If you threw a brick inside any Federal Reserve building, chances are you’d hit a professor. Ben Bernanke came to the Fed from Princeton, Janet Yellen was a professor at the Haas Business School at Berkeley (she’s still Emerita), and almost everyone in any important policy position at the Fed is a former academic, and soon will be an academic again.
I have nothing (well, not nothing) against professors(1), but there are some serious problems with this. In no particular order:
* Most immediately, hardly anyone at the Fed knows much about how financial markets actually work, since few of them have ever worked in an actual finance job. The amount of ignorance of practical reality at the Fed is astonishing, and it persists because Feddites have no interest in how markets work, as opposed to how they work in theory. For folks whose job it is to oversee and regulate the financial sector, this is, shall we say, a serious lapse.
* Everyone at the Fed indulges a preoccupation with the Great Depression, and therefor fairly trembles with fear of deflation. To an academic, this is understandable, since reality need not intrude on their speculations. But, folks, here’s a factoid for you: the Depression started damn near a century ago. Back then, markets, the financial system, regulators, and practically everything else were unrecognizably different from what operates today. It would be as though we walked into the Pentagon and discovered that all the generals were preoccupied with World War I.(2)
* Finally, and maybe worst of all, American academia is the most hostile soil on the planet toward free markets. Even Communist China adopted a capitalistic economic system in the 1980s, a time when US academics were still glorifying the Cultural Revolution and reading Mao’s little red book. I’m not suggesting that the Fed is a beehive of socialistic activity bent on the destruction of free markets everywhere. I’m merely suggesting that it’s difficult to live in academia for very long without finding yourself drifting leftward. The consequence of this is that the most important capitalist policy institution on the planet is teeming with people who have very little appreciation for how free markets actually work, and who therefore misapprehend their robustness and resilience. Most people at the Fed honestly believe that the US economy would collapse if it weren’t for their daily heroic efforts.
As Al Fagaly and Harry Shorten would have said, “There Oughta Be a Law.”(3)
(1) Several Greycourt partners, including your humble scrivener, have served as adjunct faculty at various universities, and others, while not technically adjunct, have lectured widely to finance and investment classes.
(2) The Fed’s war cry – “Remember the Great Depression!” – suggests that, just like the French generals who built to the Maginot Line, they are busily fighting the last war.
(3) As my readers of a certain age will know, “There Oughta Be a Law” was a comic strip launched in 1948 and discontinued in the mid-1980s. It was likely modeled after “They’ll Do It Every Time,” the iconic strip that ran from 1929 until (amazingly) 2008. My parents read it as kids, as did I, and as did my kids: 80 years of chuckles. Thanx and a tip of the hat to Jimmy Hatlo.
Next up: Professors, Free Markets & The Fed – Part Two
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