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In response to the meltdown of financial institutions, unprecedented power has been unleashed by the federal government. Between actions by the Federal Reserve, the TARP, guarantees made by the FDIC, and other direct bailouts, the total comes to nearly $8 trillion. That's over 30 times the inflation-adjusted cost of the S&L bailout, according to Bianco Research.

But the mainstream financial press is urging the Fed to do much, much more. "Look, this is no time for the Fed to act like a bashful virgin," ex-Fed operative Vincent Reinhart told Barron's. Reinhart used to be the director of monetary affairs under Greenspan and now toils for the American Enterprise Institute. Ironically, Mr. Reinhart says that because we are now in a "dangerous period," the central bank "needs to be aggressively buying all sorts of paper, including toxic assets like collateralized debt obligations, non-agency mortgage-backeds and non-investment-grade corporate bonds in order to bring liquidity to the markets and raise security prices." That would be the paper much of which was created during the monetary expansion ramped up by Reinhart and his former boss.

Of course Fed chair Ben Bernanke is doing all he can to disabuse any and all that he is a bashful virgin. "Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver — the provision of liquidity — remains effective," he told the Greater Austin (Texas) Chamber of Commerce. Bernanke told the Chamber audience that the Fed could buy long-term Treasuries and other agency securities on the open market to raise prices and lower yields. Indeed, Bernanke's employer purchased $5 billion worth of debt from Fannie, Freddie, and the Federal Home Loan Banks just a few days after he spoke.

All of this monetary pumping hasn't put anyone to work. The labor department reports that 533,000 jobs were lost last month. And if part-time workers wanting full-time work and anyone who has looked for work in the last year unsuccessfully are added to those who are included in the official unemployment rate, the total amounts to a 12.5 percent unemployment rate, according to the New York Times, "the highest level since the government began calculating the measure in 1994."

But the argument is that we must be patient with our wise men at the Fed and the Treasury. Monetary policy takes time to work, but, rest assured, the mistakes of the 1930s will not be made again. After all, Ben Bernanke is an expert on the Great Depression, we're told over and over. He knows what to do to make sure it doesn't happen again.

But as F.A. Hayek explained in his 1974 Nobel Prize acceptance speech, entitled "The Pretense of Knowledge," monetary and fiscal policies are the product of what he called the "scientistic" attitude, which is in fact unscientific in that it "involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed."

Just as it was 34 years ago, when Hayek delivered this seminal speech, which is included in the soon-to-be published book A Free-Market Monetary System, there is the belief that there "exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level."

So while Bernanke, Treasury Secretary Hank Paulson, and soon-to-be Treasury Secretary Tim Geithner think they can crunch the data, make a diagnosis, concoct the right monetary witch's brew, and inject lots of it to make us all employed and living happily ever after, the fact is that's impossible. In the physical sciences, that may work; but, as Hayek explains, "such complex phenomena as the market, which depends on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable."

The wise ones at the Fed and Treasury are only looking at factors that can be quantitatively measured and disregard any factors that can't. Thus, "they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant."

No single observer could know all the factors determining prices and wages in a well-functioning marketplace. But because policy makers think they know, "an almost exclusive concentration on quantitative measurable surface phenomena has produced a policy which has made matters worse," said Hayek back in 1974. Nothing has changed.

Bernanke and company are making matters worse by endlessly inflating and bailing out dysfunctional firms. The result will be more unemployment, not less. But not-so-bashful Ben is arrogant enough to believe that he can step on the monetary gas, make things all better, and then return the Fed balance sheet to normal (whatever that is). Perhaps Chamber members believed him when he said, "To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed's balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way."

The government's money men are engaging in what Hayek referred to as "the fatal conceit," thinking they have the knowledge to fix and plan the economy. They can and will only make matters worse.