The New York Times magazine cover piece, “The Education of Ben Bernanke,” is a real hoot, full of nifty quotes and blah blah justifying central banking like this:
After the Civil War, the United States adopted a gold standard, but without a central bank, the amount of money in circulation was fixed according to the available supply of gold — a rigid structure that the economy was outgrowing. The demand for credit was variable. For instance, it was heavy in the fall when the crops came to market.
But the piece also relates some golden moments of central banking — the passion and the violence! — that I’m certain haven’t made their way into many official histories of the Federal Reserve. (They certainly didn’t end up in any of my college econ texts.)
[Fed chief William McChesney] Martin ran into even tougher pressure from Lyndon B. Johnson, who tried to browbeat him into easing rates. One version of what occurred, according to Richard Fisher, the current head of the Dallas Fed, who has studied the history, is that “Lyndon took Martin to his ranch and asked the Secret Service to leave the room. And he physically beat him, he slammed him against the wall, and said, ‘Martin, my boys are dying in Vietnam, and you won’t print the money I need.’ ” Martin ultimately caved. By the time he retired, in 1970, inflation was a worrisome 6 percent.
The last graf of the piece relates the hopes and dreams of central banking — that it can provide technocratic engineers the perfect way to manage an economy, to find that sweet spot where both inflation and employment are maximized (this after an earlier admission in the piece that central bankers cannot do much). This, of course, is the only kind of economics policy makers and their ilk understand because it isn’t buying and selling, making and saving, this isn’t stuff individual human beings do voluntarily either by themselves or collectively. Rather, this is government fiat and force.
Perhaps the Great Moderation [the last 25 years or so] has been the result of good luck. Or perhaps it has been because of improved management skills —business learning not to overstock inventories, for example. Bernanke has written that it is something else. He sees it as a result, in large part, of better monetary policies. He says that central bankers have finally learned how to guide economies — not with mystique but with economic science. If that is so, we will not need a wizard behind the curtain anymore, only intelligent engineers who can steer markets to a promised land of rational expectations. To prove that he is right, Bernanke will need to minimize or, if possible, avoid the looming recession that looks ever more likely. It will not be easy. Bernanke’s education has just begun
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8:36 am on January 21, 2008
