The Federal Reserve releases transcripts of
FOMC (Federal Open Market Committee) meetings after a five-year wait. The 2008
transcripts were made public late, last week. The FOMC is the monetary
policymaking body within the Federal Reserve System. Having read at least 10
years of transcripts when writing about Greenspan and his Fed, there is a
lingering question of what might have been redacted before the public release
as well as what might be said outside the boardroom so as to escape
transcription. Every once in awhile some forward-thinking FOMC attendee (a
rarity, to be sure) will remind the mob: "Remember, that comment will be
public in five years."
The FOMC transcripts also do not include
"other meetings at which smaller groups of Fed officials, working with the
Treasury Department, arranged the bailouts of bankrupt Bear Stearns, the
American International Group (NYSE: AIG), and housing service entities Fannie
Mae and Freddie Mac. Nor do the transcripts include notes from the meetings at
which policy makers decided to let Lehman fail." (FOXBusiness, "Fed
Releases Transcripts from 2008 Meetings")
Nevertheless, the initial stories across news
channels were full of ridicule and indignation at the FOMC's real-time
ignorance as banks and markets collapsed. We are fortunate that two of the
scheduled FOMC gatherings happened to be on March 18, 2008, and September, 16,
2008, immediately after the collapse of Bear Stearns and Lehman Brother,
respectively. The FOMC also held a conference call on March 10, 2008, days
before the Bear Stearns failure. The conversations from each show a body more
incapable of making connections, translating their macro models to the real
world, than a five-year-old. (I remember clearly: a five-year-old walking into
the kitchen, looking at the September 16, 2008, New York Times, seeing a
large picture of an ex-Lehman employee carrying her belongings out of the
building, and asking: "Daddy, are we in a Depression?")
The story of the 2008 transcripts will fade.
It must: to preserve faith in the Fed and the stock market. If the Fed was
thought unable to "make connections," as it so clearly failed to do
in 2008, this might cause a reduction in market exposure (from 99% to 98%
leverage). Market authorities remind investors of "considerations which
must nowadays modify ideas about the future. One is the power and protective
resources of the Federal Reserve." (New York Times, September 9,
1929).
The Fed has been awarded greater power and
resources than ever before (to put it mildly) since 2008, yet, the results of
its "learning by doing" experiments show the FOMC is no wiser than
when Chairman Ben S. Bernanke, Great Depression scholar and legend in his own
mind, gathered his flock on September 16, 2008. In the same monologue, the
professor claimed: "I think that our policy is looking actually pretty
good" and "I am decidedly confused and very muddled about
this." He might seem to possess the wiring of a schizophrenic, but there
actually is no contradiction in the professor's mind. It is we who wander
without full knowledge.
The Fed, ECB, IMF, and fellow travelers
operate under the presumption any disturbance can be corrected by central
bankers. Their model says so. The Dynamic Stochastic General Equilibrium (DSGE)
model made it certain the Fed would not take action before the 2007 financial
implosion. The economist Bernard Connolly wrote to his clients in 2006 (when at
AIG) the Federal Reserve would not - could not - act beforehand. The holy DSGE
model was the reason Bernanke could feel kinda' good when he was confused and
muddled. The model provides a central-banking solution for all human errors.
Connolly wrote on February 4, 2008, the "DSGE contention that
negative demand disturbances (although perhaps exhibiting some serial
correlation) rather soon revert to an expected value of zero, is, in conditions
of intertemporal disequilibria, nothing more than a fairy tale..." This
is difficult to absorb, especially in such an abbreviated form, but it is way
the world works (currently). All of Connolly's work from that period can be
read at his firm's website, "Hamiltonian
Associates," under the "AIG" tab.
The vote was unanimous at that September
16, 2008, meeting: to do nothing, leave the funds rate at 2.0%. Within days,
Bernanke and Hank Paulson were terrorizing congressmen and Americans: the end
was nigh. In case you have forgotten the general panic, an example was at a
Whole Foods outlet where a woman of means turned and asked "I'm worried.
Do you think we're in a Depression?" The customer so queried told the
worrywart: "You'll have to ask my daughter." Which she did. This
customer's five-year-old daughter, having given some thought to her confusion
on the morning after Lehman's failure, replied: "Some parts of the country
are in a depression, but we are not, at least, yet." This response
relieved the anxiety of the woman of means.
The point is not whether the five-year-old
was correct or not, but that she had given more thought to current events than
the entire FOMC bureaucracy. Chairman Bernanke spoke for those who worshiped
the DSGE model at the October 7, 2008 meeting: "It's more than
obvious that we have an extraordinary situation.... I should say that this
comes as a surprise to me." This is to be expected. Financial markets are
not part of the model.
Since 2008, central bankers have been
"learning by doing," as Simple Ben told a Jackson Hole, Wyoming
audience on August 31, 2012. His speech carried the title of "Monetary
Policy Since the Onset of the Crisis." The speech made clear the model was
holier than ever. ("It is likely that the crisis and the recession have
attenuated some of the normal transmission channels of monetary policy relative
to what is assumed in the models...") Reliable sources report the DSGE
model is still sacred at the Yellen Fed. In fact, the younger generation of
economic Ph.D's who now tweak the input have often learned nothing else in
their post-graduate work.
It is important for the rest of humanity to comprehend the consequences. No
action will be taken to prevent what cannot happen. The media sometimes veers
towards the fatal FOMC flaw but lacks a full understanding. Thus, Binyamin
Appelbaum, writing about the 2008 transcripts in the February 21, 2014, New
York Times, explained: "The Fed's understanding of the crisis,
however, was clouded by its reliance on indicators that tend to miss sharp
changes in conditions. The government initially estimated, for example, that
the economy expanded in the first half of 2008 because it basically assumed
that some economic trends, like the pace of business creation, had continued
apace. The Fed also relied on economic models that assumed the existence of
smoothly functioning financial markets, limiting its ability to project the consequences
of a breakdown."
Appelbaum does not quite understand the assumption "of smoothly
functioning financial markets" is imbedded in FOMC policy. Financial
markets are not part of the DSGE model since "negative demand
disturbances" of financial markets "rather soon revert to an expected
value of zero." Therefore, they do not exist and FOMC transcripts from
2009 through 2014 will show discussions by the hallowed professors made no
allowance for reality and were "nothing more than a fairy tale."
An unrelated note. From the February 26, 2014
Wall Street Journal: "LONDON - Last summer, Adrian Eady, a banker
with Royal Bank of Scotland, was nearly crushed hauling a crate of feta cheese
off a forklift truck in a North London warehouse."
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