The Closing of Central Banking's Economic Mind
It's perhaps apocryphal, but in his classic 1982 book The Economy In Mind, the late Warren Brookes referenced the arrival of a famous Keynesian at New York's JFK airport in 1979. Upon reaching customs, the customs' official checking passports said to the economist "I don't know whether I should let you back, Professor, considering what you economists have done to this country."
Brookes' story bears relevance in light of the aggressive actions taken by economists at the Fed, and at central banks around the world. To witness their machinations is to marvel at the damage being done, and to wonder if central banking has lost its collective mind.
Defined as "quantitative easing," over the last six years the Federal Reserve has purchased trillions in U.S. Treasurys, along with mortgage-backed securities. This was done to supposedly stimulate economic growth? It's hard to see how.
Not asked forcefully enough is why the subsidization of government spending would boost real economic activity. No matter the political party or person in charge of the federal purse, the reality is that government spending is almost by definition evidence of wealth consumption, as opposed to creation of same. Of course if the congenital optimists in our midst truly believe government spending amounts to investment, they must also believe that Mitch McConnell, Harry Reid, Nancy Pelosi and John Boehner are better at migrating capital to its highest return than market-disciplined investors in the private sector.
Considering the Fed's mortgage purchases, has 2008 really already been forgotten? Back then excessive government support of housing consumption reached an ugly conclusion, yet in propping up mortgages the purportedly wise individuals who operate our central bank have essentially doubled down on that which caused so much economic carnage a little over six years ago.
More broadly, for one to believe that quantitative easing achieved something of economic value, such an optimist would have to think Ben Bernanke, and now Janet Yellen, more knowledgeable allocators of precious capital than is the information machine that is the marketplace itself. Simple logic says any excitement about the investment skills of central bankers is overdone no matter their ideology. And if information-abundant market forces don't have a high batting average when it comes to profitable capital commitments, it's the triumph of hope over experience to presume that more narrowly informed central bankers can do better.
Most important of all, it can't be forgotten that the Fed doesn't, nor can it, create credit. Credit is about access to real economic resources - think tractors, computers, airplanes and labor - created in the real economy. As such, when the Fed fiddles with interest rates it doesn't create credit as much as it usurps the role of the market when it comes to divvying up precious resources.
Luckily the Fed's $4 trillion experiment with funds borrowed from banks has come to an end. At least that's what they say. One can only hope that the cessation of Fed meddling is over for good.
Unfortunately, the Fed isn't the only globally prominent central bank with designs on engineering economic growth. Despite decades of failed attempts at stimulus, the Bank of Japan (BOJ) continues to intervene in what is an overmedicated economy.
As is well known now, recently the BOJ announced roughly $750 billion in asset purchases meant to drive down bond yields; the thinking behind this latest intervention that artificially high bond prices will make equities a more attractive bet for investors. This policy doesn't speak to serious thinking on the part of Japan's economic establishment.
Were those operating the BOJ more focused on actual economic growth, they'd sit back and do nothing. And if Japanese equities plummet as a result, all the better. Markets only work and economies only grow if and when business concepts deemed wanting by the marketplace are starved of investment so that good ideas can receive it in abundance. In presuming to prop up Japanese shares, the country's central bankers are attempting to erase the very failure that powers all economies upward.
Lest we forget, Silicon Valley isn't one of the richest locales in the world because all of its start-ups succeed; rather it's marked by staggering wealth precisely because the vast majority of the companies funded there fail. The U.S. technology sector has been defined by over 50 years of cushion-free error, and the latter has been what's authored its wealth-abundant drive toward perfection.
If central bankers and politicians had made technology companies their compassionate focus in the U.S., we'd still be typing on Commodore computers, connecting with new and old contacts on Friendster; all of this arguably done with dial-up Internet connections. But thanks to Silicon Valley's relative isolation from the political class, bad ideas die so that good ones can attain funding.
It's reasonable to say that the BOJ's actions are quite simply cruel in light of the long-term stagnation that's defined the country's economy. Needful of the cleansing that would sunset yesterday's ideas, its central bankers are focused on fine tuning the status quo.
In the U.S. we properly scoff when politicians take on the role of venture capitalist, we were rightly horrified when the details of Solyndra's bankruptcy came to light, but when central bankers invest in dollar amounts that make politicized investment and lending microscopic by comparison, the outcry is muted. Yet a dollar is a dollar. The Fed's investment of over $4 trillion in what it deems worthy is $4 trillion not being directed by actual market forces. Is it any wonder that the economy remains relatively weak?
Central bankers here and around the world should know better. While their doings have perhaps shielded us from the full force of recession, they've also robbed us of the stupendous growth that only reveals itself when economies are allowed to correct. The closing of central banking's mind is our ongoing stagnation.
