Fed could soon be in the hands of somebody who never learns anything or forgets anything
about 10 hours ago
the Fed cut interest rates to zero and “printed money” on a huge scale during the financial crisis.
Last week John Kelly, the White House chief of staff, tried to defend President Donald Trump against charges that he was grossly insensitive to the widow of a US soldier killed in action.
In the process, Kelly accused Frederica Wilson, the member of Congress and friend of the soldier’s family who reported what Trump had said, of having behaved badly previously during the dedication of an FBI building. Video of the dedication shows, however, that Kelly’s claim was false, and that Wilson’s remarks at the ceremony were entirely appropriate.
So Kelly, a former general and a man of honour, admitted his error and apologised profusely. See? I made a joke! In reality, of course, Kelly has neither admitted error nor apologised. Instead, the White House declared that it’s unpatriotic to criticise generals – which, aside from being a deeply un-American position, is ludicrous given the many times Donald Trump has done just that.
But we are living in the age of Trumpal infallibility: We are ruled by men who never admit error, never apologise and, crucially, never learn from their mistakes.
Needless to say, men who think admitting error makes you look weak just keep making bigger mistakes; delusions of infallibility eventually lead to disaster, and one can only hope that the disasters ahead don’t bring catastrophe for all of us.
Which brings me to the subject of the Federal Reserve. What? The truth is that what I’m calling Trumpal infallibility – the insistence on clinging to false ideas and refuted claims, no matter what ? is a disease that infested the modern Republican Party long before Trump. And one of the areas where the symptoms are especially severe is monetary policy.
You see, when the 2008 financial crisis struck, the Federal Reserve, led at the time by Ben Bernanke, took extraordinary action. It cut interest rates to zero and “printed money” on a huge scale – not literally, but it bought trillions of dollars’ worth of bonds by creating new bank reserves.
Many conservatives were aghast. TV pundits hyperventilated about hyperinflation, and even seemingly more respectable voices denounced the Fed’s actions. In 2010 a who’s who of conservative economists and pundits published an open letter warning that the Fed’s policies would cause inflation and “debase the dollar.” But it never happened.
In fact, the Fed’s preferred measure of inflation has consistently fallen short of its target of 2 per cent a year. Now, every economist makes bad forecasts now and then – if you don’t, you’re not taking enough risks.
I’ve certainly made my share, including a bad market call on election night – which I retracted three days later, acknowledging that my political dismay had gotten the better of my analytical judgment. But I always try to face up to my mistakes and learn from them. But I guess I’m just old fashioned that way.
Four years after that open letter to Bernanke, Bloomberg tracked down many of the signatories to ask what they had learned. None of them – not one – was even willing to admit having been wrong. So what happens to economists who never admit mistakes, and never change their views in the light of experience?
The answer, apparently, is that they get put on the short list to be the new Fed chair. Consider, for example, the case of Stanford’s John Taylor (one of the signatories of that open letter). Unlike some of the other names on the rumored list, he’s a highly cited academic economist.
Since the financial crisis, however, he has repeatedly demanded that the Fed raise interest rates in line with a policy rule he devised a quarter-century ago. Failing to follow that rule was supposed to cause inflation, which it hasn’t – but seven years of being consistently wrong hasn’t inspired any rethinking on his part.
What it has inspired is a descent into increasingly strange reasons the Fed should raise rates despite low inflation. Easy money, he declared, was part of a conspiracy to “bail out fiscal policy,” that is, an effort to help president Barack Obama.
Or maybe it was like the monetary equivalent of rent control, discouraging lending the way rent control discourages building apartments – a bizarre analysis that had colleagues scratching their heads.
What these ever-odder interventions had in common was that they always offered some reason wrong was right – why Taylor had been right to warn against easy-money policies even though higher inflation, the problem he predicted as a result of these policies, never materialised. And never, ever, an admission that maybe something was wrong with his initial analysis.
Again, everyone makes forecast errors. If you’re consistently wrong, that should certainly count against your credibility; track records matter. But it’s much worse if you can never bring yourself to admit past errors and learn from them.
That kind of behaviour makes it all too likely that you’ll keep making the same mistakes; but more than that, it shows something wrong with your character. And men with that character flaw should never be placed in positions of policy responsibility.