In Praise of Humility


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Counting on monetary policy to secure full employment is like attempting vascular surgery with a dull ax. … Running what amounts to a hedge fund on steroids is more glamorous and exciting than managing a regulatory bureaucracy. Perhaps the most important qualification for the next Fed leader is one all too rare in Washington: humility.

From the NYT:

Wanted: A Boring Leader for the Fed

By AMAR BHIDÉ

THE debate over who should succeed Ben S. Bernanke, the chairman of the Federal Reserve, has been exceptionally personality-driven. Supporters and opponents of the two leading contenders — Lawrence H. Summers, a former Treasury secretary and adviser to President Obama, and Janet L. Yellen, a Clinton administration veteran like Mr. Summers, and now the Fed’s vice chairwoman — have been feuding in public. Mr. Obama has called the decision, which is expected soon, one of the most important of his presidency.

What all sides seem to misunderstand, however, is the proper nature of the central bank’s role in the economy. Instead of casting about for a new maestro, we need to return the Fed to dullness and its chairman to obscurity.

The Fed has become anything but boring. Under Mr. Bernanke and his predecessor, Alan Greenspan, it didn’t foresee the housing bubble, much less try to pop it. Even if the Fed could identify bubbles, Mr. Bernanke once said, “monetary policy is too blunt a tool for effective use against them.”

Yet for more than four years, the Fed has used this blunt instrument on an unprecedented scale. It is currently buying $85 billion in Treasury securities every month, the third round of a strategy, known as quantitative easing, that aims to stimulate the economy by keeping interest rates low.

Mr. Bernanke’s supporters say he has done his best with monetary policy while a do-nothing Congress has offered no help through fiscal policy. But quantitative easing has amounted to an audacious experiment in trickle-down economics. Among other things, it has artificially boosted the stock market in the hope that enriching a few — the top 1 percent of American households owned 42 percent of the nation’s financial assets in 2010 — will help the many. Meanwhile, retirees who don’t dare buy stocks have seen their modest bank deposits stagnate with interest rates near zero (despite a recent significant increase in Treasury yields).

Economists hate to admit it, but the profession is as much faith as science. “If we speak frankly,” John Maynard Keynes once wrote, “we have to admit that our basis of knowledge for estimating the yield 10 years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence.” Even in medicine, where double-blind experiments with control groups are de rigueur, the evidence of efficacy is far from ironclad; for economic policy, it is even less so.

Supporters say Mr. Bernanke has made up for his lack of prescience before the Great Recession through his bold emergency rescue actions, coordinated with President George W. Bush and then President Obama, and his willingness to do “whatever it takes” to get the economy moving, despite the potential risks of inflation down the road.

But wittingly or not, the mild-mannered Mr. Bernanke has made his job even more prominent than it was under Mr. Greenspan’s 19-year tenure. Such concentration of power within the Federal Reserve Board in Washington is precisely what Congress did not intend when it created the central bank in 1913.

The Fed’s chairmen in recent decades have been eminently qualified individuals of undisputed probity. But they are humans, too, whose blind spots, egos and potential conflicts of interest — Mr. Greenspan has had a lucrative post-Fed career giving speeches and advice — raise real concerns about hubris, even bias. The solution is not to subject the Fed to the whims of a dysfunctional Congress but rather to scale back what we can expect of it.

Counting on monetary policy to secure full employment is like attempting vascular surgery with a dull ax. Diversity and dynamism are vital features of our economy. As home building in Nevada collapsed, fracking in North Dakota boomed. Facebook and Apple surged while AOL and Yahoo stumbled. Across-the-board interest-rate suppression is just as likely to pump up already surging sectors as it is to revive slumping ones. Property prices have soared in Manhattan, while Detroit is in a death spiral.

Commanding the Fed to eliminate price fluctuations is also asking too much. The prices of bananas can fluctuate even across neighboring supermarkets. Each of us has our own consumption basket and inflation rate. The overall inflation rate is important — as Mr. Greenspan’s predecessor, Paul A. Volcker, demonstrated in the early 1980s when he crushed inflation at the cost of painful, back-to-back recessions — but only at the extremes.

Where the Fed must be held more accountable is for its oversight of banks. It is banks, not the government, that effectively create most of the money we use, by extending credit where it is most needed. As we’ve painfully learned, banks can over-lend and even set off an economic collapse.

Before the crisis the Fed seemingly lost all capacity for the painstaking, boots-on-the-ground supervision of the banks under its purview. And, effective or not, top-down monetary interventions remain attractive to the Fed’s top brass. Running what amounts to a hedge fund on steroids is more glamorous and exciting than managing a regulatory bureaucracy. Perhaps the most important qualification for the next Fed leader is one all too rare in Washington: humility.

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