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"The science of monetary policy"

Monday, July 28, 2008

Sometimes you have to wonder what future historians will have to say about mainstream economic thought during the current era.

More than thirty five years clear of any semblance of a "hard money" standard, with a government facing gargantuan long-term liabilities that are joined at the hip with the "official" inflation rate, and currently in the midst of what may go down in the history books as the greatest economic calamity since the Great Depression, the hubris of some economists at the highest levels continues to be at odds with what might be a more reasonable response to the current mess, namely, a "reality-based" approach to their profession.

This report in Reuters on the latest wisdom from outgoing Federal Reserve "Boy Wonder" Frederic Mishkin once again demonstrates just how detached some economists are from reality as monetary policy is referred to as a "science" with no hint of that characterization being facetious.

The U.S. Federal Reserve can improve its communication and better anchor inflation expectations without losing policy flexibility by agreeing on a goal for price stability, a top Fed official said on Monday.

"I believe that the science of monetary policy indicates that the FOMC needs to go even further," Fed Governor Frederic Mishkin said, referring to the policy-setting Federal Open Market Committee, as he argued for greater communication.

"The FOMC should lengthen the horizons of its projections, reach a consensus on a specific numerical value for the mandate-consistent inflation rate, and indicate that this consensus value would be modified only for good scientific reasons," he told the Peterson Institute for International Economics in a speech.
...
"Some commentators have worried that establishing a specific numerical inflation objective might lead to an overemphasis on controlling inflation and not enough concern about stabilizing real economic activity.

"My proposal is, however, consistent with the dual mandate, because it has the advantage of being less likely to be misinterpreted as a commitment to control inflation within a tight range over short horizons, since it only involves a consensus on the mandate-consistent inflation rate," he said.
Given the current predicament that central bankers now find themselves in, a good "scientist" would be more concerned with the questionable data collection and flawed analysis that has gotten us to the current juncture (see Numbers Racket by Kevin Phillips at Harpers) rather than focusing on communication, "inflation expectations", or the new and improved "mandate-consistent inflation rate".

Aside from the obvious one, has there ever been a better example of "groupthink" than what passes as the "science" of contemporary monetary policy?

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5 comments:

Mr. Rational said...

I completely agree that economists seem stuck in insane groupthink and can only compare it to those who convince themselves that anthropogenic global warming is beyond any debate whatsoever.
Groupthink is a powerful phenomenon probably based on a low-level survival instinct. As such, it is anything BUT science!
The desire to be part of 'the group' and 'get along' is common. I doubt you'll find a lot of free thinkers in high levels of our society.

dearieme said...

It is better to be wrong in the right company than right on your own. Better for your career, that is.

Anonymous said...

Frederic needs a wedgie (loved that BusinessWeek quote Tim!)

Anonymous said...

This cat is talking his book. It's amazing to me that supposedly informed citizens don't even realize the fed is a private bank, staffed by psychopaths like Mishkin, and relying on the Talmud for a moral compass. One man's "groupthink" is another man's conspiracy.

Tim said...

From Naseem Taleb in the New York Times via Yves Smith at Naked Capitalism:

“I cannot find a single convincing argument that tells me that astrologers won’t do better than economists,” Mr. [Nassim Nicholas] Taleb said last week by telephone from Lebanon, where he was mountain hiking.

“The problem is the arrogance of these economists,” he said. “They’re making people rely on theories that have not worked, do not work, and are really dangerous.”

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