Priceless: How The Federal Reserve Bought The Economics Profession
by Ryan Grim
Reserve, through its extensive network of consultants, visiting
scholars, alumni and staff economists, so thoroughly dominates the
field of economics that real criticism of the central bank has become
a career liability for members of the profession, an investigation
by the Huffington Post has found.
helps explain how, even after the Fed failed to foresee the greatest
economic collapse since the Great Depression, the central bank has
largely escaped criticism from academic economists. In the Fed's
thrall, the economists missed it, too.
has a lock on the economics world," says Joshua Rosner, a Wall
Street analyst who correctly called the meltdown. "There is
no room for other views, which I guess is why economists got it
way the Fed exerts control on academic economists is through its
relationships with the field's gatekeepers. For instance, at the
Journal of Monetary Economics, a must-publish venue for rising economists,
more than half of the editorial board members are currently on the
Fed payroll and the rest have been in the past.
The Fed failed
to see the housing bubble as it happened, insisting that the rise
in housing prices was normal. In 2004, after "flipping"
had become a term cops and janitors were using to describe the way
to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan
said that "a national severe price distortion [is] most unlikely."
A year later, current Chairman Ben Bernanke said that the boom "largely
reflect strong economic fundamentals."
The Fed also
failed to sufficiently regulate major financial institutions, with
Greenspan and the dominant economists believing that the banks
would regulate themselves in their own self-interest.
this, Bernanke has been nominated for a second term by President
In the field
of economics, the chairman remains a much-heralded figure, lauded
for reaction to a crisis generated, in the first place, by the Fed
itself. Congress is even considering legislation to greatly expand
the powers of the Fed to systemically regulate the financial industry.
New York Times magazine, did his own autopsy of economics,
asking "How Did Economists Get It So Wrong?" Krugman concludes
that "[e]conomics, as a field, got in trouble because economists
were seduced by the vision of a perfect, frictionless market system."
So who seduced
The Fed did
The Fed has
been dominating the profession for about three decades. "For
the economics profession that came out of the [second world] war,
the Federal Reserve was not a very important place as far as they
were concerned, and their views on monetary policy were not framed
by a working relationship with the Federal Reserve. So I would date
it to maybe the mid-1970s," says University of Texas economics
professor and Fed critic James Galbraith. "The generation
that I grew up under, which included both Milton Friedman on the
right and Jim Tobin on the left, were independent of the Fed. They
sent students to the Fed and they influenced the Fed, but there
wasn't a culture of consulting, and it wasn't the same vast network
of professional economists working there."
But by 1993,
when former Fed Chairman Greenspan provided the House banking committee
with a breakdown of the number of economists on contract or employed
by the Fed, he reported that 189 worked for the board itself and
another 171 for the various regional banks. Adding in statisticians,
support staff and "officers" who are generally also
economists the total number came to 730. And then there were
the contracts. Over a three-year period ending in October 1994,
the Fed awarded 305 contracts to 209 professors worth a total of
Just how dominant
is the Fed today?
Reserve's Board of Governors employs 220 PhD economists and a host
of researchers and support staff, according to a Fed spokeswoman.
The 12 regional banks employ scores more. (HuffPost placed calls
to them but was unable to get exact numbers.) The Fed also doles
out millions of dollars in contracts to economists for consulting
assignments, papers, presentations, workshops, and that plum gig
known as a "visiting scholarship." A Fed spokeswoman says
that exact figures for the number of economists contracted with
weren't available. But, she says, the Federal Reserve spent $389.2
million in 2008 on "monetary and economic policy," money
spent on analysis, research, data gathering, and studies on market
structure; $433 million is budgeted for 2009.
That's a lot
of money for a relatively small number of economists. According
to the American Economic Association, a total of only 487 economists
list "monetary policy, central banking, and the supply of money
and credit," as either their primary or secondary specialty;
310 list "money and interest rates"; and 244 list "macroeconomic
policy formation [and] aspects of public finance and general policy."
The National Association of Business Economists tells HuffPost that
611 of its roughly 2,400 members are part of their "Financial
Roundtable," the closest way they can approximate a focus on
monetary policy and central banking.
Auerbach, a former investigator with the House banking committee,
spent years looking into the workings of the Fed and published much
of what he found in the 2008 book, Deception
and Abuse at the Fed. A chapter in that book, excerpted
here, provided the impetus for this investigation.
that in 1992, roughly 968 members of the AEA designated "domestic
monetary and financial theory and institutions" as their primary
field, and 717 designated it as their secondary field. Combining
his numbers with the current ones from the AEA and NABE, it's fair
to conclude that there are something like 1,000 to 1,500 monetary
economists working across the country. Add up the 220 economist
jobs at the Board of Governors along with regional bank hires and
contracted economists, and the Fed employs or contracts with easily
500 economists at any given time. Add in those who have previously
worked for the Fed or who hope to one day soon and
you've accounted for a very significant majority of the field.
that the "problems associated with the Fed's employing or contracting
with large numbers of economists" arise "when these economists
testify as witnesses at legislative hearings or as experts at judicial
proceedings, and when they publish their research and views on Fed
policies, including in Fed publications."
On The Payroll
The Fed keeps
many of the influential editors of prominent academic journals on
its payroll. It is common for a journal editor to review submissions
dealing with Fed policy while also taking the bank's money. A HuffPost
review of seven top journals found that 84 of the 190 editorial
board members were affiliated with the Federal Reserve in one way
publish an article critical of the Fed with an editor who works
for the Fed," says Galbraith. And the journals, in turn, determine
which economists get tenure and what ideas are considered respectable.
industry has similarly worked to control key medical journals, but
that involves several companies. In the field of economics, it's
just the Fed.
Being on the
Fed payroll isn't just about the money, either. A relationship with
the Fed carries prestige; invitations to Fed conferences and offers
of visiting scholarships with the bank signal a rising star or an
economist who has arrived.
with the Fed have become the oxygen of academic life for monetary
economists. "It's very important, if you are tenure track and
don't have tenure, to show that you are valued by the Federal Reserve,"
says Jane D'Arista, a Fed critic and an economist with the Political
Economy Research Institute at the University of Massachusetts, Amherst.
editor in chief of the Journal of Monetary Economics and a visiting
scholar at the Richmond Federal Reserve Bank, dismisses the notion
that his journal was influenced by its Fed connections. "I
think that the suggestion is a silly one, based on my own experience
at least," he wrote in an e-mail. (His full response is at
a Fed critic, has seen the Fed's influence on academia first hand.
He and co-authors Olivier Giovannoni and Ann Russo found that in
the year before a presidential election, there is a significantly
tighter monetary policy coming from the Fed if a Democrat is in
office and a significantly looser policy if a Republican is in office.
The effects are both statistically significant, allowing for controls,
and economically important.
a paper with their findings to the Review of Economics and Statistics
in 2008, but the paper was rejected. "The editor assigned to
it turned out to be a fellow at the Fed and that was after I requested
that it not be assigned to someone affiliated with the Fed,"
in top journals is, like in any discipline, the key to getting tenure.
Indeed, pursuing tenure ironically requires a kind of fealty to
the dominant economic ideology that is the precise opposite of the
purpose of tenure, which is to protect academics who present oppositional
And while most
academic disciplines and top-tier journals are controlled by some
defining paradigm, in an academic field like poetry, that situation
can do no harm other than to, perhaps, a forest of trees. Economics,
unfortunately, collides with reality as it did with the Fed's
incorrect reading of the housing bubble and failure to regulate
financial institutions. Neither was a matter of incompetence, but
both resulted from the Fed's unchallenged assumptions about the
way the market worked.
Even the late
Milton Friedman, whose monetary economic theories heavily influenced
Greenspan, was concerned about the stifled nature of the debate.
Friedman, in a 1993 letter to Auerbach that the author quotes in
his book, argued that the Fed practice was harming objectivity:
"I cannot disagree with you that having something like 500
economists is extremely unhealthy. As you say, it is not conducive
to independent, objective research. You and I know there has been
censorship of the material published. Equally important, the location
of the economists in the Federal Reserve has had a significant influence
on the kind of research they do, biasing that research toward noncontroversial
technical papers on method as opposed to substantive papers on policy
and results," Friedman wrote.
Congress in October 2008 that he was in a state of "shocked
disbelief" and that the "whole intellectual edifice"
had "collapsed." House Committee on Oversight and Government
Reform Chairman Henry Waxman (D-Calif.) followed up: "In other
words, you found that your view of the world, your ideology, was
not right, it was not working."
precisely," Greenspan replied. "You know, that's precisely
the reason I was shocked, because I have been going for 40 years
or more with very considerable evidence that it was working exceptionally
But, if the
intellectual edifice has collapsed, the intellectual infrastructure
remains in place. The same economists who provided Greenspan his
"very considerable evidence" are still running the journals
and still analyzing the world using the same models that were incapable
of seeing the credit boom and the coming collapse.
Wall Street analyst who foresaw the crash, says that the Fed's ideological
dominance of the journals hampered his attempt to warn his colleagues
about what was to come. Rosner wrote a strikingly prescient paper
in 2001 arguing that relaxed lending standards and other factors
would lead to a boom in housing prices over the next several years,
but that the growth would be highly susceptible to an economic disruption
because it was fundamentally unsound.
on those ideas over the next few years, connecting the dots and
concluding that the coming housing collapse would wreak havoc on
the collateralized debt obligation (CDO) and mortgage backed securities
(MBS) markets, which would have a ripple effect on the rest of the
economy. That, of course, is exactly what happened and it took the
Fed and the economics field completely by surprise.
you're doing is, actually, in order to get published, having to
whittle down or narrow what might otherwise be oppositional or expansionary
views," says Rosner. "The only way you can actually get
in a journal is by subscribing to the views of one of the journals."
was casting his paper on CDOs and MBSs about, he knew he needed
an academic economist to co-author the paper for a journal to consider
it. Seven economists turned him down.
believe that markets are efficient?" he says they asked, telling
him the paper was "outside the bounds" of what could be
published. "I would say 'Markets are efficient when there's
equal access to information, but that doesn't exist,'" he recalls.
The CDO and
MBS markets froze because, as the housing market crashed, buyers
didn't trust that they had reliable information about them
precisely the case Rosner had been making.
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