The Inevitable Failure of Mechanistic Monetary Policy
Our current faith in central banks’ ability to “make the economy all better, all the time” is horrendously misplaced.
We are living in the Cargo Cult Era of Central Bankers. The era began in earnest on December 5, 1996, when Federal Reserve chairman Alan Greenspan cautiously wondered aloud if the stock market was exhibiting “irrational exuberance.”
The stock market promptly tanked. In this era, the utterances of central bankers exert more influence over markets than fundamentals.
Documentary film maker Adam Curtis explored the inherent limits of mechanistic monetary models in Episode 3 of his 6-part series, Pandora’s Box (1992).This simplistic faith in the Cargo Cult magic of central banks is based on the absurd notion that two levers–interest rates and buying debt–can control and guide an immensely complex economy. Central bankers are well-versed in arcane incantations such as Operation Twist and aggregate demand, but if we strip away the mumbo-jumbo we find only two levers: interest rates and the purchase of debt.
The wizards of monetary policy make the implicit assumption that monetary policy is the most important factor in an economy’s expansion or contraction. But an economy is far more than interest rates, inflation and the purchase of bonds and other assets.
An economy is also the education or mis-education of the next generation of workers, the creative destruction wrought by technologies, the cultural appetite for risk and what I call the infrastructure of opportunity–the complex mix of attributes that either encourage social mobility or preclude it.
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