Time to Shut Down the US Federal Reserve?

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by Ambrose Evans-Pritchard: Gold
Reclaims Its Currency Status as the Global System Unravels



Kartik Athreya,
senior economist for the Richmond Fed, has written a paper condemning
economic bloggers as chronically stupid and a threat to public order.

Matters of
economic policy should be reserved to a priesthood with the correct
post-doctoral credentials, which would of course have excluded David
Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics
graduate, with a tripos foray in moral sciences).

who have not taken a year of PhD coursework in a decent economics
department (and passed their PhD qualifying exams), cannot meaningfully
advance the discussion on economic policy.”

you just love that throw-away line “decent”? Dr Athreya
hails from the University of Iowa.

“The response
of the untrained to the crisis has been startling. The real issue
is that there is an extremely low likelihood that the speculations
of the untrained, on a topic almost pathologically riddled by dynamic
considerations and feedback effects, will offer anything new. Moreover,
there is a substantial likelihood that it will instead offer something
incoherent or misleading.”

You couldn’t
make it up, could you?

is hard. Really hard. You just won’t believe how vastly hugely
mind-boggingly hard it is. I mean you may think doing the Sunday
Times crossword is difficult, but that’s just peanuts to
economics. And because it is so hard, people shouldn’t blithely
go shooting their mouths off about it, and pretending like it’s
so easy. In fact, we would all be better off if we just ignored
these clowns.”

I hold my hand
up Dr Athreya and plead guilty. I am grateful to Bruce Krasting’s
blog for bringing this stinging rebuke to my attention.

However, Dr
Athreya’s assertions cannot be allowed to pass. The current
generation of economists have led the world into a catastrophic
cul de sac. And if they think we are safely on the road to recovery,
they still fail to understand what they did.

Central banks
were the ultimate authors of the credit crisis since it is they
who set the price of credit too low, throwing the whole incentive
structure of the capitalist system out of kilter, and more or less
forcing banks to chase yield and engage in destructive behaviour.

They ran ever-lower
real interests with each cycle, allowed asset bubbles to run unchecked
(Ben Bernanke was the cheerleader of that particular folly), blamed
Anglo-Saxon over-consumption on excess Asian savings (half true,
but still the silliest cop-out of all time), and believed in the
neanderthal doctrine of “inflation targeting”. Have they
all forgotten Keynes’s cautionary words on the “tyranny
of the general price level” in the early 1930s? Yes they have.

They allowed
the M3 money supply to surge at double-digit rates (16pc in the
US and 11pc in euroland), and are now allowing it to collapse (minus
5.5pc in the US over the last year). Have they all forgotten the
Friedman-Schwartz lessons on the quantity theory of money? Yes,
they have. Have they forgotten Irving Fisher’s “Debt Deflation
causes of Great Depressions”? Yes, most of them have. And of
course, they completely failed to see the 2007–2009 crisis
coming, or to respond to it fast enough when it occurred.

The Fed has
since made a hash of quantitative easing, largely due to Bernanke’s
ideological infatuation with “creditism”. QE has been
large enough to horrify everybody (especially the Chinese) by its
sheer size – lifting the balance sheet to $2.4 trillion –
but it has been carried out in such a way that it does not gain
full traction. This is the worst of both worlds. So much geo-political
capital wasted to such modest and distorting effect.

the rest of the article

1, 2010

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