By Ambrose Evans-Pritchard, Telegraph.Co.Uk | 29 June 2010
Like a mad aunt, the Fed is slowly losing its marbles. Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order. Matters of economic policy should be reserved to a priesthood with the correct "post-doctoral credentials", which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences).
Adam Smith Didn't Have An Economics Phd
"Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy." Don't you just love that throw-away line "decent"? Dr Athreya hails from the University of Iowa [[ranked 66th in the US by IDEAS: normxxx]].
You Couldn't Make It Up, Could You?
I hold my hand up Dr Athreya and plead guilty. I am grateful to Bruce Krasting's blog for bringing this stinging rebuke to my attention. However, Dr Athreya's assertions cannot be allowed to pass. The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did.
Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter [[repeating the script of the 1920's disaster as if on cue: normxxx]], and more or less forcing banks to chase yield and engage in destructive behaviour [[ultimately, self-destructive: normxxx]]. They ran ever-lower real interest rates with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly [[although it was Alan G. who famously opined that "a housing bubble is not possible": normxxx]]), blamed Anglo-Saxon over-consumption on "excess" Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of "inflation targeting". Have they all forgotten Keynes's cautionary words on the "tyranny of the general price level" in the early 1930s? Yes they have.
They allowed the M3 money supply to surge at double-digit rates (16% in the US and 11% in euroland), and are now allowing it to collapse (minus 5.5% in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher's "Debt Deflation causes of Great Depressions"? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred [[BB was famously still "holding back" in Autumn of 2007 and was still pretty sanguine about things in the summer of 2008— just before the international credit system completely froze up!: normxxx]].
The Fed has since made a hash of 'quantitative easing', largely due to Bernanke's ideological infatuation with "creditism". QE has been large enough to horrify everybody (especially the Chinese) by its sheer size— lifting the balance sheet to $2.4 trillion— but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect.
The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don't we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell.
And now the Fed tells us all to shut up[!?!] Fie to you sir!
The 20th Century was a horrible litany of absurd experiments and atrocities committed by 'intellectuals', or by elite groupings that claimed a 'higher' knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin.
The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science[!?!] and answers to Newtonian laws. In any case, Newton was wrong [[actually, as is most scientific theory, even today, merely incomplete: normxxx]]. He neglected the fourth dimension of time, as Einstein called it. And that is exactly what the new 'classical' school of economics has done by failing to take into account the intertemporal effects of debt— now 360% of GDP across the OECD bloc, if properly counted [[I should add that economists regularly ignore the effects of time— an inconvenience to many an economic equation: normxxx]].
There has been a cosy self-delusion that rising debt is largely benign because it is merely money that 'society owes to itself'. This is a bad error of judgement, one that the intuitive man in the street can see through immediately. Debt 'draws forward' prosperity, which leads to powerful overhang effects that are not properly incorporated into Fed models. That is the key reason why Ben Bernanke's Fed was caught flat-footed when the crisis hit, and kept misjudging it until the events started to spin out of control.
Economics should never be treated as a 'hard' science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a relatively rare spectacle in hard science, where disputes are usually [[eventually: normxxx]] resolved, one way or another, by hard data. It is a branch of anthropology and psychology, a moral discipline if you like. Anybody who loses sight of this is a public nuisance, starting with Dr Athreya.
As for the Fed, I venture to say that a common jury of 12 American men and women placed on the Federal Open Market Committee would have done a better job of setting monetary policy over the last 20 years than Doctors Bernanke and Greenspan. Actually, Greenspan never earned a Phd. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind.