long end. She left me to wonder how you can restrict monetary injections to a specific area of the financial world.

The entire yield curve is affected by the central bank's central planning of interest rates, at all times. Thirty-year mortgage rates are around 6% because of monetary injections on the "short" end. The Fed did not increase the money supply with any intent on causing a housing bubble, but those dollars traveled thirty years nonetheless. Murray Rothbard once wrote, "All credit is interrelated on the market,"[16]and he's correct. Markets, free of political meddling, do not set interest rates (neither short nor long) in Brazil or any country with a central bank.

Ms. Baum, who writes that an "interest rate is the price of credit," wishes for the central bank to destroy the flexibility of its price (at least, in her view, only for short-term credit), to make sure it can no longer adjust to market forces, to put the funds rate where it wants. This is the opposite of when she writes "the only ironclad rule is that supply and demand works" (251) and that command economies can't possibly deliver the goods "because they have no price signals to guide them" (xvi) — except, apparently, when it comes to the provision of money and credit.

My disagreement with Ms. Baum regarding central banking is at base a disagreement about what exactly is money and credit. She never explicitly lays out her thoughts on the matter and, by failing to define her terms, she skips right over her own words about the central bank's "magical powers to create reserves out of nowhere" (159), how it "creates money out of nowhere" (184), and "creates reserves out of thin air and destroys them in the same way" (xv) without so much as a backward glance, her usual journalistic curiosity undisturbed.


"Have you ever asked what is the root of all money?" – Ayn Rand

Ms. Baum writes in the book's introduction that her job is to "make knotty subjects understandable and fun" (xv). She does so almost without fail. This, combined with her knowledge of economic science and abundant common sense, makes Just What I Said worth every cent of its price and more. It has the sure sign of a superior product: it bears repeated viewing.

It would be a boon to her reading public to give them another offering, and I suggest expanding the book's best "theme" — "First Principles" — into a book length Principles of Economics. And somewhere therein plug that one hole, answer the one question that this otherwise excellent book left me asking:

What exactly is money and credit?

"In this question it is absolutely necessary to forget money, coins, bank notes, and the other media by which products pass from hand to hand, in order to see only the products themselves, which constitute the real substance of a loan." – Frederic Bastiat (1801–1850)


[1]All page citations in this article are taken from Just What I Said, Caroline Baum, copyright 2005, Bloomberg Press, New York.

[2]For all you Sally Sunshines out there, all hope is lost.

[3]Bastiat says of me, "Men have a natural inclination … to go for a bargain". My wife says I'm a cheap-ass.

[4]OK, maybe the world would be a better place (or at least a far more populated place) had Stalin never read The Communist Manifesto.

[5]For example, Austrian giant Benjamin Anderson believed "Governmental economic planning in World War One was highly intelligent and very honest." Uuummm … if you say so.

[6]I know that "core competencies" makes me sound like a horse's ass, but I want to prove to you that I've earned a post-graduate degree from a very prestigious university. Now read on, safe in the knowledge that an "expert" is sailing the ship, steady as she goes.

[7]What is rightfully his! She will never be offered a job at the New York Times.

[8]Maybe she can explain the inexplicably successful career of Keanu Reeves.

[9]Ludwig Von Mises, Theory and History, p.263.

[10]Asset price rises do not create wealth, they re-price already existing goods.

[11]NAIRU, for those of you who have a social life, is the "non-accelerating rate of unemployment." It is an attempt to mathematically measure what level of unemployment will be deemed appropriate, because it was discovered after 1913 that too many people being employed causes inflation.

[12]Don't get all defensive…. Repeat after me: Richard Cantillon. What other school of economic thought has an accused murderer as one of its leading lights?

[13]Actually, it might be bad customer service that really gets her going. Should Ms. Baum fail to make it into heaven, she has an eternity of waiting on hold ahead of her.

[14]Murray Rothbard, The Great Depression, (New York: Richardson & Snyder, 1983), p.25.

[15]And Der Fuehrer stormed off the stage like a spoiled teenaged girl having a snit. Ah! The glory that was the Third Reich!

[16]Murray Rothbard, The Great Depression, (New York: Richardson & Snyder, 1983), p.73.



Contact C.J. Maloney

CJ Maloney lives and works in New York City. He blogs for Liberty & Power on the History News Network and the Daily Kos. His first book, Back to the Land: Arthurdale, FDR's New Deal, and the Costs of Economic Planning, is to be released by John Wiley and Sons in February 2011.