Tell
him to buy me an acre of land,
Between
the salt water and the sea sand,
Tell
him to plough it with a ram's horn,
And sow
it all over with one peppercorn,
Tell
him to sheer't with a sickle of leather,
And
bind it up with a peacock's feather,
Tell
him to thrash it on yonder wall,
And
never let one corn of it fall,
Then he
shall be a true lover of mine.
John Mauldin has written a
piece on the task of the Federal Reserve. The title is sufficient to
disabuse anyone of the idea of central planning money and credit – although the
title only tells part of the story: Data-Dependent ... on Imaginary Data.
He begins with the oft-stated
mantra by the Fed: “our decisions are data dependent!”
…how could their policy choices
not be data-dependent? The only alternatives would be that they made decisions
randomly or that there was an a priori path already determined by
previous Fed policymakers that they were forced to comply with.
Or that they make decisions
politically….
He asks: are they looking at
the right data? Is the data accurate? We know the answer to the
first: it isn’t the right data because it can’t be the right data – the
right data can’t be measured; the right data is tens of millions of
individual decisions every day, not yet even know to the actors, let alone to
the Fed.
Well, if it isn’t the right
data, it doesn’t really matter if it is accurate, does it. But it isn’t
accurate, either.
Mauldin cites an op-ed by Jared
Bernstein (bolded by Mauldin):
Recent events have exposed a
hole in the middle of economists’ knowledge of key economic parameters: We
know neither the unemployment rate at full employment nor the potential level
of gross domestic product (GDP).
Recent events?
What about 2008? What about every bust since 1913?
In any case, that’s a problem
if you want to centrally plan money and credit. But no respectable writer
will label the Fed’s work as communist-style central planning. As is
pointed out often enough to me, I am no respectable writer.
Mauldin continues by offering
several ways by which such economic statistics are little more than
guessing. He doesn’t offer that they are guesses about wrong things, but
in many cases this is also true. For instance, why is GDP considered to
measure the health of the economy? Do you measure your economic
well-being by how much you spend? Is it irrelevant what you
spend your money on and why?
The various hurricanes and
fires of the last year have been a boon to GDP – a boon to spending.
What does this say about the health of the economy? The best case is a
return to where we were before these tragedies. Does the broken window
fallacy come to mind?
GDP is good for one thing: it
measures state-accessible-product. Much of taxation is dependent on
economic activity, and GDP measures economic activity. That’s it.
Mauldin accepts that the Fed
must act on such whimsical data; this despite comparing the Fed to your doctor
or an airplane pilot: would you trust either of these professionals with your
life if all they had was data as useless as GDP and unemployment? Of course
not:
All this is very obvious to
people who lack graduate degrees, yet for some reason the economics profession
persists in thinking it knows things it simply does not. Economists have
physics envy. They want their profession to be a hard science, when it is
probably one of the softer of the soft sciences.
If the market is competent to
set long-term rates or LIBOR, then maybe we should trust the market to set
short-term rates.
This is the closest I have
heard Mauldin come to suggesting an end to the Fed. But he doesn’t.
The Fed governors should be more humble, but central planning should not be
discarded:
That doesn’t mean there would
be no role for the Fed. There are points in the economic cycle when the Fed can
be quite useful, typically during a liquidity crisis that follows hard on the
heels of too much irrational exuberance.
Irrational exuberance.
Let a few major money-center banks go belly up (along with the wealth of its
stockholders, bondholders and executive management) next time and you will go a
long way toward purging the system of irrational exuberance. In other
words, if there is some reason for the Fed to exist, it shouldn’t be to bail
out stupid banks.
Conclusion
Think about this: 12 people sit around a table, chew the fat over
masses of data and metadata, and then set the price for the most important
commodity in the world: the US dollar, the world’s reserve currency.
Yes, think about this. It doesn’t take much thought to conclude
that this is a power no small group of people should have; it is a
responsibility that is impossible to carry out. It is central planning
“for the most important commodity in the world.”
I have a better idea: End the Fed.