Wednesday, January 16, 2013

The Psychotic Fed

Whether it is growing older and less patient or whether the world is actually becoming more stupid is an issue I wrestle with periodically. I suspect it is a bit of both.
Here is an example of the nonsense that increasingly riles me. This snippet comes from a Reuters report available at CNBC:
Dramatic action by central banks to counter a global financial crisis cannot be explained by traditional models of how monetary policy works, and the economics profession has got to go back to the drawing board.
Think about this for a moment. Re-read it. If it doesn’t strike you as stupid, it may be because you are not familiar with economics or logic. Let’s imagine the same thought process being used in another field. Try this example: 
Dramatic actions by a group of physicists to counter the law of gravity cannot be explained by traditional models in physics, and the physics profession has got to go back to the drawing board.
The paraphrase should provide perspective. The physics profession would not “go back to the drawing board” in this situation. They would likely expel the quacks impersonating physicists first and then seek professional help for them from psychologists or psychiatrists.
If we can easily conclude that physicists behaving in this manner must be psychologically troubled, why should we not conclude the same regarding the Fed? Isn’t the situation identical? Why does the author assume that the bizarre behavior by the Fed has anything to do with economic law?
Money was the first market variable studied. The use of money preceded Christ by about 1,000 years. Money was studied before the term economics came into being and likely shortly after its introduction.
Monetary theory or the theory of money evolved over more than a thousand years. People may question its validity, as I do. My reservations come from the belief of any aggregate(s) has value in economics. Regardless, if there is a better theory of money, it has not surfaced in the three thousand years that money has existed.
Apparently the writer of the article believes the Fed is acting according to some new theory that they themselves have discovered. I think not. Fed officials are flying blind with what they are doing and appearing increasingly desperate and irresponsible as time passes. Furthermore, they are not acting as economists but as agents of the Federal government. To believe that their action signals a breakthrough that demands a revision in economic theory shows amazing naivety.
The laws of economics have not changed just because the Fed chooses to ignore them. These laws cannot be repealed by the Fed nor can they be altered. For better or worse, they are what they are, just as the law of gravity is what it is. To pretend otherwise is foolish and has consequences. That is one reason why normal physicists don’t jump off buildings.
But the Fed’s monetary folly is just as dangerous as jumping off a building. Trying to appear relevant to a world that increasingly recognizes their inability to improve the economy, the Fed is trying anything. They cannot stop their interventions because without their assistance the federal government would be unable to pay its bills.
Hence, we get smoke and mirror economics. In order to keep doing what has already failed, the Fed and its apologists keep inventing new rationale for continuing the behavior.  about how the Fed is driving economists back to the drawing board.
In reality, instead of “diving economists back to the drawing board,” economists should be driving the Fed to the nearest psychiatric ward.
"Monty Pelerin" is a pseudonym derived from The Mont Pelerin Society. Friedrich Hayek, 1974 Nobel laureate in Economics, was the founder.
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